UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 20152017
Commission file number 000-21783
8x8, Inc.
(Exact name of Registrant as Specified in its Charter)
2125 O'Nel Drive
San Jose, CA 95131
(Address of Principal Executive Offices including Zip Code)
(408) 727-1885
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company" and "smaller reporting"emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES ¨ NO x
Based on the closing sale price of the Registrant's common stock on the NASDAQ Capital Market System on September 30, 2014,2016, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $587,802,739.$1,362,839,166. For purposes of this disclosure only, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant and their respective affiliates, if any, have been excluded because such persons mayas shares that might be deemed to be affiliates.held by affiliates of the Registrant. The determination of affiliate status for this purpose is not necessarily a conclusive determination for any other purpose.
The number of shares of the Registrant's common stock outstanding as of May 27, 201525, 2017 was 88,152,273.91,620,610.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the Proxy Statement to be filed within 120 days of March 31, 20152017 for the 20152017 Annual Meeting of Stockholders.
8X8, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED MARCH 31, 20152017
Part I. |
| Page |
Business |
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Risk Factors | 11 | |
Unresolved Staff Comments |
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Properties |
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Legal Proceedings |
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Mine Safety Disclosures |
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Part II. |
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Market for Registrant's Common Stock and Related Security Holder Matters and Issuer Purchases of Equity Securities |
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Selected Financial Data |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Quantitative and Qualitative Disclosures About Market Risk | 46 | |
Financial Statements and Supplementary Data | 46 | |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 79 | |
Controls and Procedures | 79 | |
Other Information | 79 | |
Part III. |
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Directors, Executive Officers and Corporate Governance | 80 | |
Executive Compensation | 80 | |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 80 | |
Certain Relationships and Related Transactions, and Director Independence | 80 | |
Principal Accountant Fees and Services | 80 | |
Part IV. |
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Exhibits and Financial Statement Schedules | 80 | |
| 82 |
PART I
Forward-Looking Statements and Risk Factors
Statements contained in this annual report on Form 10-K, or Annual Report, regarding our expectations, beliefs, estimates, intentions or strategies are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results and those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, to-
The forward-looking statements may also be impacted by the additional risks faced by us as described in this Annual Report, including those set forth under the section entitled "Risk Factors." All forward-looking statements included in this Annual Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Annual Report, refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 20152017 refers to the fiscal year ended March 31, 2015)2017). Unless the context requires otherwise, references to "we," "us," "our," "8x8" and the "Company" refer to 8x8, Inc. and its consolidated subsidiaries.
Overview
A leading provider of enterprise cloud communications solutions, 8x8 Inc. offershelps businesses get their employees, customers and applications talking, to make people more connected and productive, no matter where they are in the world. From a SaaS (Softwaresingle, proprietary platform, which we refer to as the 8x8 Communications Cloud™, we offer unified communications, team collaboration, contact center, analytics and other services to our business customers on a Service) communication solutionSoftware-as-a Service (SaaS) model.
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While organizations of all sizes have started to migrate from legacy, on-premises systems to cloud communications solutions like ours, the adoption of cloud communications by larger businesses has increased markedly in recent years and will, we believe, drive the next phase of cloud communications growth. Small businesses were the first to transition their communications to the cloud several years ago, often based on its cost effectiveness, ease of deployment and inherent flexibility. Now, larger businesses that have adopted cloud-based solutions for other applications and processes are increasingly looking to modernize their communications in a similar fashion. We believe this adoption is atbeing driven by the forefrontconvergence of several market trends, including the disruptive shiftincreasing costs of maintaining installed legacy communications systems; the fragmentation resulting from use of multiple on-premises systems, which has worsened as workforces have become more distributed and international; and the proliferation of personal mobile devices in the workplace.
Our solutions offer businesses a secure, reliable and simplified approach for businesses to transition their legacy, on-premises communications systems to cloud-based alternatives. We arethe cloud. Our comprehensive solution, built from core cloud technologies that we own and manage internally, enables 8x8 customers to rely on a recognized leader in the business cloudsingle provider for their global communications, industry, pioneering the development and use of Internet protocol voice, video and data communication technologies in a true SaaS model.
Our integrated, "pure-cloud" services platform is developed from internally owned and managed technologies and is uniquely positioned to serve mid-market and enterprise businesses making the shift to cloud based Unified Communications. 8x8 makes a full set of unified communications capabilities including cloud telephony, contact center video and web conferencing available from anywhere in the world. With 8x8 analytics and reporting,customer support requirements. Combining these services allows our customers have an unprecedented view into companyto eliminate information silos and expose vital, real-time communications whether employees are mobile via the mobile client or in-office using a softphone, or a desk phone. These flexible, secure, highly reliable,data spanning multiple services, applications and highly scalable services are delivered globally to more than 40,000 businesses operatingdevices — which, in over 40 countries across six continents.
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Through a combination of open API's (application program interface)turn, can improve productivity, business performance and prebuilt integrations, 8x8 makes it easy to mix real time customer communications with critical customer context from internal customer data systems and industry leading Customer Relationship Management (CRM) systems, including cloud based solutions from Salesforce.com, NetSuite, and Zendesk.experience.
Our customers are spread across more than 100 countries and range from small businesses to large multinational enterprises. enterprises with more than 10,000 employees. In recent years, we have increased our focus on the mid-market and enterprise customer segments, and in fiscal 2017, we generated a majority of our services revenue from customers in these business segments. We provide most of our communications services on a SaaS model, with monthly billing of service fees and usage charges, under contracts with terms that generally range from one to four years.
Our turnkey solution spans the breadthIndustry
Businesses today face increasing cost and complexity with deployments of communications and collaboration needs, is provided with 99.997% availability at an affordable cost and is quick and easy to deploy through our patent-pending deployment methodology. This allows customers to focus on their business instead of trying to manage the complexities of disparate Unified Communications & Collaboration (UCC) platforms and the integration of these platforms with other cloud-based business applications, such as enterprise resource planning or ERP, CRM and/or human capital management or HCM.
Available Information
We were incorporated in California in February 1987 and reincorporated in Delaware in December 1996. We maintain a corporate Internet website at the address http://www.8x8.com. The contents of this website are not incorporated in or otherwise to be regarded as part of this Annual Report. We file reports with the Securities and Exchange Commission, or SEC, which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. You also can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including 8x8.
Our Industry
Businesses are increasingly focused on utilizing mobility and UCC solutions to enable increased productivity, improve interactions with customers and partners, and enhance organizational agility and responsiveness. Legacy solutions have proven to be costly and cumbersome and do not meet these evolving business requirements.solutions. Companies of all sizes are managing a mobileglobal, distributed, remote and globally distributedmultigenerational workforce that seeks to leverage multiple meansforms of communications and collaboration, including voice, text, video and desktop.communication in their day-to-day interactions. The rapid rise of mobile devices in the enterprise has created demand for "bringBYOD (bring your own device," or BYOD, provisioning capabilities. Additionally, companiesdevice) integration as part of s typical business' communications needs. Companies are looking to increase their competitive edge by also integrating their communications with ERP (Enterprise Resource Planning), CRM and(Customer Relationship Management), HCM (Human Capital Management) applications and other back-office information technology, or IT (information technology) systems withwithin their communications infrastructure. Further complicating matters, business users are circumventing their IT departments by using a variety of self-selected third-party tools for team communications and collaboration, systems. Finally, as cyber threats proliferate and Internet hacker attacks become more sophisticated, voice and data security and compliance are at the forefront of business requirements. Legacy providers have struggled to keep up with the new business paradigm and continue to require long, high-touch sales and setup cycles in an effort to solve carrier and hardware complexity. Some of the new cloud-based providers deliver point solutions and typically do not providedriving a secure, comprehensive UCC platformshift in the cloud.
Cloud Market Opportunity
We believe that the addressable market for our cloud telephony, unified communications and contactbuying center services is large, growing and underpenetrated. Our services directly address multiple markets. According to IDC (International Data Corporation), worldwide cloud-based UCC offerings are forecast to reach almost $8 billion in 2014 and grow to $13.5 billion in 2018 at a compound annual growth rate (CAGR) of 15.2%. Research and Markets forecasts worldwide growth in the cloud based contact center market from $4.15 billion in 2014 to $10.9 billion in 2019 at a CAGR of 21.3%.The global web event services market is forecasted by Frost & Sullivan to grow at an 11.0% CAGR from $424 million in 2013 to $712 million in 2018. We address these markets with our Virtual Office, Virtual Contact Center and Virtual Meeting solutions, respectively.
Legacy Approaches are Cumbersome and Expensive
Companies are facing increasing complexity with deployments of communications and collaboration services. The exponential growth and variety of mobile devices (with employees seeking to incorporate their personal devices into the workplace environment), the increase in a globally distributed workforces, demand for full functionality with third-party applications and other back office IT systems and increasing security and regulatory concerns create numerous challenges for companies seeking a comprehensive UCC solution, including:
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We believe traditional on-premises communications systems are unable to improve employee productivity. Furthermore, companies need to manage and secure voice and data while protecting customer privacy.
Shortcomings of Existing Solutions
The current market is primarily comprised of two categories of solutions that are proving unable to adequately address today's business communications and collaboration requirements:
The 8x8 Solution
The 8x8 unified cloud communications solution addresses the shortcomings of legacy and point solution cloud services through its pure cloud Software as a Service offering. At the core of our service are two technologies that deliver highly available UCC functionality that has been pre-integrated to CRM providers. Our Infrastructure Manager abstracts complex global interconnectivity between VoIP (Voice over Internet Protocol) and traditional PSTN (public switched telephone network) providing customers with a phone system that can reach any phone in the world whether wireless or wireline. Our Integration Manager integrates with third-party applications, including Salesforce.com, Microsoft Dynamics, NetSuite, Zendesk and many others, to provide integrated applications functionality within our communications and collaboration services. To date, we have been awarded 104 United States patents related to technology developments in these and other areas. Our solution provides the following key benefits:
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The 8x8 Solution
We offer unified communications, team collaboration, contact center, and analytics in a scalable platform that is used by businesses of all sizes across the globe, and can be accessed utilizing available Internet connections.
The key attributes of the 8x8 Communications Cloud solution include:
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Our Strategy
8x8 isWe are committed to developing and delivering the most innovative, reliable, scalable and secure cloud software for global business communications services available.as part of the 8x8 Communications Cloud. Our strategy is informed by evolving market dynamics, including the growing adoption of cloud communications software by larger commercial and enterprise customers, along with the unique attributes of our technology.
Key elements of our strategy include:
Our Growth Initiatives
The following are key elements of our growth strategy:
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Our PlatformProducts
Powered by internally owned and managed technologies, 8x8's solutions serve businesses of all sizes, scaling readily to serve large, globally distributed enterprise customers. All of our core software components work together and can be combined into different bundles depending on the business needs of our customers.
Our unified software platform delivers a comprehensive, easy-to-use communications and collaboration solution for SMBs and mid-market and distributed enterprises. Our Infrastructure Manager software abstracts complex global interconnectivity between VoIP and traditional PSTN, enabling a turnkey UCC solution for our customers. Additionally, our Integration Manager software integrates with third-party applications and other back-end IT systems, allowing our customers to access important data while communicating with their clients or collaborating with colleagues. These core componentscurrent suite of our software platform enable rapid workspace and phone provisioning and seamless deployment of our UCC solutions globally. Furthermore, we have invested heavily in complying with state and federal regulations, including FISMA, HIPAA, HITECH, FIPS 140-2, CPNI, PCI-DSS and Safe Harbor. Although we cannot ever be certain that our systems fully comply with these complex regulations, we have expended significant resources on developing software and obtaining third party risk assessments that enable us to serve customers that are required to comply with these regulations.products includes:
Our services work on smartphones, tablets, PCs, IP phones and mobile phones. In addition, our platform integrates with third party applications such as Salesforce.com, NetSuite, Microsoft Dynamics, SugarCRM, Zendesk, eAgent and many others to provide enhanced functionality.
Our Services
8x8 Virtual Office
8x8 Virtual Office is a SaaS, cloud based replacement for legacy on premises business phone systems. Launched in March 2004,(VO) delivers high quality voice and unified communications-as-a-service globally. 8x8 Virtual Office is targeted at the SMB and mid-market and distributed enterprise markets. It is an affordable, easy-to-use UCCa self-contained, end-to-end solution that allows users withenables a broadband Internet connection anywhere in the world accesscustomer to use a rich set of UCC features.
As a completely cloud-based service, Virtual Office enables SMB customers to rapidly deploy and easily manage enterprise-gradesingle business telephony capabilities, including full mobility, with no upfront capital expense and no requirement for in-house IT resources. Furthermore, our cloud-based delivery model can provide seamless connectivity across multiple offices and facilities, worldwide, for our larger mid-market and distributed enterprise customers.
Virtual Office customers can easily move their existing phone service to 8x8 and preserve their phone number identity and investment by porting existing numbers to the new telephony service. Each extension in the virtual PBX can be located anywhere in the world that is serviced by a high-speed Internet connection. Virtual Office extension-to-extension calls and transfers are accomplished over the Internet, anywhere in the world, free of extra charges from third party telecommunications carriers. Virtual Office offers the following features:
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Virtual Office Pro extends the capabilities of Virtual Office with additional functions such as synchronization of corporate directory, an integrated Virtual Meeting allowing for scheduled or ad hoc collaboration, presence management, as well as many other features required by our growing number of mid-market and distributed enterprise customers. Virtual Office Pro offers the following features:
The basic feature set of 8x8 Virtual Office servicesincludes auto attendants; unlimited, metered or international calling plans; worldwide extension dialing; corporate directory with click-to-call functionality; presence, messaging and functions from an iPhone/iPod Touch/iPad/Android mobile handset;
We also provide, at no additional cost, Virtual Office Mobile software that turns Apple iOS and Android-based mobile devices into extensions on the phone, off8x8 Virtual Office platform. Virtual Office Mobile can be downloaded from the phoneApple or currently unavailable; and
8x8 Virtual Contact Center
We introduced8x8 Virtual Contact Center (VCC) is a multi-channel cloud based solution that enables even the smallest contact center to enjoy customer experience and agent productivity benefits that were previously available only to large contact centers at a much higher cost. 8x8 Virtual Contact Center is suitable for customer support, sales and any other corporate function that generates a high volume of inbound interactions with customers.
Basic features of the 8x8 Virtual Contact Center service in July 2007. Virtual Contact Center is an integrated cloud-basedsolution include a programmable IVR tool for greeting customers, automatic queuing and routing of inbound inquiries, skills-based routing of inquiries to the appropriate call center solution that works with any broadband Internet connection and provides enterprise class contact center functionality combined with Virtual Office calling features. The Virtual Contact Center allows companies to quickly deploy and operate multi-channel contact centers without the time and expense of purchasing, installing and maintaining costly, specialized equipment. Delivered entirely as a cloud service, the Virtual Contact Center requires no specialized hardware or software, no telecom equipment and no up-front capital expenditures by the customer. Virtual Contact Center offers features such as skills-based routing, multi-mediaagents, browser-based agent console, multimedia management, real timereal-time monitoring and reporting, internal chat, voice recording and logging, historical reporting, Interactive Voice Response, integration with third party CRM and ERP solutions, and contact and case management tools, and integration with popular third-party CRM tools. To give customers a truly global presence, 8x8 Virtual Contact Center seamlessly connects an organization's international agents over a single platform with integrated presence, multilingual chat with automatic translation, call routing, reporting and management.
Recent enhancements to 8x8 Virtual Contact Center include Customer Journey analytics capabilities that offer insight into customer experience and cloud-native Quality Management tools that help contact center managers evaluate every customer interaction and make timely improvements.
8x8 Virtual Office Meetings (Web and Video Conferencing/Collaboration)
8x8 Virtual Meeting
We launchedOffice Meetings is a cloud-based video conferencing and collaboration solution that enables secure, continuous collaboration with borderless high definition (HD) video and audio communications from mobile and desktop devices, anywhere in the 8x8 Virtual Meeting service in September 2009 as an affordable, easy-to-use web event service that allows businesses to meet with customers, share and edit documents collaboratively, conduct training classes or deliver presentations from any computer with any browser from any location. Virtual Meeting allows unlimited meetings of unlimited duration for up to 50 participants per meeting. Additionally, Virtual Meeting seamlessly integrates withworld. Virtual Office soMeetings is built seamlessly into 8x8's Virtual Office desktop and mobile experience which allows users can easily searchto schedule meetings, initiate instant collaboration on the fly, and transition IM conversations into a meeting from a single application. In addition, the solution gives users access to their corporate directory or share their workspace with other meeting participants. Virtual Meeting also enables meeting recordingfor easy engagement and management. Delivered as a cloud-based service, Virtual Meeting requires nothing more than a web browsereliminates the need for customersusers and IT to create web events. Additionally, we offer Virtual Room, a video collaboration service, which is a low-cost alternative to traditional tele-presence solutions.manage multiple logins and passwords.
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8x8Inside a Virtual Office AnalyticsMeeting, participants experience high definition audio conferencing (for employees or external participants using a software download), content sharing, chat conversations, high definition video conferencing and meeting recordings. Meetings can be scheduled in advance either from the software itself or from Microsoft Outlook or Google Calendar. When in a meeting, users can take advantage of 8x8's integrated presence feature to bring additional participants directly into a collaboration session using their preferred method of communication, including IM, email and voice.
8x8 Sameroom (Team Collaboration Interoperability)
With the surge in team messaging and collaboration apps such as Slack and HipChat, enterprises are increasingly subject to application proliferation and fragmentation that is hard to manage and govern securely. 8x8 Sameroom provides an interoperability platform that enables cross-team messaging and collaboration within a large organization and between organizations. With the Sameroom technology, our customers can collaborate across more than twenty disparate team messaging solutions.
8x8 ContactNow (Contact Center Solution for Teams)
8x8 Virtual Office AnalyticsContactNow is an intelligent, scalable and easy-to-use cloud contact center solution that we market for use by teams. ContactNow provides call center functionality for teams that regularly interact with internal and external customers, such as sales, marketing, human resources, recruiting and help desks, but do not require the capabilities and feature set of a full scale, traditional contact center solution. 8x8 ContactNow offers a flexible pay-as-you-go model and is readily scalable and customizable through self-service configuration, allowing customers to add and subtract agents "on the fly" based on customer demand. We expect 8x8 ContactNow generally to be more affordable and better suited for the needs of small teams than 8x8 VCC.
Script8 (Scripting Engine)
Script8 is a robust suitedynamic communications flow and routing engine that offers a scripting environment for intelligently routing communications data for specific workflows. Script8 allows end-users to create simple, personalized and customizable communications experiences, including communications control, external data source integration and intelligent routing. Script8 use cases have included, for example: routing priority calls based on sales pipeline data in CRM system; IVR with two-factor authentication; sending SMS with directions to a retail store; and emergency dialing with Caller ID override.
Our Technology
We introduced our first communications SaaS offering in 2002, and have since expanded our solutions, features and capabilities. Our services are powered by internally-owned and operated technologies and are delivered to our customers from our 8x8 Communications Cloud platform. From inception through March 31, 2017 we have been awarded 131 United States patents covering a variety of web-based toolsvoice and video communications, signaling, processing and storage technologies. Many patents in our portfolio relate to the communications software used in our various SaaS solutions.
We developed our Global Reach patented technology to ensure that 8x8 voice communications, placed or received anywhere on the globe on any compatible device, can have the same consistent quality as a local call within a single area code. Many hosted Voice over Internet Protocol (VoIP) solutions route call data through the same data center, regardless of the physical or geographic location of callers. By contrast, when an end-user makes a call using our solution, our patented technology seeks out the closest data center to the caller's location, subject to service quality, security and data sovereignty considerations. We call this "geo-routing." Our proprietary technologies take into account current Internet and carrier network conditions and determine the best route virtually instantaneously, ensuring that latency is minimized within the available routing options.
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Many of our software solutions provide mission critical services to our business customers. We have therefore developed technologies and architectures that embed high reliability and uptime into our software. Based on this reliability and our Global Reach techology, we are able to offer qualifying enterprise customers an end-to-end SLA that provides enterprise-level analyticscommitments as to both the availability of our solutions, or uptime, and voice call quality.
We believe one of the key areas that differentiates 8x8 from our competitors is the quality of our real-time service delivery over the public Internet. Real-time voice is perhaps the most difficult application to be delivered over the public Internet as there is no time for retransmission and there is little buffering that can be useddone without impacting the quality of a real-time conversation. As such, quality of the connection well beyond just the available bandwidth is the most important element of service delivery for VoIP. By having diverse routes and connectivity as well as full and granular Border Gateway Protocol (BGP) control over these connections, 8x8 is constantly inspecting the state of the Internet to make highly informedoptimize our service delivery to customers.
In addition, we have instrumented hundreds of thousands of 8x8 endpoints to provide details of quality of connection information at the end of each call to 8x8's internal network operations environment. This is possible due to our full control over the core networking stack/equipment and the transit connections in our data centers.
Our technologies include a number of deployment methodologies that represent best practices for implementing our software at a customer site and driving customer adoption of our more advanced software features. We also manage and port existing business decisions. This suitenumbers globally, and we provide local number porting services in more than 40 countries. We provide software connectivity to emergency services and other regulatory services required by law in different regions of services delivers easy to use, customizablethe world. We have developed our own billing software, and rapid insights into the historicalprovide our customers with electronic monthly billing.
Finally, a key aspect of our technology, especially critical for larger enterprise customers and real-time information associated with all extensionscertain industry verticals (such as healthcare), is our emphasis on security and devices in an organization's Virtual Office phone system. Virtual Office Analytics improves enterprise decision making by providing details about internal and external call activity, real-time call queue status, call quality, and individual end-point device status around the globe. This deep level of detail and intelligence can be used to improve businesses productivity in areascompliance, which we have addressed through specific measures such as employee performance, sales campaignsour end-to-end encryption technologies and customer experience management.certifications with various regulations and industry standards as described above.
Sales, Marketing and Promotional Activities
We currently sell and market our services directly to end users through our direct sales force, website,a variety of means, including search engine marketing and channel partners. Our sales force primarily handles inbound telephone calls and website leads which are generated from third partyoptimization, third-party lead generation sources, industry conferences, trade shows, and direct web advertising suchwebinars, as Google, orwell as traditional advertising channels such as in-flight magazineschannels. We employ a direct sales organization, consisting of inside and billboards. Sales representatives are paidfield-based sales agents, and an indirect channel partner network consisting of value-added resellers (VARs), master agents, system integrators and service providers. We typically contract directly with the end customer and use these channel partners to identify, qualify and manage prospects throughout the sales cycle, and have arrangements with a base salary or hourly ratenumber of partners who resell our services to their customers. For mid-market and monthly commission for sellingenterprise customers, our productssales professionals work closely with inside technical support, sales engineers and services. The commission isdeployment specialists to develop customized solution proposals based on individual customer requirements.
In fiscal 2017, we invested in new resources and support tools for our channel partner program, including new sales made by the sales representative. Our sales department employs more than 100 people.enablement training and resources, deployment and support certification programs, online customer return on investment (ROI) tools, co-branded marketing materials and our new "PartnerConnect" portal which, among other capabilities, allows partners to launch and manage pre-built, multi-touch digital co-marketing campaigns.
Competition
Given the size and stage of the current market opportunity and the breadth of our communications and collaboration service platform, we face competition from a varietymany companies, including other cloud services providers, communications and collaboration software vendors and incumbent telephone companies and other resellers of firms, none of whom currently competes directly with our entire set of cloud UCC services, but who separately compete with us on one or more areas. We believe that the principal competitive factors affecting our ability to attract and retain customers are the breadth of services delivered via the Internet, reliability, call quality, price, and customer service.legacy communications equipment. For more information regarding the risks associated with such competition, please refer to our "Risk Factors" below.
Hosted or 8
Cloud Based Telephony and Contact CenterServices Providers
When companies make the moveFor customers looking to implement cloud-based communications, we compete with other cloud basedcommunication software providers of UCC, contact center, or phone service 8x8 competes with hosted or cloud providers to win that business. There are a number of competitors in this emerging market but none is dominant.such as RingCentral, Fuze, Vonage, Five9 and InContact/Nice. We believe that the integration of our breadthservices over a common platform, including contact center, differentiates our services from those offered by these competitors. We believe we also compare favorably as to security, reliability, quality of service, including our contact center capabilities give companies of all sizes a significant incentive to choose us when competing with cloud based providers that offer either UCC capabilities or contact center capabilities but not both.
Our primary competitors of our cloud telephonyanalytics and contact center service also include traditional PBX providers including Cisco Systems, Inc. and Avaya Holdings Corp. and other cloud telephony and contact center providers such as Comcast Corporation, inContact, Inc., Interactive Intelligence and RingCentral, Inc. These competitors have services offerings primarily limited to telephony. We believe our products offer unmatched breadth and deployment simplicity of our cloud UCC services.global coverage.
Communications and Collaboration Software Vendors
We also face competition from communications and collaboration software vendors such as Cisco, Google, Amazon and Microsoft Corporation. These competitors provide software solutions that compete with our Virtual Meeting service. They represent a point solution that overlaps with our offering. While noneCorporation, some of which are well-established in the communications industry while others have only recently begun to market cloud communications solutions. Some of these competitors currently have cloud services offerings that span the entire breadth of our services offerings, they each havedeveloped strong software solutions for theirits respective communications and/or collaboration silos.silo. Many of these competitors are substantially larger, and better capitalized, and more well-known than we are and have advantages with larger existing customer bases and larger marketing budgets.are. However, we believe that a collective deployment of a collection of theirthese software solutions that is equivalent to a similar deployment of our services is likely to be more expensive and cumbersome for the customer.customers, when compared to similar deployments of our services.
Legacy on Premises Telephone equipment providers and Incumbent Telephony Companies and Legacy Equipment Providers
In telephony, we face competition fromOur cloud-based software replaces wire line business voice services sold by incumbent telephone companies,and cable companies and alternative voice and video communication providers, including cloud telephony providers. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers.
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These competitors includesuch as AT&T, CenturyLink, Comcast, and Verizon Communications. These competitors are substantially largerCommunications, often in conjunction with on-premises hardware solutions from companies like Avaya, Cisco and better capitalized than we are and haveMitel. We believe that the advantage of a large existing customer base, and larger marketing budgets than we have. Moreover, they also provide some of the broadband services that are required to use our service, which is a significant competitive advantage. However, the servicessolutions offered by these competitors are typically more expensive to adopt, typically require on-premisecumbersome on-premises implementations, and requireneed regular hardware and IT infrastructure upgrades. Furthermore, these competitors typicallythe offerings often do not provide limitedall the functionality needed for ourlarger customers to integrate their communication systems with their IT infrastructure, therefore requiring additional system integration investments and set up.
A deployment of a collection of services offered by these competitors equivalent to a similar deployment of our services is likely to be more expensive and difficult to manage. In addition, in a distributed office setting, on premise solutions typically will be more expensive due to the requirement to locate on premise equipment in each office location, and the incumbent telephone companies may not have service offerings across the business's entire office footprint due to the geographic centric business model of traditional telecommunications companies that limits their terrestrial service offering to geographies where they have physical network facilities. By way of example, the largest incumbent telephone exchange carriers do not have nationwide coverage across the United States for their traditional fixed line telephony service.investments.
Operations
Our Infrastructure Manageroperations infrastructure consists of data management, monitoring, control and billing systems that support all of our products and services. We have invested substantial resources to develop and implement our real-time call management information system. Key elements of our Infrastructure Manageroperations infrastructure include a prospective customer quotation portal, customer provisioning, customer access, fraud control, network security, call routing, call monitoring, media processing and normalization, call reliability, detailed call record storage and billing and integration with third-party applications. We maintain a call switchingcall-switching platform in software that manages call admission, call control and call rating and routes calls to an appropriate destination or customer premises equipment.
Network Operations Center
We maintain aglobal network operations centercenters at our headquarters in San Jose, California and in Cluj-Napoca, Romania, and employ a staff of approximately 50 individuals with experience in voice and data operations to provide 24-hour operations support, seven days per week. We use various tools to monitor and manage all elements of our network and our partners' networks in real-time.real time. We also monitor the network elements of some of our larger business customers. Additionally, our network operations center provides technical support to troubleshoot equipment and network problems. We also rely upon the network operations centers and resources of our telecommunications carrier partners such as Level 3 Communications, Inc. and data center providers such as Equinix, Inc. to augment our monitoring and response efforts.
In the event of a major disruption at a data center, such as a natural disaster, failover between data centers for 8x8 Virtual Office is designed to occur instantly. Active calls may disconnect, but new calls can be generated immediately. In addition, most of the maintenance services performed by 8x8 are seamless and non-disruptive to customers. For example, we can move the core call flow processing from one data center to another without dropping a call. We offer local redundancy (i.e., failover to a data center within the same region) as a standard feature of 8x8 Virtual Contact Center, and geographical redundancy (i.e., failover to a data center in a different region) can be enabled as an option to provision geo-redundant tenants on multiple sites. Our ContactNow product is geographically redundant in the U.S. and, in the UK, across multiple sites in London.
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Customer and Technical Support
We maintain8x8 maintains a call center at our headquartersglobal customer support organization with operations in San Jose, Californiathe United States, United Kingdom, Philippines and have a staff of approximately 100 employees and contractors that provideRomania. Customers can access 8x8 customer service andsupport services directly from the company website or receive multi-channel technical support via phone, chat, web and email. Emergency support is available on a 24x7 basis.
We take a lifecycle approach to customers. In addition, we have outsourced some customer support, activitiessupporting customers from onboarding to third parties. Customers who accessdeployment and training, and through the renewal process, to drive greater user adoption of 8x8 services. For our services directlylarger enterprise customers, our Elite Touch implementation methodology utilizes a Deployment Management team and provides active support through the "go-live" date at each customer site. We also provide a Customer Success Manager as a single point of contact for every aspect of the post-sale relationship. Finally, we offer a variety of training classes through our website receive customer service and technical support8x8 Academy, either through multilingual telephone communication, web-based and "chat" sessions, and e-mail support.instructor-led classes or self-paced eLearning.
Interconnection Agreements
We are a party to telecommunications interconnect and service agreements with VoIP providers and PSTNpublic switched telephone network (PSTN) telecommunications carriers such as Level3 Communications, Verizon Communicationsin the United States and Inteliquent.other global regions. Pursuant to these agreements, VoIP calls originating on our network can be terminated on other VoIP networks or the PSTN. Correspondingly,PSTN, and likewise, calls originating on other VoIP networks and the PSTN can be terminated on our network.
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Research and Development
The UCC in the cloud communications market is characterized by rapid technological changes and advancements, typical of most SaaS markets. Accordingly, we make substantial investments in the design and development of new products and services, as well as the development of enhancements and features to our existing products and services, and make these enhancements available to our customers frequently. OurResearch and development expenses in each of the fiscal years ended March 31, 2017, 2016 and 2015 were $27.5 million, $24.0 million and $15.1 million, respectively.
We plan to invest in expanding the set of services within our platform, including extending our contact center capabilities, adding deeper collaboration services, and bringing an increasing number of analytics-driven applications to market. We expect our future development programs also willto focus on the integration and functionality of our products and services with other SaaS products, such as Salesforce.com, Netsuite,NetSuite, Zendesk and others. Supporting a variety of standard and custom integration partners and services is essential to our success as a cloud services provider.
We currently employ more than 140 individuals in research, development and engineering activities in our facilities in San Jose, California, London, England and Cluj, Romania as well as outsourced software development consultants. Research and development expenses in each of the fiscal years ended March 31, 2015, 2014 and 2013 were $15.1 million, $11.6 million and $8.1 million, respectively.
Regulatory Matters
In the United States, VoIP and other software communications and collaboration services, like ours, have been subject to less regulation at the state and federal levels than traditional telecommunications services. Providers of traditional telecommunications services are subject to the highest degree of regulation, while providers of VoIP and other information services are largely exempt from most federal and state regulations governing traditional common carriers. The FCC has subjected VoIP service providers to a smaller subset of regulations that apply to traditional telecommunications service providers and has not yet classified VoIP services as either telecommunications or information. The FCC is currently examining the status of VoIP service providers and the services they provide in multiple open proceedings. In addition, many
Many state regulatory agencies impose taxes and other surcharges on VoIP services, and certain states take the position that offerings by VoIP providers are intrastate telecommunications services and therefore subject to state regulation. These states argue that if the beginning and end points of communications are known, and if some of these communications occur entirely within the boundaries of a state, the state can regulate that offering. We believe that the FCC has preempted states from regulatingfederal regulations largely pre-empt state regulations that treat VoIP offerings in the same manner as providers of traditional telecommunications services. However, this issuethere are many areas of regulation where pre-emption has not been resolved definitively as a matter of law, and it remainslaw. It is possible that the FCC could determine that suchVoIP services are not information services, or that there could be a judicial or legislative determination that the states are not preemptedpre-empted from regulating VoIP services as traditional telecommunications services. We cannot predict how or when these issues will be resolved or itsthe potential future impact on our business at this time.
The effect of any future laws, regulations and orders on our operations, including, but not limited to, our cloud-based communications and collaboration services, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding obligations increases service costs that may or may not be recoverable from our customers, which could result in making our services less competitive with traditional telecommunications services if we increase our prices or decreasing our profit margins if we attempt to absorb such costs.10
In addition to regulations addressing Internet telephony and broadband services, other regulatory issues relating to the Internet in general,generally could affect our ability to provide our services. Congress has adopted legislation that regulates certain aspects of the Internet including online content, user privacy, taxation, liability for third partythird-party activities and jurisdiction. In addition, a number of initiatives pending in Congress and state legislatures would prohibit or restrict advertising or sale of certain products and services on the Internet, which may have the effect of raising the cost of doing business on the Internet generally.
Internationally, we are subject to a complex patchwork of regulations that vary from country to country. Some countries have adopted laws that make the provision of VoIP services illegal within the country. Other countries have adopted laws that impose stringent licensing obligations on providers of VoIP services like ours. In many countries, it is not clear how laws that have historically been applied to traditional telecommunications providers will be applied to providers of VoIP services like us.
The effect of any future laws, regulations and orders, or any changes in existing laws or their enforcement, on our operations cannot be determined. But as a general matter, increased regulation and the imposition of additional funding obligations increases service costs that may or may not be recoverable from our customers. An increase in these costs could make our services less competitive with traditional telecommunications services, if we increase our prices, or decrease our profit margins, if we attempt to absorb such costs.
Federal, state, local and foreign governmental organizations are considering other legislative and regulatory proposals that would regulate and/or tax applications running over the Internet. We cannot predict whether new taxes will be imposed on our services, and depending on the type of taxes imposed, whether and how our services would be affected thereafter. Increased regulation of the Internet may decrease its growth and hinder technological development, which may negatively impact the cost of doing business via the Internet or otherwise materially adversely affect our business, financial condition and results of operations. Please refer to Part I, Item 1A.1A "Risk Factors"Factors," for a discussion of regulatory risks, proceedings and issues that could adversely affect our business and operating results in the future.
Intellectual Property and Proprietary Rights
Our ability to compete depends, in part, on our ability to obtain and enforce intellectual property protection for our technology in the United States and internationally. We currently rely primarily on a combination of trade secrets, patents, copyrights, trademarks and licenses to protect our intellectuallyintellectual property. As ofFrom inception through March 31, 2015,2017, we have been awarded 104131 United States patents, of which we expect to expire between 20152017 and 2042.2035. We have additional United States and foreign patent applications pending.
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We cannot predict whether our pending patent applications will result in issued patents.
To protect our trade secrets and other proprietary information, we require our employees to sign agreements providing for the maintenance of confidentiality and also the assignment of rights to inventions made by them while in our employ.employed by us. There can be no assurance that our means of protecting our proprietary rights in the United States or abroad will be adequate or that competition will not independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any of our patents. In addition, the laws of foreign countries in which our products are or may be sold domay not protect our intellectual property rights to the same extent as do the laws of the United States. Our failure to protect our proprietary information could cause our business and operating results to suffer.
We are also subject to the risks of adverse claims and litigation alleging infringement of the intellectual property rights of others. Such claims and litigation could require us to expend substantial resources and distract key employees from their normal duties, which could have a material adverse effect on our operating results, cash flows and financial condition. The communications and software industries are subject to frequent litigation regarding patent and other intellectual property rights. Moreover, the VoIP service provider community has historically been a target of patent holders. There is a risk that we will be a target of assertions of patent rights and that we may be required to expend significant resources to investigate and defend against such assertions of patent rights. For information about specific claims, please refer to Part I, Item 1A,Risk Factors - "Our infringement of a third party's proprietary technology could disrupt our business" and Part I, Item 3. "LEGAL PROCEEDINGS."
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We rely uponutilize certain technology, including hardware and software, licensedthat we license from third parties. TheseMost of these licenses are on standard commercial terms made generally available by the companies providing the licenses. To date, the cost and terms of these licenses individually has not been material to our business. There can be no assurance that the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology currently utilized by us or other technology which we may seek to license in the future will be available to us on commercially reasonable terms or at all, however. The loss of, or inability to maintain, existing licenses could result in shipment delays or reductions until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and could harm our business.
Geographic Areas
Most of our customers and substantially all of our revenues are in the U.S. Revenue from customers outside the United States was not material for the fiscal years ended March 31, 2015, 2014 and 2013. We have only onetwo reportable segment.segments. Financial information relating to revenues generated in different geographic areas are set forth in Note 12 to our consolidated financial statements contained in Part II, Item 8 of this Annual Report.
Employees
As of March 31, 2015,2017, our workforce consisted of 565 employees.1,019 full time employees spread across the globe. None of our employees are represented by a labor union or are subject to a collective bargaining arrangement.
Available Information
We were incorporated in California in February 1987 and reincorporated in Delaware in December 1996. We maintain a corporate Internet website at the address http://www.8x8.com. The contents of this website are not incorporated in or otherwise to be regarded as part of this Annual Report. We file reports with the Securities and Exchange Commission, or SEC, which are available on our website free of charge. These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports, each of which is provided on our website as soon as reasonably practical after we electronically file such materials with or furnish them to the SEC. You can also read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1.800.SEC.0330. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including 8x8.
Executive Officers of the Registrant
Our executive officers as of the date of this report are listed below.
Vikram Verma, Chief Executive Officer. Vikram Verma, age 50,52, has served as Chief Executive Officer since September 2013 and as a director since January 2012. From October 2008 through August 2013, Mr. Verma was President of Strategic Venture Development for Lockheed Martin. From 2006 through 2008, Mr. Verma was President of the IS&GS Savi Group, a division of Lockheed Martin. Prior to 2006, Mr. Verma was Chairman and Chief Executive Officer of Savi Technology, Inc. Mr. Verma received a B.S.E.E. degree from Florida Institute of Technology, ana M.S.E. degree from the University of Michigan in electrical engineering, and a graduate degree of Engineer in Electrical Engineering from Stanford University.
Bryan Martin,Chairman and Chief Technology Officer. Bryan Martin, age 47,49, has served as Chairman of the Board of Directors since December 2003, has served as Chief Technology Officer since September 2013 and as a director since February 2002. From February 2002 to September 2013, he served as Chief Executive Officer. From March 2007 to November 2008, and again from April 2011 to December 2011, he served as President. From February 2001 to February 2002, he served as our President and Chief Operating Officer. He served as our Senior Vice President, Engineering Operations from July 2000 to February 2001 and as Chief Technical Officer from August 1995 to August 2000. He also served as a director of the Company from January 1998 through July 1999. In addition, Mr. Martin served in various technical roles for the Company from April 1990 to August 1995. He received a B.S. and an M.S. in Electrical Engineering from Stanford University.
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Mary Ellen Genovese, Chief Financial Officer. Mary Ellen Genovese, age 55,58, has served as our Chief Financial Officer since November 2014. Ms. Genovese had been serving as our Senior Vice President of Human Resources since July 2014 and prior to that, as a consultant to the Company since April 2012. Prior to joining the Company, from 2008 to 2011, Ms. Genovese served as a consultant to a Fortune 50 security company. From 2004 through 2006, Ms. Genovese was the Chief Financial Officer of Savi Technology, Inc. Prior to joining Savi Technology, she was Chief Financial Officer of Trimble Navigation Limited from 2000 to 2004. Between 1992 and 2000, Ms. Genovese worked at Trimble in a succession of other financial and accounting positions, including VP of Finance and Corporate Controller. Ms. Genovese holds a B.S. Degree in Accounting from Fairfield University and received her CPA license from the State of Connecticut.
Darren Hakeman, Senior Vice President of Product and Strategy. Darren Hakeman, age 45,47, has served as our Senior Vice President of Product and Strategy since September 2013, and was a consultant to the Company starting in May 2013. From 2009 to 2013, Mr. Hakeman worked as a strategic advisor to leading Silicon Valley companies and emerging start-ups including Authentication Metrics, Inc. (now Agari), Blackfire Research, and a major global security company. Prior to 2009, he served as Senior Vice President of Operations for a SaaS Business Unit of Lockheed Martin that emerged following Lockheed's acquisition of Savi Technology, Inc. He received a B.S. and an M.S. in Electrical Engineering from Stanford University.
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Puneet Arora, Senior Vice President of Global Sales. Puneet Arora, age 39,42, has served as Senior Vice President of Global Sales since January 2015. From January 2013 to January 2015, Mr. Arora was Vice President and Head of North America Sales at LivePerson. From August 2010 to August 2012, Mr. Arora led Cloud CRM Sales - North America - West for Oracle. From September 2007 to November 2009, Mr. Arora was Vice President of Corporate Sales for Salesforce.com. He received a B.S. in Computer Engineering from Iowa State University.University and an M.B.A. from Babson College.
Henrik Gerdes, Chief Accounting Officer. Henrik Gerdes, age 41, has served as our Chief Accounting Officer, since March 2017. Prior to joining the Company, Mr. Gerdes, served as Corporate Controller and Treasurer at Rocket Fuel Inc. from 2014 through March 2017, Director of Finance at TIBCO Software Inc. from 2011 through 2014 and SEC reporting manager from 2010 through 2011. Between 2002 and 2010, Mr. Gerdes served in different positions at PricewaterhouseCoopers in Germany and San Jose, USA. Mr. Gerdes holds a Masters of Business Economics from University of Goettingen, Germany.
If any of the following risks actually occur, our business, results of operations and financial condition could suffer significantly.
Our success depends on the growth and customer acceptance of our services.
Our future success depends on our ability to significantly increase revenue generated from sales of our cloud communications and collaboration servicessoftware solutions to business customers, including SMBssmall and midsize businesses (SMBs) and mid-market and larger distributed enterprises. To increase our revenue, we must add new customers and encourage existing customers to continue their subscriptions on(on terms favorable to us,us), increase their usage of our services, andand/or purchase additional services from us. For customer demand and adoption of our cloud communications and collaboration servicessolutions to grow, the quality, cost and feature benefits of these services must be sufficientcompare favorably to cause customers to adopt them.those of competing services. For example, our cloud telephonyunified communications and contact center services must continue to evolve so that high-quality service and features can be consistently providedoffered at competitive prices. As our target markets mature, or as competitors introduce lower cost and/or more differentiated products or services that compete or are perceived to compete with ours, our ability to sell new customers and obtain renewals from existing customers could be impaired. As a result, we may be unable to renew or extend our agreements with existing customers or attract new customers, or new business from existing customers, on terms that would be favorable or comparable to prior periods,terms, which could have an adverse effect on our revenue and growth.
Historically, our core service offerings have been our cloud telephony and contact center services, which contributed a substantial majority of our revenues in fiscal years ended March 31, 2015, 2014 and 2013. Marketing and selling new and enhanced features and services, and additional communications and collaboration offerings, may require increasingly sophisticated and costly sales efforts. Similarly, theThe rate at which our existing customers purchase any new or enhanced services we may offer depends on a number of factors, including general economic conditions, and their reactions to any price changes related tothe importance of these additional features and services.services to our customers, and the price at which we offer them. If our customers react negatively to our new or enhanced service offerings or our efforts to upsell to our customers are otherwise not as successful and negative reaction occurs,as we project, our business may suffer. Our sales strategies must also continue to evolve and adapt as our market matures, for example through the offering of additional customer self-service tools and automation for the SMB segment and the development of new and more sophisticated sales channels that leverage the strengths of our partners. In addition, marketing and selling new and enhanced features and services may require increasingly sophisticated and costly sales and marketing efforts, which may require us to incur additional expenses and may negatively impact the results of our operations.
To support the successful marketing and sale of our services to new and existing customers, we must continue to offer high-quality educationtraining, deployment, and customer support. Providing this education and supportthese services effectively requires that our customer support personnel have specificindustry-specific technical knowledge and expertise, makingwhich may make it more difficult and costly for us to locate and hire qualified personnel, andparticularly in the competitive Silicon Valley labor market where we are headquartered. Our support personnel also require extensive training on our products, which may make it difficult to scale up our support operations due to the extensive training required.rapidly. The importance of high-quality customer support will increase as we expand our business globally and pursue new mid-market and distributed enterprise customers. If we do not help our customers quickly resolve post-deployment issues and provide effective ongoing support, our ability to sell additional functionalityfeatures and services to existing customers will suffer and our reputation with existing or potential customers willmay be harmed.
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Furthermore, we operate in an industry that is subject to significant federal and state regulation in the United States and regulation by various governments and governmental bodies in other countries in which we offer our communications and collaboration services. Regulations may impede the growthAs more of our sales efforts are targeted at enterprise customers, our sales cycle may become more time-consuming and expensive, we may encounter pricing pressure and implementation and customization challenges, and we may have to delay revenue recognition for some complex transactions, all of which could harm our business impose significant additional costs, and require substantial changes to software and other technology. Also, new regulations may be adopted that materially reduce demand for our services by businesses.operating results.
We face significant risks incurrently derive a majority of our strategyrevenues from sales of our cloud software solutions to target mid-market and larger distributed enterprises, and we believe increasing our sales to these customers is key to our future growth. Our sales cycle, which is the time between initial contact with a potential customer and the ultimate sale to that customer, is often lengthy and unpredictable for saleslarger enterprise customers. Many of our prospective enterprise customers do not have prior experience with cloud-based communications and, therefore, typically spend significant time and resources evaluating our solutions before they purchase from us. Similarly, we typically spend more time and effort determining their requirements and educating these customers about the benefits and uses of our solutions. Enterprise customers also tend to demand more customizations, integrations and additional features than SMB customers. As a result, we may be required to divert more sales and engineering resources to a smaller number of large transactions than we have in the past, which means that we will have less personnel available to support other segments or that we will need to hire additional personnel, which would increase our operating expenses.
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It is often difficult for us to forecast when a potential enterprise sale will close, the size of the customer's initial service order and the period over which the deployment will occur, which impacts our recognition of revenue. Enterprise customers may delay their purchases from one quarter to another as they assess their budget constraints, negotiate early contract terminations with their existing providers or wait for us to develop new features. Any delay in closing, or failure to close, a large enterprise sales opportunity in a particular quarter or year could significantly harm our projected growth rates and cause the amount of new sales we book to vary significantly from quarter to quarter. We may also have to delay revenue recognition on some of these transactions until the customer's technical or implementation requirements have been met.
In some cases, we may enter into a contract with a large enterprise customer, such as a preferred vendor agreement, that has little or no minimum purchase commitments but establishes the terms on which the customer's affiliates, clients or franchisees (as the case may be) may order services from us in the future. We may expend significant time and resources towards becoming a preferred vendor without booking significant sales from the opportunity until months or years after we sign the initial agreement. If we are unsuccessful in selling our services to the prospective purchasers under these agreements, we may not recognize revenue in excess of the expenses we incur in pursuing these opportunities, which could adversely impact our profitability and cash flow.
We also face significant risks in implementing and supporting the services we sell to mid-market and larger distributed enterprises and, if we do not manage these efforts effectively, our business and results of operations could be materially and adversely affected.
We currently derive a minority of our revenues from sales of our cloud communications and collaboration services to mid-market and larger distributed enterprises, but we believe penetrating these customers is key to our future growth. We have a limited history of selling our services to larger businesses and have experienced, and may continue to experience, new challenges in deploying and providing our cloud communications and collaboration servicesongoing support for the solutions we sell to large customers. As we have targeted more of our sales efforts to mid-market and larger distributed enterprises, our sales cycle has become more time-consuming and expensive. As we expand farther into this market segment, we may encounter pricing pressure and implementation and customization challenges, and revenue recognition may be delayed for some complex transactions, all of which could harm our business and operating results. In this market segment, the customer's decision to use our service may be an enterprise-wide decision and, if so, these types of sales may require us to provide greater levels of education regarding the use and benefits of our service, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. In addition, larger customers may demand more features, integration services and customization. Furthermore, larger
Larger customers' networks canare often more complex than those of smaller customers and generally require participation from the customer information technology (IT) team, and there is no guarantee that resources with adequate expertise will be complex, and theiravailable when we deploy our services. The lack of local IT expertiseresources may prevent us from ensuring the proper deployment of our services, which can in turn adversely impact the quality of services that we deliver over theirour customers' networks, and canand/or may result in delays in the implementation of our services that can adversely affect the installation of our services, which may lead to the cancellation of orders or services. This may create a public perception that we are unable to deliver high quality of service to the end-users, negatively impactingour customers, which could harm our reputation and creating an adverse perception of our abilitiesmake it more difficult to implementattract new customers and deliver services resulting in cancellation of orders or services.retain existing customers. Moreover, larger customers demandtend to require higher levels of customer service and individual attention (including periodic business reviews and in-person visits, for example), which can impactmay increase our cost structure to implementcosts for implementing and deliverdelivering services. If a customer is not satisfiedunsatisfied with the quality of services we provide or the quality of work performed by us or a third party, orwe may decide to incur costs beyond the scope of our contract with the type of services or solutions delivered, then we might incur additional costscustomer in order to address the situation and protect our reputation, which may in turn reduce or eliminate the profitability of that work might be impaired, andour contract with the customer's dissatisfaction with our services could damage our ability to obtain additional work from that customer. In addition, negative publicity related to our larger customer relationships, regardless of its accuracy, could injureharm our reputation and further damage our business by affecting our abilitymake it more difficult for us to compete for new business with current and prospective customers.
Larger customers also might require services in different international locations where we may encounter technical, logistical, infrastructure and regulatory limitations on our ability to implement or deliver our services, and be unable to provide the required services. These issues could limit the expansion of our services for some of these customers or result in cancellation of all of our services to those customers that want just one vendor internationally
As a result of these factors, these sales opportunities may require us to devote greater sales support and engineering services resources to individual customers, driving up costs and time required to complete sales and diverting our own sales and engineering resources to a smaller number of larger transactions, while potentially delaying revenue recognition on transactions for which we must meet technical or implementation requirements. Such delays in revenue recognition could adversely impact our periodic revenues and cause our operating results to become more volatile, and materially adversely affect our operating results. Furthermore, we may invest significant time and resources with no assurance that a sale will ever be made. We also face challenges building and training an integrated sales force capable of fully addressing the services and features contained in all of the components in our communications and collaborationcomprehensive product suite, as well as a staff of expert engineering and customer support personnel capable of addressing the full range of installation and deployment issues ofthat tend to arise more frequently with larger customers that can arise with a comprehensive suite of services like ours.customers. Also, we have only limited experience in developing and managing sales channels and distribution arrangements for larger businesses. If we fail to effectively execute the sale, deployment and ongoing support of our strategyservices to target mid-market and larger distributed enterprises, our results of operations and our overall ability to grow our customer base could be materially and adversely affected.
Intense competition in the markets in which we compete could prevent us from increasing or sustaining our revenue growth and increasing or maintaining profitability.
The business of cloud communications and collaboration servicesindustry is competitive, and we expect it to become increasingly competitive in the future. We may also face competition from companies in adjacent or overlapping industries.
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In connection with our unified communication services, we face competition from other providers of cloud communication services, such as RingCentral, Fuze, Vonage and Dialpad. In connection with our cloud contact center services, we face competition from other providers of cloud and premise-based contact center software services, such as inContact (recently acquired by NICE), Five9 and Interactive Intelligence. In addition, because many of our target customers have historically purchased communications services from incumbent telephone companies along with legacy on-premises communication equipment, we compete with these customers' existing providers. These competitors include, for example, AT&T, CenturyLink, Comcast and Verizon Communications in the United States, as well as local incumbent communications providers in the international markets where we operate, such as Vodafone, Telefonica, Orange, America Movil and Deutsche Telekom, all in conjunction with on-premises hardware solutions from companies like Avaya, Cisco and Mitel. We may also face competition from large Internet and cloud service companies such as Google Inc., Amazon Inc., Oracle Corporation and Microsoft Corporation, any of which might launch its owna new cloud-based business communications servicesservice, expand its existing offerings or acquire other cloud-based business communications companies in the future.
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In connection with our cloud telephony services, we face competition from incumbent telephone companies, cable companies and alternative voice and video communication providers, including other providers of cloud telephony services. Because most of our target customers are already purchasing communications services from one or more of these providers, our success is dependent upon our ability to attract these customers away from their existing providers. The incumbent telephone companies are our primary competitors in cloud communications and collaboration. These competitors include AT&T, CenturyLink and VerizonCommunications as well as rural incumbents, such as Windstream. In addition, in connection with all of our collaboration and communications services, we face competition from traditional private branch exchange, or PBX, providers, including Cisco Systems and Avaya and other providers of cloud telephony and contact center services, such as Comcast, inContact, Microsoft and RingCentral.
Many of our current and potential competitors have longer operating histories, significantly greater resources and brand awareness, and a larger base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours.products. Our competitors may also offer bundled service arrangements that offerpresent a more completedifferentiated or better integrated product to customers. CompetitionIncreased competition could decreaserequire us to lower our prices, reduce our sales revenue, lower our gross profits and/or decrease ourcause us to lose market share. In addition, many of our customers are not subject to long-term contractual commitments and have the ability to purchaseswitch from our services and can terminateto our service and switch to competitors' offerings on relatively short notice.
Given the significant price competition in the markets for our services, we aremay be at a significant disadvantage compared with many of ourthose competitors especially those withwho have substantially greater resources whothan us or may otherwise be better ablepositioned to withstand an extended period of downward pricing pressure. The adverse impact of a shortfall in our revenues may be magnified by our inability to adjust our expenses to compensate for such shortfall. Announcements, or expectations, as to the introduction of new products and technologies by our competitors or us could cause customers to defer purchases of our existing products, which also could have a material adverse effect on our business, financial condition or operating results.
Because we recognize revenue from customer subscriptions over the term of the relevant contract, the effects of customer additions, cancellations and changes in subscribed services are not immediately reflected in full in our operating results.
As a subscription-based business, we recognize revenue over the term of each of our contracts, which generally range from one to five years. As a result, much of the revenue we report each quarter results from contracts entered into during previous quarters. Consequently, a shortfall in demand for our cloud communications and collaboration services or a decline in new or renewed contracts in any one quarter may not significantly reduce our revenue for that quarter but could negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in new sales or cancellations of our services and subscriptions from new customers or for additional services from existing customers will impact our ongoing monthly recurring revenue but will not be reflected fully in our operating results until future periods. Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable term of the contracts.
We have a history of losses and are uncertain of our future profitability.
We recorded an operating incomeloss of $3.9approximately $6.7 million for the fiscal year ended March 31, 20152017 and ended the period with an accumulated deficit of $104.7approximately $115 million. Although we have achieved operating income in eachthree of our five most recent fiscal years, we sufferedincurred substantial operating losses prior to that period and we may incur operating losses in the future, which mayand those loses could be substantial. As we expand our geographic reach and range of service offerings, and further invest in research and development, and sales and marketing, and regulatory compliance, we will need to increase revenues in order to generate sustainable operating profit. Given our history of fluctuating revenues and operating losses, we cannot be certain that we will be able to achieve or maintain operating profitability on an annual basis or on a quarterly basis in the future.
A higherOur churn rate ofmay increase in future periods due to customer cancellations would negatively affect our business by reducingor other factors, which may adversely impact our revenue or requiringrequire us to spend more money to grow our customer base.
Our customers generally do not have long-term contracts with us and may discontinue their subscriptions for our services after the expiration of their initial subscription period, which typically range from one to fivethree years. In addition, our customers may renew for lower subscription amounts or for shorter contract lengths. We may not accurately predict cancellation rates for our customers. Our cancellation rates may increase or fluctuate as a result of a number of factors, including customer usage, pricing changes, number of applications used by our customers, customer satisfaction with our service, the acquisition of our customers by other companies and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or decrease the amount they spend with us, our revenue will decline and our business will suffer.
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Our average monthly business service revenue churn was 0.7% forless than 1% over the past two fiscal year ended March 31, 2015 compared with 1.3% for the fiscal year ended March 31, 2014.years. Our method of computing this revenue churn rate may be different from methods used by our competitors and other companies in our industry to compute their publicly disclosed churn rates. As a result, only limited reliance can be placed on our churn rate when attempting to compare it to that of other companies. Also, our churn rate can vary based on events that may not be indicative of actual trends in our business. Our churn rate could increase in the future if customers are not satisfied with our service. Other factors, including increased competition from other providers of communications and collaborations services, alternative technologies, and adverse business conditions also influence our churn rate.
Because of churn, we must acquire new customers on an ongoing basis to maintain our existing level of customers and revenues. As a result, marketing expenditures are an ongoing requirement of our business. If our churn rate increases, we will have to acquire even more new customers in order to maintain our existing revenues. We incur significant costs to acquire new customers, and those costs are an important factor in determining our net profitability. Therefore, if we are unsuccessful in retaining customers or are required to spend significant amounts to acquire new customers beyond those budgeted, our revenue could decrease and our net incomeloss could decrease.increase.
AlthoughOur rate of customer cancellations may increase in future periods due to a number of factors, some of which are beyond our control, such as the majorityfinancial condition of our billing arrangements with customers are prepaid, we regularly monitoror the percentagestate of customers who ceasecredit markets. In addition, a single, protracted service outage or a series of service disruptions, whether due to pay for our services due to closing or downsizing their business. Even though our customer churn rates improved in fiscal 2015, we believe that between 25% and 50%those of our totalcarrier partners, may result in a sharp increase in customer churn is related to customers' financial condition and we cannot be certain that we will continue to experience the same improvement in churn rates given current economic conditions. cancellations.
Due to the length of our sales cycle, especially in adding new mid-market and larger distributed enterprises as customers, we may also experience delays in acquiring new customers to replace those that have terminated our services. Such delays would be exacerbated if general economic conditions worsen. An increase in churn, particularly in challenging economic times, could have a negative impact on the results of our operations.
The impact of the current economic climate and adverse credit markets may disproportionately impact demand for our products and services due to our target customer profile.
The majority of our existing and target customers are in the SMB and mid-market business sectors. These businesses may be more likely to be significantly affected by economic downturns than larger, more established businesses. They also may be more likely to require working capital financing from local and regional banks whose lending activities have been reduced substantially since 2008, as a result of which many of our existing and target customers may lack the funds necessary to add new equipment and services such as ours. Additionally, these customers often have limited discretionary funds which they may choose to spend on items other than our products and services. If small and medium businesses continue to experience economic hardship,this could negatively affect the overall demand for our products and services, delay and lengthen sales cycles and lead to slower growth or even a decline in our revenue, net income and cash flows.
The market for cloud communications and collaboration servicessoftware solutions is subject to rapid technological change, and we depend on new product and service introductions in order to maintain and grow our business.
We operate in an emerging market that is characterized by rapid changes in customer requirements, frequent introductions of new and enhanced products, and continuing and rapid technological advancement. To compete successfully in this emerging market, we must continue to design, develop, manufacture, and sell new and enhanced cloud communications and collaborationsoftware solutions products and services that provide higher levels of performance and reliability at lower cost. If we are unable to develop new services that address our customers' needs, to deliver our applications in one seamless integrated product offering that addresses our customers' needs, or to enhance and improve our services in a timely manner, we may not be able to achieve or maintain adequate market acceptance of our services. Our ability to grow is also subject to the risk of future disruptive technologies. Access and use of our services is provided via the cloud, which, itself, has been disruptive to the previous premise-basedpremises-based model.
If new technologies emerge that are able to deliver communications and collaboration services at lower prices, more efficiently, more conveniently or more securely, such technologies could adversely impact our ability to compete.
Maintaining adequate research and development personnel and resources is essential to new product development and continued innovation, and we intend to increase our investment in research and development activities to add new features and services to our offerings. If we are unable to develop new features and services internally due to certain constraints,factors such as competitive labor markets, high employee turnover, lack of management ability or a lack of other research and development resources, we may miss market opportunities. Further, many of our competitors expendhave historically spent a considerably greater amount of funds on their research and development programs, and those that do not may be acquired by larger companies that would allocate greater resources to our competitors' research and development programs. In addition, there is no guarantee that our research and development efforts will succeed, or that our new products and services will enable us to maintain or grow our revenue or recover our development
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costs. Our failure to maintain adequate research and development resources, to compete effectively with the research and development programs of our competitors and to successfully monetize our research and development efforts could materially and adversely affect our business and results of operations.
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We may not be able to scale our business efficiently or quickly enough to meet our customers' growing needs, and if we are not able to grow efficiently,in which case our operating results could be harmed.
As usage of our communications and collaboration servicescloud software solutions by mid-market and larger distributed enterprises expands and as customers continue to integrate our services across their enterprises, we will needare required to devote additional resources to improving our application architecture, integrating our products and applications across our technology platform, integrating with third-party systems, and maintaining infrastructure performance. As our customers gain more experience with our services, the number of users and transactions managed by our services, the amount of data transferred, processed and stored by us, the number of locations where our service is being accessed, and the volume of communications managed by our services have in some cases, and may in the future, expand rapidly. In addition, we will need to appropriately scale our internal business systems and our services organization, including customer support and services and regulatory compliance, to serve our growing customer base. Any failure of or delay in these efforts could cause impaired system performance and reduced customer satisfaction. These issues could reduce the attractiveness of our cloud communications and collaboration servicessoftware solutions to customers, resulting in decreased sales to new customers, lower renewal rates by existing customers, the issuance of service credits, or requested refunds, which could hurt our revenue growth and our reputation. Even if we are ableThese system upgrades and the expansion of our support and services have been and will continue to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management time and attention and increasing our operating expenses. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to ourinfrastructureour infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely impact our financial results.
To provide our services, we rely on third parties for all of our network connectivity and co-location facilities.
We currently use the infrastructure of third-party network service providers, including the services of Equinix, Inc., and Level 3 Communications, Inc., to provide all of our cloud services over their networks rather than deploying our own networks.
We also rely on third-party network service providers to originate and terminate substantially all of the PTSN calls using our cloud-based services. We leverage the infrastructure of third partythird-party network service providers to provide telephone numbers, PSTN call termination and origination services, and local number portability for our customers rather than deploying our own network throughout the United States.States and internationally. This decision has resulted in lower capital and operating costs for our business in the short-term, but has reduced our operating flexibility and ability to make timely service changes. If any of these network service providers cease operations or otherwise terminate the services that we depend on, the delay in switching our technology to another network service provider, if available, and qualifying this new service provider could have a material adverse effect on our business, financial condition or operating results. The rates we pay to our network service providers may also increase, which may reduce our profitability and increase the retail price of our service.
While we believe that relations with our current service providers are good, and we have contracts in place, thereThere can be no assurance that these service providers will be able or willing to supply cost-effective services to us in the future or that we will be successful in signing up alternative or additional providers. Although we believe that we could replace our current providers, if necessary, our ability to provide service to our subscribers could be impacted during this any such transition, which could have an adverse effect on our business, financial condition or results of operations. The loss of access to, or requirement to change, the telephone numbers we provide to our customers also could have a material adverse effect on our business, financial condition or operating results.
Due to our reliance on these service providers, when problems occur in a network, it may be difficult to identify the source of the problem. The occurrence of hardware and software errors, whether caused by our service or products or those of another vendor, may result in the delay or loss of market acceptance of our products and any necessary revisions may force us to incur significant expenses. The occurrenceUnder the terms of somethe "end-to-end" service level commitments that we make for the benefit of qualifying customers, we are potentially at risk for service problems experienced by these types of problemsservice providers. Customers who do not qualify for these enhanced SLA commitments may seriouslynevertheless hold us responsible for these service issues and seek service credits, early termination rights or other remedies. Accordingly, service issues experienced by our service provider partners may harm our reputation as well as our business, financial condition or operating results.
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Our physical infrastructure is concentrated in a few facilities and any failure in our physical infrastructure or services could lead to significant costs and disruptions and could reduce our revenue, harm our business reputation and have a material adverse effect on our financial results.
Our leased network and data centers are subject to various points of failure. Problems with cooling equipment, generators, uninterruptible power supply, routers, switches, or other equipment, whether or not within our control, could result in service interruptions for our customers as well as equipment damage. Because our services do not require geographic proximity of our data centers to our customers, our infrastructure is consolidated into a few large data center facilities. Any failure or downtime in one of our data center facilities could affect a significant percentage of our customers. The total destruction or severe impairment of any of our data center facilities could result in significant downtime of our services and the loss of customer data. Because our ability to attract and retain customers depends on our ability to provide customers with highly reliable service, even minor interruptions in our service could harm our reputation. Additionally, in connection with the expansion or consolidation of our existing data center facilities from time to time, there is an increased risk that service interruptions may occur as a result of server relocation or other unforeseen construction-related issues.
We have experienced interruptions in service in the past. While we have not experienced a material increase in customer attrition following these events, the harm to our reputation is difficult to assess. We havetakenhave taken and continue to take steps to improve our infrastructure to prevent service interruptions, including upgrading our electrical and mechanical infrastructure. However, service interruptions continue to be a significant risk for us and could materially impact our business.
Any future service interruptions could:
Any of these events could materially increase our expenses or reduce our revenue, which would have a material adverse effect on our operating results.
We may also be required to transfer our servers to new data center facilities in the event that we are unable to renew our leases on acceptable terms, or at all, or the owners of the facilities decide to close their facilities, and we may incur significant costs and possible service interruption in connection with doing so. In addition, any financial difficulties, such as bankruptcy or foreclosure, faced by our third-party data center operators, or any of the service providers with which we or they contract, may have negative effects on our business, the nature and extent of which are difficult to predict. Additionally, if our data centers are unable to keep up with our increasing needs for capacity, our ability to grow our business could be materially and adversely impacted.
Failure of our information technology systems to function properly could result in significant business disruption.
We rely on IT systems to manage numerous functions of our internal operations. Our third party ERP software is not operating on the vendor's most updated version of the software. Furthermore, we have internally developed IT systems that are not integrated with our ERP system. These IT systems require specialized knowledge for which we have to train new personnel, and if we were to experience an unusual increase in attrition of our IT personnel, we may not be adequately equipped to respond to an IT system failure. Although we have never experienced significant disruption of our IT systems based on the current infrastructure, any failure of our IT systems could result in a significant business disruption.
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We may incur significant costs to meet the guarantees under our service level agreements, and our failure to meet these guarantees could result in a loss of customers and expected revenue.
Our standard service level agreement guarantees levels of service availability and voice quality for calls transmitted over the public Internet that are among the most stringent standards in our industry. Our SLAs typically provide guarantees of more than 99.99% uptime and a mean opinion score of at least 3.0 for at least 98% of all calls carried over the network. Our SLAs further require rapid response times in order to resolve issues. We may incur significant network support and maintenance costs in order to meet these guarantees.
We have in the past and may in the future experience network failures, software bugs or other problems that interrupt service or impair call quality. If these problems are severe enough in duration or frequency, we may breach our service level guarantees under our SLAs, as a result of which our customers could be entitled to credits against future amounts due under contract, early termination rights or other remedies against us. If a sufficient number of customers exercise these remedies, the resulting reduction in revenue could have a material adverse effect on our results of operations.
We depend on third-party vendors for IP phones and software endpoints, and any delay or interruption in supply by these vendors would result in delayed or reduced shipments to our customers and may harm our business.
We rely on third-party vendors for IP phones and software endpoints required to utilize our service. We currently do not have long-term supply contracts with any of these vendors. As a result, most of these third-party vendors are not obligated to provide products or services to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. The inability of these third-party vendors to deliver IP phones of acceptable quality and in a timely manner, particularly the sole source vendors, could adversely affect our operating results or cause them to fluctuate more than anticipated. Additionally, some of our products may require specialized or high-performance component parts that may not be available in quantities or in time frames that meet our requirements.
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If we do not or cannot maintain the compatibility of our communications and collaboration software with third-party applications and mobile platforms that our customers use in their businesses, our revenue will decline.
The functionality and popularity of our communications and collaboration servicescloud software solutions depends, in part, on our ability to integrate our services with third-party applications and platforms, including enterprise resource planning, customer relations management, human capital management and other proprietary application suites. Third-party providers of applications and application programmable interfaces, or APIs, may change the features of their applications and platforms, restrict our access to their applications and platforms or alter the terms governing use of their applications and APIs and access to those applications and platforms in an adverse manner. Such changes could functionally limit or terminate our ability to use these third-party applications and platforms in conjunction with our services, which could negatively impact our offerings and harm our business. If we fail to integrate our software with new third-party back-end enterprise applications and platforms used by our customers, we may not be able to offer the functionality that our customers need, which would negatively impact our ability to generate revenue and adversely impact our business.
Our services also allow our customers to use and manage our cloud communications and collaboration servicessoftware solutions on smartphones, tablets and other mobile devices. As new smart devices and operating systems are released, we may encounter difficulties supporting these devices and services, and we may need to devote significant resources to the creation, support, and maintenance of our mobile applications. In addition, if we experience difficulties in the future integrating our mobile applications into smartphones, tablets or other mobile devices or if problems arise with our relationships with providers of mobile operating systems, such as those of Apple Inc. or Google Inc., our future growth and our results of operations could suffer.
If our software fails due to defects or similar problems, and if we fail to correct any defect or other software problems, we could lose customers, become subject to service performance or warranty claims or incur significant costs.
Our customers use our service to manage important aspects of their businesses, and any errors, defects, disruptions to our service or other performance problems with our service could hurt our reputation and may damage our customers' businesses. Our services and the systems infrastructure underlying our cloud communications and collaboration platform incorporate software that is highly technical and complex. Our software has contained, and may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors in our software code may only be discovered after the code has been released. Any errors, bugs, or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results. We implement bug
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fixes and upgrades as part of our regularly scheduled system maintenance, which may lead to system downtime. Even if we are able to implement the bug fixes and upgrades in a timely manner, any history of defects, or the loss, damage or inadvertent release of confidential customer data, could cause our reputation to be harmed, and customers may elect not to purchase or renew their agreements with us and subject us to service performance credits, warranty claims or increased insurance costs. The costs associated with any material defects or errors in our software or other performance problems may be substantial and could materially adversely affect our operating results.
Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.19
Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our customers, content creators and brand advertisers. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our platform or discontinue use of portions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable license terms. Our inability to use third party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.
Our business depends on continued, unimpeded access to the Internet by us and our users, but
Internet access providers and Internet backbone providers may be able to block, degrade or charge for access to or bandwidth use of certain of our products and services, which could lead to additional expenses and the loss of users.
Our products and services depend on the ability of our users to access the Internet, and certain of our products require significant bandwidth to work effectively. In addition, users who access our services and applications through mobile devices, such as smartphones and tablets, must have a high-speed connection, such as Wi-Fi, 3G, 4G or LTE, to use our services and applications. Currently, this access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, includingincumbentincluding incumbent telephone companies, cable companies and mobile communications companies. Some of these providers offer products and services that directly compete with our own offerings, which give them a significant competitive advantage. Some of these broadband providers have stated that they may exempt their own customers from data-caps or offer other preferred treatment to their customers. Other providers have stated that they may take measures that could degrade, disrupt or increase the cost of user access to certain of our products by restricting or prohibiting the use of their infrastructure to support or facilitate our offerings, or by charging increased fees to us or our users to provide our offerings, while others, including some of the largest providers of broadband Internet access services, have committed to not engaging in such behavior. These providers have the ability generally to increase their rates, which may effectively increase the cost to our customers of using our cloud communications and collaboration services.software solutions.
On March 12, 2015, the Federal Communications Commission, or FCC, released an order that would prevent broadband Internet access providers from degrading or otherwise disrupting a broad range of services provisioned over consumers' and enterprises' broadband Internet access lines. AWhile this order was appealed by a number of providers and trade organizations, have appealedit was subsequently upheld by the FCC's order. We cannot predictUnited States Court of Appeals for the outcomeDC Circuit on June 14, 2016. A petition for rehearing seeking an en banc rehearing is currently pending. In addition, the current Chairman of this rulemaking or predict whether the FCC's rules will be upheld on appeal. Although we believe interference with access to our products and services is unlikely,FCC has publicly expressed an interest in changing the regulatory model for broadband Internet access under the current rules. The regulatory treatment of prioritization or degradation of traffic over the Internet, also known as net neutrality, varies widely among the jurisdictions in which we operate. While certain jurisdictions, such as the European Union have strong protections for competitive services such as ours, other countries either lack a net neutrality framework altogether or otherwise have lax enforcement of their rules. Broadband Internet access provider interference has occurred in limited circumstances in the United States and could result in a loss of existing users and increased costs, and could impair our ability to attract new users, thereby negatively impacting our revenue and growth.
Vulnerabilities to security breaches, cyber intrusions and other malicious acts could adversely impact our business.
Our operations depend on our ability to protect our network from interruption by damage from unauthorized entry, computer viruses or other events beyond our control. In the past, we may have been subject to denial or disruption of service, or DDOS, attacks by hackers intent on bringing down our services, and we may be subject to DDOS attacks in the future. We cannot assure you that our backup systems, regular data backups, security protocols, DDOS mitigation and other procedures that are currently in place, or that may be in place in the future, will be adequate to prevent significant damage, system failure or data loss.
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Critical to our provision of service is the storage, processing, and transmission of confidential and sensitive data. We store, process and transmit a wide variety of confidential and sensitive information including credit card, bank account and other financial information, proprietary, trade secret or other data that may be protected by intellectual property laws, customers' and employees' personally identifiable information, as well as other sensitive information. We, along with others in the industry, will be subject to cyber threats and security breaches, either by third parties or employees, given the nature of the information we store, process and transmit. Our continued ability to securely store, process and transmit data is essential to our business.
We are aware of the risks associated with cyber threats and we have implemented a number of measures to protect ourselves from cyber attacks. Specifically, we have redundant servers such that if we suffer equipment or software failures in one location or on one set of servers, we have the ability to provide continuity of service. We actively monitor our network for cyber threats and implement protective measures periodically. We conduct vulnerability assessments and penetration testing and engage in remedial action based on such assessments. Depending on the evolving nature of cyber threats and the measures we may have to implement to continue to maintain the security of our networks and data, our profitability may be adversely be impacted or we may have to increase the price of our services thatwhich may make our offerings less competitive with other communications providers.
But, like all other companies in the marketplace, there is no guarantee that we will not be adversely impacted by cyber attacks. 20
If our employees or third parties obtainan individual obtains unauthorized access to our network, or if our network is penetrated, our service could be disrupted and sensitive information could be lost, stolen or disclosed which could have a variety of negative impacts, including legal liability, investigations by federallaw enforcement and state law enforcementregulatory agencies, and exposure to fines or penalties, any of which could harm our business reputation and have a material negative impact on our business. In addition, to the extent we market our services as compliantwithcompliant with particular laws governing data privacy and security, such as Health Insurance Portability and Accountability Act and foreign data protection laws, a security breach that exposes protected information may make us susceptible to a number of claims of false advertising and unfair trade practices for misrepresentingrelated to our level of compliance, in addition to any liability we may have for the breach itself.marketing.
Many governments have enacted laws requiring companies to notify individuals of data security incidents involving certain types of personal data. In addition, some of our customers contractually require notification of any data security compromise. Security compromises experienced by our competitors, by our customers or by us may lead to public disclosures, which may lead to widespread negative publicity. Any security compromise in our industry, whether actual or perceived, could harm our reputation, erode customer confidence in the effectiveness of our security measures, negatively impact our ability to attract new customers, cause existing customers to elect not to renew their subscriptions or subject us to third-party lawsuits, regulatory fines or other action or liability, which could materially and adversely affect our business and operating results.
Our customers are increasingly asking usIn contracts with larger enterprises, we often agree to assume liability for security breaches in excess of the amount of committed revenue we receive from them.the contract. In addition, there can be no assurance that any limitations of liability provisions in our contracts for a security breach would be enforceable or adequate or would otherwise protect us from any such liabilities or damages with respect to any particular claim. We also cannot be sure that our existing general liability insurance coverage and coverage for errors or omissions will continue to be available on acceptable terms or will be available in sufficient amounts to cover one or more large claims, or that the insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, financial condition and operating results.
Failure to comply with laws and contractual obligations related to data privacy and protection could have a material adverse effect on our business, financial condition and operating results.
We are subject to the data privacy and protection laws and regulations adopted by federal, state and foreign governmental agencies. Data privacy and protection is highly regulated and may become the subject of additional regulation in the future. For example, lawmakers and regulators worldwide are considering proposals that would require companies, like us, that encrypt users' data to ensure access to such data by law enforcement authorities. Privacy laws restrict our storage, use, processing, disclosure, transfer and protection of non-public personal information, including credit card data, provided to us by our customers.customers as well as data we collect from our customers and employees. We strive to comply with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is possible that these requirementsif we fail to comply, we may be interpretedsubject to fines, penalties and appliedlawsuits, and our reputation may suffer. We may also be required to make modifications to our data practices that could have an adverse impact on our business.
Governmental entities, class action lawyers and privacy advocates are increasingly examining companies' data collection, processing, use, storing, sharing, transferring and transmitting or personal data and data linkable to individuals. Self-regulatory codes of conduct, enforcement actions by regulatory agencies, and lawsuits by private parties impose additional compliance costs on us negative impacting our profitability as well as subject us to unknown potential liabilities. These evolving laws, rules and practices may also curtail our current business activities which may also result in a manner that is inconsistent from one jurisdiction to anotherslimmer profit margins and may conflict with other rules or our practices. reduce new opportunities.
We are also subject to the privacy and data protection-related obligations in our contracts with our customers and other third parties. Any failure, or perceived failure, by us to comply with federal, state, or international laws, including laws and regulations regulating privacy, data or consumer protection, or to comply with our contractual obligations related to privacy, could result in proceedings or actions against us by governmental entities, contractual parties or others, which could result in significant liability to us as well as harm to our reputation. Additionally, third parties on which we rely enter into contracts to protect and safeguard our customers' data. Should such parties violate these agreements or suffer a breach, we could be subject to proceedings or actions against us by governmental entities, contractual parties or others, which could result in significant liability to us as well as harm to our reputation.
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There is considerable uncertainty with respect to the state of law governing data transfers between the European Union ("EU"), and other countries with similar data protection laws, and the U.S. There is ongoing litigation in the EU, as well as calls by certain political and governmental bodies in the EU to re-evaluate data transfers between the EU and the U.S., that could negatively impact the existing legally acceptable methods for transferring data between the EU and the U.S. on which we rely as do many other companies that transfer certain data between the EU and the U.S. Moreover, while we established alternative methods to transfer data between the EU and U.S. that addressed certain legal uncertainties that previously existed, some independent data regulators have adopted the position that other forms of compliance, including the methods we rely upon now as do many other companies, are also invalid though the legal grounds for these findings remains unclear at this time. Like many other companies, we continue to face uncertainty with respect to the measures we have implemented. Additionally, there is continued uncertainty regarding the legality of transferring certain data between the EU and U.S. caused by: (i) ongoing litigation that could invalidate the existing method that we, along with many other companies, rely upon for compliance with relevant law; and (ii) there is the possibility that political and other governmental bodies may invalidate the method we, along with many other companies, rely upon to comply with relevant law. We cannot predict how or if this issue will be resolved nor can we evaluate our potential liability at this time.
We could be liable for breaches of security on our website, fraudulent activities of our users, or the failure of third partythird-party vendors to deliver credit card transaction processing services.
A fundamental requirement for operating an Internet-based, worldwide communication and collaboration servicecloud software solutions and electronically billing our customers is the secure transmission of confidential information and media over public networks. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate such fraud or breaches may adversely affect our operating results. The law relating to the liability of providers of online payment services is currently unsettled and states may enact their own rules with which we may not comply. We rely on third partythird-party providers to process and guarantee payments made by our subscribers up to certain limits, and we may be unable to prevent our customers from fraudulently receiving goods and services. Our liability risk will increase if a larger fraction of transactions effected using our cloud-based services involve fraudulent or disputed credit card transactions. Any costs we incur as a result of fraudulent or disputed transactions could harm our business.
In addition, the functionality of our current billing system reliesonrelies on certain third partythird-party vendors delivering services. If these vendors are unable or unwilling to provide services, we will not be able to charge for our services in a timely or scalable fashion, which could significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results.
We must maintain Payment Card Industry Data Security Standard, or PCI DSS, compliance to bill our customers via credit card. If we fail to meet minimum-security standards for PCI DSS compliance, credit card providers such as American Express Company or Visa Inc. could refuse to process credit card transactions on our behalf and our ability to collect payments from our customers would be adversely impacted.
We may also experience losses due to subscriber fraud and theft of service. Subscribers have, in the past, obtained access to our service without paying for monthly service and international toll calls by unlawfully using our authorization codes or by submitting fraudulent credit card information. To date, such losses from unauthorized credit card transactions and theft of service have not been significant. We have implementedIf our existing anti-fraud procedures in order to control losses relating to these practices, but these procedures mayare not be adequate to effectively limit all of our exposure in the future from fraud. If our procedures are notor effective, consumer fraud and theft of service could significantly decrease our revenue and have a material adverse effect on our business, financial condition and operating results. In addition, software and security flaws in our software can result in unauthorized access to our core network resulting in damages such as fraudulent toll usage on our network.
Additionally, third parties have attempted in the past, and may attempt in the future, to fraudulently induce domestic and international employees, consultants or customers into disclosing sensitive information, such as user names, passwords or customer proprietary network information, or CPNI, or other information in order to gain access to our customers' data or to our data. CPNI includes information such as the phone numbers called by a consumer, the frequency, duration, and timing of such calls, and any services/features purchased by the consumer, such as call waiting, call forwarding, and caller ID, in addition to other information that may appear on a consumer's bill.
Natural disasters, war, terrorist attacks or malicious conduct could adversely impact our operations thatand could degrade or impede our ability to offer services.
As a provider of "cloud-based" services, ourOur cloud communications services rely on uninterrupted connection to the Internet through data centers and networks. Any interruption or disruption to our network, or the third parties on which we rely, could adversely impact our ability to provide service. Our network could be disrupted by circumstances outside of our control including natural disasters, acts of war, terrorist attacks or other malicious acts including, but not limited to, cyber-attacks. Our headquarters, global networks operations center and one of our third-party data center facilities are located in the San Francisco Bay Area, a region known for seismic activity. Should any of these events occur and interfere with our ability to operate our network even for a limited period of time, we could incur significant expenses, lose substantial amounts of revenue, suffer damage to our reputation, and lose customers. Such an event may also impede our customers' connections to our network, since these connections also occur over the Internet, and would be perceived by our customers as an interruption of our services, even though such interruption would be beyond our control. Any of these events could have a material adverse impact on our business.
We may also be subject to negative search engine optimization attacks intended to impair our visibility on search engines such as Google, Yahoo! and Bing. Such attacks generally involve generating a high volume of poor-quality inbound links to a company's website in order to cause the company's website ranking to decline due to the operation of a spam-detecting penalty function in the search engine's algorithm. We depend on search engine visibility for a significant portion of our revenue, so any degradation in our search engine rankings could have a material adverse impact on our revenue and profits.
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We license technology from third parties that we do not control and cannot be assured of retaining.
We rely upon certain technology, including hardware and software, licensed from third parties. There can be no assurance that the technology licensed by us will continue to provide competitive features and functionality or that licenses for technology currently utilized by us or other technology which we may seek to license in the future, will be available to us on commercially reasonable terms or at all. The loss of, or inability to maintain, existing licenses could result in delays or reductions in the installation and deployment of our cloud communications and collaboration services until equivalent technology or suitable alternative products could be developed, identified, licensed and integrated, and could harm our business. Software defects in the core IP and networking hardware we license from vendors, over which we have little or no control, can adversely affect ourability to deliver services to our customers and could harm our business. These licenses are on standard commercial terms made generally available by the companies providing the licenses. The cost and terms of these licenses individually are not material to our business.
Our infringement of a third party's proprietary technology could disrupt our business.
There has been substantial litigation in the communications, cloud telephonycommunication services, semiconductor, electronics, and related industries regarding intellectual property rights and, from time to time, third parties may claim that we, our customers, our licensees or parties'parties indemnified by us are infringing, misappropriating or otherwise violating their intellectual property rights. Third parties may also claim that our employees have misappropriated or divulged their former employers' trade secrets or confidential information. Our broad range of current and former technology, including IP telephony systems, digital and analog circuits, software, and semiconductors, increases the likelihood that third parties may claim infringement by us of their intellectual property rights. For example, on May 2, 2008,
During our 2017 fiscal year, we receivedwere named as defendants in two lawsuits, each brought by a letter from AT&T Intellectual Property, L.L.C., or AT&T IP, expressingnon-practicing entity and alleging infringement of a single patent. During our 2016 fiscal year, we were similarly named as defendants in two lawsuits in which we were alleged to have infringed patents. We were successful in settling all four lawsuits relatively quickly, although we have in the beliefpast been involved in patent infringement lawsuits that we must license a specified patent for use in our 8x8 broadband telephone service, as well as suggesting that we obtain a license to its portfolio of MPEG-4 patents for use with our video telephone products and services. At the same time, we began an evaluation of whether AT&T IP's affiliated entities may need to license any of our patents or other intellectual property. We have continued to engage in discussions with AT&T IP to explore a mutually agreeable resolution of the parties' respective assertions regarding these intellectual property issues. We are unable at this time to state whether we will enter into any license or cross-license agreements with AT&T IP or whether we ultimately anticipate any material effects on our operating results or financial condition as a consequence of these matters.
spanned several years. Certain technology necessary for us to provide our services may, in fact, be patented by other parties either now or in the future. If such technology were held under patent by another person, we would have to negotiate a license for the use of that technology, which we may not be able to negotiate at a price that is acceptable or at all. The existence of such a patent, or our inability to negotiate a license for any such technology on acceptable terms, could force us to cease using such technology and offering products and services incorporating such technology.
We have recently been named as defendants in four patent infringement lawsuits. On February 22, 2011, we were named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc. et al., along with 20 other defendants. On March 31, 2014, we were named a defendant in a lawsuit, CallWave Communications LLC v. 8x8, Inc. On December 31, 2014, we were named as a defendant in a lawsuit, Adaptive Data, LLC v. 8x8, Inc. Adaptive Data, LLC also sued another 36 other defendants on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. On April 15, 2015, we were named as a defendant in a lawsuit, UrgenSync, LLC v. 8x8, Inc. Each of these actions is described in more detail under Part I, Item 3, "Legal Proceedings". If we are found to be infringing on the intellectual property rights of any third partythird-party in these lawsuits or other claims and proceedings that may be asserted against us, in the future, we could be subject to monetary liabilities for such infringement, which could be material. We could also be required to refrain from using, manufacturing or selling certain products or using certain processes, either of which could have a material adverse effect on our business and operating results. From time to time, we have received, and may continue to receive in the future, notices of claims of infringement, misappropriation or misuse of other parties' proprietary rights. There can be no assurance that we will prevail in these discussions and actions or that other actions alleging infringement by us of third partythird-party patents will not be asserted or prosecuted against us. Furthermore, lawsuits like these may require significant time and expense to defend, may divert management's attention away from other aspects of our operations and, upon resolution, may have a material adverse effect on our business, results of operations, financial condition and cash flows. More information regarding the four pending suits is provided under Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.
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Inability to protect our proprietary technology would disrupt our business.
We rely, in part, on trademark, copyright, and trade secret law to protect our intellectual property in the United States and abroad. We seek to protect our software, documentation, and other written materials under trade secret and copyright law, which afford only limited protection. We also rely, in part, on patent law toprotect our intellectual property in the United States and internationally. As of March 31, 2015, we had been awarded 104 United States patents, of which we expect to expire between 2015 and 2042. We have additional United States and foreign patentspatent applications pending. We cannot predict whether such pending patent applications will result in issued patents, and if they do, whether such patents will effectively protect our intellectual property. The intellectual property rights we obtain may not be sufficient to provide us with a competitive advantage, and could be challenged, invalidated, infringed or misappropriated. We may not be able to protect our proprietary rights in the United States or internationally (where effective intellectual property protection may be unavailable or limited), and competitors may independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any patent of ours.
We attempt to further protect our proprietary technology and content by requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements. These agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology.
Litigation may be necessary in the future to enforce our intellectual property rights, to determine the validity and scope of our proprietary rights or the rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of management time and resources and could have a material adverse effect on our business, financial condition, and operating results. Any settlement or adverse determination in such litigation would also subject us to significant liability.
We also may be required to protect our proprietary technology and content in an increasing number of jurisdictions, a process that is expensive and may not be successful, or which we may not pursue in every location. In addition, effective intellectual property protection may not be available to us in every country, and the laws of some foreign countries may not be as protective of intellectual property rights as those in the United States. Additional uncertainty may result from changes to intellectual property legislation enacted in the United States and elsewhere, and from interpretations of intellectual property laws by applicable courts and agencies. Accordingly, despite our efforts, we may be unable to obtain and maintain the intellectual property rights necessary to provide us with a competitive advantage.
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Because our long-term growth strategy involves further expansion outside the United States, our business will be susceptible to risks associated with international operations.
An important component of our growth strategy involves the further expansion of our operations and customer base internationally. We have formed several subsidiaries outside the United States, including a Romanian subsidiary that contributes significantly to our research and development efforts. We have also acquired two UK-based companies — DXI in May 2015 and Voicenet in November 2013. The risks and challenges associated with sales and other operations outside the United States are different in some ways from those associated with our operations in the United States, and we have a limited history addressing those risks and meeting those challenges. Our current international operations and future initiatives will involve a variety of risks, including:
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We have limited experience in operating our business internationally, which increases the risk that any potential future expansion efforts that we may undertake will not be successful. We expect to invest substantial time and resources to expand our international operations. If we are unable to do this successfully and in a timely manner, our business and operating results could be materially adversely affected.
Acquisitions may divert our management's attention, result in dilution to our stockholders and consume resources that are necessary to sustain our business.
On November 29, 2013,In fiscal 2017, we acquired LeChat, Inc., the developer of Sameroom. In fiscal 2016, we acquired DXI Limited, which developed the technology on which ContactNow was based, and substantially all of the assets of Quality Software Corporation, or QSC, which developed the technology behind our Quality Management service. In fiscal 2014, we acquired Voicenet Solutions Limited, ("Voicenet"), a UK-based provider of cloud communications and collaborationcommunication services in the United Kingdom. In fiscal 2012, we completed two acquisitions of businesses. In fiscal 2011, we completed one acquisition and one investment in another company. If appropriate opportunities present themselves, we may make additional acquisitions or investments or enter into joint ventures or strategic alliances with other companies. Risks commonly encountered in such transactions include:
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As a result of these potential problems and risks, among others, businesses that we may acquire or invest in may not produce the revenue, earnings, or business synergies that we anticipate. In addition, there can be no assurance that any potential transaction will be successfully completed or that, if completed, the acquired business or investment will generate sufficient revenue to offset the associated costs or other potential harmful effects on our business.
Our future operating results may vary substantially from period to period and may be difficult to predict.
Our historical operating results have fluctuated significantly and will likely continue to fluctuate in the future, and a decline in our operating results could cause our stock price to fall. On an annual and a quarterly basis, there are a number of factors that may affect our operating results, manysome of which are outside our control. These include, but are not limited to:
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Due to these and other factors, we believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of our future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. If this were to occur, the price of our common stock would likely decline significantly.
Our products must comply with industry standards, FCC regulations, state, local, country-specific and international regulations, and changes may require us to modify existing products and/or services.
In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent upon the adoption of industry standards so that products from multiple manufacturers are able to communicate with each other. Our cloud-based communications and collaboration services rely heavily on communication standards such as SIP, MGCP and network standards such as TCP/IP and UDP to interoperate with other vendors' equipment. There is currently a lack of agreement among industry leaders about which standard should be used for a particular application, and about the definition of the standards themselves. These standards, as well as audio and video compression standards, continue to evolve. We also must comply with certain rules and regulations of the FCC regarding electromagnetic radiation and safety standards established by Underwriters Laboratories, as well as similar regulations and standards applicable in other countries. Standards are frequently modified or replaced. As standards evolve, we may be required to modify our existing products or develop and support new versions of our products. We must comply with certain federal, state and local requirements regarding how we interact with our customers, including marketing practices, consumer protection, privacy, and billing issues, the provision of 9-1-1 or other international emergency serviceservices, including location data and the quality of service we provide to our customers. The failure of our products and services to comply, or delays in compliance, with various existing and evolving standards could delay or interrupt volume production of our communications and collaboration services, subject us to fines or other imposed penalties, or harm the perception and adoption rates of our service, any of which would have a material adverse effect on our business, financial condition or operating results.
For example:
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Our emergency and E-911 calling services are different from those offered by traditional wireline telephone companies and may expose us to significant liability. There may be risks associated with limitations associated with E-911 and other emergency dialing with the 8x8 service.
Both our emergency calling service and our E-911 calling service are different, in significant respects, from the emergency calling services offered by traditional wireline telephone companies.companies in the United States and abroad. In each case, the differences may cause significant delays, or even failures, in callers' receipt of the emergency assistance they need.
The FCC may determine that our nomadic emergency calling service does not satisfy the requirements of its VoIP E-911 order because, in some instances, our nomadic emergency calling service requires that we route an emergency call to a national emergency call center instead of connecting our customers directly to a local public-safety answering point through a dedicated connection and through the appropriate selective router. Similarly, foreign telecommunications regulators may determine that our nomadic emergency calling service does not meet applicable local emergency dialing and location requirements.
Delays our customers may encounter when making emergency services calls and any inability of the answering point to automatically recognize the caller's location or telephone number can result in life threatening consequences. Customers may, in the future, attempt to hold us responsible for any loss, damage, personal injury or death suffered as a result of any failure of our E-911 services and other emergency dialing services.
In July 2008, the President signed into law the New and Emerging Technologies 911 Improvement Act of 2008. The law provides public safety entities, interconnected VoIP providers and others involved in handling 911 calls the same liability protections when handling 911 calls from interconnected VoIP users as from mobile or wired telephone service users. The applicability of the liability protections to our national call center service is unclear at the present time. Also,
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Alleged or actual failure of our solutions to comply with regulations governing outbound dialing, including regulations under the Telephone Consumer Protection Act of 1991 and similar foreign statutes, could harm our business, financial condition, results of operations and cash flows.
The legal and contractual environment surrounding calling consumers and wireless phone numbers is complex and evolving. In the United States, two federal agencies, the Federal Trade Commission ("FTC") and the FCC, and various states have enacted laws including, at the federal level, the Telephone Consumer Protection Act of 1991, or TCPA, that restrict the placing of certain telephone calls and texts to residential and wireless telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice messages and fax machines. Internationally, we are also subject to similar laws imposing limitations on marketing calls to wireline and wireless numbers and compliance with do not call rules. These laws require companies to institute processes and safeguards to comply with these restrictions. Some of these laws can be enforced by the FTC, FCC, State Attorneys General, foreign regulators or private party litigants. In these types of actions, the plaintiff may seek damages, statutory penalties, costs and/or attorneys' fees.
It is possible that the FTC, FCC, foreign regulators, private litigants or others may attempt to hold our customers, or us as a software provider, responsible for alleged violations of these laws. In the event that litigation is brought, or fines are assessed, against us, we may not successfully enforce or collect upon any contractual indemnities we may have from our customers. Additionally, any changes to these laws or their interpretation that further restrict calling consumers, any adverse publicity regarding the alleged or actual failure by companies, including our customers and competitors, to comply with such laws, or any governmental or private enforcement actions related thereto, could result in the reduced use of our solution by our clients and potential clients, which could harm our business, financial condition, results of operations and cash flows. We anticipate that these risks will increase as we begin to market and sell our EasyContactNow service in the United States.
Failure of our back-end information technology systems to function properly could result in significant business disruption.
We rely on IT systems to manage numerous functions of our internal operations. We have historically utilized internally developed IT systems that are not integrated with our ERP system. These IT systems require specialized knowledge for which we have to train new personnel, and if we were to experience an unusual increase in attrition of our IT personnel, we may not be adequately equipped to respond to an IT system failure. These IT systems were developed at a time when we provided services primarily to SMB customers and they may not be able to accommodate the requirements of larger enterprises as effectively as more modern and flexible solutions. Continued reliance on these systems may harm us competitively and impede our efforts to sell to larger enterprises.
Although we are in the process of upgrading a number of our IT systems, including our ERP software, our quote-to-cash software and our customer service and support software, we face risks relating to these transitions. For example, we may incur greater costs than we anticipate to train our personnel on the new systems; we may experience more errors in our records during the transition; and we may be exposeddelayed in meeting our various reporting obligations. To the extent any of these risks or events impact our customer service, we may experience an increase in customer attrition, which could have a material adverse impact on our results of operations.
Our inability to liability for 911 calls made prioruse software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.
Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to the adoption of this new law althoughwhich we are unawaresubject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our platform to our customers, content creators and brand advertisers. In the future, we could be required to seek licenses from third parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our platform or discontinue use of anyportions of the functionality provided by our platform. In addition, the terms of open source software licenses may require us to provide software that we develop using such liability.software to others on unfavorable license terms. Our inability to use third- party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could impair our business.
Increased energy costs, power outages, and limited availability of electrical resources may adversely affect our operating results.
Our data centers are susceptible to increased costs of power and to electrical power outages. Our customer contracts do not contain provisions that would allow us to pass on any increased costs of energy to our customers, which could affect our operating margins. Any increases in the price of our services to recoup these costs could not be implemented until the end of a customer contract term. Further, power requirements at our data centers are increasing as a result of the increasing power demands of today's servers. Increases in our power costs could impact our operating results and financial condition. Since we rely on third parties to provide our data centers with power sufficient to meet our needs, our data centers could have a limited or inadequate amount of electrical resources necessary to meet our customer requirements. We attempt to limit exposure to system downtime due to power outages by using backup generators and power supplies. However, these protections may not limit our exposure to power shortages or outages entirely. Any system downtime resulting from insufficient power resources or power outages could damage our reputation and lead us to lose current and potential customers, which would harm our operating results and financial condition.
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Decreasing telecommunications rates and increasing regulatory charges may diminish or eliminate our competitive pricing advantage versus legacy providers.
Decreasing telecommunications rates may diminish or eliminate the competitive pricing advantage of our services, while increased regulation and the imposition of additional regulatory funding obligations at the federal, state, local and localforeign level could require us to either increase the retail price for our services, thus making us less competitive, or absorb such costs, thus decreasing our profit margins. International and domestic telecommunications rates have decreased significantly over the last few years in most of the markets in which we operate, and we anticipate these rates will continue to decline in all of the markets in which we do business or expect to do business. Users who select our services to take advantage of the current pricing differential betweentraditionalbetween traditional telecommunications rates and our rates may switch to traditional telecommunications carriers if such pricing differentials diminish or disappear, however, and we will be unable to use such pricing differentials to attract new customers in the future. Continued rate decreases would require us to lower our rates to remain competitive in the United States and abroad and would reduce or possibly eliminate any gross profit from our services. In addition, we may lose subscribers for our services.
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Because our long-term growth strategy involves further expansion of our sales to customers outside the United States, our business will be susceptible to risks associated with international operations.
A component of our growth strategy involves the further expansion of our operations and customer base internationally. In November 2013, we acquired Voicenet, demonstrating our commitment to expand our business outside of North America. The risks and challenges associated with sales of our cloud communications and collaboration services to customers outside North America are different in some ways from those associated with sales in North America, and we have a limited history addressing those risks and meeting those challenges. Our current international operations and future initiatives will involve a variety of risks, including:
We have limited experience in operating our business internationally, which increases the risk that any potential future expansion efforts that we may undertake will not be successful. We expect to invest substantial time and resources to expand our international operations. If we are unable to do this successfully and in a timely manner, our business and operating results could be materially adversely affected.
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Our ability to offer services outside the United States is subject to different local regulatory environments, which may be unknown, complicated and uncertain.
Regulatory treatment of VoIP telephony and cloud-based services outside the United States varies from country to country and often the laws are unclear. In January 2013, we launched our Virtual Office services in Canada. We currently distribute our products and services directly to consumers and through resellers that may be subject to telecommunications regulations in their home countries. The failure by us or our customers and resellers to comply with these laws and regulations could reduce our revenue and profitability. Because of our relationship with the resellers, some countries may assert that we are required to register as a telecommunications provider in that country. In such case, our failure to do so could subject us to fines or penalties. In addition, some countries are considering subjecting VoIP services to the regulations applied to traditional telephone companies. Regulatory developments such as these could have a material adverse effect on the use of our services in international locations.
As we expand our operations internationally, we expect to become subject to additional government regulations. Such regulations include, but are not limited to: licensing obligations, emergency services obligations, data retention and transfer laws and regulations, privacy laws and regulations, consumer protection, national security laws and regulations, law enforcement obligations, financial reporting, surcharge and other fees that must be collected and remitted as well as other laws and regulations. For example, as a provider of electronic communications services in the UK, we are subject to regulation in the UK by the Office of Communications. Some of these regulatory obligations include providing access to emergency call services (E999/112); providing access to operator assistance, directories and directory enquiry services, offering contracts with minimum terms, providing and publishing certain information transparently, providing itemized billing, protecting customer information (including personal data); porting phone numbers upon a valid customer request and implementing a code of practice. We are also required to comply with laws and matters relating to, among other things, competition law, distance selling, e- commerce and consumer protection. We must also comply with various reporting and recordkeeping requirements.
In some cases, the relevant laws may be uncertain or unsettled complicating our ability to comply and may subject us to fines, penalties or other enforcement actions. It is possible that we could be subject to civil and criminal liabilities that may damage our business reputation and brand. Moreover, any changes in laws, regulations or enforcement policies may expose us to unknown civil and criminal risks that could requires us to modify our offerings or expose us to fines, penalties or other enforcement actions, or compel us to require with onerous obligations that we either were not previously subject or did not foresee. We may be required to exit certain foreign markets should such changes make the provision of our service unprofitable, too costly, too risky or for other reasons that could adversely impact our profitability, or our ability to compete effectively with other service providers. Any of these occurrences could negatively impact our brand and our business reputation.
We will also become subject to risks associated with changes in the regulatory structure of the telecommunications services marketplace in international markets. As in the United States, we will continue to dependon underlying carriers to terminate our traffic to the PSTN in each country where we offer services. As countries evaluate and change intercarrier payment schemes, remove and impose new obligations, our costs to provide service may increase. This could require us either to reduce our profitability or raise the price of our service which may make our offerings less competitive with other providers in the marketplace. We may have to exit markets that we previously thought would be profitable which could negatively impact our business, and damage our brand and reputation.
We support local number portability, or LNP, which allows our customers to retain their existing telephone numbers when subscribing to our services. A new customer of our services must maintain both the new 8x8 service and the customer's existing telephone service during the number transfer process. By comparison, transferring wireless telephone numbers among wireless service providers generally takes several hours, and transferring wireline telephone numbers among traditional wireline service providers generally takes a few days. In foreign countries, we anticipate longer delays in porting existing telephone numbers. The additional delay that we experience is due to our reliance on third party carriers to transfer the numbers, as well as the delay the existing telephone service provider may contribute to the process. Local number portability is considered an important feature by many potential customers, especially our business customers, and if we fail to reduce related delays, we may experience increased difficulty in acquiring new customers or retaining existing customers.
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We need to retain key personnel to support our products and ongoing operations.
The development and marketing of our communications and collaboration services will continue to place a significant strain on our limited personnel, management, and other resources. Our future success depends upon the continued services of our executive officers and other key employees who have critical industry experience and relationships that we rely on to implement our business plan. None of our officers or key employees are bound by employment agreements for any specific term. The loss of the services of any of our officers or key employees could delay the development and introduction of, and negatively impact our ability to sell our services which could adversely affect our financial results and impair our growth. We currently do not maintain key person life insurance policies on any of our employees.
We may need to raise additional capital to support our future operations.
As of March 31, 2015, we had cash and cash equivalents and investments of approximately $177.1 million. While we believe these funds are sufficient to meet our current and anticipated liquidity requirements, we may need to raise additional capital to pursue our strategic objectives. We may seek additional funding through public or private equity or debt financing, including pursuant to the shelf registration statement of which this prospectus supplement is a part. We might decide to raise additional debt or equity capital at such times and upon such terms as management considers favorable and in our interests, but we cannot be certain that we will be able to complete offerings of our securities at such times and on such terms as we may consider desirable for us. Any such financings may be upon terms that are dilutive to existing stockholders. We may not be able to obtain such additional financing as needed on acceptable terms, or at all, which may require us to reduce our operating costs and other expenditures, including reductions of personnel and capital expenditures.
Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.
Our restated certificate of incorporation and amended and restated bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors, including, among other things:
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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Our principal operations are located in San Jose, CACalifornia, in a facilitytwo facilities that isare approximately 104,657140,831 square feet of leased office space. Outside the United States our operations are conducted primarily in leased sites located in the United Kingdom.Kingdom and Romania. We believe our facilities will adequately meet our current and foreseeable future needs. For additional information regarding our obligations under leases, see Note 78 to the consolidated financial statements contained in Part II, Item 8 of this Annual Report.
From time to time, we become involved in various legal claims and litigation that arise in the normal course of our operations. While the results of such claims and litigation cannot be predicted with certainty, we are not currently aware of any such matters that we believe would have a material adverse effect on our financial position, results of operations or cash flows.
On March 31, 2014,November 14, 2016, we were named as a defendant in a lawsuit, CallWave CommunicationsSerenitiva LLC (CallWave) v. 8x8, Inc. CallWave alsoInc., filed in U.S. District Court for the E.D. of Texas (Civil Action No. 6:16-cv-1290). Plaintiff Serenitiva sued Fonality Inc.us based on March 31, 2014, and previously hadalleged infringement of U.S. Patent No. 6,865,268 concerning alleged activities involving our Virtual Contact Center Agent Console (Plaintiff Serenitiva sued nine other companies including Verizon, Google, T-Mobile, and AT&T. We answereddefendants, concurrently, based on the same patent. In April 2017, we settled the suit prior to answering the complaint under the terms of a settlement agreement between the Company and filed counterclaims in response thereto. Thereafter, CallWave made numerous demands thatthe plaintiff. Under the terms of a settlement agreement between the plaintiff and us, we pay CallWave cash consideration for settling the suit. On April 21, 2015, we filed papers to present numerous counterclaims including patent misuse. On or about May 26, 2015, the parties concluded negotiations regarding CallWave's cash-payment demands and agreed to settle all claims inpay plaintiff an amount that was not material to our business, and we were granted a limited license to the suit (and potential future claims) under confidential terms which await finalization by filing dismissal papers withpatent. A Joint Motion to Dismiss was filed April 20, 2017, and an Order of Dismissal With Prejudice should be forthcoming from the Court.
On December 31, 2014,2, 2016, we were named as a defendant in a lawsuit, Adaptive Data,Paluxy Messaging LLC v. 8x8, Inc. Adaptive Data,, filed in U.S. District Court for the E.D. of Texas, Tyler Division (Civil Action No. 6:16-cv-1346). Plaintiff Paluxy Messaging LLC also sued another 36us based on alleged infringement U.S. Patent No. 8,411,829 concerning alleged activities involving our voicemail system (Plaintiff Paluxy Messagingsued seven other defendants, on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process has not yet been effected on the Company.
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On April 15, 2015, we were named as a defendant in a lawsuit, UrgenSync, LLC v. 8x8, Inc. UrgenSync, LLC also sued another 14 other defendantsconcurrently, based on the same day regardingpatent). Based on our subscription to certain patent risk management services, we settled the same patent asserted insuit prior to answering the complaint filed against 8x8.complaint. Under the terms of a settlement agreement between the plaintiff and us, we agreed to pay plaintiff an amount that was not material to our business, and we were granted a limited license to the patent. An Order of Dismissal With Prejudice was issued March 13, 2017.
On April 16, 2015, we were named as a defendant in a lawsuit, Slocumb Law Firm v. 8x8, Inc., filed in the United States District Court for the Middle District of Alabama. The Slocumb Law Firm allegeshas alleged that it purchased certain business services from us that did not perform as advertised or expected, assertsand has asserted various causes of actions forincluding fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On May 7,June 10, 2015, the Company filedUnited States Magistrate Judge issued a Report and Recommendation that the Court grant our motion withto stay the Alabama Federal Court seeking an order compellingcase and compel the Slocumb Law Firm to arbitrate its claims against us in Santa Clara County, California pursuant to a clause mandating arbitration of disputes set forth in the terms and conditions to which Slocumb Law Firm agreed in connection with its purchase of business services from the us. No briefing schedule or hearing date for theThe Court closed this case administratively when it granted our motion to compel arbitration. Slocumb Law firm has been setnot initiated arbitration. Under our standard business terms and conditions, as of this time. DiscoveryMarch 31, 2017, the period to initiate arbitration has not yet commenced in the case. We intend to vigorously defend against Slocumb Law Firm's claims.lapsed.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We completed our initial public offering on July 2, 1997 under the name 8x8, Inc. From that date through April 3, 2000, ourOur common stock was traded on the NASDAQ National Market, or the NASDAQ, under the symbol "EGHT." From April 4, 2000 through July 18, 2001, our common stock was traded on the NASDAQ under the symbol "NTRG." Since July 19, 2001 our common stock hasis traded under the symbol "EGHT." In July 2002, in connection with"EGHT" and is listed on the transformation of the NASDAQ to a national securities exchange our listing was transferred to the NASDAQ CapitalNasdaq Global Select Market of the NASDAQNasdaq Stock Market LLC.national securities exchange.
We have never paid cash dividends on our common stock and have no plans to do so in the foreseeable future. As of May 27, 2015,25, 2017, there were 247223 holders of record of our common stock.
The following table sets forth the range of high and low close prices for each period indicated:
Period | High | Low | High | Low | ||||||||
Fiscal 2015: | ||||||||||||
Fiscal 2017: | ||||||||||||
First quarter | $ | 11.07 | $ | 6.80 | $ | 14.61 | $ | 10.19 | ||||
Second quarter | $ | 8.47 | $ | 6.49 | $ | 15.43 | $ | 12.94 | ||||
Third quarter | $ | 9.31 | $ | 5.80 | $ | 15.63 | $ | 13.05 | ||||
Fourth quarter | $ | 9.15 | $ | 7.06 | $ | 16.50 | $ | 14.20 | ||||
Fiscal 2014: | ||||||||||||
Fiscal 2016: | ||||||||||||
First quarter | $ | 8.27 | $ | 6.47 | $ | 9.49 | $ | 8.34 | ||||
Second quarter | $ | 10.84 | $ | 8.37 | $ | 9.05 | $ | 7.62 | ||||
Third quarter | $ | 11.95 | $ | 8.95 | $ | 12.17 | $ | 8.16 | ||||
Fourth quarter | $ | 11.47 | $ | 9.56 | $ | 12.91 | $ | 9.29 |
See Item 12 of Part III of this Annual Report regarding information about securities authorized for issuance under our equity compensation plans.
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The graph below shows the cumulative total stockholder return over a five yearfive-year period assuming the investment of $100 on March 31, 20102012 in each of 8x8's common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index. The graph is furnished, not filed, and the historical return cannot be indicative of future performance.
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Issuer Purchases of Equity Securities
The activity underregistrant did not make any repurchases of stock during the Repurchase Plans for the three monthsquarter ended March 31, 2015 is summarized as follows:2017 under a stock repurchase program. The last plan authorized by the Company's board of directors expired in October 2016 with an unused authorized repurchase amount of $15.0 million.
Total Number | Approximate | ||||||||||
of Shares | Dollar | ||||||||||
Purchased | Value of Shares | ||||||||||
Total | Weighted | as Part of | that May Yet | ||||||||
Number of | Average | Publicly | be Purchased | ||||||||
Shares | Price Paid | Announced | Under the | ||||||||
Purchased | Per Share | Program | Program | ||||||||
January 1 - January 31, 2015 | 666,973 | $ | 7.88 | 666,973 | $ | 8,103,520 | |||||
February 1 - February 28, 2015 | 1,029,810 | 7.85 | 1,029,810 | 20,000,000 | |||||||
March 1 - March 31, 2015 | 574,467 | 7.38 | 574,467 | $ | 15,749,279 | ||||||
Total | 2,271,250 | $ | 7.72 | 2,271,250 | |||||||
(1)Increase due to Board of Director's authorization of the 2015 Repurchase Plan. |
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of 8x8 Inc. for each year in the five yearfive-year period ended March 31, 2015.2017. The following selected consolidated financial data is qualified by reference to and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements, related notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.
Years Ended March 31, | Years Ended March 31, | |||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2012 | 2011 | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||||||||
(in thousands, except per share amounts) | (in thousands, except per share amounts) | |||||||||||||||||||||||||||||
Total revenues | $ | 162,413 | $ | 128,597 | $ | 103,786 | $ | 83,372 | $ | 70,163 | $ | 253,388 | $ | 209,336 | $ | 162,413 | $ | 128,597 | $ | 103,786 | ||||||||||
Net income | $ | 1,926 | $ | 2,514 | $ | 13,939 | $ | 69,228 | $ | 6,494 | ||||||||||||||||||||
Net income per share: | ||||||||||||||||||||||||||||||
Net income (loss) | $ | (4,751) | $ | (5,120) | $ | 1,926 | $ | 2,514 | $ | 13,939 | ||||||||||||||||||||
Net income (loss) per share : | ||||||||||||||||||||||||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.20 | $ | 1.04 | $ | 0.10 | $ | (0.05) | $ | (0.06) | $ | 0.02 | $ | 0.03 | $ | 0.20 | ||||||||||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.19 | $ | 0.99 | $ | 0.10 | $ | (0.05) | $ | (0.06) | $ | 0.02 | $ | 0.03 | $ | 0.19 | ||||||||||
Total assets | $ | 295,624 | $ | 299,203 | $ | 152,611 | $ | 130,733 | $ | 26,584 | $ | 333,855 | $ | 313,452 | $ | 295,624 | $ | 299,203 | $ | 152,611 | ||||||||||
Accumulated deficit | $ | (104,739) | $ | (106,665) | $ | (109,179) | $ | (123,118) | $ | (192,346) | $ | (114,610) | $ | (109,859) | $ | (104,739) | $ | (106,665) | $ | (109,179) | ||||||||||
Total stockholders' equity | $ | 272,211 | $ | 278,178 | $ | 137,033 | $ | 118,450 | $ | 15,861 | $ | 288,601 | $ | 275,306 | $ | 272,211 | $ | 278,178 | $ | 137,033 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading provider of VoIPenterprise cloud communications solutions, helping businesses get their employees, customers and SaaS communication solutions in the cloud for SMBsapplications talking, to make people more connected and mid-market and distributed enterprises. We deliver a broad suite of SaaS services including hosted cloud telephony, virtual contact center, and virtual meeting to in-office and mobile devices through its proprietary unified SaaS platform. We currently serve approximately 41,600 business customers with over 650,000 subscriptions, making us a leading provider of UCC services in the cloud. Our integrated, "pure-cloud" services platform is developed from internally owned and managed technologies and is uniquely positioned to serve mid-market and enterprise businesses making the shift to cloud based Unified Communications. We make a full set of unified communications capabilities including cloud telephony, contact center, video and web conferencing available from anywhereproductive, no matter where they are in the world. WithFrom a single, proprietary platform, which we refer to as the 8x8 Communications Cloud, we offer unified communications, team collaboration, contact center, analytics and reporting,other services to our business customers have an unprecedented view into company communications whether employees are mobile via the mobile client or in-office usingon a softphone, or a desk phone. Since fiscal 2004, substantially all of our revenue has been generated from the sale, license and provision of communications services. Prior to fiscal 2003, our focus was on our Voice over Internet Protocol semiconductor business.Software-as-a Service (SaaS) model.
SUMMARY AND OUTLOOK
In fiscal year 2015,2017, we displayed continued momentum in four areas.key areas of our business. First, our continuedincreased focus on mid-market and distributed enterprise customers resulted in 42%approximately 54% of our total service revenue coming from mid-marketthis customer segment, compared with 37%48% in fiscal 2014. We2016. Over the course of the fiscal year, we continued to show an increase in our average monthly service revenue per customer to $320 in(ARPU). In the fourth quarter of fiscal 20152017, our ARPU grew 11% to $426, compared with $287$385 in the same period of fiscal 2014, which is the result of2016. The increase resulted from our success in selling a greater number of subscriptions to larger, more established customers.
Second, we achieved efficiencycontinued the advancement of our technology and productivityproduct development work on several key platform infrastructure and product development initiatives. Initiatives include our new micro services platform, admin portal, desktop and mobile clients, and back office improvements fromto enable end-to-end quoting, ordering, provisioning, configuring, and billing our SMBexpanded mid-market and enterprise customer base. We also launched the 8x8 Communication Cloud Platform, an industry first solution which combines unified communications, team collaboration interoperability, contact center, and real time analytics in a single open platform.
Third, we have made significant progress with increasing the effectiveness of our global channel network to ensure our channel partners are properly engaged and prepared to transition their customers to 8x8. We enhanced our partner enablement offering with a new Partner Connect global web portal, which offers extensive sales, group resulting from an increased focus on adding larger SMB (> five employees)technical resources, marketing, and smaller mid-market (50 - 250 employee) accounts. As we continued to focus on building a more profitable and sustaining midmarket customer base, one that can contribute significantly greater lifetime value than the average small business customer, we added fewer one - two line business customers.lead generation support.
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Third,Fourth, we continuedhave made significant progress enhancing our global systems and customer support capabilities to focusbetter serve our multinational customers. We went live on selling a greater number and variety of services to our existing customer base. Our comprehensive suite of services, combinedSalesforce Service Cloud, an enterprise-scalable platform that is fully integrated with our abilitysales automation system. This enables any of our contact centers around the world to offer a broad range of cloud-based critical communications services brought us larger deals where we continued to displace incumbent, premises-based systems. We intend to continue to pursue opportunities to sell our comprehensive suite of unified communications, contact centerview and analytics/reporting services to SMBs and mid-market and distributed enterprises who wish to consolidate their cloud communications and collaborative service requirements with a single service provider.
Fourth, we continued to build on our Global Reach initiative by continuing to invest in our Voicenet United Kingdom subsidiary, establishing a branch in Canada, and opening data centers in Hong Kong and Australia during the year. We are in the process of migrating servicesmanage any customer case, allowing for non-US customers to our new overseas infrastructure. Beyond serving the needs of existing customers, it is our intent to penetrate these markets through a variety of additional methods including strategic alliances, partners and acquisitions.
To support these initiatives and strengthen our business, we intend to continue investing in research and development and sales and marketing at rates comparable to the third and fourth quarters of fiscal 2015 for the foreseeable future.seamless case handoffs across regions.
CRITICAL ACCOUNTING POLICIES & ESTIMATES
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note 1 to the consolidated financial statements in Part II, Item 8 of this Report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
We have identified the policies below as some of the more critical to our business and the understanding of our results of operations. These policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our consolidated financial statements. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate such estimates, including, but not limited to, those related to bad debts, returns reserve for expected cancellations, valuation of inventories, income and sales tax, and litigation and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities, and equity that are not readily apparent from other sources. Our actual results could differ from those estimates under different assumptions or conditions.
Additional information regarding risk factors that may impact our estimates is included above under Part I, Item 1A, "Risk Factors."
Revenue Recognition
Our revenue recognition policies are described in Note 1 to the consolidated financial statements in Part II, Item 8 of this Annual Report. As described below, significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
Service and Product Revenue
We recognize service revenue, mainly from subscription services related to its cloud-based voice, call center, video, and collaboration solutions, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable and collectability is reasonably assured. We defer recognition of service revenues in instances when cash receipts are received before services are delivered and we recognize deferred revenues ratably, over the course of the contract, as services are provided.
35Under the terms of our typical subscription agreements, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. We have determined that we have sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, we recognize new subscriber revenue that is fixed and determinable and that is not contingent on future performance or future deliverables, in the month in which the new order was shipped, net of an allowance for expected cancellations.
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We recognize revenue from product sales, mainly 8x8 IP telephones, for which there are no related services to be rendered upon shipment to customers provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods sold. Reserves for returns and allowances for customer sales are recorded at the time of shipment. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605,Revenue Recognition, we recorddefer revenue from shipments to distributors, retailers, channel partners, and resellers, where the right of return exists, as deferred revenue. We defer recognition of revenue on product sales to distributors, retailers, and resellers until the products have been sold to the end customer.
We record revenue net of any sales and service related taxes and mandatory government charges that are billed to our customers. We believe this approach results in consolidated financial statements that are more easily understood by users.
Under the terms of our typical subscription agreement, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. We have determined that we have sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, we recognize new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected cancellations.
Multiple Element Arrangements
ASC 605-25,Revenue Recognition - Multiple Element Arrangements, requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. The provisioning of the 8x8 cloud service with the accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. For arrangements with multiple deliverables, we allocate the arrangement consideration to all units of accounting based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the relative selling price to be used for allocating arrangement consideration to units of accounting as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("BESP").
VSOE generally exists only when we sell the deliverable separately, on more than a limited basis, at prices within a relatively narrow range. When VSOE cannot be established, we attempt to establish the selling price of deliverables based on relevant TPE. TPE is determined based on manufacturer's prices for similar deliverables when sold separately, when possible. WhenAs we arehave historically been unable to establish a selling price using VSOE or TPE, we use BESP for the allocation of arrangement consideration. The objective of BESP is to determine the price at which we would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. We determine BESP for a product or service by considering multiple factors including, but not limited to:
In accordance with the guidance of ASC 605-25, when we enter into revenue arrangements with multiple deliverables we allocate arrangement consideration, including activation fees, among the 8x8 IP telephonesproducts and subscriber services based on their relative selling prices. Arrangement consideration allocated to the IP telephonessold products that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized as product revenues during the period of the sale less the allowance for estimated returns during the 30-day trial period. Arrangement consideration allocated to subscriber services that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized ratably as service revenues as the related services are provided, which is generally over the initial contract term.
Our ability to enter into revenue generating transactions and recognize revenue in the future is subject to a number of business and economic risks discussed above under Item 1A,"Risk Factors."
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Collectability of Accounts Receivable
We must make estimates of the collectability of our accounts receivable. Management specifically analyzes accounts receivable, including historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. As of March 31, 2015,2017, the accounts receivable balance was $6.6approximately $14.3 million, net of an allowanceallowances for doubtful accounts and returns of $0.5 million, including a reserve for disputed credits, and an estimated returns reserve of $0.1$1.3 million. If the financial condition of our customers deteriorates, our actual losses may exceed our estimates, and additional allowances would be required.
Valuation of Inventories35
We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand, market conditions and replacement costs. If actual future demand or market conditions are less favorable than those projected by us, additional inventory write-downs may be required.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwill and indefinite lived intangible assets are not amortized, but are annually tested for impairment and more often if there is an indicator of impairment.
We perform an annual impairment assessment in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether it is more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. For reporting units in which this assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit.
Internal - Use Software Development Costs
We account for computer software developed or obtained for internal use in accordance with ASC 350-40,Internal Use Software (ASC 350-40), which requires capitalization of certain software development costs incurred during the application development stage. In accordance with authoritative guidance, we begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Once the project has been completed, these costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in research and development expense on our consolidated statements of operations.
Income and Other Taxes
As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax expense and to assess temporary differences resulting from book-tax accounting differences for items such as accrued vacation. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would reduce income tax expense in the period such determination was made.
Significant management judgment is required to determine the valuation allowance recorded against our net deferred tax assets, which include net operating loss and tax credit carry forwards. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. As of March 31, 2017, the net deferred tax asset on the consolidated balance sheet represented the projected tax benefit we expect to realize. We maintain a valuation allowance against the portion of our deferred tax assets that we believe is not more likely than not to be used to reduce our income tax liability.
During the fourth quarter of fiscal 2015,2017 and 2016, we evaluated the need for a valuation allowance against our net deferred tax asset and concluded that we needed less of an allowance.allowance because certain California net operating losses expired in fiscal 2017 and 2016 and will not be utilized. Therefore, we decreased our valuation allowance by approximately $1.5 million, as certain California net operating losses will not be utilized as they have expired in fiscal 2015. During the fourth quarters of fiscal 2014 and 2013, we evaluated the need for a valuation allowance against our net deferred tax asset and concluded that an additional allowance was needed. Therefore, we increased our valuation allowance related to our state and federal net operating loss and tax credit carryovers which resulted in reversals of previous income statement credits of approximately $1.3$0.8 million and $1.0$1.1 million, respectively. We determined that an increase in our valuation allowance was appropriate as a result of the change in the net income apportionment methodology in California and the acquisition of Voicenet in the third quarter of fiscal 2014. In making this determination, we considered all available positive and negative evidence, including our recent earnings trend and expected continued future taxable income. As of March 31, 2015,2017, the net deferred tax asset on the consolidated balance sheet represented the projected tax benefit we expect to realize. We continue to maintain a valuation allowance against the portion of our deferred tax assets that we believe is more likely than not to be used to reduce our income tax liability.
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We have received inquiries, demands or audit requests from several state, municipal and 9-1-1 taxing agencies seeking payment of taxes that are applied to or collected from the customers of providers of traditional public switched telephone network services. We recorded $0.1$0.5 million, $0.1$0.4 million and $0$0.1 million of expense for the years ended March 31, 2015, 20142017, 2016 and 2013,2015, respectively, for estimated tax exposure for such assessments.
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Stock-Based Compensation
We account for our employee stock options, stock purchase rights, restricted stock units, and restricted performance stock units granted under the 1996 Stock Plan, 1996 Director Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012 Equity Incentive Plan, the 2013 New Employee Inducement Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase Plan (collectively "Equity Compensation Plans") under the provisions of ASC 718 -Stock Compensation. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
We recognize stock-based compensation expense in the Consolidated Statements of Income for fiscal 2015, 2014 and 2013, based on ASC 718 criteria. Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and includes the impact of estimated forfeitures. Compensation expense for restricted stock units with performance and market conditions is recognized over the requisite service period using the straight-line method and includes the impact of estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
To value option grants stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation, we used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model varies based on assumptions used for the expected stock prices volatility, expected life, risk-free interest rates and future dividend payments. . For the twelve months ended March 31, 2015, 2014 and 2013, weWe used the historical volatility of our stock over a period equal to the expected life of the options. The expected life assumptions represent the weighted-average period stock-based awards are expected to remain outstanding. We established expected life assumptions through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk-free interest rate was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The dividend yield assumption was based on our history and expectation of future dividend payout.
To value restricted performance stock units under the Equity Compensation Plans, we used a Monte Carlo simulation model. Fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and the NASDAQ Composite Index, risk freerisk-free interest rates, and future dividend payments. For the twelve months ended March 31, 2015 and 2014, weWe used the historical volatility and correlation of our stock and the Index over a period equal to the remaining performance period as of the grant date. The risk-free interest rate was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the remaining performance period as of the grant date. The dividend yield assumption was based on our history and expectation of future dividend payout.
ASC 718 requires usRecently Issued and Adopted Accounting Pronouncements
Recent accounting pronouncements are detailed in Note 1 to calculate the additional paid-in-capital pool, or APIC Pool, available to absorb tax deficiencies recognized subsequent to adopting ASC 718, as if we had adopted ASC 718 at its effective dateour Consolidated Financial Statements included in Part II, Item 8 of January 1, 1995. There are two allowable methods to calculate our APIC Pool: (1) the long form method or (2) the short form method as set forth in ASC 718. We have elected to use the long form method under which we track each award grantthis Annual Report on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. We then compared the fair value expense to the tax deduction received for each grant and aggregated the benefits and deficiencies to establish the APIC Pool.Form 10-K.
Due to the adoption of ASC 718, some option exercises result in tax deductions in excess of book deductions based on the option value at the time of grant. We recognize these windfall tax benefits associated with the exercise of stock options directly to stockholders' equity only when realized. We use the "with and without" approach as described in ASC 740, in determining the order in which our tax attributes are utilized. The "with and without" approach results in the recognition of the windfall stock option tax benefits only after all other tax attributes of ours have been considered in the annual tax accrual computation. Also, we have elected to ignore the indirect tax effects of share-based compensation deductions in computing our research and development tax credits and alternative tax credits and as such, we recognize the full effect of these deductions in the consolidated income statement in the period in which the taxable event occurs.
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SELECTED OPERATING STATISTICS
We periodically review certain key business metrics, within the context of our articulated performance goals, in order to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. The selected operating statistics include the following:
Selected Operating Statistics | Selected Operating Statistics | ||||||||||||||||||||
March 31, | Dec 31, | Sept. 30, | June 30, | March 31, | March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | ||||||||||||
2015 | 2014 | 2014 | 2014 | 2014 | 2017 | 2016 | 2016 | 2016 | 2016 | ||||||||||||
Total business customers(1) | 41,621 | 41,051 | 40,434 | 39,340 | 37,933 | ||||||||||||||||
Business customers average monthly | |||||||||||||||||||||
service revenue per customer (2) | $ 320 | $ 305 | $ 299 | $ 293 | $ 287 | ||||||||||||||||
Monthly business service revenue churn (3) | 0.5% | 1.0% | 0.9% | 0.4% | 1.2% | ||||||||||||||||
service revenue per customer (1) | $ 426 | $ 414 | $ 409 | $ 399 | $ 385 | ||||||||||||||||
Monthly business service revenue churn (2)(3) | 0.7% | 1.0% | 0.6% | 0.5% | 0.4% | ||||||||||||||||
Overall service margin | 81% | 80% | 79% | 80% | 79% | 83% | 83% | 81% | 81% | 81% | |||||||||||
Overall product margin | -19% | -11% | -8% | -9% | -23% | -9% | -20% | -6% | -16% | -18% | |||||||||||
Overall gross margin | 73% | 72% | 72% | 71% | 70% | 77% | 77% | 74% | 74% | 72% |
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(1) |
| |
| Business customer average monthly service revenue per customer is service revenue from business customers in the period divided by the number of months in the period divided by the simple average number of business customers during the period. | |
| Business customer service revenue churn is calculated by dividing the service revenue lost from business customers (after the expiration of 30-day trial) during the period by the simple average of business customer service revenue during the same period and dividing the result by the number of months in the period. | |
(3) | Excludes DXI business customer service revenue churn for all periods presented. |
We believe it is useful to monitor these metrics together and not individually, as we do not make business decisions based upon any single metric.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes included elsewhere in this Annual Report.
We have minimal seasonality in our business but typically sales of new subscriptions in our fourth fiscal quarter are greater than any of the first three quarters of the fiscal year. We believe this occurs because the customers we target have a tendency to spend a relatively greater portion of their annual capital budgets at the beginning of the calendar year compared with each of the last three quarters of the year.REVENUE
REVENUE Years Ended March 31, Year-over-Year Change 2015 2014 2013 2014 to 2015 2013 to 2014 (dollar amounts in thousands) Service revenue $ 148,208 $ 116,607 $ 94,384 $ 31,601 27.1% $ 22,223 23.5% Percentage of total revenue 91.3% 90.7% 90.9%
Years Ended March 31, | Year-over-Year Change | ||||||||||||||||||||
2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||
(dollar amounts in thousands) | |||||||||||||||||||||
Service revenue | $ | 235,816 | $ | 192,241 | $ | 148,208 | $ | 43,575 | 22.7% | $ | 44,033 | 29.7% | |||||||||
Percentage of total revenue | 93.1% | 91.8% | 91.3% |
Service revenue consists primarily of revenues attributable to the provision of our 8x8 cloud communication and collaboration services. We expect that cloud communication and collaboration service revenues will continue to comprise nearly all of our service revenues for the foreseeable future.
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software solutions.
The increase in fiscal year 2015,2017, compared with fiscal year 2014,2016, was primarily attributable to an increase in our business customer subscriber base (net of customer churn), in particular, to mid-market and enterprise customers, and an increase in the average monthly service revenue per customer. Our business service subscriber base grew from approximately 38,00045,700 customers at the end of fiscal 20142016 to approximately 41,60049,200 customers on March 31, 2015.2017. Average monthly service revenue per customer for the fiscal year increased from $273$367 for fiscal 20142016 to $305$412 for fiscal 2015.2017. These growth factors were partially offset by the discontinuance of a certain customer segment of the United Kingdom based platform-as-a-service (DXI PaaS) that was acquired in fiscal 2016 as part of the DXI acquisition, and the decline of the GBP exchange rate to the USD. We expect growth in the number of business customers and average monthly service revenue per customer to continue to grow in fiscal 2016.2018.
The increase in fiscal year 2014,2016, compared with fiscal year 2013,2015, was primarily attributable to an increase in our business customer subscriber base (net of customer churn) in particular, to mid-market and enterprise customers, revenue of approximately $10.0 million from customers acquired as part of the DXI acquisition, and an increase in the average monthly service revenue per customer. Our business service subscriber base grew from approximately 32,50041,600 customers at the end of fiscal 20132015 to approximately 38,00045,700 customers on March 31, 2014. The increase in business customers included approximately 1,000 customers obtained through our acquisition of Voicenet, on November 29, 2013.2016. Average monthly service revenue per customer for the fiscal year increased from $249$305 for fiscal 20132015 to $273$367 for fiscal 2014.2016.
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Product revenue | $ | 14,205 | $ | 11,990 | $ | 9,402 | $ | 2,215 | 18.5% | $ | 2,588 | 27.5% | $ | 17,572 | $ | 17,095 | $ | 14,205 | $ | 477 | 2.8% | $ | 2,890 | 20.3% | ||||||||||||||||||
Percentage of total revenue | 8.7% | 9.3% | 9.1% | 6.9% | 8.2% | 8.7% |
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Product revenue consists primarily of revenues from sales of IP telephones in conjunction with our cloud telephony service.
The increase Product revenue is contingent whether a customer chooses to purchase an IP telephone, or use an existing cell phone, in fiscal year 2015 from fiscal year 2014 resulted from a $2.2 million increaseconjunction with the purchase of our Virtual Office service. We expect customers to continue to adopt the mobile solution in product revenue attributable to growth in our business customer subscriber base, for which we have been subsidizing equipment purchases.
The increase in fiscal year 2014 from fiscal year 2013 resulted from a $2.6 million increase in product revenue attributable to growth in our business customer subscriber base, for which we have been subsidizing equipment purchases.the future.
No single customer represented more than 10% of our total revenues during fiscal 2015, 20142017, 2016 or 2013.2015.
The following table illustrates our net revenues by geographic area. Revenues are attributed to countries based on the destination of shipment and the customer's service address (in thousands):
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Americas (principally US) | 92% | 97% | 99% | ||||||
Europe | 7% | 2% | 0% | ||||||
Asia Pacific | 1% | 1% | 1% | ||||||
100% | 100% | 100% |
Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Americas (principally US) | 89% | 87% | 92% | ||||||
Europe (principally UK) | 11% | 13% | 8% | ||||||
100% | 100% | 100% |
COST OF REVENUE
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Cost of service revenue | $ | 29,701 | $ | 22,445 | $ | 19,928 | $ | 7,256 | 32.3% | $ | 2,517 | 12.6% | $ | 42,400 | $ | 37,078 | $ | 29,701 | $ | 5,322 | 14.4% | $ | 7,377 | 24.8% | ||||||||||||||||||
Percentage of service revenue | 20.0% | 19.2% | 21.1% | 18.0% | 19.3% | 20.0% |
Cost of service revenue primarily consists of costs associated with network operations and related personnel, telephonycommunication origination and termination services provided by third partythird-party carriers, and technology license and royalty expenses.
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licenses.
The increase in cost of service revenue for fiscal 20152017 from fiscal 20142016 was primarily due to a $3.5$2.6 million increase in third party network service expenses (due to increased call volumes associated with our subscription revenue growth), a $1.5$0.6 million increase in licenses and fees, a $0.6 million increase in stock-based compensation expenses, a $0.5 million increase in amortization expense, a $0.4 million increase in payroll and related expenses, a $1.0$0.4 million increase in depreciation,computer supply expenses, and a $0.3$0.2 million increase in stock-based compensationtemporary personnel, consulting and outside service expenses.
The increase in cost of service revenue for fiscal 20142016 from fiscal 20132015 was primarily due to a $0.9$2.0 million increase in third-party network service expenses, a $1.6 million increase in amortization expense, a $1.4 million increase in payroll and related expenses, a $0.8$0.5 million increase in third party network service expenses,depreciation, a $0.2$0.5 million increase in consultantlicenses and outside service expensesfees, and a $0.2$0.5 million increase in repair and maintenancestock-based compensation expenses.
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Cost of product revenue | $ | 15,863 | $ | 15,170 | $ | 11,801 | $ | 693 | 4.6% | $ | 3,369 | 28.5% | $ | 19,714 | $ | 20,168 | $ | 15,863 | $ | (454) | -2.3% | $ | 4,305 | 27.1% | ||||||||||||||||||
Percentage of product revenue | 111.7% | 126.5% | 125.5% | 112.2% | 118.0% | 111.7% |
The cost of product revenue consists primarily of IP telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, shipping and handling. We allocate a portion of service revenues to product revenues but these revenues are less than
The decrease in the cost of product revenue for fiscal 2017 from fiscal 2016 was primarily due to a $0.2 million decrease in the product.shipment of equipment to our business customers, and a $0.1 million decrease to warranty expense.
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The increase in the cost of product revenue for fiscal 20152016 from fiscal 20142015 was primarily due to a $1.5 million increase in the shipment of equipment to our business customers, a $0.1 million increase in freight costs, offset by a $0.9 million decrease in warranty expense.
The increase in the cost of product revenue for fiscal 2014 from fiscal 2013 was primarily due to a $2.7$3.6 million increase in the shipment of equipment to our business customers, a $0.3 million increase in warranty expense,freight costs, and a $0.2 million increase in freight costs.to warranty expense.
RESEARCH AND DEVELOPMENT EXPENSES
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Research and development | $ | 15,118 | $ | 11,633 | $ | 8,147 | $ | 3,485 | 30.0% | $ | 3,486 | 42.8% | $ | 27,452 | $ | 24,040 | $ | 15,118 | $ | 3,412 | 14.2% | $ | 8,922 | 59.0% | ||||||||||||||||||
Percentage of total revenue | 9.3% | 9.0% | 7.8% | 10.8% | 11.5% | 9.3% |
Historically, our research and development expenses have consisted primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our development and engineering efforts. During the fiscal year ended March 31, 2015, we expensed all research and development costs as they were incurred in accordance with ASC 985-20,Costs of Software to Be Sold, Leased, or Marketed, and we capitalized $1.5 million of payroll and related costs in accordance with ASC 350-40,Goodwill and Other - Internal-Use Software.
The increase in research and development expenses for fiscal 20152017 from fiscal 20142016 was primarily attributable to a $0.8$6.8 million increase in payroll and related expenses, and a $0.8$1.2 million increase in temporary personnel, consulting and outside service expenses, a $1.2 million increase in facility and other allocated costs (which is based on employee headcount), a $0.5$0.8 million increase in stock-based compensation expenses, a $0.2 million increase in travel costs, partially offset by $1.5$7.0 million of capitalized payroll and related costs capitalized in accordance with ASC 350-40.consulting costs.
The increase in research and development expenses for fiscal 20142016 from fiscal 20132015 was primarily attributable to a $1.7$6.5 million increase in payroll and related expenses, and a $1.5$1.4 million increase in stock-based compensation expenses, a $0.3 million increase in temporary personnel, consulting and outside service expenses partially offset by $0.8$0.9 million of capitalized softwarepayroll and development costs in accordance with ASC 985-20.
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consulting costs.
SALES AND MARKETING EXPENSES
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Sales and marketing | $ | 80,667 | $ | 60,906 | $ | 45,573 | $ | 19,761 | 32.4% | $ | 15,333 | 33.6% | $ | 139,277 | $ | 109,379 | $ | 80,667 | $ | 29,898 | 27.3% | $ | 28,712 | 35.6% | ||||||||||||||||||
Percentage of total revenue | 49.7% | 47.4% | 43.9% | 55.0% | 52.3% | 49.7% |
Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service which includes deployment engineering.engineering and technical support. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show,shows, advertising and other marketing and promotional expenses.
The increase in sales and marketing expenses for fiscal 20152017 from fiscal 20142016 was primarily due to a $11.2$16.6 million increase in payroll and related expenses from expanding our sales force, deployment engineering, and customer success teams, a $5.0 million increase in facility and allocated costs, a $2.6 million increase in stock-based compensation expenses, a $2.1 million increase in third-party sales commissions, a $1.5 million increase in travel and meal expenses, a $1.3 million increase in advertising, a $0.5 million increase in credit card processing fees, a $0.5 increase in public relations costs, a $0.5 million increase in bad debt expense, a $0.3 million increase in depreciation expense, offset partially by a $0.8 million decrease in temporary personnel, consulting and outside service expenses, and a $0.3 million decrease in amortization expense due to intangibles acquired in acquisitions.
The increase in sales and marketing expenses for fiscal 2016 from fiscal 2015 was primarily due to a $13.8 million increase in payroll and related expenses from an increase in our sales force, deployment engineering, customer success teams, and from the acquisition of Voicenet,DXI, a $1.9$3.5 million increase in third partythird-party sales commissions, a $1.4 million increase in stock-based compensation expenses, a $0.9$2.6 million increase in temporary personnel, consulting and outside service expenses, a $0.7$2.3 million increase in stock-based compensation expenses, a $1.2 million increase in travel and meal expenses, a $0.6$1.1 million increase in amortization expense due to intangibles acquired in acquisitions,advertising, a $0.6 million increase in trade show expenses, a $0.4$0.5 million increase in credit card processing fees, a $0.2 million increase in expensed computer, software and light furniture, offset by a $0.3 million decrease in bad debt expenses and a $0.2 million decrease in advertising expenses.
The increase in sales and marketing expenses for fiscal 2014 from fiscal 2013 was primarily due to a $10.2 million increase in payroll and related expenses from an increase in our sales force, a $1.1 million increase in advertising expenses, a $0.8 million increase in temporary personnel, consulting and outside service expenses, a $0.5 million increase in third party sales commissions, a $0.5 million increase in travel and meal expenses, a $0.4 million increase in credit card processing fees, a $0.3 million increase in trade show expenses, a $0.3 million increase in amortization expense due to intangibles acquired in acquisitions, and a $0.2 million increase in expensed computer, software and light furniture.depreciation expense.
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GENERAL AND ADMINISTRATIVE EXPENSES
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 18,182 | $ | 15,368 | $ | 8,558 | $ | 2,814 | 18.3% | $ | 6,810 | 79.6% | $ | 31,214 | $ | 25,745 | $ | 18,182 | $ | 5,469 | 21.2% | $ | 7,563 | 41.6% | ||||||||||||||||||
Percentage of total revenue | 11.2% | 12.0% | 8.2% | 12.3% | 12.3% | 11.2% |
General and administrative expenses consist primarily of personnel and related overhead costs and professional service fees for finance, legal, human resources, employee recruiting, and general management.
The increase in general and administrative expenses for fiscal 20152017 from fiscal 20142016 was primarily due to a $1.4 million increase in payroll and related expenses, a $1.1 million increase in stock-based compensation expenses, a $1.3 million increase in temporary personnel, consulting and outside service expenses, and a $0.7 million increase in legal, accounting and tax expenses.
The increase in general and administrative expenses for fiscal 2016 from fiscal 2015 was primarily due to a $2.6 million increase in stock-based compensation expenses, a $1.7 million increase in payroll and related expenses, a $1.0 million increase in legal expenses, a $0.3 million increase in recruiting expenses, a $0.2 million increase in facility lease and maintenance expenses, offset by a $0.6 million decrease in stock-based compensation expenses.
The increase in general and administrative expenses for fiscal 2014 from fiscal 2013 was primarily due to a $4.8 million increase in payroll and related expenses including a one-time charge of approximately $0.1 million in severance pay and $1.1 million in stock-based compensation related to the resignation of the Company's president in October 2013, a $0.6 million increase in legal expenses, a $0.6 million increase in facility lease and maintenance expenses, a $0.2$0.9 million increase in temporary personnel, consulting and outside service expenses, a $0.2$0.8 million increase in salesfacility lease and use tax expense,maintenance expenses, a $0.2$0.5 million increase in property and franchise tax expenses,depreciation expense, and a $0.2 million increase in accounting and taxlegal expenses.
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GAIN ON PATENT SALE
Years Ended March 31, | Year-over-Year Change | ||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | |||||||||||||||||
(dollar amounts in thousands) | |||||||||||||||||||||
Gain on patent sale | $ | (1,000) | $ | - | $ | (12,965) | $ | (1,000) | 100.0% | $ | 12,965 | -100.0% | |||||||||
Percentage of total revenue | -0.6% | 0.0% | -12.5% |
In June 2012, we entered into a patent purchase agreement for the sale of a familygroup of United States patents. We recognized a gain of slightly less thanapproximately $12.0 million, net of transaction costs, in the first fiscal quarter of 2013 approximatelyand $1.0 million in the fourth fiscal quarter of 2013, and approximately $1.0 million in the second fiscal quarter of 2015 due to the third partythird-party purchaser entering into a license agreement with its customer. The gain on patent sale has been recorded as a reduction of operating expenses in the consolidated statements of income.operations for fiscal 2015.
INTEREST INCOME AND OTHER, NET
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Interest income and other, net | $ | 833 | $ | 742 | $ | 105 | $ | 91 | 12.3% | $ | 637 | 606.7% | $ | 1,792 | $ | 1,107 | $ | 833 | $ | 685 | 61.9% | $ | 274 | 32.9% | ||||||||||||||||||
Percentage of total revenue | 0.5% | 0.6% | 0.1% | 0.7% | 0.5% | 0.5% |
This item primarily consisted of interest income earned on our cash, cash equivalents and investments and amortization or accretion of investments in fiscal 20152017, 2016 and 2014.2015.
(BENEFIT) PROVISION FOR INCOME TAXES
Years Ended March 31, | Year-over-Year Change | Years Ended March 31, | Year-over-Year Change | |||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | 2017 | 2016 | 2015 | 2016 to 2017 | 2015 to 2016 | |||||||||||||||||||||||||||||||||
(dollar amounts in thousands) | (dollar amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||
Provision for income taxes | $ | 2,789 | $ | 2,219 | $ | 9,399 | $ | 570 | 25.7% | $ | (7,180) | -76.4% | ||||||||||||||||||||||||||||||
(Benefit) provision for income taxes | $ | (126) | $ | (847) | $ | 2,789 | $ | 721 | -85.1% | $ | (3,636) | -130.4% | ||||||||||||||||||||||||||||||
Percentage of total revenue | 1.7% | 1.7% | 9.1% | 0.0% | -0.4% | 1.7% |
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We recorded an income tax provisionbenefit of $0.1 million, $0.8 million and an income tax expense of $2.8 million in fiscal year2017, 2016 and 2015, all of which related to netrespectively. Our income tax provision has historically been driven by our pretax profitability, tax credits, foreign losses not benefited and nondeductible expenses from operations. The decrease in income tax benefit during fiscal 2017 as compared to fiscal 2016 was mainly due to lower overall pretax loss and higher nondeductible expenses partially offset by higher tax credits. The change in income tax provision in fiscal 2016 as compared to fiscal 2015 was mainly due to the change in profitability, from a pretax income in fiscal 2015 to a pretax loss in fiscal 2016, and due to higher tax credits.
During the fourth quarter of fiscal 2017, 2016 and 2015, we evaluated the need for a valuation allowance against our net deferred tax assetassets and determined that a decrease of $0.8 million, $1.1 million and $1.5 million, respectively, was needed asbecause of certain California net operating lossesloss carryforwards having expiredexpiring in fiscal 2015.
We recorded an income tax provision of $2.2 million in fiscal year 2014 of which $0.9 million related to net income from operations2017, 2016 and $1.3 million due to an increase in our valuation allowance. During the fourth quarter of fiscal 2014, we evaluated the need for a valuation allowance against our net deferred tax asset and determined that an additional $1.3 million was needed for certain net operating loss and research credit carryovers that may expire before utilization. Therefore, we increased the valuation allowance related to the deferred tax asset which resulted in an additional provision for income taxes to the consolidated income statement of approximately $1.3 million.2015.
At March 31, 2015,2017, we had net operating loss carryforwards for federal and state income tax purposes of approximately $142.8$141.7 million and $66.7$23.2 million, respectively that expire at various dates between 20162018 and 2035.2037. In addition, at March 31, 2015,2017, we had research and development credit carryforwards for federal and state tax reporting purposes of approximately $3.3$5.6 million and $5.1$7.3 million, respectively. The federal income tax credit carryforwards will expire between 2021 and 2035,2037, while the California income tax credit will carry forward indefinitely. Under the ownership change limitations of the Internal Revenue Code of 1986, as amended, the amount and benefit from the net operating losses and credit carryforwards may be limited in certain circumstances.
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At March 31, 2015 and 2014, we had net deferred tax assets before valuation allowances of approximately $52.5 million and $55.4 million, respectively.
INCOME FROM DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION
Years Ended March 31, | Year-over-Year Change | ||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | |||||||||||||||||
(dollar amounts in thousands) | |||||||||||||||||||||
Income from discontinued | |||||||||||||||||||||
operations, net of income | |||||||||||||||||||||
tax provision | $ | - | $ | 320 | $ | 489 | $ | (320) | -100.0% | $ | (169) | -34.6% | |||||||||
Percentage of total revenue | 0.0% | 0.2% | 0.5% |
On September 30, 2013, we sold our dedicated server hosting business. The current and historical results of our dedicated server hosting business have been reclassified to income from discontinued operations, net of income tax provision. For the years ended March 31, 2015, 2014 and 2013, income taxes were $0, $0.2 million and $0.3 million, respectively.
GAIN ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF INCOME TAX PROVISION
Years Ended March 31, | Year-over-Year Change | ||||||||||||||||||||
2015 | 2014 | 2013 | 2014 to 2015 | 2013 to 2014 | |||||||||||||||||
(dollar amounts in thousands) | |||||||||||||||||||||
Gain on disposal of discontinued operations, | |||||||||||||||||||||
net of income tax provision | $ | - | $ | 596 | $ | - | $ | (596) | -100.0% | $ | 596 | 100.0% | |||||||||
Percentage of total revenue | 0.0% | 0.5% | 0.0% |
For the year ended March 31, 2014, we recorded a gain on disposal of our dedicated server hosting business of $1.1 million, net of a tax provision of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2015,2017, we had $177.1$175.0 million of cash, and cash equivalents and investments. By comparison, at March 31, 2014,2016, we had $178.4$162.9 million in cash, and cash equivalents and investments. During fiscal 2015, we repurchased approximately 2.5 million shares of our common stock on the market for a total of approximately $19.2 million. We currently have no borrowing arrangements. We believe we havethat our existing cash, cash equivalents and investment balances, and our anticipated cash flows from operations will be sufficient liquidity to fund operationsmeet our working capital and expenditure requirements for the foreseeable future. In addition, we have a shelf registration statement that would allow usnext twelve months.
Fiscal 2017 to raise up to an additional $123.7 million from the sale of new securities of ours. Please refer to Part I, Item 1A, Risk Factors "We may need to raise additional capital to support our future operations."
2015 to 2014Fiscal 2016
Net cash provided by operating activities for fiscal 20152017 was $21.2$28.5 million, compared with $14.9$23.6 million provided by operating activities for fiscal 2014.2016. Cash used in or provided by operating activities has historically been affected by:
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Net cash used in investing activities was $12.2$22.2 million in fiscal 2015,2017, compared with $136.5 million used in investing activities$36.3 in fiscal 2014.2016, which comprised investments in property and equipment of $8.9 million, cost for capitalized software projects of $5.5 million and net purchases of investments of $4.9 million. The decrease in cash used in investing activities during fiscal 2015 was primarilyoutflow related to the purchase of investments ($106.0 million) and theLeChat acquisition of property and equipment ($5.8 million). The increase in cash used in investing activities during fiscal 2015 was partially offset by the sale and maturities of investments in fiscal 2015 ($100.3 million).$2.9 million.
Net cash used in financing activities was $14.9 million in fiscal 2015, compared with $130.5 million provided by financing activities was $1.6 million in fiscal 2014.2017, compared with $7.2 million in fiscal 2016. Our financing activities for fiscal 2015 provided2017 used cash of $4.5$3.0 million duefor share repurchases to settle payroll taxes obligations. This cash use was offset by $5.1 million proceeds from the issuance of common stock under our employee stock purchase plan andplans. During fiscal 2017, we did not repurchase shares from the issuance of shares related to the exercise of options, which was offset by approximately $19.2 million used inmarket under a stock repurchase programs.program.
2014Fiscal 2016 to 2013Fiscal 2015
Net cash provided by operating activities for fiscal 20142016 was $14.9$23.6 million, compared with $31.8$21.2 million provided by operating activities for fiscal 2013.2015. Cash used in or provided by operating activities has historically been affected by:
Net cash used in investing activities was $136.5$36.3 million in fiscal 2014,2016, compared with $5.9$12.2 million used in investing activities in fiscal 2013.2015. The increase in cash used in investing activities during fiscal 20142016 was primarily related to the purchase of investments ($141.6126.7 million) and the acquisition of a businessbusinesses ($18.523.2 million). The increase in cash used in investing activities during fiscal 20142016 was partially offset by the sale of investments in fiscal 2014 ($24.2 million)56.3) million and proceeds from dispositionmaturities of discontinued operations, net of transaction costsinvestments ($3.064.4 million).
Net cash provided byused in financing activities was $130.5$7.2 million in fiscal 2014,2016, compared with $2.0$14.9 million used in financing activities in fiscal 2013.2015. Our financing activities for fiscal 2014 provided2016 used cash of approximately $125.8$11.7 million netfor the repurchase of issuance costs of $0.6 million, related to underwritten registered offering ofour common stock ($11.2 million under our stock repurchase program and $0.5 million for share withheld for payroll taxes). The cash used in which we sold 14,375,000 shares and $5.2financing activities in fiscal 2016 was partially offset by $4.8 million due toproceeds from the issuance of common stock under ourthe employee stock purchase plan and the issuance of shares related to the exercise of options. The cash provided by financing activities in fiscal 2014 was partially offset by $0.5 million due to repurchase of restricted shares and payment of capital leases.plan.
Contractual Obligations
Future operating lease payments, capital lease payments and purchase obligations at March 31, 20152017 for the next five years were as follows (in thousands):
Year Ending March 31, | Year Ending March 31, | ||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2018 | 2019 | 2020 | Thereafter | Total | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | Total | ||||||||||||||||||||||||||||
Capital leases | $ | 25 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 25 |
| $ | 1,004 |
| $ | 736 |
| $ | 163 |
| $ | - |
| $ | - |
| $ | - |
| $ | 1,903 | ||||||
Office leases | 1,913 | 1,977 | 1,872 | 1,926 | 1,100 | - | 8,788 |
| 4,707 |
| 5,596 |
| 4,906 |
| 2,435 |
| 2,140 |
| 4,768 |
| 24,553 | ||||||||||||||||||||
Purchase obligations |
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| |||||||||||||||||||||||||||
Third party customer support provider | 2,158 | - | - | - | - | - | 2,158 | ||||||||||||||||||||||||||||||||||
Third party customer support providers |
| 2,158 |
| - |
| - |
| - |
| - |
| - |
| 2,158 | |||||||||||||||||||||||||||
Third party network service providers | 3,014 | 2,452 | 891 | - | - | - | 6,357 |
| 1,364 |
| 133 |
| 8 |
| - |
| - |
| - |
| 1,505 | ||||||||||||||||||||
Open purchase orders | 48 | - | - | - | - | - | 48 | ||||||||||||||||||||||||||||||||||
$ | 7,158 | $ | 4,429 | $ | 2,763 | $ | 1,926 | $ | 1,100 | $ | - | $ | 17,376 |
| $ | 9,233 |
| $ | 6,465 |
| $ | 5,096 |
| $ | 2,435 |
| $ | 2,140 |
| $ | 4,768 |
| $ | 30,119 |
WeOur capital lease obligations consist of leases for computer equipment.
Our office lease obligations consist of our principal facility and various leased facilities under operating lease agreements, which expire on various dates from fiscal 2018 through fiscal 2026. The Company leases its headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months with a 3% increase each year thereafter, and requires us to pay property taxes, utilities and normal maintenance costs.
45
We lease our UK headquarters in Aylesbury UK under operating lease agreements that expires in March 2017. The lease was amended in September 2014 for additional space. The lease has a base monthly rent of approximately $7,800 until March 2015, rising to approximately $8,800 thereafter, and requires us to pay property taxes, service charges, utilities and normal maintenance costs. We also lease office space in London UK under an operating lease agreement that expires in April 2019. The lease has a base monthly rent of approximately $6,700 until March 2016, rising to approximately $7,100 thereafter.
In the third quarter of 2010, we amended our contract with one of our third partythird-party customer support vendors containing a minimum monthly commitment of approximately $0.4 million. TheAs the agreement requires a 150-day notice to terminate. At March 31, 2015,terminate, the total remaining obligation under the contract was $2.2 million.million at March 31, 2017.
We have entered into contracts with multiple vendors for third party network service which expire on various dates in fiscal 20162018 through 2018.2020. At March 31, 2015,2017, the total remaining obligations under these contracts were $6.4$1.5 million.
At March 31, 2015, we had open purchase orders of $48,000, primarily related to inventory purchases from our contract manufacturers. These purchase commitments are reflected in our consolidated financial statements once goods or services have been received or at such time when we are obligated to make payments related to these goods or services. 43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Fluctuation Risk
The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates would have a significant impact on our interest income.
During the years ended March 31, 20152017 and 2014,2016, we did not have any outstanding debt instruments other than equipment under capital leases and, therefore, we were not exposed to market risk relating to interest rates.
Foreign Currency Exchange Risk
We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than the U.S. dollar, primarily the British Pound, causing both our revenue and our operating results to be impacted by fluctuations in the exchange rates.
Gains or losses from the translation of certain cash balances, accounts receivable balances and intercompany balances that are denominated in these currencies impact our net income (loss). A hypothetical decrease in all foreign currencies against the US dollar of 10 percent, would not result in a material foreign currency loss on foreign-denominated balances, at March 31, 2017. As our foreign operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business.
At this time, we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
| Page |
FINANCIAL STATEMENTS: |
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Consolidated Balance Sheets at March 31, |
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4644
Report of Independent Registered Public Accounting FirmREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
8x8, Inc.
We have audited the accompanying consolidated balance sheets of 8x8, Inc. (the Company), as of March 31, 20152017 and 2014,2016, and the related consolidated statements of income,operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended March 31, 2015.2017. Our audits also included the financial statement schedule listed in Item 15(a)(2). We also have audited the Company's internal control over financial reporting as of March 31, 2015,2017, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also include performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 8x8, Inc., as of March 31, 20152017 and 2014,2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2015,2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, 8x8, Inc., maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015,2017, based on criteria established inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Moss Adams LLP
San Francisco, California
May 29, 201530, 2017
4745
8X8, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, | March 31, | |||||||||||
2015 | 2014 | 2017 | 2016 | |||||||||
ASSETS | ||||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 53,110 | $ | 59,159 | $ | 41,030 | $ | 33,576 | ||||
Short-term investments | 123,984 | 47,181 | 133,959 | 129,274 | ||||||||
Accounts receivable, net | 6,642 | 5,503 | 14,264 | 11,070 | ||||||||
Inventory | 704 | 811 | 908 | 520 | ||||||||
Deferred cost of goods sold | 428 | 263 | 619 | 634 | ||||||||
Deferred tax asset | 4,454 | 2,065 | - | 5,382 | ||||||||
Other current assets | 2,274 | 1,951 | 6,574 | 5,444 | ||||||||
Total current assets | 191,596 | 116,933 | 197,354 | 185,900 | ||||||||
Long-term investments | - | 72,021 | - | - | ||||||||
Property and equipment, net | 10,248 | 7,711 | 16,384 | 12,375 | ||||||||
Intangible assets, net | 12,260 | 15,095 | 17,038 | 21,464 | ||||||||
Goodwill | 36,887 | 38,461 | 46,136 | 47,420 | ||||||||
Non-current deferred tax asset | 43,169 | 47,797 | 48,859 | 43,189 | ||||||||
Other assets | 1,464 | 1,185 | 8,084 | 3,104 | ||||||||
Total assets | $ | 295,624 | $ | 299,203 | $ | 333,855 | $ | 313,452 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 7,775 | $ | 6,789 | $ | 15,711 | $ | 10,954 | ||||
Accrued compensation | 6,183 | 4,583 | 11,508 | 10,063 | ||||||||
Accrued warranty | 339 | 660 | 324 | 326 | ||||||||
Accrued taxes | 2,800 | 2,323 | 5,354 | 5,200 | ||||||||
Accrued outside commissions | 2,920 | 2,186 | ||||||||||
Deferred revenue | 1,768 | 1,857 | 2,144 | 1,925 | ||||||||
Other accrued liabilities | 2,965 | 1,909 | 5,383 | 4,080 | ||||||||
Total current liabilities | 21,830 | 18,121 | 43,344 | 34,734 | ||||||||
Non-current liabilities | 1,352 | 1,619 | 1,850 | 3,258 | ||||||||
Non-current deferred revenue | 231 | 1,285 | 60 | 154 | ||||||||
Total liabilities | 23,413 | 21,025 | 45,254 | 38,146 | ||||||||
Commitments and contingencies (Note 7) | ||||||||||||
Stockholders' equity: | ||||||||||||
Preferred stock, $0.001 par value: | ||||||||||||
Authorized: 5,000,000 shares; | ||||||||||||
Issued and outstanding: no shares at March 31, 2015 and 2014 | - | - | ||||||||||
Issued and outstanding: no shares at March 31, 2017 and 2016 | - | - | ||||||||||
Common stock, $0.001 par value: | ||||||||||||
Authorized: 200,000,000 shares; | ||||||||||||
Issued and outstanding: 88,065,528 shares and 88,525,015 shares | ||||||||||||
at March 31, 2015 and 2014, respectively | 88 | 88 | ||||||||||
Issued and outstanding: 91,500,091 shares and 89,213,205 shares | ||||||||||||
at March 31, 2017 and 2016, respectively | 91 | 89 | ||||||||||
Additional paid-in capital | 378,971 | 384,325 | 412,762 | 389,260 | ||||||||
Accumulated other comprehensive (loss) income | (2,109) | 430 | ||||||||||
Accumulated other comprehensive loss | (9,642) | (4,184) | ||||||||||
Accumulated deficit | (104,739) | (106,665) | (114,610) | (109,859) | ||||||||
Total stockholders' equity | 272,211 | 278,178 | 288,601 | 275,306 | ||||||||
Total liabilities and stockholders' equity | $ | 295,624 | $ | 299,203 | $ | 333,855 | $ | 313,452 |
The accompanying notes are an integral part of these consolidated financial statements.
46
8X8, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Service revenue | $ | 235,816 | $ | 192,241 | $ | 148,208 | |||
Product revenue | 17,572 | 17,095 | 14,205 | ||||||
Total revenue | 253,388 | 209,336 | 162,413 | ||||||
Operating expenses: | |||||||||
Cost of service revenue | 42,400 | 37,078 | 29,701 | ||||||
Cost of product revenue | 19,714 | 20,168 | 15,863 | ||||||
Research and development | 27,452 | 24,040 | 15,118 | ||||||
Sales and marketing | 139,277 | 109,379 | 80,667 | ||||||
General and administrative | 31,214 | 25,745 | 18,182 | ||||||
Gain on patent sale | - | - | (1,000) | ||||||
Total operating expenses | 260,057 | 216,410 | 158,531 | ||||||
Income (loss) from operations | (6,669) | (7,074) | 3,882 | ||||||
Other income, net | 1,792 | 1,107 | 833 | ||||||
Income (loss) before provision (benefit) for income taxes | (4,877) | (5,967) | 4,715 | ||||||
Provision (benefit) for income taxes | (126) | (847) | 2,789 | ||||||
Net income (loss) | $ | (4,751) | $ | (5,120) | $ | 1,926 | |||
Net income (loss) per share: | |||||||||
Basic | $ | (0.05) | $ | (0.06) | $ | 0.02 | |||
Diluted | $ | (0.05) | $ | (0.06) | $ | 0.02 | |||
Weighted average number of shares: | |||||||||
Basic | 90,340 | 88,477 | 89,071 | ||||||
Diluted | 90,340 | 88,477 | 91,652 |
The accompanying notes are an integral part of these consolidated financial statements.
47
8X8, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Net income (loss) | $ | (4,751) | $ | (5,120) | $ | 1,926 | |||
Other comprehensive income (loss), net of tax | |||||||||
Unrealized gain (loss) on investments in securities | 70 | (50) | (26) | ||||||
Foreign currency translation adjustment | (5,528) | (2,025) | (2,513) | ||||||
Comprehensive loss | $ | (10,209) | $ | (7,195) | $ | (613) |
The accompanying notes are an integral part of these consolidated financial statements.
48
8X8, INC.
CONSOLIDATED STATEMENTS OF INCOMESTOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)SHARES)
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Service revenue | $ | 148,208 | $ | 116,607 | $ | 94,384 | |||
Product revenue | 14,205 | 11,990 | 9,402 | ||||||
Total revenue | 162,413 | 128,597 | 103,786 | ||||||
Operating expenses: | |||||||||
Cost of service revenue | 29,701 | 22,445 | 19,928 | ||||||
Cost of product revenue | 15,863 | 15,170 | 11,801 | ||||||
Research and development | 15,118 | 11,633 | 8,147 | ||||||
Sales and marketing | 80,667 | 60,906 | 45,573 | ||||||
General and administrative | 18,182 | 15,368 | 8,558 | ||||||
Gain on patent sale | (1,000) | - | (12,965) | ||||||
Total operating expenses | 158,531 | 125,522 | 81,042 | ||||||
Income from operations | 3,882 | 3,075 | 22,744 | ||||||
Other income, net | 833 | 742 | 105 | ||||||
Income from continuing operations before | |||||||||
provision for income taxes | 4,715 | 3,817 | 22,849 | ||||||
Provision for income taxes | 2,789 | 2,219 | 9,399 | ||||||
Income from continuing operations | 1,926 | 1,598 | 13,450 | ||||||
Income from discontinued operations, | |||||||||
net of income tax provision | - | 320 | 489 | ||||||
Gain on disposal of discontinued operations, | |||||||||
net of income tax provision of $456 | - | 596 | - | ||||||
Net income | $ | 1,926 | $ | 2,514 | $ | 13,939 | |||
Income per share - continuing operations: | |||||||||
Basic | $ | 0.02 | $ | 0.02 | $ | 0.19 | |||
Diluted | $ | 0.02 | $ | 0.02 | $ | 0.18 | |||
Income per share - discontinued operations: | |||||||||
Basic | $ | 0.00 | $ | 0.01 | $ | 0.01 | |||
Diluted | $ | 0.00 | $ | 0.01 | $ | 0.01 | |||
Net income per share: | |||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.20 | |||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.19 | |||
Weighted average number of shares: | |||||||||
Basic | 89,071 | 78,310 | 71,390 | ||||||
Diluted | 91,652 | 81,658 | 74,700 |
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||
Balance at March 31, 2014 | 88,525,015 | $ | 88 | $ | 384,325 | $ | 430 | $ | (106,665) | $ | 278,178 | |||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 2,043,781 | 2 | 4,525 | - | - | 4,527 | ||||||||||||
Cost of issuance of common stock | (8) | (8) | ||||||||||||||||
Repurchase of common stock | (2,503,268) | (2) | (19,369) | - | - | (19,371) | ||||||||||||
Stock-based compensation expense | - | - | 9,347 | - | - | 9,347 | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 151 | - | - | 151 | ||||||||||||
Unrealized investment loss | - | - | - | (26) | - | (26) | ||||||||||||
Foreign currency translation adjustment | - | - | - | (2,513) | - | (2,513) | ||||||||||||
Net income | - | - | - | - | 1,926 | 1,926 | ||||||||||||
Balance at March 31, 2015 | 88,065,528 | 88 | 378,971 | (2,109) | (104,739) | 272,211 | ||||||||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 2,218,470 | 2 | 5,386 | - | - | 5,388 | ||||||||||||
Cost of issuance of common stock | (3) | (3) | ||||||||||||||||
Repurchase of common stock | (1,422,837) | (1) | (11,652) | - | - | (11,653) | ||||||||||||
Stock-based compensation expense | - | - | 16,334 | - | - | 16,334 | ||||||||||||
Issuance of common stock for | ||||||||||||||||||
acquisition of DXI | 352,044 | - | - | - | - | - | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 224 | - | - | 224 | ||||||||||||
Unrealized investment loss | - | - | - | (50) | - | (50) | ||||||||||||
Foreign currency translation adjustment | - | - | - | (2,025) | - | (2,025) | ||||||||||||
Net loss | - | - | - | - | (5,120) | (5,120) | ||||||||||||
Balance at March 31, 2016 | 89,213,205 | 89 | 389,260 | (4,184) | (109,859) | 275,306 | ||||||||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 2,576,785 | 3 | 4,564 | - | - | 4,567 | ||||||||||||
Cost of issuance of common stock | (6) | (6) | ||||||||||||||||
Repurchase of common stock | (289,899) | (1) | (3,004) | - | - | (3,005) | ||||||||||||
Stock-based compensation expense | - | - | 21,462 | - | - | 21,462 | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 486 | - | - | 486 | ||||||||||||
Unrealized investment gain | - | - | - | 70 | - | 70 | ||||||||||||
Foreign currency translation adjustment | - | - | - | (5,528) | - | (5,528) | ||||||||||||
Net loss | - | - | - | - | (4,751) | (4,751) | ||||||||||||
Balance at March 31, 2017 | 91,500,091 | $ | 91 | $ | 412,762 | $ | (9,642) | $ | (114,610) | $ | 288,601 |
The accompanying notes are an integral part of these consolidated financial statements.
49
8X8, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMECASH FLOWS
(IN THOUSANDS)
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Net income | $ | 1,926 | $ | 2,514 | $ | 13,939 | |||
Other comprehensive income (loss), net of tax | |||||||||
Unrealized gain (loss) on investments in securities | (26) | (41) | 22 | ||||||
Foreign currency translation adjustment | (2,513) | 507 | - | ||||||
Comprehensive (loss) income | $ | (613) | $ | 2,980 | $ | 13,961 |
Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Cash flows from operating activities: | |||||||||
Net income (loss) | $ | (4,751) | $ | (5,120) | $ | 1,926 | |||
Adjustments to reconcile net income (loss) to net cash provided by | |||||||||
operating activities: | |||||||||
Depreciation | 6,084 | 4,994 | 3,540 | ||||||
Amortization of intangibles | 3,762 | 3,557 | 2,232 | ||||||
Impairment of long-lived assets | 15 | 640 | - | ||||||
Amortization of capitalized software | 591 | 456 | 341 | ||||||
Net accretion of discount and amortization of premium on marketable securities | 219 | 740 | 896 | ||||||
Stock-based compensation expense | 21,462 | 16,334 | 9,347 | ||||||
Tax benefit from stock-based compensation expense | (486) | (224) | (151) | ||||||
Deferred income tax (benefit) expense | (411) | (1,493) | 2,390 | ||||||
Other | 977 | 533 | 256 | ||||||
Changes in assets and liabilities: | |||||||||
Accounts receivable | (4,799) | (4,539) | (1,529) | ||||||
Inventory | (430) | 136 | 52 | ||||||
Other current and noncurrent assets | (2,025) | (1,432) | (196) | ||||||
Deferred cost of goods sold | (60) | (224) | (207) | ||||||
Accounts payable | 4,173 | 2,473 | 610 | ||||||
Accrued compensation | 1,615 | 3,566 | 1,632 | ||||||
Accrued warranty | (2) | (13) | (321) | ||||||
Accrued taxes | 247 | 2,292 | 490 | ||||||
Accrued outside commissions | 734 | 1,744 | (5) | ||||||
Deferred revenue | 195 | (273) | (1,065) | ||||||
Other current and noncurrent liabilities | 1,368 | (580) | 1,002 | ||||||
Net cash provided by operating activities | 28,478 | 23,567 | 21,240 | ||||||
Cash flows from investing activities: | |||||||||
Purchases of property and equipment | (8,851) | (4,894) | (5,826) | ||||||
Cost of capitalized software | (5,516) | (2,095) | (724) | ||||||
Purchase of investments - available for sale | (140,026) | (126,723) | (106,021) | ||||||
Sales of investments - available for sale | 41,288 | 56,302 | 36,764 | ||||||
Proceeds from maturities of investments - available for sale | 93,795 | 64,361 | 63,546 | ||||||
Acquisition of businesses, net of cash acquired | (2,884) | (23,246) | - | ||||||
Net cash used in investing activities | (22,194) | (36,295) | (12,261) | ||||||
Cash flows from financing activities: | |||||||||
Capital lease payments | (674) | (446) | (149) | ||||||
Payment of contingent consideration | (300) | (200) | - | ||||||
Repurchase of common stock | (3,003) | (11,653) | (19,371) | ||||||
Tax benefit from stock-based compensation expense | 486 | 224 | 151 | ||||||
Proceeds from issuance of common stock under employee stock plans | 5,087 | 4,827 | 4,455 | ||||||
Net cash provided by (used in) financing activities | 1,596 | (7,248) | (14,914) | ||||||
Effect of exchange rate changes on cash | (426) | 442 | (114) | ||||||
Net increase (decrease) in cash and cash equivalents | 7,454 | (19,534) | (6,049) | ||||||
Cash and cash equivalents, beginning of year | 33,576 | 53,110 | 59,159 | ||||||
Cash and cash equivalents, end of year | $ | 41,030 | $ | 33,576 | $ | 53,110 | |||
Supplemental and non-cash disclosures: | |||||||||
Acquisition of property and equipment, net in connection with | |||||||||
acquisitions of businesses | $ | - | $ | 1,453 | $ | - | |||
Acquisition of capital lease in connection with acquisitions of businesses | - | 1,332 | - | ||||||
Equipment acquired under capital leases | 1,152 | 573 | - | ||||||
Interest paid | 16 | 44 | 5 | ||||||
Income taxes paid | 460 | 445 | 159 |
The accompanying notes are an integral part of these consolidated financial statements.
50
8X8, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY(IN THOUSANDS, EXCEPT SHARES)
Accumulated | ||||||||||||||||||
Additional | Other | |||||||||||||||||
Common Stock | Paid-in | Comprehensive | Accumulated | |||||||||||||||
Shares | Amount | Capital | Income (Loss) | Deficit | Total | |||||||||||||
Balance at March 31, 2012 | 70,679,493 | $ | 71 | $ | 241,555 | $ | (58) | $ | (123,118) | $ | 118,450 | |||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 1,503,238 | 1 | 2,400 | - | - | 2,401 | ||||||||||||
Cost of issuance of common stock | - | - | (43) | - | - | (43) | ||||||||||||
Repurchase of common stock | (73,751) | - | (419) | - | - | (419) | ||||||||||||
Stock-based compensation expense | - | - | 2,634 | - | - | 2,634 | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 49 | - | - | 49 | ||||||||||||
Unrealized investment gain | - | - | - | 22 | - | 22 | ||||||||||||
Net income | - | - | - | - | 13,939 | 13,939 | ||||||||||||
Balance at March 31, 2013 | 72,108,980 | 72 | 246,176 | (36) | (109,179) | 137,033 | ||||||||||||
Issuance of common stock, net of | ||||||||||||||||||
issuance costs | 14,375,000 | 14 | 125,736 | - | - | 125,750 | ||||||||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 2,091,435 | 2 | 5,165 | - | - | 5,167 | ||||||||||||
Repurchase of common stock | (50,400) | - | (489) | - | - | (489) | ||||||||||||
Stock-based compensation expense | - | - | 7,595 | - | - | 7,595 | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 142 | - | - | 142 | ||||||||||||
Unrealized investment loss | - | - | - | (41) | - | (41) | ||||||||||||
Foreign currency translation adjustment | - | - | - | 507 | - | 507 | ||||||||||||
Net income | - | - | - | - | 2,514 | 2,514 | ||||||||||||
Balance at March 31, 2014 | 88,525,015 | 88 | 384,325 | 430 | (106,665) | 278,178 | ||||||||||||
Issuance of common stock under | ||||||||||||||||||
stock plans | 2,043,781 | 2 | 4,525 | - | - | 4,527 | ||||||||||||
Cost of issuance of common stock | - | - | (8) | - | - | (8) | ||||||||||||
Repurchase of common stock | (2,503,268) | (2) | (19,369) | - | - | (19,371) | ||||||||||||
Stock-based compensation expense | - | - | 9,347 | - | - | 9,347 | ||||||||||||
Income tax benefit from stock- | ||||||||||||||||||
based compensation | - | - | 151 | - | - | 151 | ||||||||||||
Unrealized investment loss | - | - | - | (26) | - | (26) | ||||||||||||
Foreign currency translation adjustment | - | - | - | (2,513) | - | (2,513) | ||||||||||||
Net income | - | - | - | - | 1,926 | 1,926 | ||||||||||||
Balance at March 31, 2015 | 88,065,528 | $ | 88 | $ | 378,971 | $ | (2,109) | $ | (104,739) | $ | 272,211 |
The accompanying notes are an integral part of these consolidated financial statements.
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8X8, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(IN THOUSANDS)
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Cash flows from operating activities: | |||||||||
Net income | $ | 1,926 | $ | 2,514 | $ | 13,939 | |||
Adjustments to reconcile net income to net cash provided by | |||||||||
operating activities: | |||||||||
Depreciation | 3,540 | 2,567 | 2,523 | ||||||
Amortization of intangibles | 2,232 | 1,643 | 1,428 | ||||||
Amortization of capitalized software | 341 | 147 | - | ||||||
Net Accretion of discount and amortization of | |||||||||
premium on marketable securities | 896 | 114 | - | ||||||
Gain on disposal of discontinued operations | - | (596) | - | ||||||
Gain on escrow settlement | - | (565) | - | ||||||
Stock-based compensation expense | 9,347 | 7,595 | 2,634 | ||||||
Tax benefit from stock-based compensation | (151) | (142) | (49) | ||||||
Deferred income tax expense | 2,390 | 2,266 | 9,308 | ||||||
Other | 256 | 650 | 616 | ||||||
Changes in assets and liabilities: | |||||||||
Accounts receivable | (1,529) | (1,575) | (2,171) | ||||||
Inventory | 52 | (276) | 27 | ||||||
Other current and noncurrent assets | (196) | (488) | (30) | ||||||
Deferred cost of goods sold | (207) | 163 | (60) | ||||||
Accounts payable | 605 | (1,035) | 410 | ||||||
Accrued compensation | 1,632 | 488 | 524 | ||||||
Accrued warranty | (321) | 208 | 65 | ||||||
Accrued taxes | 490 | 276 | 440 | ||||||
Deferred revenue | (1,065) | 681 | 345 | ||||||
Other current and noncurrent liabilities | 1,002 | 282 | 1,839 | ||||||
Net cash provided by operating activities | 21,240 | 14,917 | 31,788 | ||||||
Cash flows from investing activities: | |||||||||
Acquisitions of property and equipment | (5,826) | (2,853) | (5,678) | ||||||
Cost of capitalized software | (724) | (755) | (190) | ||||||
Purchase of investments | (106,021) | (141,604) | - | ||||||
Sales of investments | 36,764 | 24,219 | - | ||||||
Proceeds from maturities of investments | 63,546 | - | - | ||||||
Acquisition of businesses, net of cash acquired | - | (18,474) | - | ||||||
Proceeds from disposition of discontinued operations, net of transaction costs | - | 3,000 | - | ||||||
Net cash used in investing activities | (12,261) | (136,467) | (5,868) | ||||||
Cash flows from financing activities: | |||||||||
Capital lease payments | (149) | (85) | (86) | ||||||
Repurchase of common stock | (19,371) | (489) | (419) | ||||||
Tax benefit from stock-based compensation | 151 | 142 | 49 | ||||||
Proceeds from (cost of) issuance of common stock, net of issuance costs | - | 125,750 | (43) | ||||||
Proceeds from issuance of common stock under employee stock plans | 4,455 | 5,167 | 2,458 | ||||||
Net cash (used in) provided by financing activities | (14,914) | 130,485 | 1,959 | ||||||
Effect of exchange rate changes on cash | (114) | (81) | - | ||||||
Net (decrease) increase in cash and cash equivalents | (6,049) | 8,854 | 27,879 | ||||||
Cash and cash equivalents, beginning of year | 59,159 | 50,305 | 22,426 | ||||||
Cash and cash equivalents, end of year | $ | 53,110 | $ | 59,159 | $ | 50,305 | |||
Supplemental and non-cash disclosures: | |||||||||
Acquisition of property and equipment, net in connection with | |||||||||
acquisitions of businesses | $ | - | $ | 956 | $ | - | |||
Acquisition of capital lease in connection with acquisitions of businesses | - | 216 | - | ||||||
Interest paid | 5 | 5 | 8 | ||||||
Income taxes paid | 159 | 427 | 415 |
The accompanying notes are an integral part of these consolidated financial statements.
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8X8, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
8x8, Inc. ("8x8" or the "Company") was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996.
The Company is a leading provider of VoIP technology and SaaS (Software as a service) communicationenterprise cloud communications solutions, in the cloud for SMBs and mid-market and distributed enterprises. The Company delivers a broad suite of SaaS services to in-office and mobile devices spanning cloud telephony, virtualincluding unified communications, team collaboration, contact center, and virtual meeting through its proprietary unified SaaSanalytics, integrated over a single Software-as-a Service (SaaS) platform. The Company currently serves approximately 41,600 business customers with over 650,000 subscriptions, making it8x8 Communications CloudTM offers businesses a leading provider of UCC services insecure, reliable and simplified approach to transitioning their legacy, on-premises communications systems to the cloud. The Company's software abstracts complex networking, redundancy, securityThis comprehensive solution, built from owned and interconnection requirementsmanaged cloud technologies, enables customers to providerely on a seamless and easy-to-use solutionsingle provider for its customers. The Company's software also integrates with leading enterprise resource planning, customer relationship management, or human capital management, and other third-party application suites, such as Salesforce.com and NetSuite, to provide organizations an integrated, fully functional businesstheir global communications and collaboration experience that is criticalcontact center capabilities as well as customer support requirements. 8x8 customers are spread across more than 100 countries and range from small businesses to operate their businesses.large enterprises. Since fiscal 2004, substantially all revenue has been generated from the sale of communications services and related hardware. Prior to fiscal 2003, the Company's main business was Voice over Internet Protocol semiconductors.
The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 20152017 refers to the fiscal year ended March 31, 2015)2017).
Common Stock Offering
In November 2013, the Company completed an underwritten registered offering of common stock in which it sold 14,375,000 shares for total cash proceeds of approximately $125.8 million, net of issuance costs of $0.6 million. The shares issued in theoffering had been registered under a shelf registration statement previously filed with the Securities and Exchange Commission relating to up to $250,000,000 of the Company's securities. A member of the Company's board of directors participated in the offering and purchased 30,000 shares at the public offering price.
Acquisition of Voicenet Solutions LimitedAcquisitions
In November 2013,January 2017, the Company entered into a share purchase agreement with the shareholders of LeChat, Inc., the maker of Sameroom™, an interoperability platform that enables cross-team messaging and optionholderscollaboration in the enterprise.
In June 2015, the Company entered into an asset purchase agreement with the shareholder of Voicenet SolutionsQuality Software Corporation and other parties affiliated with the shareholder and Quality Software Corporation, a developer of cloud-native quality management capabilities and analytics.
In May 2015, the Company entered into a share purchase agreement with the shareholders of DXI Limited, API Telecom Limited, Easycallnow Limited and RAS Telecom Limited, a provider of cloud communicationsin cloud-based outbound and collaboration services in the United Kingdom. blended contact center solutions.
See Note 13.13 for further discussion.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-goingongoing basis, the Company evaluates its estimates, including, but not limited to, those related to bad debts, returns reserve for expected cancellations, valuation of inventories, income and sales tax, and litigation and other contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities, and equity that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.
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REVENUE RECOGNITION
Service and Product Revenue
The Company recognizes service revenue, mainly from subscription services to its cloud-based voice, call center, video and collaboration solutions, when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable and collectability is reasonably assured. The Company defers recognition of service revenues in instances when cash receipts are received before services are delivered and recognizes deferred revenues ratably, over the course of the contract, as services are provided.
Under the terms of the Company's typical subscription agreements, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company recognizes new subscriber revenue that is fixed or determinable and that is not contingent on future performance or future deliverables in the month in which the new order was shipped, net of an allowance for expected cancellations. The Company recognizes revenue from product sales, mainly 8x8 IP telephones, for which there are no related services to be rendered upon shipment to customers provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods sold. Reserves for returns and allowances for customer sales are recorded at the time of shipment. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 605,Revenue Recognition, the Company records shipments to distributors, retailers, channel partners, and resellers, where the right of return exists, as deferred revenue. The Company defers recognition of revenue on product sales to distributors, retailers, channel partners, and resellers until the products have been sold to the end customer.end-customer.
The Company records revenue net of any sales and service related taxes and mandatory government charges that are billed to its customers. The Company believes this approach results in consolidated financial statements that are more easily understood by users.
Under the terms of the Company's typical subscription agreement, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company recognizes new subscriber revenue that is fixed or determinable and that are not contingent on future performance or future deliverables in the month in which the new order was shipped, net of an allowance for expected cancellations.
Multiple Element Arrangements
ASC 605-25, Revenue Recognition - Multiple Element Arrangements, requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. The provisioning of the 8x8 cloud service with the accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables. For arrangements with multiple deliverables, the Company allocates the arrangement consideration to all units of accounting based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the relative selling price to be used for allocating arrangement consideration to units of accounting as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("BESP").
VSOE generally exists only when thea Company sells the deliverable separately, on more than a limited basis, at prices within a relatively narrow range. When VSOE cannot be established, the Company attempts to establish the selling price of deliverables based on relevant TPE. TPE is determined based on manufacturer's prices for similar deliverables when sold separately, when possible. WhenAs the Company ishas historically been unable to establish a selling price using VSOE or TPE, it uses a BESP for the allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company determines BESP for a product or service by considering multiple factors including, but not limited to:
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In accordance with the guidance of ASC 605-25, when the Company enters into revenue arrangements with multiple deliverables the Company allocates arrangement consideration, including activation fees, among the 8x8 IP telephonesproducts and subscriber services based on their relative selling prices. Arrangement consideration allocated to the IP telephonessold products that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized as product revenues during the period of the sale less the allowance for estimated returns during the 30-day trial period. Arrangement consideration allocated to
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subscriber services that is fixed or determinable and that is not contingent on future performance or future deliverables is recognized ratably as service revenues as the related services are provided, which is generally over the initial contract term.
DEFERRED COST OF GOODS SOLD
Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return. The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has accepted the service.
CASH, CASH EQUIVALENTS AND INVESTMENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Management determines the appropriate categorization of its investments at the time of purchase and reevaluates the classification at each reporting date. The cost of the Company's investments is determined based upon specific identification.
The Company's investments are comprised of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, mortgage backed securities, agency bonds, international government securities, certificates of deposit and money market funds. At March 31, 20152017 and 2014,2016, all investments were classified as available-for-sale and reported at fair value, based either upon quoted prices in active markets, quoted prices in less active markets, or quoted market prices for similar investments, with unrealized gains and losses, net of related tax, if any, included in other comprehensive income (loss) and disclosed as a separate component of consolidated stockholders' equity. Realized gains and losses on sales of all such investments are reported within the caption of other income net in the consolidated statements of incomeoperations and computed using the specific identification method. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations. The Company's investments in marketable securities are monitored on a periodic basis for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. These available-for-sale investments are primarily held in the custody of aone major financial institution.
ACCOUNTS RECEIVABLE ALLOWANCE
The Company estimates the amount of uncollectible accounts receivable at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, and communications with its customers. Amounts are written off only after considerable collection efforts have been made and the amounts are determined to be uncollectible.
INVENTORY
Inventory is stated at the lower of standard cost, which approximates actual cost using the first-in, first-out method, or market. Any write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently would not be marked up based on changes in underlying facts and circumstances. On an on-goingongoing basis, the Company evaluates inventory for obsolescence and slow-moving items. This evaluation includes analysis of sales levels, sales projections, and purchases by item, as well as raw material usage related to the Company's manufacturing facilities. If the Company's review indicates a reduction in utility below carrying value, it reduces inventory to a new cost basis. If future demand or market conditions are different than the Company's current estimates, an inventory adjustment may be required, and would be reflected in cost of goods sold in the period the revision is made.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method. Estimated useful lives of three years are used for equipment and software and five years for furniture and fixtures. Amortization of leasehold improvements is computed using the shorter of the remaining facility lease term or the estimated useful life of the improvements.
55
Maintenance, repairs and ordinary replacements are charged to expense. Expenditures for improvements that extend the physical or economic life of the property are capitalized. Gains or losses on the disposition of property and equipment are recorded in the Consolidated Statements of Income.Operations.
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Construction in progress primarily relates to costs to acquire or internally develop software for internal use not fully completed as of March 31, 2015.2017.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company reviews the recoverability of its long-lived assets, such as property and equipment, definite lived intangibles or capitalized software, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. Examples of such events could include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset or a significant change in the operation or use of an asset. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset or asset group from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate future cash flows and the fair value of long-lived assets. No suchassets and asset groups through future cash flows. See Note 5 for further discussion on impairment charges were recorded in the periods presented.incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and intangible assets with indefinite useful lives are not amortized. Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. The carrying value of goodwillGoodwill and indefinite lived intangible assets with indefinite useful lives are not amortized, but are tested annually for impairment and more often if there is an indicator of impairment. The Company has determined that it has twothree reporting units, and allocates goodwill to the reporting units for the purposes of theits annual test for impairment.impairment test.
The Company's annual goodwill impairment test is performed on January 1 each year. No goodwill impairment charges were recorded in the periods presented.
Intangible assets with finite useful lives are amortized on a straight-line basis over the periods benefited. Amortization expense for the customer relationship intangible asset is included in sales and marketing expenses. Amortization expense for technology is included in cost of service revenue.
WARRANTY EXPENSE
The Company accrues for estimated product warranty cost upon revenue recognition. Accruals for product warranties are calculated based on the Company's historical warranty experience adjusted for any specific requirements.
RESEARCH, DEVELOPMENT AND SOFTWARE COSTS
The Company accounts for software to be sold or otherwise marketed in accordance with ASC 985-20,Costs of Software to be Sold, Leased or Marketed (ASC 985-20) which requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs for software to be sold or otherwise marketed incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material.
In fiscal 2015 and 2014, the Company capitalized approximately $0 and $0.8 million, respectively, of software development costs in accordance with ASC 985-20. At March 31, 2015 and 2014, total capitalized software development costs included in other long-term assets was approximately $1.0 million, and accumulated amortization costs related to capitalized software was approximately $0.5 million and $0.1 million, respectively.
The Company accounts for computerComputer software developed or obtained for internal use in accordance with ASC 350-40,Internal Use Software (ASC 350-40), which requires capitalization of certain software development costs incurredis capitalized during the application development stage. In fiscal 2015,accordance with authoritative guidance, the Company capitalized $1.5 millionbegins to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Once the project has been completed, these costs are amortized on a straight - line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in accordanceresearch and development expense on our consolidated statements of operations. The Company classifies application development costs associated with ASC 350-40,the development of which $0.8 million is classifiedthe Company's products and services as other long-term assets. The Company classifies application development costs associated with purchased software as property and equipment and $0.7 million is classified as long-term assets. In fiscal 2014, no such costs were capitalized. At March 31, 2015, the projects had not yet been placed into service, and accordingly no amortization has been recognized.equipment. See Note 6 for further details.
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ADVERTISING COSTS
Advertising costs are expensed as incurred and were $6.8$9.5 million, $7.3$8.5 million and $6.5$6.8 million for the years ended March 31, 2015, 20142017, 2016 and 2013,2015, respectively.
FOREIGN CURRENCY TRANSLATION
The Company has determined that the functional currency of each of its UK foreign subsidiary issubsidiaries are the subsidiary's local currency, the British Pound Sterling, which thecurrency. The Company believes this most appropriately reflects the current economic facts and circumstances of the UK subsidiary'sCompany's subsidiaries' operations. The assets and liabilities of the subsidiarysubsidiaries are translated at the applicable exchange rate as of the end of the balance sheet period and revenue and expenses are translated at an average rate over the period presented. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income or loss within the stockholder's equity in the consolidated balance sheets.
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BUSINESS SEGMENTS
The Company has onetwo reportable operating segment.segments, Americas and Europe. The Company's chief operating decision makers, the Chief Executive Officer, Chief Financial Officer, and Chief Technology Officer, evaluate performance of the Company and makes decisions regarding allocation of resources based on total Companygeographical results (see Note 12).
SUBSCRIBERCUSTOMER ACQUISITION COSTS
SubscriberCustomer acquisition costs are expensed as incurred and include the advertising, marketing, promotions, commissions, rebates and equipment subsidy costs associated with the Company's efforts to acquire new subscribers.
INCOME TAXES
Income taxes are accounted for using the asset and liability approach. Under the asset and liability approach, a current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributed to temporary differences and carryforwards. If necessary, the deferred tax assets are reduced by the amount of benefits that, based on available evidence, is more likely than not expected to be realized.
CONCENTRATIONS
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, investments and trade accounts receivable. The Company has cash equivalents and investment policies that limit the amount of credit exposure to any one financial institution and restrict placement of these funds to financial institutions evaluated as highly credit-worthy. The Company has not experienced any material losses relating to its investment instruments.
The Company sells its products to business customers and distributors. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral from its customers. At March 31, 20152017 and 2014,2016, no customer accounted for more than 10% of accounts receivable.
The Company outsources the manufacturingpurchases all of its hardware products to independent contract manufacturers.from suppliers that manufacturer the hardware directly. The inability of any contract manufacturersupplier to fulfill supply requirements of the Company could materially impact future operating results, financial position or cash flows. If any of these contract manufacturers fail to perform on their obligations to the Company, such failure to fulfill supply requirements of the Company could materially impact future operating results, financial position and cash flows.
The Company also relies primarily on third partythird-party network service providers to provide telephone numbers and PSTN call termination and origination services for its customers. If these service providers failed to perform their obligations to the Company, such failure could materially impact future operating results, financial position and cash flows.
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FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal market or the most advantageous market in which it would transact.
The accounting guidance for fair value measurement requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are inputs that reflect the assumptions market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors that market participants would use in valuing the asset or liability developed based on the best information available in the circumstances.
The standard establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value by requiring that the most observable inputs be used when available. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is as follows:
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The estimated fair value of financial instruments is determined by the Company using available market information and valuation methodologies considered to be appropriate. The carrying amounts of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short maturities. The Company's investments are carried at fair value.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company accounts for its employee stock options, stock purchase rights, restricted stock units and restricted performance stock units granted under the 1996 Stock Plan, 1996 Director Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012 Equity Incentive Plan, the 2013 New Employee Inducement Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase Plan (collectively "Equity Compensation Plans") under the provisions of ASC 718 -Stock Compensation. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.
To value option grants stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation the Company used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model varies based on assumptions used for the expected stock prices volatility, expected life, risk freerisk-free interest rates and future dividend payments. For fiscal years 2015, 2014 and 2013, theThe Company used the historical volatility of its stock over a period equal to the expected life of the options. The expected life assumptions represent the weighted-average period stock-based awards are expecting to remain outstanding. These expected life assumptions were established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk freerisk-free interest isrates were based on the closing market bid yields onof actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company's history and expectation of future dividend payout.
Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and includes the impact of estimated forfeitures.
58The Company issued restricted performance stock units (PSUs) to a group of executives with vesting that is contingent on both market performance and continued service during the fiscal year ended March 31, 2017:
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The Company issued restrictedPSUs to a group of executives with vesting that is contingent on both market performance and continued service during the fiscal year ended March 31, 2016:
The Company issued PSUs to a group of executives with vesting that is contingent on both market performance and continued service. For the market-based restricted performance stock units issued during the fiscal year ended March 31, 2015:
Tranche 1: One year following the date of the grant
Tranche 2: Two years following the date of the grant
Tranche 3: Three years following the date of the grant
Tranche 4: Four years following the date of the grant
To value these market-basedMarket-based restricted performance stock units under the Equity Compensation Plans, the Company usedare valued using a Monte Carlo simulation model on the date of grant. Fair value determined using the Monte Carlo simulation model varies based on the assumptions used for the expected stock price volatility, the correlation coefficient between the Company and the NASDAQ Composite Index, risk freerisk-free interest rates, and future dividend payments. The Company used the historical volatility and correlation of our stock and the Index over a period equal to the remaining performance period as of the grant date. The risk-free interest rate was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the remaining performance period as of the grant date. The dividend yield assumption was based on our history and expectation of future dividend payout. Compensation expense for restricted stock units with performance and market conditions is recognized over the requisite service period using the straight-line method on a tranche by tranche basis and includes the impact of estimated forfeitures.
In October 2013, the board of directors approved the modification of unvested stock options to purchase 74,479 shares of common stock and unvested stock purchase rights totaling 37,000 shares of common stock held by the Company's president upon his resignation. The options held by the Company's president upon his resignation, taken as a whole, had a weighted average exercise price of $4.05 per share and range from $2.72 to $5.87 per share, and a weighted average remaining vesting term of 0.5 years. Approximately $1.1 million of the $7.6 million of stock-based compensation charge in fiscal year 2014 applied to the options held by the former president of the Company and was recorded in general and administrative expenses.
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COMPREHENSIVE INCOME (LOSS) INCOME
Comprehensive income (loss) income,, as defined, includes all changes in equity (net assets) during a period from non-owner sources. The difference between net income (loss) and comprehensive income (loss) income is due to foreign currency translation adjustments and unrealized gains or losses on investments classified as available-for-sale.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and employee restricted purchase rights.
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DEFERRED RENT
In April 2012, the Company entered into an 87-month lease agreement for its new headquarters. Under the terms of the lease agreement:
In the second quarter of fiscal 2013, the Company received a $1.7 million allowance for reimbursement for the cost of tenant improvements that the Company included in cash flows from operating activities. In accordance with the guidance in ASC 840-20,Leases, the Company accounts for its headquarters facility operating lease as follows:
Rent Holidays.The Company recognizes the related rent expense on a straight-line basis at the earlier of the first rent payment or the date of possession of the leased property. The difference between the amounts charged to expense and the rent paid is recorded as deferred lease incentives and amortized over the lease term.
Rent Escalations.The Company recognizes escalating rent provisions on a straight-line basis over the lease term. The difference between the amounts charged to expense and the rent paid is recorded as deferred lease incentives and amortized over the lease term.
Tenant Improvement Allowance. The tenant improvement allowance is deferred and amortized on a straight-line basis over the life of the lease as a reduction to rent expense.
In January 2016, the Company entered into a 48-month lease for additional office space near the Company's US headquarters. In April 2016, the lease was amended for actual move in date. Base rent begins at $105,628 and increases 3% each year thereafter. Future minimum annual lease payments under this lease is included in "Leases" in Note 8.
At March 31, 2015,2017, total deferred rent included in other accrued liabilities and non-current liabilities was $1.1 million and $0.8 million, respectively. At March 31, 2016, total deferred rent included in other accrued liabilities and non-current liabilities was $0.3 million and $1.3 million, respectively. At March 31, 2014, total deferred rent included in other accrued liabilities and non-current liabilities was $0.2 million and $1.6$1.0 million, respectively.
RECENTRECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In AprilAugust 2014, the FASBFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08,No. 2014-15,Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an EntityStatements: Going Concern (Subtopic 205-40). This, this ASU changes the requirements for reporting discontinued operationsprovides guidance regarding management's responsibility in FASB ASU 205-20, such that a disposal of a component of an entity or a group of components of an entityevaluating whether there is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. This ASU requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position, as well as additional disclosures about discontinued operations. Additionally, the ASU requires disclosuressubstantial doubt about a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements and expands thecompany's ability to continue as a going concern. Certain disclosures will be required if conditions give rise to substantial doubt about an entity's significant continuing involvement withability to continue as a discontinued operation.going concern. The accounting updateamendment is effective for the annual periods beginning on orperiod ending after December 15, 2014. Early adoption is permitted but only2016, and for disposals that have not been reported in financial statements previously issued.annual periods and interim periods thereafter. The adoption isof this update did not expected to have a material impact on the Company's resultsconsolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-05,Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance in evaluating whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the software license element of operations, cash flows orthe arrangement should be accounted for as an acquisition of a software license. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance does not change generally accepted accounting principles for a customer's accounting for service contracts. This update is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Therefore, the Company has prospectively adopted this new standard on April 1, 2016. The adoption of this standard did not have a material impact on our consolidated financial position.statements.
60In November 2015, the FASB issued ASU No. 2015-17,Income Taxes - Balance Sheet Classification of Deferred Taxes (Topic 740). This ASU requires all deferred tax liabilities and assets to be presented in the balance sheet as noncurrent. As permitted, the Company early adopted this standard prospectively during the quarter ended June 30, 2016. The adoption of this standard resulted in reclassifying current deferred income tax assets to noncurrent deferred income tax assets and current deferred income tax liabilities to noncurrent deferred income tax liabilities. No prior periods were retrospectively adjusted.
58
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers (Topic 606), along with amendments issued in 2015 and 2016, which requires an entity to recognize the IASB has issued IFRS 15, Revenue from Contracts with Customers. The issuanceamount of these documents completes the joint effort by the FASB and the IASBrevenue to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS. The new guidance affects any entity that either enters into contracts with customerswhich it expects to transfer goods or services or enters into contractsbe entitled for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. Thispromised goods or services to customers. The ASU will supersede thereplace most existing revenue recognition requirementsguidance in Topic 605, Revenue Recognition, and most industry-specific guidance. For public entities, the amendments areU.S. GAAP when it becomes effective. The new standard will become effective for annual reporting periodsthe Company on April 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has preliminary selected the modified retrospective method as the transition method.
The Company is in the initial stages of the assessment of the impact of the new standard on the Company's accounting policies, processes and system requirements. The Company has assigned internal resources and engaged third-party service providers to assist with the assessment and implementation. The Company currently believes the most significant impact relates to the allocation of consideration in a contract between product and service performance obligations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which provides guidance for measurement and recognition of expected credit losses for financial assets held based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendment is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
In August 2016, includingthe FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within that reporting period.those fiscal years. Early applicationadoption is notpermitted. The Company is currently assessing the impact of this pronouncement to its Consolidated Statements of Cash Flows.
In October 2016, the FASB has issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which provides guidance on how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
In June 2014,November 2016, the FASB has issued ASU 2014-12,No. 2016-18Accounting for Share-Based Payments When, Statement of Cash Flows (Topic 230), which provides guidance on how restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the Termsbeginning-of-period and end-of-period total amounts shown on the statement of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.cash flows. This ASU requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718,Compensation-Stock Compensation, as it relates to such awards. ASU 2014-12amendment is effective for us in our first quarterfiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of fiscalthis pronouncement to its Consolidated Statements of Cash Flows.
In January 2017, with early adoption permitted using eitherthe FASB has issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of two methods: (i) prospective to all awards granted or modified aftera Business, which clarifies the effective date; or (ii) retrospective to all awards with performance targets that are outstanding asdefinition of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter,a business with the cumulative effectobjective of applyingadding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
59
In January 2017, the FASB has issued ASU 2014-12 asNo. 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill but rather require an adjustmententity to record an impairment charge based on the opening retained earnings balance asexcess of thea reporting unit's carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning of the earliest annual period presented in the financial statements.after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
In April 2015,February 2016, the FASB issued ASU 2015-05,No. 2016-02,Intangibles -GoodwillLeases (Topic 842),which requires companies to generally recognize on the balance sheet operating and Other -Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid infinancing lease liabilities and corresponding right-of-use assets. The update also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The update requires the use of a Cloud Computing Arrangement. This ASU provide guidance to customers about whether a cloud computing arrangementmodified retrospective transition approach, which includes a software license. For public businessnumber of optional practical expedients that entities the amendments will bemay elect to apply. This amendment is effective for annual periods,fiscal years beginning after December 15, 2018, including interim periods within those annual periods, beginning after December 15, 2015.fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
61
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As a result of the adoption, stock-based compensation excess tax benefits or tax deficiencies will be reflected in the consolidated statement of operations within the provision for income taxes rather than in the consolidated balance sheet within additional paid-in capital. The amount of the impact to the provision for income taxes will depend on the difference between the market value of share-based awards at vesting or settlement and the grant date fair value. The amendment is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.
2. CASH, CASH EQUIVALENTS AND INVESTMENTSFAIR VALUE MEASUREMENTS
Cash, cash equivalents, and available-for-sale investments, and contingent consideration were (in thousands):
Gross | Gross | Cash and | Gross | Gross | Cash and | |||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Cash | Short-Term | Amortized | Unrealized | Unrealized | Estimated | Cash | Short-Term | |||||||||||||||||||||||||
As of March 31, 2015 | Costs | Gain | Loss | Fair Value | Equivalents | Investments | ||||||||||||||||||||||||||||||
As of March 31, 2017 | Costs | Gain | Loss | Fair Value | Equivalents | Investments | ||||||||||||||||||||||||||||||
Cash | $ | 24,734 | $ | - | $ | - | $ | 24,734 | $ | 24,734 | $ | - | $ | 29,122 | $ | - | $ | - | $ | 29,122 | $ | 29,122 | $ | - | ||||||||||||
Level 1: | ||||||||||||||||||||||||||||||||||||
Money market funds | 28,376 | - | - | 28,376 | 28,376 | - | 11,908 | - | - | 11,908 | 11,908 | - | ||||||||||||||||||||||||
Mutual funds | 2,000 | - | (107) | 1,893 | - | 1,893 | 2,000 | - | (194) | 1,806 | - | 1,806 | ||||||||||||||||||||||||
Subtotal | 55,110 | - | (107) | 55,003 | 53,110 | 1,893 | 43,030 | - | (194) | 42,836 | 41,030 | 1,806 | ||||||||||||||||||||||||
Level 2: | ||||||||||||||||||||||||||||||||||||
Commercial paper | 9,043 | 1 | - | 9,044 | - | 9,044 | 19,144 | 8 | - | 19,152 | - | 19,152 | ||||||||||||||||||||||||
Corporate debt | 75,284 | 57 | (10) | 75,331 | - | 75,331 | 83,995 | 61 | (58) | 83,998 | - | 83,998 | ||||||||||||||||||||||||
Municipal securities | 5,435 | 2 | (1) | 5,436 | - | 5,436 | ||||||||||||||||||||||||||||||
Asset backed securities | 21,503 | 4 | (5) | 21,502 | - | 21,502 | 26,906 | 4 | (22) | 26,888 | - | 26,888 | ||||||||||||||||||||||||
Mortgage backed securities | 5,822 | - | (52) | 5,770 | - | 5,770 | 116 | - | (1) | 115 | - | 115 | ||||||||||||||||||||||||
Agency bond | 4,201 | 3 | - | 4,204 | - | 4,204 | 2,000 | - | - | 2,000 | - | 2,000 | ||||||||||||||||||||||||
International government securities | 800 | 4 | - | 804 | - | 804 | ||||||||||||||||||||||||||||||
Subtotal | 122,088 | 71 | (68) | 122,091 | - | 122,091 | 132,161 | 73 | (81) | 132,153 | - | 132,153 | ||||||||||||||||||||||||
Total | $ | 177,198 | $ | 71 | $ | (175) | $ | 177,094 | $ | 53,110 | $ | 123,984 | ||||||||||||||||||||||||
Total assets | $ | 175,191 | $ | 73 | $ | (275) | $ | 174,989 | $ | 41,030 | $ | 133,959 | ||||||||||||||||||||||||
Level 3: | ||||||||||||||||||||||||||||||||||||
Contingent consideration | $ | - | $ | - | $ | - | $ | 148 | $ | - | $ | - | ||||||||||||||||||||||||
Total liabilities | $ | - | $ | - | $ | - | $ | 148 | $ | - | $ | - |
6160
Gross | Gross | Cash and | Gross | Gross | Cash and | ||||||||||||||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | Cash | Short-Term | Long-Term | Amortized | Unrealized | Unrealized | Estimated | Cash | Short-Term | |||||||||||||||||||||||||||
As of March 31, 2014 | Costs | Gain | Loss | Fair Value | Equivalents | Investments | Investments | ||||||||||||||||||||||||||||||||
As of March 31, 2016 | Costs | Gain | Loss | Fair Value | Equivalents | Investments | |||||||||||||||||||||||||||||||||
Cash | $ | 26,548 | $ | - | $ | - | $ | 26,548 | $ | 26,548 | $ | - | $ | - | $ | 18,596 | $ | - | $ | - | $ | 18,596 | $ | 18,596 | $ | - | |||||||||||||
Level 1: | |||||||||||||||||||||||||||||||||||||||
Money market funds | 32,611 | - | - | 32,611 | 32,611 | - | - | 14,980 | - | - | 14,980 | 14,980 | - | ||||||||||||||||||||||||||
Mutual funds | 1,964 | - | (55) | 1,909 | - | 1,909 | - | 2,000 | - | (187) | 1,813 | - | 1,813 | ||||||||||||||||||||||||||
Subtotal | 61,123 | - | (55) | 61,068 | 59,159 | 1,909 | - | 35,576 | - | (187) | 35,389 | 33,576 | 1,813 | ||||||||||||||||||||||||||
Level 2: | |||||||||||||||||||||||||||||||||||||||
Commercial paper | 30,374 | 5 | - | 30,379 | - | 30,379 | - | 6,794 | 2 | - | 6,796 | - | 6,796 | ||||||||||||||||||||||||||
Corporate debt | 63,621 | 35 | (39) | 63,617 | - | 14,893 | 48,724 | 85,164 | 78 | (28) | 85,214 | - | 85,214 | ||||||||||||||||||||||||||
Municipal securities | 5,435 | 5 | (1) | 5,439 | - | - | 5,439 | 1,007 | - | (1) | 1,006 | - | 1,006 | ||||||||||||||||||||||||||
Asset backed securities | 17,049 | 6 | (1) | 17,054 | - | - | 17,054 | 24,614 | 7 | (11) | 24,610 | - | 24,610 | ||||||||||||||||||||||||||
Mortgage backed securities | 2,045 | - | (17) | 2,028 | - | 2,028 | |||||||||||||||||||||||||||||||||
Agency bond | 6,805 | 1 | - | 6,806 | - | 6,806 | |||||||||||||||||||||||||||||||||
International government securities | 800 | 4 | - | 804 | - | - | 804 | 1,000 | 1 | - | 1,001 | - | 1,001 | ||||||||||||||||||||||||||
Subtotal | 117,279 | 55 | (41) | 117,293 | - | 45,272 | 72,021 | 127,429 | 89 | (57) | 127,461 | - | 127,461 | ||||||||||||||||||||||||||
Total | $ | 178,402 | $ | 55 | $ | (96) | $ | 178,361 | $ | 59,159 | $ | 47,181 | $ | 72,021 | |||||||||||||||||||||||||
Total assets | $ | 163,005 | $ | 89 | $ | (244) | $ | 162,850 | $ | 33,576 | $ | 129,274 | |||||||||||||||||||||||||||
Level 3: | |||||||||||||||||||||||||||||||||||||||
Contingent consideration | $ | - | $ | - | $ | - | $ | 341 | $ | - | $ | - | |||||||||||||||||||||||||||
Total liabilities | $ | - | $ | - | $ | - | $ | 341 | $ | - | $ | - |
Contractual maturities of investments as of March 31, 20152017 are set forth below (in thousands):
Estimated | |||
Fair Value | |||
Due within one year | $ | ||
Due after one year | |||
Total | $ |
Contingent Consideration and Escrow Liability
The Company's contingent consideration liability and escrow liability, included in other accrued liabilities and noncurrent liabilities on the consolidated balance sheets, is associated with the Quality Software Corporation (QSC) acquisition made in the first quarter of fiscal 2016. Amounts held in escrow were measured at fair value using present value computations at the time of acquisition. The contingent consideration was measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract milestones be reached. As there was no market data available to use in valuing the contingent consideration; therefore, the Company developed its own assumptions related to the achievement of the milestones to evaluate the fair value of the liability. As such, the contingent consideration is classified within Level 3 as described below.
The items are classified as Level 3 within the valuation hierarchy, consisting of contingent consideration and escrow liability related to the QSC acquisition, were valued based on an estimate of the probability of success of the milestones being achieved and present value computations, respectively. The table below presents a roll-forward of the contingent consideration and escrow liability valued using a Level 3 input (in thousands):
Years Ended March 31, | ||||||
2017 | 2016 | |||||
Balance at beginning of period | $ | 341 | $ | - | ||
Purchase price contingent consideration | - | 541 | ||||
Fair value adjustment | 107 | - | ||||
Contingent consideration payments | (300) | (200) | ||||
Balance at end of period | $ | 148 | $ | 341 |
61
3. INVENTORIES
Components of inventories were as follows:follows (in thousands):
March 31, | ||||||||||||
2015 | 2014 | March 31, | ||||||||||
(in thousands) | 2017 | 2016 | ||||||||||
Work-in-process | $ | 169 | $ | 23 | $ | - | $ | 76 | ||||
Finished goods | 535 | 788 | 908 | 444 | ||||||||
$ | 704 | $ | 811 | $ | 908 | $ | 520 |
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:following (in thousands):
March 31, | ||||||
2015 | 2014 | |||||
(in thousands) | ||||||
Machinery and computer equipment | $ | 16,099 | $ | 9,557 | ||
Furniture and fixtures | 759 | 505 | ||||
Licensed software | 4,696 | 3,517 | ||||
Leasehold improvements | 3,812 | 3,468 | ||||
Construction in progress | 942 | - | ||||
26,308 | 17,047 | |||||
Less: accumulated depreciation and amortization | (16,060) | (9,336) | ||||
$ | 10,248 | $ | 7,711 |
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March 31, | ||||||
2017 | 2016 | |||||
Computer equipment | $ | 24,293 | $ | 18,277 | ||
Furniture and fixtures | 1,411 | 1,067 | ||||
Software | 7,380 | 5,417 | ||||
Leasehold improvements | 5,579 | 3,667 | ||||
Construction in progress | 689 | 967 | ||||
39,352 | 29,395 | |||||
Less: accumulated depreciation and amortization | (22,968) | (17,020) | ||||
$ | 16,384 | $ | 12,375 |
5. INTANGIBLE ASSETS
The carrying value of intangible assets consisted of the following (in thousands):
March 31, 2015 | March 31, 2014 | March 31, 2017 | March 31, 2016 | |||||||||||||||||||||||||||||||
Gross | Gross | Gross | Gross | |||||||||||||||||||||||||||||||
Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | Carrying | Accumulated | Net Carrying | |||||||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||||||
Technology | $ | 8,242 | $ | (2,905) | $ | 5,337 | $ | 8,242 | $ | (2,080) | $ | 6,162 | $ | 18,685 | $ | (7,010) | $ | 11,675 | $ | 18,640 | $ | (4,622) | $ | 14,018 | ||||||||||
Customer relationships | 9,686 | (3,720) | 5,966 | 9,686 | (1,710) | 7,976 | 9,419 | (6,187) | 3,232 | 9,993 | (4,847) | 5,146 | ||||||||||||||||||||||
Trade names/domains | 957 | - | 957 | 957 | - | 957 | 2,036 | - | 2,036 | 2,205 | - | 2,205 | ||||||||||||||||||||||
Total acquired identifiable | ||||||||||||||||||||||||||||||||||
intangible assets | $ | 18,885 | $ | (6,625) | $ | 12,260 | $ | 18,885 | $ | (3,790) | $ | 15,095 | ||||||||||||||||||||||
In-process research and development | 95 | - | 95 | 95 | - | 95 | ||||||||||||||||||||||||||||
Total acquired identifiable intangible assets | $ | 30,235 | $ | (13,197) | $ | 17,038 | $ | 30,933 | $ | (9,469) | $ | 21,464 |
At March 31, 2015,2017, annual amortization of definite lived intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):
Amount | Amount | |||||
2016 | $ | 2,159 | ||||
2017 | 2,152 | |||||
2018 | 1,904 | $ | 3,854 | |||
2019 | 1,658 | 3,459 | ||||
2020 | 1,658 | 3,009 | ||||
2021 | 2,666 | |||||
2022 | 1,701 | |||||
Thereafter | 1,772 | 218 | ||||
Total | $ | 11,303 | $ | 14,907 |
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Impairment of Long-Lived Assets
During the year ended March 31, 2017,the Company decided to discontinue a certain customer segment of its United Kingdom based platform-as-a-service (DXI PaaS) that was acquired in fiscal 2016 as part of the DXI acquisition.The Company evaluated long-lived assets related to the DXI reporting unit including the technology, customer relationships, and trade name intangible assets for impairment and determined that the assets were not impaired. However, the Company recorded an impairment charge equal to the remaining value of the impaired DXI PaaS customer relationship in the third fiscal quarter. The impairment recorded during the fiscal year was immaterial to the consolidated statements of operations. Revenues and net income (loss) from DXI PaaS were not material for all periods presented.
During the year ended March 31, 2016, the Company decided to end-of-life its hosted virtual desktop service (Zerigo). The Company evaluated long-lived assets related to Zerigo including the technology, customer relationships, and trade name intangible assets for impairment. The Company determined it was appropriate to record an impairment charge equal to the remaining value of the impaired long-lived assets in the third fiscal quarter. The impairment recorded during the fiscal year was $0.6 million, of which $0.4 million and $0.2 million was recorded in cost of service and sales and marketing, respectively, in the consolidated statements of operations. Revenues and net income (loss) from Zerigo were not material for all periods presented.
6. CAPITALIZED SOFTWARE COSTS
Capitalized software consisted of the following (in thousands):
Other Long-Term Assets
|
|
| March 31, | |||
|
|
| 2017 |
|
| 2016 |
Capitalized projects in service |
| $ | 1,804 |
| $ | - |
Capitalized projects in process |
|
| 6,461 |
|
| 2,753 |
Accumulated amortization |
|
| (588) |
|
| - |
Total capitalized software costs |
| $ | 7,677 |
| $ | 2,753 |
|
|
|
|
|
|
|
Application development stage costs capitalized during the year |
| $ | 5,516 |
| $ | 2,095 |
Application development stage costs capitalized during the year in other long-term assets consists of cost related to both completed and in-process costs capitalized in accordance with ASC 350-40.
Property and Equipment
|
|
| March 31, | |||
|
|
| 2017 |
|
| 2016 |
Capitalized projects in service |
| $ | 2,904 |
| $ | 1,183 |
Capitalized projects in process |
|
| 689 |
|
| 967 |
Accumulated amortization |
|
| (871) |
|
| (250) |
Total capitalized software costs |
| $ | 2,722 |
| $ | 1,900 |
|
|
|
|
|
|
|
Application development stage costs capitalized during the year |
| $ | 1,452 |
| $ | 756 |
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Application development stage costs capitalized during the year in other property and equipment consists of cost related to both completed and in-process costs capitalized in accordance with ASC 350-40.
7. GOODWILL
The following table provides a summary of the changes in the carrying amounts of goodwill by reporting segment (in thousands):
Americas | Europe | Total | |||||||
Balance at March 31, 2015 | $ | 23,940 | $ | 12,947 | $ | 36,887 | |||
Additions due to acquisitions | 1,789 | 10,125 | 11,914 | ||||||
Foreign currency translation | - | (1,381) | (1,381) | ||||||
Balance at March 31, 2016 | 25,729 | 21,691 | 47,420 | ||||||
Additions due to acquisitions | 1,580 | - | 1,580 | ||||||
Foreign currency translation | - | (2,864) | (2,864) | ||||||
Balance at March 31, 2017 | $ | 27,309 | $ | 18,827 | $ | 46,136 |
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7.8. COMMITMENTS AND CONTINGENCIES
Guarantees
Indemnifications
In the normal course of business, the Company may agree to indemnify other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters such as breaches of representations or covenants or intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.
It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material impact on the Company's operating results, financial position or cash flows. Under some of these agreements, however, the Company's potential indemnification liability might not have a contractual limit.
Product Warranties
The Company accrues for the estimated costs that may be incurred under its product warranties upon revenue recognition. Changes in
Operating Leases
The Company's operating lease obligations consist of the Company's product warranty liability,principal facility and various leased facilities under operating lease agreements, which is included in cost of product revenues in the consolidated statements of income were as follows (in thousands):
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Balance at beginning of year | $ | 660 | $ | 452 | $ | 387 | |||
Accruals for warranties | 185 | 953 | 611 | ||||||
Settlements | (364) | (745) | (546) | ||||||
Changes in estimate | (142) | - | - | ||||||
Balance at end of year | $ | 339 | $ | 660 | $ | 452 |
Leases
expire on various dates from fiscal 2018 through fiscal 2026. The Company leases its headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease with monthly base rent of $130,821 for the first 15 months with a 3% increase each year thereafter, and requires us to pay property taxes, utilities and normal maintenance costs.
The Company leases its UK headquarters in Aylesbury UK under operating lease agreements that expires in March 2017. The lease was amended in September 2014 for additional space. The lease has a base monthly rent of approximately $7,800 until March 2015, rising to approximately $8,800 thereafter, and requires us to pay property taxes, service charges, utilities and normal maintenance costs. The Company also leases office space in London UK under an operating lease agreement that expires in April 2019. The lease has a base monthly rent of approximately $6,700 until March 2016, rising to approximately $7,100 thereafter.64
At March 31, 2015,2017, future minimum annual lease payments under non-cancelable operating leases were as follows (in thousands):
Year ending March 31: | ||||||
2016 | $ | 1,913 | ||||
2017 | 1,977 | |||||
2018 | 1,872 | $ | 4,708 | |||
2019 | 1,926 | 5,596 | ||||
2020 and Thereafter | 1,100 | |||||
2020 | 4,906 | |||||
2021 | 2,435 | |||||
2022 and Thereafter | 6,908 | |||||
Total | $ | 8,788 | $ | 24,553 |
Rent expense for the years ended March 31, 2017, 2016 and 2015 2014was $5.1 million, $2.1 million and 2013 was $1.8 million, $1.5 million and $1.2 million, respectively.
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Capital Leases
The Company has non-cancelable capital lease agreements for office and computer equipment bearing interest at various rates. At March 31, 2015,2017, future minimum annual lease payments under non-cancelable capital leases were as follows (in thousands):
Year ending March 31: | ||||||
2016 | $ | 29 | ||||
2018 | $ | 981 | ||||
2019 | 681 | |||||
2020 | 169 | |||||
2021 | 5 | |||||
2022 | 5 | |||||
Total minimum payments | 29 | 1,841 | ||||
Less: Amount representing interest | (4) | (116) | ||||
25 | 1,725 | |||||
Less: Short-term portion of capital lease obligations | (25) | (918) | ||||
Long-term portion of capital lease obligations | $ | - | $ | 807 |
Capital leases included in computer and office equipment were approximately $0.5$2.7 million and $0.6$1.6 million at March 31, 20152017 and 2014,2016, respectively. Total accumulated amortization was approximately $0.3$1.0 million and $0.4$0.1 million at March 31, 20152017 and 2014,2016, respectively. Amortization expense for assets recorded under capital leases is included in depreciation expense.
Minimum Third PartyThird-Party Customer Support Commitments
In the third quarter of 2010, the Company amended its contract with one of its third partythird-party customer support vendors containing a minimum monthly commitment of approximately $0.4 million effective April 1, 2010. TheAs the agreement requires a 150-day notice to terminate. At March 31, 2015,terminate, the total remaining obligation under the contract was $2.2 million.million at March 31, 2017.
Minimum Third PartyThird-Party Network Service Provider Commitments
The Company entered into contracts with multiple vendors for third partythird-party network service which expire on various dates in fiscal 20162017 through 2018. At March 31, 2015,2017, future minimum annual payments under these third partythird-party network service contracts were as follows (in thousands):
Year ending March 31: | ||||||
2016 | $ | 3,014 | ||||
2017 | 2,452 | |||||
2018 | 891 | $ | 1,364 | |||
2019 | 133 | |||||
2020 | 8 | |||||
Total minimum payments | $ | 6,357 | $ | 1,505 |
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Legal Proceedings
The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can arise in the normal course of the Company's operations. Pending or future litigation could be costly, could cause the diversion of management's attention and could upon resolution, have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.
On February 22, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. (BCT) v. 8x8, Inc. et al., filed in the U.S. District Court for the District of Delaware (the Delaware Court), along with 20 other defendants. OnCollectively this patent litigation is referred to as In re Bear Creek Technologies, Inc. (MDL No.: 2344). In August 17, 2011, the suit was dismissed without prejudice as tobut then refiled in the Company under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, Bear Creek Technologies, Inc. refiled its suitDelaware Court against the Company in the United States District Court for the District of Delaware. Further, onCompany. On November 28, 2012, the U.S. Patent &and Trademark Office ("USPTO") initiated a Reexamination proceeding with a Reexamination Declaration explaining that there is a substantial new questionProceeding through which the claims of patentability,the patent asserted against the Company were found to be invalid based on four separate grounds and affecting each claim of the patent which is the basis for the complaint filed against us. On March 26, 2013, the USPTO issued a first Office Action ingrounds. During the Reexamination with all claims ofProceeding, the '722 patent being rejected on each ofDelaware Court granted the four separate grounds raised in the Request for Reexamination. On July 10, 2013, the Company filed an informational pleading in support of and joining aCompany's motion to stay the proceeding in(July 17, 2013) and administratively closed the District Court; the District Court granted the motioncase on July 17, 2013, based on the possibility that at least oneMay 5, 2015 with leave to reopen if needed. The outcome of the USPTO rejections will be upheld and consideringReexamination Proceeding was first appealed to the USPTO's conclusion that Bear Creek's patent suffers from a defective claim for priority. On March 24, 2014, the USPTO issued another Office Action in which the rejections of the claims were maintained. On August 15, 2014, the USPTO issued a Right of Appeal Notice, as the USPTO maintained all rejections of the patent claims.
65
On September 15, 2014, Bear Creek Technologies, Inc. filed a Notice of Appeal of this decision with the Patent Trial and Appeal Board.Board which affirmed the invalidity bases of all claims in a Decision dated Dec. 29, 2015 ("the Board Decision"). The case is currently on appeal. The Company believes that it has meritorious defensesBoard Decision was then appealed to thesethe United States Court of Appeals for the Federal Circuit ("Federal Circuit"), which also affirmed the invalidity bases of all claims as the Federal Circuit noted in a Judgment dated March 15, 2017. On April 21, 2017, the Federal Circuit issued a Mandate, which formally concluded the appeal and, is presenting a vigorous defense, but we cannot estimate potential liability inabsent any unforeseen circumstances, formally ended the Federal Circuit's jurisdiction of this case at this early stagematter, thereby for effecting finality of litigation.the Delaware Court's May 5, 2015 decision.
On March 31, 2014,November 14, 2016, the Company was named as a defendant in a lawsuit, CallWave CommunicationsSerenitiva LLC (CallWave) v. 8x8, Inc. CallWave alsoInc., filed in U.S. District Court for the E.D. of Texas (Civil Action No. 6:16-cv-1290). Plaintiff Serenitiva sued Fonality Inc.the Company based on March 31, 2014, and previously hadalleged infringement of U.S. Patent No. 6,865,268 concerning alleged activities involving the Company's Virtual Contact Center Agent Console (Plaintiff Serenitiva sued nine other companies including Verizon, Google, T-Mobile, and AT&T. Thedefendants, concurrently, based on the same patent). Pursuant to an agreement executed by both parties in mid-April 2017, the Company answeredsettled the suit prior to answering the complaint under the terms of a settlement agreement between us and filed counterclaims in response thereto. Thereafter, CallWave made numerous demands that 8x8 pay CallWave cash consideration for settling the suit. On April 21, 2015,plaintiff. Under the terms of a settlement agreement between the plaintiff and the Company, filed papers to present numerous counterclaims including patent misuse. On or about May 26, 2015, the parties concluded negotiations regarding CallWave's cash-payment demands and agreed to settle all claims in the suit (and potential future claims) under confidential terms which await finalization by filing dismissal papers with the Court. As part of the settlement, the Company8x8 agreed to pay CallWave in a manner whichplaintiff an amount that was not material to our business, and the Company recognized as generalwas granted a limited license to the patent. A Joint Motion to Dismiss was filed April 20, 2017, and administrative expense inan Order of Dismissal With Prejudice should be forthcoming from the statements of income as of March 31, 2015, as the Company determined the settlement consideration to be commensurate with a loss contingency, and the amount was probable and estimable. At March 31, 2015, the Company accrued a loss contingency related to this litigation and to other patent-related issues in current other accrued liabilities in the consolidated balance sheets.Court.
On December 31, 2014,2, 2016, the Company was named as a defendant in a lawsuit, Adaptive Data,Paluxy Messaging LLC v. 8x8, Inc. Adaptive Data,, filed in U.S. District Court for the E.D. of Texas, Tyler Division (Civil Action No. 6:16-cv-1346). Plaintiff Paluxy Messaging LLC also sued another 36the Company based on alleged infringement U.S. Patent No. 8,411,829 concerning alleged activities involving the Company's voicemail system (Plaintiff Paluxy Messagingsued seven other defendants, on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process has not yet been effected on the Company.
On April 15, 2015, the Company was named as a defendant in a lawsuit, UrgenSync, LLC v. 8x8, Inc. UrgenSync, LLC also sued another 14 other defendantsconcurrently, based on the same day regardingpatent). Based on the sameCompany's subscription to certain patent asserted inrisk management services, the complaint filed against 8x8.Company settled the suit without needing to answer the complaint. Under the terms of a settlement agreement between the plaintiff and the Company, 8x8 agreed to pay plaintiff an amount that was not material to our business, and we were granted a limited license to the patent. An Order of Dismissal With Prejudice was issued March 13, 2017.
On April 16, 2015, the Company was named as a defendant in a lawsuit, Slocumb Law Firm v. 8x8, Inc., filed in the United States District Court for the Middle District of Alabama. The Slocumb Law Firm allegeshas alleged that it purchased certain business services from the Company that did not perform as advertised or expected, assertsand has asserted various causes of actions forincluding fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On May 7,June 10, 2015, the Company filedUnited States Magistrate Judge issued a Report and Recommendation that the Court grant the Company's motion withto stay the Alabama Federal Court seeking an order compellingcase and compel the Slocumb Law Firm to arbitrate its claims against the Company in Santa Clara County, California pursuant to a clause mandating arbitration of disputes set forth in the terms and conditions to which Slocumb Law Firm agreed in connection with its purchase of business services from the Company. No briefing schedule or hearing date forCompany The Court closed this case administratively when it granted the Company's motion has been setto compel arbitration. Under the Company's standard business terms and conditions, as of this time. DiscoveryMarch 31, 2017, the period to initiate arbitration has not yet commenced in the case. The Company intends to vigorously defend against Slocumb Law Firm's claims.lapsed.
State and Municipal Taxes
From time to time, the Company has received inquiries from a number of state and municipal taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions currently are conducting tax audits of the Company's records. The Company collects or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the accruals established by the Company.
Regulatory
VoIP communication services, like the Company's, are subject The Company adjusts its accrual when facts relating to less regulation at the federal level than traditional telecommunication services and states are preempted from regulatingspecific exposures warrant such services. Many regulatory actions are underway or are being contemplated by federal and state authorities, including the FCC, and state regulatory agencies. The FCC initiated a notice of public rule-making in early 2004 to gather public comment on the appropriate regulatory environment for IP telephony which would include the services we offer. In November 2004, the FCC ruled that the VoIP service of a competitor and "similar" services are jurisdictionally interstate and not subject to state certification, tariffing and other legacy telecommunication carrier regulations.
The effect of any future laws, regulations and the orders on the Company's operations, including, but not limited to, the 8x8 service, cannot be determined. But as a general matter, increased regulation and the imposition of additional funding obligations increases the Company's costs of providing service that may or may not be recoverable from the Company's customers which could result in making the Company's services less competitive with traditional telecommunications services if the Company increases its retail prices or decreases the Company's profit margins if it attempts to absorb such costs.adjustment.
66
8. STOCKHOLDERS' EQUITY
1996 Stock Plan
In June 1996,For the Company's board of directors adopted the 1996 Stock Plan ("1996 Plan"). A total of 12,035,967 shares were reserved for issuance under the 1996 Plan prior to its expiration in June 2006. As offiscal year ended March 31, 2015, there are no shares available2017, the City of San Francisco levied an assessment for future grants underutility taxes against the 1996 Plan.Company. The 1996 Plan provided for granting incentive stock optionsCompany plans to employees and nonstatutory stock options to employees, directors or consultants. The stock option price of incentive stock options granted could not be less thanvigorously appeal the determined fair market value at the date of grant. Options generally vested over four years and had a ten-year term.
1996 Director Option Plan
The Company's 1996 Director Option Plan ("Director Plan") was adopted in June 1996 and became effective in July 1997. A total of 1,650,000 shares of common stock were reserved for issuance under the Director Plan prior to its expiration in June 2006. As of March 31, 2015 there are no shares available for future grants under the Director Plan. The Director Plan provided for both discretionary and periodic grants of nonstatutory stock options to non-employee directorsassessment. Based on historical experience of the Company, (the "Outside Directors"). The exercise price per share of all options granted undermanagement has determined the Director Plan was equalprobable loss relating to this exposure to be approximately $0.5 million. Although the fair market value of a share ofoutcome cannot be predicted, the Company's common stock on the date of grant. Options generally vested over a period of four years. Options grantedestimated reasonable additional loss is between $0 to Outside Directors under the Director Plan had a ten year term, or shorter upon termination of an Outside Director's status as a director.$0.5 million.
9. STOCKHOLDERS' EQUITY
2006 Stock Plan
In May 2006, the Company's board of directors approved the 2006 Stock Plan ("2006 Plan"). The Company's stockholders subsequently adopted the 2006 Plan in September 2006, and the 2006 Plan became effective in October 2006. The Company reserved 7,000,000 shares of the Company's common stock for issuance under this plan. As of March 31, 2015, 201,3362017, there are no shares remained available for future grants under the 2006 Plan. The 2006 Plan provides for granting incentive stock options to employees and nonstatutorynon-statutory stock options to employees, directors or consultants. The stock option price of incentive stock options granted may not be less than the fair market value on the effective date of the grant. Other types of options and awards under the 2006 Plan may be granted at any price approved by the administrator, which generally will be the compensation committee of the board of directors. Options generally vest over four years and expire ten years after grant. In 2009, the 2006 Plan was amended to provide for the granting of stock purchase rights. The 2006 Plan expiresexpired in May 2016.
2003 Contactual Plan
In the second fiscal quarter of 2012, the Company assumed the Amended and Restated Contactual, Inc. 2003 Stock Option Plan (the "2003 Contactual Plan") and registered an aggregate of 171,974 shares of the Company's common stock that may be issued upon the exercise of stock options previously granted under the 2003 Contactual Plan and assumed by the Company when it acquired Contactual. No new stock options or other awards can be granted under 2003 Contactual Plan.
2012 Equity Incentive Plan
In June 2012, the Company's board of directors approved the 2012 Equity Incentive Plan ("2012 Plan"). The Company's stockholders subsequently adopted the 2012 Plan in July 2012, and the 2012 Plan became effective in August 2012. The Company reserved 4,100,000 shares of the Company's common stock for issuance under this plan. In August 2014 and 2016, the 2012 Plan was amended to allow for an additional 6,800,000 and 4,500,000 shares reserved for issuance.issuance, respectively. As of March 31, 2015, 5,957,0882017, 4,060,411 shares remained available under the 2012 Plan. The 2012 Plan provides for granting incentive stock options to employees and nonstatutorynon-statutory stock options to employees, directors or consultants, and granting of stock appreciation rights, restricted stock, restricted stock units and performance units, qualified performance-based awards and stock grants. The stock option price of incentive stock options granted may not be less than the fair market value on the effective date of the grant. Other types of options and awards under the 2012 Plan may be granted at any price approved by the administrator, which generally will be the compensation committee of the board of directors. Options, restricted stock and restricted stock units generally vest over four years and expire ten years after grant. The 2012 Plan expires in June 2022.
2013 New Employee Inducement Incentive Plan
In September 2013, the Company's board of directors approved the 2013 New Employee Inducement Incentive Plan ("2013 Plan"). The Company reserved 1,000,000 shares of the Company's common stock for issuance under this plan. In November 2014, the 2013 Plan was amended to allow for an additional 1,200,000 shares reserved for issuance. AsIn July 2015, the Plan was amended to allow for an additional 1,200,000 shares reserved for issuance.In connection with its approval of March 31, 2015, 722,727 shares remained available forthe August 2016 amendments to the 2012 Plan, the Board of Directors has approved the suspension of future grants under the 2013 Plan.Plan, which became effective immediately upon stockholder approval of the proposed 2012 Plan amendments in August 2016. In addition, the 2013 Plan was amended to reduce the number of shares reserved for issuance under the 2013 Plan to the number of shares that are then subject to outstanding awards under the 2013 Plan, leaving no shares available for future grant. The 2013 Plan providesprovided for granting nonstatutorynon-statutory stock options, stock appreciation rights, restricted stock, restricted stock and performance units and stock grants solely to newly hired employees as a material inducement to accepting employment with the Company. Options arewere granted at market value on the grant date under the 2013 Plan, unless determined otherwise at the time of grant by the administrator, which generally will be the compensation committee of the board of directors. Options generally expire ten years after grant. The 2013 Plan expires in September 2023.
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Stock-Based Compensation
The following table summarizes stock-based compensation expense (in thousands):
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Cost of service revenue | $ | 692 | $ | 372 | $ | 211 | |||
Cost of product revenue | - | - | - | ||||||
Research and development | 1,495 | 967 | 428 | ||||||
Sales and marketing | 3,748 | 2,217 | 1,363 | ||||||
General and administrative | 3,412 | 4,039 | 632 | ||||||
Total stock-based compensation expense | |||||||||
related to employee stock options | |||||||||
and employee stock purchases, pre-tax | 9,347 | 7,595 | 2,634 | ||||||
Tax benefit | - | - | - | ||||||
Stock based compensation expense related to | |||||||||
employee stock options and employee | |||||||||
stock purchases, net of tax | $ | 9,347 | $ | 7,595 | $ | 2,634 |
Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Cost of service revenue | $ | 1,732 | $ | 1,159 | $ | 692 | |||
Cost of product revenue | - | - | - | ||||||
Research and development | 3,762 | 2,914 | 1,495 | ||||||
Sales and marketing | 8,832 | 6,133 | 3,748 | ||||||
General and administrative | 7,136 | 6,128 | 3,412 | ||||||
Total | $ | 21,462 | $ | 16,334 | $ | 9,347 |
Stock Options, Stock Purchase Right and Restricted Stock Unit Activity
Stock Option activity under all the Company's stock option plans since March 31, 2012,2014, is summarized as follows:
Weighted | Weighted | |||||||||
Average | Average | |||||||||
Exercise | Exercise | |||||||||
Number of | Price | Number of | Price | |||||||
Shares | Per Share | Shares | Per Share | |||||||
Outstanding at March 31, 2012 | 6,034,335 | $ | 1.90 | |||||||
Granted | 932,000 | 5.80 | ||||||||
Exercised | (835,246) | 1.49 | ||||||||
Canceled/Forfeited | (139,545) | 4.00 | ||||||||
Outstanding at March 31, 2013 | 5,991,544 | 2.52 | ||||||||
Granted | 1,465,400 | 9.66 | ||||||||
Exercised | (1,283,470) | 2.75 | ||||||||
Canceled/Forfeited | (171,092) | 5.25 | ||||||||
Outstanding at March 31, 2014 | 6,002,382 | 4.14 | 6,002,382 | $ | 4.14 | |||||
Granted | 1,110,466 | 7.29 | 1,110,466 | 7.29 | ||||||
Exercised | (1,326,385) | 1.87 | (1,326,385) | 1.87 | ||||||
Canceled/Forfeited | (458,556) | 6.06 | (458,556) | 6.06 | ||||||
Outstanding at March 31, 2015 | 5,327,907 | $ | 5.19 | 5,327,907 | 5.19 | |||||
Granted | 723,776 | 8.63 | ||||||||
Exercised | (1,162,175) | 2.56 | ||||||||
Canceled/Forfeited | (96,242) | 8.06 | ||||||||
Outstanding at March 31, 2016 | 4,793,266 | 6.29 | ||||||||
Granted | 407,392 | 14.63 | ||||||||
Exercised | (603,998) | 2.34 | ||||||||
Canceled/Forfeited | (134,248) | 8.41 | ||||||||
Outstanding at March 31, 2017 | 4,462,412 | $ | 7.52 | |||||||
Vested and expected to vest at March 31, 2015 | 5,327,907 | $ | 5.19 | |||||||
Exercisable at March 31, 2015 | 3,243,325 | $ | 3.35 | |||||||
Vested and expected to vest at March 31, 2017 | 4,462,412 | $ | 7.52 | |||||||
Exercisable at March 31, 2017 | 3,191,879 | $ | 6.47 |
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Stock Purchase Right activity since March 31, 20122014 is summarized as follows:
Weighted | Weighted | Weighted | Weighted | ||||||||||||||
Average | Average | Average | Average | ||||||||||||||
Grant-Date | Remaining | Grant-Date | Remaining | ||||||||||||||
Number of | Fair Market | Contractual | Number of | Fair Market | Contractual | ||||||||||||
Shares | Value | Term (in Years) | Shares | Value | Term (in Years) | ||||||||||||
Balance at March 31, 2012 | 966,400 | $ | 2.50 | 2.61 | |||||||||||||
Granted | 443,436 | 5.75 | |||||||||||||||
Vested | (367,017) | 2.14 | |||||||||||||||
Forfeited | (84,244) | 2.89 | |||||||||||||||
Balance at March 31, 2013 | 958,575 | 4.11 | 2.52 | ||||||||||||||
Granted | 22,380 | 9.69 | |||||||||||||||
Vested | (392,844) | 3.25 | |||||||||||||||
Forfeited | (98,484) | 5.18 | |||||||||||||||
Balance at March 31, 2014 | 489,627 | 4.83 | 1.93 | 489,627 | $ | 4.83 | 1.93 | ||||||||||
Granted | 31,432 | 7.88 | 31,432 | 7.88 | |||||||||||||
Vested | (223,360) | 3.98 | (223,360) | 3.98 | |||||||||||||
Forfeited | (73,864) | 5.39 | (73,864) | 5.39 | |||||||||||||
Balance at March 31, 2015 | 223,835 | $ | 5.92 | 1.50 | 223,835 | 5.92 | 1.50 | ||||||||||
Granted | - | - | |||||||||||||||
Vested | (115,789) | 5.32 | |||||||||||||||
Forfeited | (25,875) | 7.40 | |||||||||||||||
Balance at March 31, 2016 | 82,171 | 6.30 | 0.76 | ||||||||||||||
Granted | - | - | |||||||||||||||
Vested | (69,426) | 6.00 | |||||||||||||||
Forfeited | (1,375) | 6.72 | |||||||||||||||
Balance at March 31, 2017 | 11,370 | $ | 8.10 | 1.09 |
Restricted Stock Unit activity since June 22, 2012March 31, 2014 is summarized as follows:
Weighted | Weighted Average | Weighted | Weighted Average | ||||||||||||||
Number of | Average Grant | Remaining Contractual | Number of | Average Grant | Remaining Contractual | ||||||||||||
Shares | Date Fair Value | Term (in Years) | Shares | Date Fair Value | Term (in Years) | ||||||||||||
Balance at June 22, 2012 | - | $ | - | ||||||||||||||
Granted | 25,000 | 6.91 | |||||||||||||||
Vested | - | - | |||||||||||||||
Forfeited | - | - | |||||||||||||||
Balance at March 31, 2013 | 25,000 | 6.91 | 2.47 | ||||||||||||||
Granted | 1,291,200 | 9.11 | |||||||||||||||
Vested | (133,000) | 9.49 | |||||||||||||||
Forfeited | (48,344) | 9.61 | |||||||||||||||
Balance at March 31, 2014 | 1,134,856 | 9.00 | 2.00 | 1,134,856 | $ | 9.00 | 2.00 | ||||||||||
Granted | 1,965,786 | 6.68 | 1,965,786 | 6.68 | |||||||||||||
Vested | (187,788) | 9.54 | (187,788) | 9.54 | |||||||||||||
Forfeited | (214,168) | 8.30 | (214,168) | 8.30 | |||||||||||||
Balance at March 31, 2015 | 2,698,686 | $ | 7.33 | 1.88 | 2,698,686 | 7.33 | 1.88 | ||||||||||
Granted | 2,681,997 | 8.78 | |||||||||||||||
Vested | (589,788) | 7.79 | |||||||||||||||
Forfeited | (246,096) | 8.15 | |||||||||||||||
Balance at March 31, 2016 | 4,544,799 | 8.08 | 1.67 | ||||||||||||||
Granted | 2,491,877 | 15.15 | |||||||||||||||
Vested | (1,600,831) | 7.89 | |||||||||||||||
Forfeited | (496,795) | 9.56 | |||||||||||||||
Balance at March 31, 2017 | 4,939,050 | $ | 11.57 | 2.47 |
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Significant option groups outstanding at March 31, 20152017 and related weighted average exercise price, contractual life, and aggregate intrinsic value information for 8x8, Inc.'s stock option plans are as follows:
Options Outstanding | Options Exercisable | ||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||
Average | Average | Average | |||||||||||||||||
Exercise | Remaining | Aggregate | Exercise | Aggregate | |||||||||||||||
Price | Contractual | Intrinsic | Price | Intrinsic | |||||||||||||||
Shares | Per Share | Life (Years) | Value | Shares | Per Share | Value | |||||||||||||
$ 0.55 to $ 1.26 | 1,095,000 | $ | 1.11 | 2.9 | $ | 7,982,430 | 1,095,000 | $ | 1.11 | $ | 7,982,430 | ||||||||
$ 1.27 to $ 3.92 | 1,067,933 | $ | 1.63 | 1.4 | 7,233,393 | 1,064,403 | $ | 1.62 | 7,214,201 | ||||||||||
$ 4.25 to $ 6.86 | 1,543,322 | $ | 6.10 | 8.2 | 3,543,355 | 622,739 | $ | 5.50 | 1,803,291 | ||||||||||
$ 7.52 to $ 9.74 | 1,471,652 | $ | 9.26 | 8.7 | 156,354 | 415,871 | $ | 9.62 | 1,083 | ||||||||||
$ 10.97 to $ 11.26 | 150,000 | $ | 11.11 | 8.8 | - | 45,312 | $ | 11.09 | - | ||||||||||
5,327,907 | $ | 18,915,532 | 3,243,325 | $ | 17,001,005 |
Options Outstanding | Options Exercisable | ||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||
Average | Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | Exercise | Aggregate | |||||||||||||
Price | Contractual | Intrinsic | Price | Intrinsic | |||||||||||||
Shares | Per Share | Life (Years) | Value | Shares | Per Share | Value | |||||||||||
$ 0.55 to $ 4.60 | 912,189 | $ | 1.91 | 2.0 | $ | 12,168,894 | 912,189 | $ | 1.91 | $ | 12,168,894 | ||||||
$ 5.87 to $ 6.86 | 1,139,300 | $ | 6.48 | 6.7 | 9,996,307 | 863,274 | $ | 6.35 | 7,680,449 | ||||||||
$ 7.52 to $ 9.21 | 920,268 | $ | 8.43 | 7.4 | 6,277,429 | 503,564 | $ | 8.47 | 3,414,760 | ||||||||
$ 9.35 to $ 10.50 | 904,935 | $ | 9.73 | 6.6 | 4,998,813 | 758,640 | $ | 9.71 | 4,206,928 | ||||||||
$ 10.86 to $ 15.40 | 585,720 | $ | 13.48 | 8.8 | 1,043,018 | 154,212 | $ | 11.68 | 551,242 | ||||||||
4,462,412 | $ | 34,484,461 | 3,191,879 | $ | 28,022,273 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the aggregate difference between the closing stock price of the Company's common stock on March 31, 20152017 and the exercise price for in-the-money options) that would have been received by the option holders if all in-the-money options had been exercised on March 31, 2015.2017.
The total intrinsic value of options exercised in the years ended March 31, 2017, 2016 and 2015 2014 and 2013 was $8.1$7.2 million, $8.2$9.2 million and $3.3$8.1 million, respectively. As of March 31, 2015,2017, there was $24.6$48.5 million of unamortized stock-based compensation expense related to unvested stock options and awards which is expected to be recognized over a weighted average period of 2.762.05 years.
Unamortized stock-based compensation expense related to shares issued as part of the DXI acquisition (see Note 13) was approximately $1.3 million, which will be recognized over a weighted average period of 2.17 years.
Cash received from option exercises and purchases of shares under the Equity Compensation Plans for the years ended March 31, 2017, 2016 and 2015 2014 and 2013 were $4.5$5.1 million, $5.2$4.8 million and $2.4$4.5 million, respectively. The total tax benefit attributable to stock options exercised in the year ended March 31, 2017, 2016 and 2015 2014was $0.5 million, $0.2 million and 2013 was $151,000, $142,000 and $49,000,$0.2 million, respectively.
1996 Employee Stock Purchase Plan
The Company's 1996 Stock Purchase Plan ("Employee Stock Purchase Plan") was adopted in June 1996 and became effective upon the closing of the Company's initial public offering in July 1997. The Company suspended the Employee Stock Purchase Plan in 2003 and reactivated the Employee Stock Purchase Plan in fiscal 2005. Under the Employee Stock Purchase Plan, 500,000 shares of common stock were initially reserved for issuance. At the start of each fiscal year, the number of shares of common stock subject to the Employee Stock Purchase Plan increases so that 500,000 shares remain available for issuance. During fiscal 2017, 2016 and 2015, 2014approximately 0.3 million, 0.4 million, and 2013, 306,248, 282,062 and 301,3030.3 million shares, respectively, were issued under the Employee Stock Purchase Plan. In May 2006, the Company's board of directors approved a ten-year extension of the Employee Stock Purchase Plan. Stockholders approved a ten-year extension of the Employee Stock Purchase Plan at the 2006 Annual Meeting of Stockholders held September 18, 2006. The Employee Stock Purchase Plan is effective until August 2017.
The Employee Stock Purchase Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each two yeartwo-year offering period or the end of a six month purchase period, whichever is lower. When the Employee Stock Purchase Plan was reinstated in fiscal 2005, the offering period was reduced from two years to one year. The contribution amount may not exceed ten percent of an employee's base compensation, including commissions, but not including bonuses and overtime. In the event of a merger of the Company with or into another corporation or the sale of all or substantially all of the assets of the Company, the Employee Stock Purchase Plan provides that a new exercise date will be set for each option under the plan which exercise date will occur before the date of the merger or asset sale.
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As of March 31, 2017, there were approximately $0.8 million of total unrecognized compensation cost related to employee stock purchases. This cost is expected to be recognized over a weighted average period of 0.5 years.
Assumptions Used to Calculate Stock-Based Compensation Expense
The fair value of each of the Company's option grants has been estimated on the date of grant using the Black-Scholes pricing model with the following assumptions:
Years Ended March 31, | Years Ended March 31, | |||||||||||||||||
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | |||||||||||||
Expected volatility | 61% | 64% | 70% | 44% | 53% | 61% | ||||||||||||
Expected dividend yield | - | - | - | - | - | - | ||||||||||||
Risk-free interest rate | 1.4% to 1.9% | 0.7% to 2.2% | 0.5% to 0.8% | 1.1% to 2.2% | 1.5% to 1.8% | 1.4% to 1.9% | ||||||||||||
Weighted average expected option term | 6.0 years | 6.1 years | 5.3 years | 4.9 years | 5.4 years | 6.0 years | ||||||||||||
Weighted average fair value of options granted | $ | 4.14 | $ | 5.70 | $ | 3.32 | $ | 5.74 | $ | 4.17 | $ | 4.14 |
The estimated fair value of stock purchase rights granted under the Employee Stock Purchase Plan was estimated using the Black-Scholes pricing model with the following weighted-average assumptions:
Years Ended March 31, | Years Ended March 31, | |||||||||||||||||
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | |||||||||||||
Expected volatility | 49% | 40% | 40% | 37% | 43% | 49% | ||||||||||||
Expected dividend yield | - | - | - | - | - | - | ||||||||||||
Risk-free interest rate | 0.12% | 0.09% | 0.14% | 0.65% | 0.39% | 0.12% | ||||||||||||
Weighted average expected rights term | 0.80 years | 0.75 years | 0.75 years | 0.75 years | 0.83 years | 0.80 years | ||||||||||||
Weighted average fair value of rights granted | $ | 2.52 | $ | 2.83 | $ | 1.78 | $ | 4.19 | $ | 3.25 | $ | 2.52 |
Stock Repurchases
In July 2014, the Company's board of directors authorized the Company to purchase up to $15.0 million of its common stock from time to time until July 22, 2015 (the "2014 Repurchase Plan"). Share repurchases, if any, will be funded with available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time. There was no remaining authorized repurchase amount at March 31, 2015.
In February 2015, the Company's board of directors authorized the Company to purchase up to $20.0$20.0 million of its common stock from time to time until July 22, 2015February 29, 2016 (the "2015 Repurchase Plan"). This tranche of shares authorized for repurchase expired in February 2016.
In October 2015, the Company's board of directors authorized the Company to purchase an additional $15.0 million of its common stock from time to time until October 20, 2016 under the 2015 Repurchase Plan. The plan expired in October 2016 with the same conditions as the 2014 Repurchase plan. The remainingan unused authorized repurchase amount at March 31, 2015 was approximately $15.7of $15.0 million.
The stock repurchase activity as of March 31, 20152017 is summarized as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Price | Amount | ||||||
Repurchased | Per Share | Repurchased(1) | ||||||
Repurchase of common stock | ||||||||
under 2014 Repurchase Plan | 1,913,748 | $ | 7.82 | $ | 14,961,177 | |||
Repurchase of common stock | ||||||||
under 2015 Repurchase Plan | 574,467 | $ | 7.38 | 4,239,216 | ||||
Total | 2,488,215 | $ | 19,200,393 | |||||
(1) Amount excludes commission fees. |
Weighted | ||||||||
Average | ||||||||
Shares | Price | Amount | ||||||
Repurchased | Per Share | Repurchased(1) | ||||||
Balance as of March 31, 2015 | 2,488,215 | 7.38 | $ | 19,200,393 | ||||
Repurchase of common stock under 2015 Repurchase Plan | 1,392,135 | 8.02 | 11,164,329 | |||||
Balance as of March 31, 2016 | 3,880,350 | $ | $ | 30,364,722 | ||||
Repurchase of common stock under 2015 Repurchase Plan | - | - | ||||||
Balance as of March 31, 2017 | 3,880,350 | $ | $ | 30,364,722 | ||||
(1) Amount excludes commission fees. |
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The total purchase pricesprice of the common stock repurchased and retired werewas reflected as a reduction to consolidated stockholders' equity during the period of repurchase.
In fiscal 2015, 20142017, 2016 and 2013,2015, the Company also withheld 289,899, 30,702, and 15,053 50,400, 73,751,shares, respectively, shares related to tax withholdings on restricted stock awards with a total price of $0.1$3.0 million, $0.5 million, and $0.4$0.1 million, respectively.
9.10. INCOME TAXES
For the years ended March 31, 2015, 20142017, 2016 and 2013,2015, the Company recorded a (benefit) provision for income taxes of approximately ($0.1) million, ($0.8) million and $2.8 million, $2.2 million and $9.4 million, respectively. The provision in each year was attributable to federal and state current and deferred taxes. The components of the consolidated (benefit) provision for income taxes for fiscal 2015, 20142017, 2016 and 20132015 consisted of the following (in thousands):
March 31, | March 31, | |||||||||||||||||
Current: | 2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||||
Federal | $ | 92 | $ | - | $ | - | $ | (7) | $ | 97 | $ | 92 | ||||||
State | 457 | 276 | 434 | 588 | 551 | 457 | ||||||||||||
Foreign | 1 | - | - | 112 | 71 | 1 | ||||||||||||
Total current tax provision | 550 | 276 | 434 | 693 | 719 | 550 | ||||||||||||
Deferred | ||||||||||||||||||
Deferred: | ||||||||||||||||||
Federal | $ | 2,602 | $ | 1,578 | $ | 7,185 | 1,506 | 95 | 2,602 | |||||||||
State | (363) | 365 | 1,780 | (1,095) | (854) | (363) | ||||||||||||
Foreign | - | - | - | (1,230) | (807) | - | ||||||||||||
Total deferred tax provision | 2,239 | 1,943 | 8,965 | |||||||||||||||
Income tax provision | $ | 2,789 | $ | 2,219 | $ | 9,399 | ||||||||||||
Total deferred tax (benefit) provision | (819) | (1,566) | 2,239 | |||||||||||||||
Income tax (benefit) provision | $ | (126) | $ | (847) | $ | 2,789 |
The Company's income (loss) from continuing operations before income taxes included $3.5($8.4) million, $0.8($6.9) million and $0($3.5) million of foreign subsidiary loss for the fiscal years ended March 31, 2017, 2016 and 2015, 2014 and 2013, respectively. The Company is permanently reinvesting the earnings of its profitable foreign subsidiaries. The Company intends to reinvest these profits in expansion of overseas operations. If the Company were to remit these earnings, the tax impact would be immaterial.
Upon adoption of ASU 2015-17 in fiscal 2017, the Company classifies all deferred tax assets or deferred tax liabilities as long-term. Deferred tax assets and (liabilities) were comprised of the following (in thousands):
March 31, | March 31, | |||||||||||
Current deferred tax assets | 2015 | 2014 | 2017 | 2016 | ||||||||
Net operating loss carryforwards | $ | 2,179 | $ | 333 | $ | - | $ | 2,739 | ||||
Inventory valuation | 14 | 33 | - | 14 | ||||||||
Reserves and allowances | 2,394 | 1,791 | - | 2,740 | ||||||||
Net current deferred tax assets | 4,587 | 2,157 | - | 5,493 | ||||||||
Net operating loss carryforwards | 44,228 | 51,598 | 36,427 | 38,449 | ||||||||
Research and development and other credit carryforwards | 5,414 | 4,488 | 8,614 | 7,106 | ||||||||
Stock-based compensation | 6,942 | 5,577 | ||||||||||
Reserves and allowances | 3,266 | - | ||||||||||
Fixed assets and intangibles | (1,705) | (2,819) | (3,688) | (6,160) | ||||||||
Net non-current deferred tax assets | 47,937 | 53,267 | 51,561 | 44,972 | ||||||||
Valuation allowance | (4,901) | (5,562) | (2,934) | (3,760) | ||||||||
Total | $ | 47,623 | $ | 49,862 | $ | 48,627 | $ | 46,705 |
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As of March 31, 20152017, and 2014,2016, management assessed the realizability of deferred tax assets based on the available evidence, including a history of taxable income and estimates of future taxable income. At March 31, 2015,2017, management evaluated the need for a valuation allowance and determined that a valuation allowance of approximately $4.9$2.9 million was needed. Atneeded compared with approximately $3.8 million as of March 31, 2014, management evaluated the need for a valuation allowance and determined that a valuation allowance of approximately $5.6 million was needed.2016. The net change in the valuation allowance for the years ended March 31, 20152017 and 20142016 was a decrease of $0.7$0.8 million and an increase of $2.5$1.1 million, respectively.
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At March 31, 2015,2017, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $142.8$141.7 million and $66.7$23.2 million, respectively, which expire at various dates between 20162018 and 2035.2037. The net operating loss carryforwards include approximately $30.9$60.9 million in excess tax benefits resulting from employee exercises of non-qualifiednon- qualified stock options or disqualifying dispositions of incentive stock options, the tax benefits of which, when realized, will be accounted for as an addition to additional paid-in capital rather than as a reduction of the provision for income taxes. In addition, at March 31, 2015,2017, the Company had research and development credit carryforwards for federal and California tax reporting purposes of approximately $3.3$5.6 million and $5.1$7.3 million, respectively. The federal income tax credit carryforwards will expire at various dates between 2021 and 2035,2037, while the California income tax credits will carry forward indefinitely. A reconciliation of the Company's provision (benefit) for income taxes to the amounts computed using the statutory U.S. federal income tax rate of 34% is as follows (in thousands):
Years Ended March 31, | Years Ended March 31, | |||||||||||||||||
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | |||||||||||||
Tax provision at statutory rate | $ | 1,599 | $ | 1,285 | $ | 7,768 | $ | (1,652) | $ | (2,029) | $ | 1,599 | ||||||
State income taxes before valuation allowance, | ||||||||||||||||||
net of federal effect | 269 | 196 | 822 | 108 | 9 | 269 | ||||||||||||
Foreign tax rate differential | 885 | (769) | - | |||||||||||||||
Research and development credits | (725) | (1,534) | (385) | (1,484) | (1,253) | (725) | ||||||||||||
Change in valuation allowance | (1,480) | 1,264 | 1,038 | (287) | (1,555) | (1,480) | ||||||||||||
Compensation/option differences | (331) | (264) | (207) | (246) | (471) | (331) | ||||||||||||
Non-deductible compensation | 746 | 605 | 403 | 1,079 | 944 | 746 | ||||||||||||
Acquisition costs | - | 230 | - | 54 | 230 | - | ||||||||||||
Expiring CA NOLs | 1,484 | 240 | - | - | 1,626 | 1,484 | ||||||||||||
Foreign loss not benefited | 1,192 | 271 | - | 780 | 2,342 | 1,192 | ||||||||||||
Other | 35 | (74) | (40) | 637 | 79 | 35 | ||||||||||||
Total income tax provision | $ | 2,789 | $ | 2,219 | $ | 9,399 | $ | (126) | $ | (847) | $ | 2,789 |
For the years ended March 31, 2017, 2016 and 2015, the Company realized excess tax benefits as a result of stock option exercises and stock award settlements of $0.5 million, $0.2 million and $0.1 million, respectively, that were recorded to additional paid-in capital.
The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Unrecognized Tax Benefits | |||||||||||
2015 | 2014 | 2013 | |||||||||
Balance at beginning of year | $ | 2,165 | $ | 3,024 | $ | 2,483 | |||||
Gross increases - tax position in prior period | 27 | - | 73 | ||||||||
Gross decreases - tax position in prior period | - | (1,081) | - | ||||||||
Gross increases - tax positions related to the current year | 228 | 222 | 468 | ||||||||
Settlements | - | - | - | ||||||||
Lapse of statute of limitations | - | - | - | ||||||||
Balance at end of year | $ | 2,420 | $ | 2,165 | $ | 3,024 |
Unrecognized Tax Benefits | |||||||||
2017 | 2016 | 2015 | |||||||
Balance at beginning of year | $ | 2,881 | $ | 2,420 | $ | 2,165 | |||
Gross increase - tax positions in prior period | - | 82 | 27 | ||||||
Gross decreases - tax positions in prior period | - | - | - | ||||||
Gross increases - tax positions related to the current year | 450 | 379 | 228 | ||||||
Balance at end of year | $ | 3,331 | $ | 2,881 | $ | 2,420 |
At March 31, 2015,2017, the company had a liability for unrecognized tax benefits of $2.4$3.3 million, all of which, if recognized, would decrease the company's effective tax rate. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.
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The Company files U.S. federal and state income tax returns in jurisdictions with varying statutes of limitations. The Company has not been under examination by income tax authorities in federal, state or other foreign jurisdictions. The 1996tax years fiscal 1998 through fiscal 2015 tax years2017 generally remain subject to examination by federal and most state tax authorities.
The Company's policy for recording interest and penalties associated with tax examinations is to record such items as a component of operating expense income before taxes. During the fiscal year ended March 31, 2015, 20142017, 2016 and 2013,2015, the Company did not recognize any interest or penalties related to unrecognized tax benefits.
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Utilization of the Company's net operating loss and tax credit carryforwards can become subject to a substantial annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration or elimination of the net operating loss and tax credit carryforwards before utilization. The Company has performed an analysis of its changes in ownership under Section 382 of the Internal Revenue Code. ManagementThe Company currently believes that the Section 382 limitation will not limit utilization of the carryforwards prior to their expiration, with the exception of certain acquired loss and tax credit carryforwards of Contactual, Inc.
10. EMPLOYEE BENEFIT PLAN
401(k) Savings Plan
In April 1991, the Company adopted a 401(k) savings plan (the "Savings Plan") covering substantially all of its U.S. employees. Eligible employees may contribute to the Savings Plan from their compensation up to the maximum allowed by the Internal Revenue Service. In January 2007, the Company reactivated the employer matching contribution. The matching contribution is 100% of each employee's contributions in each year, not to exceed $1,500 per annum. The matching expense in 2015, 2014 and 2013 was $0.7 million, $0.4 million and $0.3 million, respectively. The Savings Plan does not allow employee contributions to be invested in the Company's common stock.
11. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income (loss) per share (in thousands, except share and per share data):
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
(In Thousands, Except Per Share Amounts) | |||||||||
Numerator: | |||||||||
Income from continuing operations | $ | 1,926 | $ | 1,598 | $ | 13,450 | |||
Income from discontinued operations, net | |||||||||
of income tax provision | - | 916 | 489 | ||||||
Net income available to common stockholders | $ | 1,926 | $ | 2,514 | $ | 13,939 | |||
Denominator: | |||||||||
Common shares | 89,071 | 78,310 | 71,390 | ||||||
Denominator for basic calculation | 89,071 | 78,310 | 71,390 | ||||||
Employee stock options | 2,088 | 2,927 | 2,958 | ||||||
Employee restricted purchase rights | 493 | 421 | 352 | ||||||
Denominator for diluted calculation | 91,652 | 81,658 | 74,700 | ||||||
Income per share - continuing operations: | |||||||||
Basic | $ | 0.02 | $ | 0.02 | $ | 0.19 | |||
Diluted | $ | 0.02 | $ | 0.02 | $ | 0.18 | |||
Income per share - discontinued operations: | |||||||||
Basic | $ | 0.00 | $ | 0.01 | $ | 0.01 | |||
Diluted | $ | 0.00 | $ | 0.01 | $ | 0.01 | |||
Net income per share: | |||||||||
Basic | $ | 0.02 | $ | 0.03 | $ | 0.20 | |||
Diluted | $ | 0.02 | $ | 0.03 | $ | 0.19 |
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Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
(In Thousands, Except Per Share Amounts) | |||||||||
Numerator: | |||||||||
Net income (loss) available to common stockholders | $ | (4,751) | $ | (5,120) | $ | 1,926 | |||
Denominator: | |||||||||
Common shares | 90,340 | 88,477 | 89,071 | ||||||
Denominator for basic calculation | 90,340 | 88,477 | 89,071 | ||||||
Employee stock options | - | - | 2,088 | ||||||
Employee restricted purchase rights | - | - | 493 | ||||||
Denominator for diluted calculation | 90,340 | 88,477 | 91,652 | ||||||
Net income (loss) per share: | |||||||||
Basic | $ | (0.05) | $ | (0.06) | $ | 0.02 | |||
Diluted | $ | (0.05) | $ | (0.06) | $ | 0.02 |
The following shares attributable to outstanding stock options and restricted stock purchase rights were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive (in thousands):
Years Ended March 31, | Years Ended March 31, | ||||||||||||||
2015 | 2014 | 2013 | 2017 | 2016 | 2015 | ||||||||||
Common stock options | 1,812 | 750 | 953 | 4,462 | 4,793 | 1,812 | |||||||||
Stock purchase rights | 57 | 18 | 16 | 4,950 | 4,628 | 57 | |||||||||
1,869 | 768 | 969 | 9,412 | 9,421 | 1,869 |
12. SEGMENT REPORTING
ASC 280,Segment Reporting, establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.
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The Company has one reportable operating segment.manages its operations primarily on a geographic basis. The Company's chief operating decision makers, the Chief Executive Officer, the Chief Financial Officer, and the Chief Technology Officer or the Company's Chief Operating Decision Makers (CODMs), evaluate performance of the Company and make decisions regarding allocation of resources based on total Companygeographic results. The Company's reportable segments are the Americas and Europe. The Americas segment is primarily North America. The Europe segment is primarily the United Kingdom. Each operating segment provides similar products and services.
The Company's revenue distribution byCODMs evaluate the performance of its operating segments based on revenues and net income. The Company does not allocate research and development, sales and marketing, general and administrative, amortization expense, stock-based compensation expense, and commitment and contingencies for each segment as management does not consider this information in its evaluation of the performance of each operating segment. Revenues are attributed to each segment based on the ordering location of the customer or ship to location.
The following tables set forth the segment and geographic region (basedinformation for each period (in thousands):
Total Revenue for the Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Americas (principally US) | $ | 227,914 | $ | 185,241 | $ | 150,764 | |||
Europe (principally UK) | 25,474 | 24,095 | 11,649 | ||||||
$ | 253,388 | $ | 209,336 | $ | 162,413 |
Revenue is based upon the destination of shipments and the customer'scustomers' service address)address. In fiscal 2017, 2016 and 2015 intersegment revenues of approximately $4.9 million, $1.0 million and $0, respectively, were eliminated in consolidation, and have been excluded from the table above.
Total Depreciation and Amortization for the Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Americas (principally US) | $ | 6,842 | $ | 5,776 | $ | 4,739 | |||
Europe (principally UK) | 3,595 | 3,231 | 1,374 | ||||||
$ | 10,437 | $ | 9,007 | $ | 6,113 |
Total Net Income (Loss) for the Years Ended March 31, | |||||||||
2017 | 2016 | 2015 | |||||||
Americas (principally US) | $ | 2,557 | $ | 940 | $ | 5,433 | |||
Europe (principally UK) | (7,308) | (6,060) | (3,507) | ||||||
$ | (4,751) | $ | (5,120) | $ | 1,926 |
|
|
| March 31, | |||||||||
|
|
| 2017 |
|
| 2016 | ||||||
|
|
| Total Assets |
|
| Property and |
|
| Total Assets |
|
| Property and |
Americas (principally US) |
| $ | 284,011 |
| $ | 11,803 |
| $ | 261,886 |
| $ | 9,733 |
Europe (principally UK) |
|
| 49,844 |
|
| 4,581 |
|
| 51,566 |
|
| 2,642 |
|
| $ | 333,855 |
| $ | 16,384 |
| $ | 313,452 |
| $ | 12,375 |
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13. ACQUISITIONS
LeChat, Inc.
On January 5, 2017, the Company entered into an Agreement and Plan of Merger (the "Agreement") with the preferred and common shareholders LeChat Inc. (LeChat) for the purchase of all the outstanding preferred and common shares of LeChat. The transaction closed on January 6, 2017. The total aggregate purchase price was $3.1 million, consisting of approximately $2.4 million paid to the preferred shareholders at closing, $0.2 million paid to the common shareholders at closing, and approximately $0.5 million in cash deposited into escrow to be held for two years as follows:security against indemnity claims made by the Company after the closing date.
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Americas (principally US) | 92% | 97% | 99% | ||||||
Europe | 7% | 2% | 0% | ||||||
Asia Pacific | 1% | 1% | 1% | ||||||
100% | 100% | 100% |
Geographic area data isThe Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based upon the locationon their estimated fair values. The excess of the propertyconsideration transferred over the aggregate fair values of the assets acquired and equipmentliabilities assumed was recorded as goodwill. The amount of goodwill recognized was primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to synergies and isacquired workforce of the acquired business. The finite-lived intangible asset consisted of developed technology, with an estimated weighted-average useful life of two years. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using a cost approach method. Intangible assets are amortized on a straight-line basis.
The fair values of the assets acquired and liabilities assumed are as follows (in thousands):
March 31, | |||||||||
2015 | 2014 | ||||||||
North America | $ | 8,348 | $ | 6,305 | |||||
Europe | 1,411 | 1,087 | |||||||
Asia-Pacific | 489 | 319 | |||||||
$ | 10,248 | $ | 7,711 |
Fair Value | |||
Assets acquired: | |||
Cash | $ | 231 | |
Intangible assets | 1,200 | ||
Other non-current assets | 428 | ||
Total assets acquired | 1,859 | ||
Liabilities assumed: | |||
Current liabilities | (324) | ||
Total liabilities assumed | (324) | ||
Net identifiable assets acquired | 1,535 | ||
Goodwill | 1,580 | ||
Total consideration transferred | $ | 3,115 |
13. ACQUISITIONNone of the goodwill recognized is expected to be deductible for income tax purposes.
Voicenet SolutionsRevenue from LeChat from the date of acquisition to March 31, 2017 was immaterial. Total acquisition related costs were immaterial. Pro forma information has not been presented as the impact to the Company's Consolidated Financial Statements was not material.
DXI Group Limited
On November 11, 2013,May 26, 2015, the Company entered into a share purchase agreement with the shareholders of DXI Limited, and optionholders of Voicenet Solutions Limited ("Voicenet"), a provider of cloud communications and collaboration services inits wholly owned subsidiaries, (collectively DXI) for the United Kingdom (the "Transaction"). The Company completed the acquisition of Voicenet on November 29, 2013. The Company purchased allpurchase of the outstanding sharesentire share capital of Voicenet forDXI. The transaction closed effective May 29, 2015. The total consideration transferredaggregate purchase price was approximately $22.5 million, consisting of $19.3 million; $3.0$18.7 million was placed in escrow and eligible for releasecash paid to the VoicenetDXI shareholders at closing, and optionholders$3.8 million in installments oncash deposited into escrow to be held for two years as security against indemnity claims made by the first and second anniversaries ofCompany after the closing date. The shares of Voicenet are held by a wholly-owned subsidiary of 8x8 recently formedcash escrow is to be released in the United Kingdom, such that Voicenet is an indirect, wholly-owned subsidiary of 8x8.
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annual installments over two years.
The Company recorded the acquired tangible and identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. The finite−livedfinite-lived intangible assets consist of the following: customer relationship,relationships, with an estimated weighted-average useful life of 7two and five years; and developed technology, with an estimated weighted-average useful life of six years. The indefinite lived intangible asset consisted of a tradename. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using the excess earnings method.income approach methods. Intangible assets are amortized on a straight-line basis.
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The fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Fair Value | |||
Assets acquired: | |||
Cash | $ | ||
Current assets | |||
Property and equipment | |||
Intangible | |||
Total assets acquired | |||
Liabilities assumed: | |||
Current liabilities and non-current liabilities | |||
Total liabilities assumed | |||
Net identifiable assets acquired | |||
Goodwill | |||
Total consideration transferred | $ |
None of the goodwill recognized is expected to be deductible for income tax purposes.
VoicenetDXI contributed revenue of approximately $3.3$10.0 million and a net loss of approximately $0.8($3.2) million for the period from the date of acquisition to March 31, 2014.2016. Total acquisition related costs were approximately $0.9 million, which were included in general and administrative expenses. The Company determined that it is impractical to include pro forma information given the difficulty in obtaining the historical financial information of DXI. Inclusion of such information would require the Company to make estimates and assumptions regarding DXI's historical financial results that the Company believes may ultimately prove inaccurate.
In the second quarter of fiscal 2016, the Company updated its analysis of the valuation of the assets and liabilities acquired, which resulted in an increase of approximately $1.1 million to goodwill, a decrease in intangible assets of approximately $1.3 million, and a decrease to current and non-current liabilities of $0.2 million, compared with the preliminary estimates recorded for the first quarter of fiscal 2016. The impact of the change in preliminary values on the first quarter of fiscal 2016 statement of operations was not material. Therefore, no measurement period adjustment was required.
Quality Software Corporation
On June 3, 2015, the Company entered into an asset purchase agreement with the shareholder of Quality Software Corporation (QSC) and other parties affiliated with the shareholder and QSC for the purchase of certain assets as per the purchase agreement. The total aggregate fair value of the consideration was approximately $2.9 million, which $2.2 million was paid in cash to the QSC shareholder at closing. As part of the aggregate purchases price, there is also $0.5 million in contingent consideration payable subject to attainment of certain revenue and product release milestones for the acquired business, and $0.3 million in cash held by the Company in escrow to be retained for two years as security against indemnity claims made by the Company after the closing date. The preliminary fair value of the contingent consideration and escrow amounts was $0.7 million at the acquisition date.
The Company recorded the acquired identifiable intangible assets and liabilities assumed based on their estimated fair values. The excess of the consideration transferred over the aggregate fair values of the assets acquired and liabilities assumed is recorded as goodwill. The amount of goodwill recognized is primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to synergies and acquired workforce of the acquired business. The finite-lived intangible assets consist of the following: customer relationships, with an estimated weighted-average useful life of five years; and developed technology, with an estimated weighted-average useful life of six years. The indefinite lived intangible asset consisted of in-process research and development and a tradename. The fair value assigned to identifiable intangible assets acquired was based on estimates and assumptions made by management using income approach methods. Intangible assets are amortized on a straight-line basis.
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The fair values of the assets acquired and liabilities assumed are as follows (in thousands):
Fair Value | |||
Assets acquired: | |||
Intangible assets | $ | 1,100 | |
Goodwill | 1,789 | ||
Total consideration transferred | $ | 2,889 |
QSC's contributions to revenue and income for the period from the date of acquisition to March 31, 2016 were not material. Total acquisition related costs were approximately $0.1 million, which were included in general and administrative expenses. The Company determined that the acquisition was not deemed to be a material business combination and it is impractical to include such pro forma information given the difficulty in obtaining the historical financial information of Voicenet.QSC. Inclusion of such information would require the Company to make estimates and assumptions regarding Voicenet'sQSC's historical financial results that we believethe Company believes may ultimately prove inaccurate.
In the fourth quarter of fiscal 2016, the Company updated its analysis of the valuation of the assets and liabilities acquired, which resulted in an increase of approximately $0.1million to goodwill, and a decrease in intangible assets of approximately $0.1 million compared with what was recorded for the third quarter of fiscal 2016. The impact of the change in preliminary values on the first quarter of fiscal 2016 statement of operations was not material. Therefore, no measurement period adjustment was required.
14. GAIN ON SETTLEMENT OF ESCROW CLAIMEMPLOYEE BENEFIT PLAN
401(k) Savings Plan
In December 2013,April 1991, the Company settled an escrow claim for indemnification withadopted a 401(k) savings plan (the "Savings Plan") covering substantially all of its U.S. employees. Eligible employees may contribute to the sellersSavings Plan from their compensation up to the maximum allowed by the Internal Revenue Service. In January 2007, the Company reactivated the employer matching contribution. The matching contribution is 100% of Contactual, Inc. Under the termseach employee's contributions up to $1,500, then 50% of the settlement, the Company recorded a gain of $0.6employee's contributions, not to exceed $3,000 per annum, in aggregate. The matching expense in 2017, 2016 and 2015 was $1.6 million, in other income, net,$0.9 million and $0.7 million, respectively. The Savings Plan does not allow employee contributions to be invested in the consolidated statement of income during the year ended March 31, 2014. Under the terms of the Contactual merger agreement and the escrow agreement, each indemnifying seller paid his, her or its pro rata share of the obligations owed to the Company on January 29, 2014. Upon receipt of the cash on January 29, 2014, the Company released the remaining escrow account balance to the sellers of Contactual Inc.Company's common stock.
15. PATENT SALE
In June 2012, the Company entered into a patent purchase agreement and sold a family of patents to a third party for approximately $12.0 million plus a future payment of up to a maximum of $3.0 million based on future license agreements entered into by the third partythird-party purchaser. In August 2014 and February 2013, the third partythird-party entered into two separate license agreements with its customers; therefore, the Company earned an additional $1.0 million each under the patent purchase agreement for fiscal 2015 and 2013. Under the terms and conditions of the patent purchase agreement, the Company has retained certain limited rights to continue to use the patents. The patent purchase agreement contains representations and warranties customary for transactions of this type.
7616. SUBSEQUENT EVENTS
16. DISCONTINUED OPERATIONS
On September 30, 2013, the Company completed the sale of its dedicated server hosting business to IRC Company, Inc. ("IRC") and, as a result, no longer provides dedicated server hosting services. In the transaction, IRC purchased 100% of the stock of Central Host, Inc., which had been wholly owned by the Company and all of the assets specific to the dedicated server hosting business.
The Company sold its dedicated server hosting business for total consideration of $3.0 million in cash, which was received on October 1, 2013.
The dedicated server hosting business has been reported as discontinued operations. The results of operations of these discontinued operations are as follows:
Years Ended March 31, | |||||||||
2015 | 2014 | 2013 | |||||||
Revenue | $ | - | $ | 1,430 | $ | 3,828 | |||
Operating expense | - | 922 | 3,005 | ||||||
Income before income taxes | - | 508 | 823 | ||||||
Provision for income taxes | - | 188 | 334 | ||||||
Income from discontinued operations | - | 320 | 489 | ||||||
Gain on disposal of discontinued operations, | |||||||||
net of income tax provision of $456 | - | 596 | - |
17. SUBSEQUENT EVENT
On May 26, 2015, the Company together with 8x8 UK Investments Limited, its wholly-owned subsidiary,had entered into a share purchase agreement with the shareholders of DXI Limited API Telecom Limited, Easycallnow Limited, and RAS Telecom Limited (collectively, "DXI"), for the purchase of the entire share capital of DXI. DXI provides SaaS for call center solution workflows. The total aggregate purchase price was approximately $25.5 million, consisting of $18.7 million in cash paid to DXI shareholders at closing, $3.8 million inwhich included cash deposited ininto escrow to be held for two years as security against indemnity claims made by the Company after the closing date,date. In April 2017, the Company agreed with the shareholders of DXI Limited to return approximately $1.4 million to the Company and $3.0release the remaining funds held in escrow to the shareholders. The Company recorded a gain in the amount of this release of approximately $1.4 million in its common stock (approximately 353,000 shares). The Company funded the aggregate cash purchase price from our cash and investments.first quarter of fiscal 2018.
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18.17. CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
In thousands, except per share data amounts:
QUARTER ENDED | ||||||||||||||||||||||||
March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | |||||||||||||||||
2015 | 2014 | 2014 | 2014 | 2014 | 2013 | 2013 | 2013 | |||||||||||||||||
Service revenue | $ | 40,009 | $ | 37,802 | $ | 36,121 | $ | 34,276 | $ | 32,545 | $ | 29,737 | $ | 27,826 | $ | 26,499 | ||||||||
Product revenue | 3,521 | 3,570 | 3,477 | 3,637 | 3,241 | 3,008 | 2,989 | 2,752 | ||||||||||||||||
Total revenue | 43,530 | 41,372 | 39,598 | 37,913 | 35,786 | 32,745 | 30,815 | 29,251 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of service revenue | 7,655 | 7,544 | 7,505 | 6,997 | 6,866 | 5,584 | 5,209 | 4,786 | ||||||||||||||||
Cost of product revenue | 4,173 | 3,959 | 3,762 | 3,969 | 3,999 | 4,041 | 3,783 | 3,347 | ||||||||||||||||
Research and development | 4,348 | 3,868 | 3,496 | 3,406 | 3,332 | 3,325 | 2,640 | 2,336 | ||||||||||||||||
Sales and marketing | 21,508 | 20,559 | 19,440 | 19,160 | 18,038 | 16,051 | 13,745 | 13,072 | ||||||||||||||||
General and administrative | 5,794 | 4,617 | 3,893 | 3,878 | 3,924 | 5,547 | 3,125 | 2,772 | ||||||||||||||||
Gain on patent sale | - | - | (1,000) | - | - | - | - | - | ||||||||||||||||
Total operating expenses | 43,478 | 40,547 | 37,096 | 37,410 | 36,159 | 34,548 | 28,502 | 26,313 | ||||||||||||||||
Income (loss) from operations | 52 | 825 | 2,502 | 503 | (373) | (1,803) | 2,313 | 2,938 | ||||||||||||||||
Other income net | 210 | 246 | 200 | 177 | 140 | 586 | 1 | 15 | ||||||||||||||||
Income (loss) from continuing | ||||||||||||||||||||||||
operations before provision | ||||||||||||||||||||||||
(benefit) for income taxes | 262 | 1,071 | 2,702 | 680 | (233) | (1,217) | 2,314 | 2,953 | ||||||||||||||||
Provision (benefit) for | ||||||||||||||||||||||||
income taxes (1) | 79 | 627 | 1,411 | 672 | 1,738 | (1,306) | 826 | 961 | ||||||||||||||||
Income (loss) from continuing | ||||||||||||||||||||||||
operations | 183 | 444 | 1,291 | 8 | (1,971) | 89 | 1,488 | 1,992 | ||||||||||||||||
Income from discontinued | ||||||||||||||||||||||||
operations, net of income | ||||||||||||||||||||||||
tax provision | - | - | - | - | 19 | - | 154 | 147 | ||||||||||||||||
Gain on disposal of discontinued | ||||||||||||||||||||||||
operations, net of income tax | ||||||||||||||||||||||||
provision of $456 | - | - | - | - | 7 | - | 589 | - | ||||||||||||||||
Net income (loss) | $ | 183 | $ | 444 | $ | 1,291 | $ | 8 | $ | (1,945) | $ | 89 | $ | 2,231 | $ | 2,139 | ||||||||
Income (loss) per share | ||||||||||||||||||||||||
continuing operations: | ||||||||||||||||||||||||
Basic | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.02) | $ | 0.00 | $ | 0.02 | $ | 0.03 | ||||||||
Diluted | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.02) | $ | 0.00 | $ | 0.02 | $ | 0.03 | ||||||||
Income per share | ||||||||||||||||||||||||
discontinued operations: | ||||||||||||||||||||||||
Basic | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | 0.00 | ||||||||
Diluted | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.01 | $ | 0.00 | ||||||||
Net income (loss) per share: | ||||||||||||||||||||||||
Basic | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.02) | $ | 0.00 | $ | 0.03 | $ | 0.03 | ||||||||
Diluted | $ | 0.00 | $ | 0.01 | $ | 0.01 | $ | 0.00 | $ | (0.02) | $ | 0.00 | $ | 0.03 | $ | 0.03 | ||||||||
Shares used in per share calculations: | ||||||||||||||||||||||||
Basic | 88,950 | 89,594 | 89,073 | 88,592 | 88,184 | 79,742 | 72,970 | 72,510 | ||||||||||||||||
Diluted | 91,266 | 91,974 | 91,615 | 91,445 | 88,184 | 83,182 | 76,232 | 75,756 |
|
|
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QUARTER ENDED | ||||||||||||||||||||||||
March 31, | Dec. 31, | Sept. 30, | June 30, | March 31, | Dec. 31, | Sept. 30, | June 30, | |||||||||||||||||
2017 | 2016 | 2016 | 2016 | 2016 | 2015 | 2015 | 2015 | |||||||||||||||||
Service revenue | $ | 62,654 | $ | 60,149 | $ | 57,717 | $ | 55,296 | $ | 52,174 | $ | 48,948 | $ | 46,951 | $ | 44,168 | ||||||||
Product revenue | 3,834 | 3,527 | 5,466 | 4,745 | 5,160 | 4,220 | 3,991 | 3,724 | ||||||||||||||||
Total revenue | 66,488 | 63,676 | 63,183 | 60,041 | 57,334 | 53,168 | 50,942 | 47,892 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of service revenue | 10,803 | 10,525 | 10,837 | 10,235 | 9,720 | 9,713 | 9,186 | 8,459 | ||||||||||||||||
Cost of product revenue | 4,187 | 4,240 | 5,782 | 5,505 | 6,103 | 5,087 | 4,596 | 4,382 | ||||||||||||||||
Research and development | 7,142 | 7,095 | 6,505 | 6,710 | 6,110 | 6,404 | 6,446 | 5,080 | ||||||||||||||||
Sales and marketing | 38,228 | 35,667 | 33,691 | 31,691 | 31,240 | 27,585 | 26,730 | 23,824 | ||||||||||||||||
General, and administrative | 9,814 | 7,852 | 6,747 | 6,801 | 7,132 | 6,888 | 5,657 | 6,068 | ||||||||||||||||
Total operating expenses | 70,174 | 65,379 | 63,562 | 60,942 | 60,305 | 55,677 | 52,615 | 47,813 | ||||||||||||||||
Income (loss) from operations | (3,686) | (1,703) | (379) | (901) | (2,971) | (2,509) | (1,673) | 79 | ||||||||||||||||
Other income, net | 583 | 408 | 391 | 410 | 397 | 272 | 204 | 234 | ||||||||||||||||
Income (loss) from | ||||||||||||||||||||||||
operations before provision | ||||||||||||||||||||||||
(benefit) for income taxes | (3,103) | (1,295) | 12 | (491) | (2,574) | (2,237) | (1,469) | 313 | ||||||||||||||||
Provision (benefit) for | ||||||||||||||||||||||||
income taxes | �� | (178) | 30 | (15) | 37 | (1,498) | (557) | 423 | 785 | |||||||||||||||
Net income (loss) | $ | (2,925) | $ | (1,325) | $ | 27 | $ | (528) | $ | (1,076) | $ | (1,680) | $ | (1,892) | $ | (472) | ||||||||
Net income (loss) per share: | ||||||||||||||||||||||||
Basic | $ | (0.03) | $ | (0.01) | $ | 0.00 | $ | (0.01) | $ | (0.01) | $ | (0.02) | $ | (0.02) | $ | (0.01) | ||||||||
Diluted | $ | (0.03) | $ | (0.01) | $ | 0.00 | $ | (0.01) | $ | (0.01) | $ | (0.02) | $ | (0.02) | $ | (0.01) | ||||||||
Shares used in per share calculations: | ||||||||||||||||||||||||
Basic | 91,175 | 90,774 | 89,987 | 89,434 | 88,888 | 88,289 | 88,557 | 88,233 | ||||||||||||||||
Diluted | 91,175 | 90,774 | 93,447 | 89,434 | 88,888 | 88,289 | 88,557 | 88,233 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
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 March 31, 2015.2017. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015,2017, our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on criteria established in the framework inInternal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that its internal control over financial reporting was effective as of March 31, 2015.2017.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Moss Adams LLP, an independent registered public accounting firm, has audited and reported on the consolidated financial statements of 8x8, Inc. and on the effectiveness of our internal control over financial reporting. The report of Moss Adams LLP is contained in Item 8 of this Annual Report on Form 10-K.
On May 26, 2015, we, together22, 2017, the compensation committee of our board of directors approved an amendment to the Management Incentive Bonus Plan, or MIP, that will permit the Committee, in its discretion, to approve quarterly and annual award payments to MIP participants based on the successful completion of approved individual objectives, our performance against predetermined metrics, or some combination of both. Previously, the MIP provided that quarterly awards would be payable based only on our performance in meeting specific quarterly targets. All our executive officers, along with 8x8 UK Investments Limited, our wholly-owned subsidiary,other management level employees as approved by the compensation committee, participate in the MIP for each fiscal year.
On May 23, 2017, the Company entered into a share purchase agreement withrepurchase program authorized by the shareholdersCompany's board of DXI Limited, API Telecom Limited, Easycallnow Limited and RAS Telecom Limited (collectively, "DXI")directors for the purchasepurpose of repurchasing up to $25 million of the entire share capital of DXI. The transaction closed effective May 29, 2015 and was not subject to regulatory approvals. The total aggregate purchase price was approximately $25.5 million, consisting of $18.7 million in cash paid to the DXI shareholders at closing, $3.8 million in cash deposited into escrow to be held for two years as security against indemnity claims made by us after the closing date, and $3.0 million in our common stock (approximately 353,000 shares). TheCompany's outstanding shares of our common stock were issued onlystock. Repurchases of shares under the program will be made pursuant to former management shareholdersa pre-arranged Rule 10b5-1 share repurchase plan, under which transactions would be effected in accordance with specified price, volume and timing conditions. A plan under Rule 10b5-1 of DXI andthe Securities Exchange Act of 1934 allows a company to repurchase shares at times when it otherwise might be prevented from doing so under insider trading laws or due to self-imposed trading blackout periods. Because repurchases under a Rule 10b5-1 share repurchase plan are subject to certain restrictions, including a four-year annual vesting requirementspecified parameters, there can be no assurance regarding the number of shares, if any, that will be repurchased pursuant to the plan, and the Company may discontinue repurchases and terminate the plan at any time.
If $25 million of shares are not purchased through the Rule 10b5-1 share repurchase plan, after the termination of that plan, the Company may from time to time purchase shares of its common stock, up to the $25 million aggregate authorization, through open market and privately negotiated transactions or through additional Rule 10b5-1 share repurchase plans, with the timing and amount of any such purchases or additional plans to be determined by the Company's management based on the continued employmentits evaluation of such shareholders. The shares are further subject to indemnity claims asserted by us prior to vesting. Vesting of the shares is subject to acceleration in the event of the shareholder's death or disability, or upon an employment termination without adequate cause, as provided in the share purchase agreement. The cash escrow also applies only to the management shareholders of DXImarket conditions and is to be released in annual installments over two year. The share purchase agreement contains representations and warranties by the management shareholders that are customary in the UK for transactions of this size and nature. We also agreed to award restricted stock units worth approximately $371,000to certain continuing employees of DXI.
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DXI is an innovative solution provider in the contact center market. EasyContactNow, DXI's product, enables customers to easily try, buy, deploy, and adapt services without the complexity and constraints experienced with traditional systems. DXI's management team has 80 years of combined expertise in communication technology, which has helped the company build a solid business with demonstrated market traction- securing major global and regional customers, ranging from SMEs to global enterprises.other factors.
PART III
Certain information required by Part III is omitted from this Annual Report on Form 10-K. The Registrant will file its definitive Proxy Statement for its Annual Meeting of Stockholders pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, not later than 120 days after the end of the fiscal year covered by this Annual Report, and certain information included in the 20152016 Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERSAND CORPORATE GOVERNANCE
Information regarding our directors and corporate governance will be presented in our definitive proxy statement for our 20152017 Annual Meeting of Stockholders to be held on or about July 23, 2015,August 10, 2017, which information is incorporated into this reportAnnual Report by reference. However, certain information regarding current executive officers found under the heading "Executive Officers" in Item 1 of Part I hereof is also incorporated by reference in response to this Item 10.
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We have adopted a Code of Conduct and Ethics that applies to our principal executive officer, principal financial officer and all other employees at 8x8, Inc. This Code of Conduct and Ethics is posted in the corporate governance section of our website at http://investors.8x8.com. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct and Ethics by posting such information in the corporate governance section on its website at http://investors.8x8.com.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be presented in our definitive proxy statement for our 20152017 Annual Meeting of Stockholders to be held on or about July 23, 2015,August 10, 2017, which information is incorporated into this reportAnnual Report by reference.
Information relating to securities authorized for issuance under equity compensation plans and other information required to be provided in response to this item will be presented in our definitive proxy statement for our 20152017 Annual Meeting of Stockholders to be held on or about July 23, 2015,August 10, 2017, which information is incorporated into this reportAnnual Report by reference. In addition, descriptions of our equity compensation plans are set forth in Part II, Item 8 "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA − NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Note 58 STOCKHOLDERS' EQUITY."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information required to be provided in response to this item will be presented in our definitive proxy statement for our 20152017 Annual Meeting of Stockholders to be held on or about July 23, 2015,August 10, 2017, which information is incorporated into this reportAnnual Report by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required to be provided in response to this item will be presented in our definitive proxy statement for our 20152017 Annual Meeting of Stockholders to be held on or about July 23, 2015,August 10, 2017, which information is incorporated into this reportAnnual Report by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements. The information required by this item is included in Item 8.
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(a)(2) Financial Statement Schedules. See "Schedule II - Valuation of Qualifying Accounts" (below) within Item 15 of this report.Annual Report.
(a)(3) Exhibits. The documents listed on the Exhibit Index appearing in this Annual Report are filed herewith or hereby incorporated by reference. Copies of the exhibits listed in the Exhibit Index will be furnished, upon request, to holders or beneficial owners of the Company's common stock.
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SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance | ||||||||||||
at | Additions | Balance | ||||||||||
Beginning | Charged to | at End | ||||||||||
Description | of Year | Expenses | Deductions (a) | of Year | ||||||||
Total Allowance for Doubtful Accounts: | ||||||||||||
Year ended March 31, 2013: | $ | 140 | $ | 639 | $ | (452) | $ | 327 | ||||
Year ended March 31, 2014: | $ | 327 | $ | 571 | $ | (432) | $ | 466 | ||||
Year ended March 31, 2015: | $ | 466 | $ | 279 | $ | (329) | $ | 416 |
Balance at | Additions | Balance | ||||||||||
Beginning | Charged to | at End | ||||||||||
Description | of Year | Expenses | Deductions (a) | of Year | ||||||||
Total Allowance for Doubtful Accounts: | ||||||||||||
Year ended March 31, 2015: | $ | 466 | $ | 279 | $ | (329) | $ | 416 | ||||
Year ended March 31, 2016: | $ | 416 | $ | 509 | $ | (339) | $ | 586 | ||||
Year ended March 31, 2017: | $ | 586 | $ | 941 | $ | (573) | $ | 954 |
(a) The deductions related to allowance for doubtful accounts represent accounts receivable which are written off.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant, 8x8, Inc., a Delaware corporation, has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on May 29, 2015.30, 2017.
| 8X8, INC. |
| By: /s/ VIKRAM VERMA |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Vikram Verma and Mary Ellen Genovese, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the following persons in the capacities and on the date indicated:
Signature | Title | Date |
/s/ VIKRAM VERMA | Chief Executive Officer (Principal Executive Officer) | May |
/s/ MARY ELLEN GENOVESE | Chief Financial Officer and Secretary | May |
/s/ BRYAN R. MARTIN | Chairman and Chief Technology Officer | May |
/s/ GUY L. HECKER | Director | May |
/s/ ERIC SALZMAN | Director | May |
/s/ IAN POTTER | Director | May |
/s/ JASWINDER PAL SINGH | Director | May |
/s/ VLADIMIR JACIMOVIC | Director | May |
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8X8, INC.
EXHIBIT INDEX
84
21.1 | |
23.1 | |
24.1 | Power of Attorney (included on page 83) |
31.1 | Certification of Chief Executive Officer of the Registrant pursuant to Rule 13a-14 |
31.2 | Certification of Chief Financial Officer of the Registrant pursuant to Rule 13a-14 |
32.1 | |
32.2 | |
101.INS** | XBRL Instance Document |
83
101.SCH** | XBRL Taxonomy Extension Schema |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase |
101.LAB** | XBRL Taxonomy Extension Label Linkbase |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase |
__________
* Indicates management contract or compensatory plan or arrangement.
**Filed herewith.
(a) | Incorporated by reference to exhibit 3.2 to the Registrant's Report on Form 8-K filed October 23, 2013 (File No. 000-21783). |
(b) | Incorporated by reference to the same numbered exhibits to the Registrant's Registration Statement on Form S-1 Commission (File No. 333-15627) as amended, declared effective July 1, 1997. |
(c) | Incorporated by reference to exhibit 10.2 to the Registrant's Form 10-Q filed November 8, 2013 (File No. 000-21783). |
(d) |
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(e) |
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(f) |
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(g) |
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(h) | Incorporated by reference to exhibit 10.6 to the Registrant's Form 10-Q filed November 8, 2013 (File No. 000-21783) |
(i) | Incorporated by reference to exhibit 10.7 to the Registrant's Form 10-K filed May 26, 2009 (File No. 000-21783). |
(j) | Incorporated by reference to exhibit 10.8 to the Registrant's Form 8-K filed November 5, 2013 (File No. 000-21783) |
(k) | Incorporated by reference to exhibit 10.1 to the Registrant's Form 10-Q filed February 7, 2007 (File No. 000-21783). |
(l) | Incorporated by reference to exhibit 10.10 to the Registrant's Form 10-K filed May 26, 2009 (File No. 000-21783). |
(m) | Incorporated by reference to exhibit 10.12 to the Registrant's Form 10-K filed May 24, 2012 (File no. 000-21783). |
(n) | Reserved |
(o) | Reserved |
(p) | Incorporated by reference to exhibit 10.15 to the Registrant's Form 10-Q filed July 22, 2011 (File No. 000-21783). |
(q) | Incorporated by reference to exhibit 10.16 and 10.17 to the Registrant's Form S-8 filed September 19, 2011 (File No. 333-176895). |
(r) | Incorporated by reference to exhibit 10.19 to the Registrant's Form S-8 filed August |
(s) | Incorporated by reference to exhibit 10.20 and 10.21 to the Registrant's Form S-8 filed August 28, 2012 (File No. 333-183597). |
(t) |
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85
(u) | Incorporated by reference to exhibit 10.23, 10.24 and 10.25 to the Registrant's Form S-8 filed September 10, 2013 (File No. 333-191080). |
(v) | Incorporated by reference to exhibit 2.2 to the Registrant's Form 8-K filed November 13, 2013 (File no. 000-21783). |
(w) | Incorporated by reference to exhibit 10.2 to the Registrant's Form 10-Q filed October 22, 2014 (File no. 000-21783). |
(x) | Incorporated by reference to exhibit 3.1 to the Registrant's Form 10-K filed May 28, 2013 (File No. 000-21783). |
(y) | Incorporated by reference to exhibit 10.28 to the Registrant's Form 10-K filed May 29, 2015 (File No. 000-21783). |
(z) | Incorporated by reference to exhibit 3.2 to the Registrant's Form 10-Q filed July 31, 2015 (File No. 000-21783). |
(aa) | Incorporated by reference to exhibit 10.2 to the Registrant's Form 10-Q filed July 31, 2015 (File No. 000-21783). |
(bb) | Incorporated by reference to exhibit 10.3 to the Registrant's Form 10-Q filed July 31, 2015 (File No. 000-21783). |
(cc) | Incorporated by reference to exhibit 10.32 to the Registrant's Form 10-K filed May 31, 2016 (File No. 000-21783). |
(dd) | Incorporated by reference to exhibit 10.33 to the Registrant's Form 10-Q filed July 29, 2016 (File No. 000-21783). |
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