UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 20162017

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to _________

Commission file number 000-21783

8X8, INC.
(Exact name of Registrant as Specified in its Charter)

 
Delaware
77-0142404
  (State or Other Jurisdiction of Incorporation or Organization) 
(I.R.S. Employer Identification Number)

2125 O'Nel Drive
San Jose, CA  95131
(Address of Principal Executive Offices)

(408) 727-1885
(Registrant's Telephone Number, including Area Code)

      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.   x YES     ¨ 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 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   ¨
(Do not check if a smaller reporting company)

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 Exchange Act). YES   ¨        NO   x

      The number of shares of the Registrant's Common Stock outstanding as of January 30, 201726, 2018 was 90,932,838.92,162,543.



FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATIONPage No.
    
Item 1. Financial Statements:Statements (unaudited):
 
    
           Condensed Consolidated Balance Sheets at December 31, 20162017 and March 31, 20162017
2
    
           Condensed Consolidated Statements of Operations for the three and nine
           months ended December 31, 20162017 and 20152016
3
    
           Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine
           months ended December 31, 20162017 and 20152016
4
    
           Condensed Consolidated Statements of Cash Flows for the nine months
           ended December 31, 20162017 and 20152016
5
    
           Notes to Unaudited Condensed Consolidated Financial Statements
6
    
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
2016
    
Item 3. Quantitative and Qualitative Disclosures About Market Risk
2723
    
Item 4. Controls and Procedures
2823
    
PART II. OTHER INFORMATION
 
    
Item 1. Legal Proceedings
2824
    
Item 1A. Risk Factors
2824
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
25
    
Item 5. Other Information
2925
    
Item 6. Exhibits
2925
    
Signature
3026

1


Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

8X8, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

 December 31, March 31, December 31, March 31,
 2016 2016 2017 2017
ASSETS  
Current assets:  
Cash and cash equivalents $33,457  $33,576  $31,769  $41,030 
Short-term investments 139,194  129,274  129,208  133,959 
Accounts receivable, net  13,069  11,070  17,937  14,264 
Inventory  572  520 
Deferred cost of goods sold  640  634 
Deferred tax asset  5,382 
Other current assets  5,551  5,444  10,240  8,101 
Total current assets  192,483  185,900  189,154  197,354 
Property and equipment, net  15,224  12,375  32,551  24,061 
Intangible assets, net  16,726  21,464  12,677  17,038 
Goodwill 44,327  47,420  39,576  46,136 
Non-current deferred tax asset 48,443  43,189 
Non-current deferred income taxes  48,859 
Other assets  6,645  3,104  967  407 
Total assets $323,848  $313,452  $274,925  $333,855 
   
LIABILITIES AND STOCKHOLDERS' EQUITY   
Current liabilities:   
Accounts payable $12,537  $10,954  $21,755  $18,631 
Accrued compensation  12,022  10,063  16,845  11,508 
Accrued warranty  290  326 
Accrued taxes 5,083  5,200  5,447  5,354 
Accrued outside commissions 2,843  2,186 
Deferred revenue  2,089  1,925  2,586  2,144 
Other accrued liabilities  3,627  4,080  6,723  5,707 
Total current liabilities  38,491  34,734  53,356  43,344 
   
Non-current liabilities  3,001  3,258  1,160  1,910 
Non-current deferred revenue 81  154 
Total liabilities  41,573  38,146  54,516  45,254 
  
Commitments and contingencies (Note 6) 
Commitments and contingencies (Note 5) 
  
Stockholders' equity:   
Common stock  90  89  92  91 
Additional paid-in capital  404,192  389,260  414,968  412,762 
Accumulated other comprehensive loss (10,322) (4,184) (6,449) (9,642)
Accumulated deficit  (111,685) (109,859) (188,202) (114,610)
Total stockholders' equity  282,275  275,306  220,409  288,601 
Total liabilities and stockholders' equity $323,848  $313,452  $274,925  $333,855 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

2


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; unaudited)

 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
 December 31, December 31, December 31, December 31,
 2016 2015 2016 2015 2017 2016 2017 2016
Service revenue $60,149  $48,948  $173,162  $140,068  $71,891  $60,149  $205,105  $173,162 
Product revenue 3,527  4,220  13,738  11,935  3,684  3,527  12,051  13,738 
Total revenue 63,676  53,168  186,900  152,003  75,575  63,676  217,156  186,900 
  
Operating expenses:  
Cost of service revenue 10,525  9,713  31,597  27,359  12,318  10,525  36,737  31,597 
Cost of product revenue 4,240  5,087  15,527  14,065  4,675  4,240  14,657  15,527 
Research and development 7,095  6,404  20,310  17,930  8,527  7,095  24,781  20,310 
Sales and marketing 35,667  27,585  101,049  78,138  48,830  35,667  131,103  101,049 
General and administrative 7,852  6,888  21,400  18,614  10,003  7,852  28,575  21,400 
Impairment of equipment, intangible assets and goodwill 9,469   9,469  
Total operating expenses 65,379  55,677  189,883  156,106  93,822  65,379  245,322  189,883 
Loss from operations (1,703) (2,509) (2,983) (4,103) (18,247) (1,703) (28,166) (2,983)
Other income, net 408  272  1,209  710  569  408  3,084  1,209 
Loss before provision (benefit) for income taxes (1,295) (2,237) (1,774) (3,393)
Provision (benefit) for income taxes 30  (557) 52  651 
Loss before provision for income taxes (17,678) (1,295) (25,082) (1,774)
Provision for income taxes 70,842  30  66,153  52 
Net loss $(1,325) $(1,680) $(1,826) $(4,044) $(88,520) $(1,325) $(91,235) $(1,826)
  
Net loss per share:   
Basic $(0.01) $(0.02) $(0.02) $(0.05) $(0.96) $(0.01) $(0.99) $(0.02)
Diluted $(0.01) $(0.02) $(0.02) $(0.05) $(0.96) $(0.01) $(0.99) $(0.02)
 
Weighted average number of shares:  
Basic  90,774  88,289  90,062  88,812  92,029  90,774  91,709  90,062 
Diluted 90,774  88,289  90,062  88,812  92,029  90,774  91,709  90,062 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, unaudited)

 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
 December 31, December 31, December 31, December 31,
 2016 2015 2016 2015 2017 2016 2017 2016
Net loss $(1,325) $(1,680) $(1,826) $(4,044) $(88,520) $(1,325) $(91,235) $(1,826)
Other comprehensive loss, net of tax  
Unrealized loss on investments in securities (170) (245) (63) (320)
Unrealized gain (loss) on investments in securities (213) (170) 13  (63)
Foreign currency translation adjustment (1,791) (972) (6,075) (904) 198  (1,791) 3,180  (6,075)
Comprehensive loss $(3,286) $(2,897) $(7,964) $(5,268) $(88,535) $(3,286) $(88,042) $(7,964)

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

 Nine Months Ended Nine Months Ended
 December 31, December 31,
 2016 2015 2017 2016
Cash flows from operating activities:  
Net loss $(1,826) $(4,044) $(91,235) $(1,826)
Adjustments to reconcile net loss to net cash   
provided by operating activities:   
Depreciation  4,463  3,598  6,049  4,463 
Amortization of intangible assets 2,741  2,565  3,995  2,741 
Impairment of long-lived assets 15  640 
Impairment of goodwill and long-lived assets 9,469  15 
Amortization of capitalized software 442  456  1,270  442 
Net accretion of discount and amortization of premium on marketable securities 228  584 
Stock-based compensation expense  15,630  11,202 
Deferred income tax (benefit) provision (104) 361 
Stock-based compensation 21,138  15,630 
Deferred income tax expense (benefit) 66,273  (104)
Gain on escrow settlement (1,393) 
Other  574  467  226  802 
Changes in assets and liabilities:   
Accounts receivable, net (3,267) (3,138) (3,305) (3,267)
Inventory (87) (122)
Other current and noncurrent assets (1,065) (1,699) (2,315) (1,238)
Deferred cost of goods sold (86) (156)
Accounts payable 1,732  418 
Accrued compensation 2,146  3,351 
Accrued warranty (36) (17)
Accrued taxes (21) 1,837 
Accounts payable and accruals 8,855  4,394 
Deferred revenue 168  (427) 351  168 
Accrued outside commissions 657  256 
Other current and noncurrent liabilities (84) (748)
Net cash provided by operating activities  22,220  15,384  19,378  22,220 
  
Cash flows from investing activities:   
Purchases of property and equipment  (6,509) (3,295) (6,524) (6,509)
Gain on escrow settlement 1,393  
Cost of capitalized software  (3,939) (1,275) (8,689) (3,939)
Purchase of businesses, net of cash acquired  (23,434)
Proceeds from maturity of investments 47,625  38,451  57,150  47,625 
Sales of investments - available for sale 34,821  43,934 
Purchases of investments - available for sale (92,647) (90,025)
Sales of investments  23,382  34,821 
Purchase of investments  (75,921) (92,647)
Net cash used in investing activities  (20,649) (35,644) (9,209) (20,649)
  
Cash flows from financing activities:   
Capital lease payments  (460) (321) (855) (460)
Payment of contingent consideration and escrow (300) (200)
Repurchase of common stock (2,828) (11,628)
Payment of contingent consideration (150) (300)
Repurchase and tax-related withholding of common stock (22,137) (2,828)
Proceeds from issuance of common stock under employee stock plans  2,694  2,848  3,303  2,694 
Net cash used in financing activities  (894) (9,301) (19,839) (894)
  
Effect of exchange rate changes on cash (796) 317  409  (796)
Net decrease in cash and cash equivalents  (119) (29,244) (9,261) (119)
  
Cash and cash equivalents, beginning of the period  33,576  53,110 
Cash and cash equivalents, end of the period $33,457  $23,866 
Cash and cash equivalents, beginning of period 41,030  33,576 
Cash and cash equivalents, end of period $31,769  $33,457 
    
Supplemental cash flow information  
Income taxes paid $350  $441  $217  $350 
Interest paid 16  30  28  16 
Property and equipment acquired under capital leases 823   765  823 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


8X8, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

8x8, Inc. (8x8 or the Company) is a leading provider of cloud-based, enterprise-class softwareglobal cloud communications and customer engagement solutions that transform the way businesses communicate and collaborate globally.to over a million business users worldwide. The Company's integrated, "pure-cloud" offering combines global voice,suite of products weaves together cloud communications, conferencing, collaboration and contact center software, conferencing, messagingsolutions so today's organization can deliver exceptional employee and video withcustomer experiences. 8x8 technology provides one integrated workflowsplatform for employees and bigcustomers engagement solutions, as well as a real-time data analytics on a single platform to enable increased team productivity, better customer engagementfor constant learning and real-time insights into business performance.improvement.

BASIS OF PRESENTATION

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 20172018 refers to the fiscal year endedending March 31, 2017)2018).

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for the fiscal year ended March 31, 2016.2017. In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations, and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

The March 31, 20162017 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 20162017 and notes thereto included in the Company's fiscal 20162017 Annual Report on Form 10-K.

The results of operations and cash flows for the interim periods included in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.

RECLASSIFICATION

Certain software development costs capitalized in accordance with ASC 350-40,Internal Use Software (ASC 350-40), that were presented in other long-term assets in the Company's consolidated balance sheets as of March 31, 2017 are presented as property and equipment for the condensed consolidated balance sheet as of December 31, 2017. Assets in the amount of $7.7 million, net of accumulated amortization, have been reclassified in the balance sheet as of March 31, 2017 to conform to the current period presentation. The reclassification had no impact on the Company's previously reported consolidated net income (loss), cash flows, or basic or diluted net income per share amounts.

Certain amounts previously reported within the Company's condensed consolidated balance sheets and condensed consolidated statements of cash flows have been reclassified within each financial statement section to conform to the current period presentation. The reclassification had no impact on the Company's previously reported net loss, cash flows, or basic or diluted net loss per share amounts.

6


DXI

Acquisition

In May 2015, the Company entered into a share purchase agreement with the shareholders of DXI Limited for a purchase price of $22.5 million, consisting of $18.7 million in cash paid to the DXI shareholders at closing and $3.8 million in cash deposited into escrow to be held for two years as security against indemnity claims made by the Company after the closing date. During the fiscal quarter ended June 30, 2017, $1.4 million of the cash held in escrow was returned to the Company and the escrow fund was closed. Since the purchase accounting for the acquisition was finalized by March 31, 2016, the proceeds are realized as a gain and reported as other income in the consolidated statements of operations.

Impairment

The Company performs its annual goodwill impairment test on January 1 of each year and during the year, whenever a triggering event for such an assessment is identified. During the third quarter of fiscal year 2018, the Company changed its product and marketing strategy for the use of DXI's technology and re-assessed the profitability outlook which triggered the requirement that the Company test the recorded goodwill for impairment in accordance with ASC 350-20-35, as amended by ASU 2017-04 (see Footnote 1, Recently Adopted Accounting Pronouncements). First, the Company estimated the fair value of its three reporting units using the market approach. Under the market approach, the Company utilized the market capitalization of its publicly-traded shares and comparable company information to determine revenue multiples which were used to determine the fair value of the reporting unit. Based on this approach, the Company determined that there was an indication of impairment for its DXI reporting unit in the UK as the carrying value including goodwill exceeded the estimated fair value. As largely independent cash flows could not be attributed to any assets individually the Company evaluated DXI's assets and liabilities as one asset group. Then the Company estimated the fair value of DXI's assets and liabilities as one asset group using discounted cash flow methods to determine the implied fair value of goodwill. The difference between this implied fair value of the goodwill and its carrying value was recorded as impairment. The outcome of the analysis resulted in a non-cash expense for impairment of property and equipment, intangible assets and goodwill of $0.3 million, $1.2 million and $8.0 million, respectively, which was recorded during the third quarter of fiscal year 2018 as a separate line item in the Company's Condensed Consolidated Statements of Operations.

These assets are reported within the Company's Europe (primarily UK) reporting segment (Footnote 9). The inputs used to measure the estimated fair value of goodwill are classified as a Level 3 fair value measurement due to the significance of unobservable inputs based on company specific information.

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany accounts and transactions have been eliminated.

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 20162017 filed with the SEC on May 31, 2016,30, 2017, and there have been no changes to the Company's significant accounting policies during the nine months ended December 31, 2016,2017, except as described in the "Recently Adopted Accounting Pronouncements" section below.

6


RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In AprilJuly 2015, the FASB issued ASU 2015-11,Simplifying the Measurement of Inventory. Under this guidance, entities utilizing the first-in-first-out or average cost method should measure inventory at the lower of cost or net realizable value, where net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The adoption of this standard did not have a material impact to the Company's consolidated financial statements.

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-5, 2016-09,"Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40)Compensation - Stock Compensation (Topic 718): Customer'sImprovements to Employee Stock-based Payment 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, which simplified certain aspects of the 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,stock-based payment transactions, 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 statements.

In 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, along with amendments issued in 2015 and 2016, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on April 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method. The Company is currently assessing the impact of this pronouncement and its amendments to its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15,Presentation of Financial Statements: Going Concern (Subtopic 205-40), this ASU provides guidance regarding management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern. Certain disclosures will be required if conditions give rise to substantial doubt about an entity's ability to continue as a going concern. The amendment is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company will apply the requirements of ASU 2014-15 during the fiscal year ended March 31, 2017.

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, 2020. 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, the 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 those fiscal years. Early adoption is permitted. 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, classification of awards as either equity or liabilities, 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 pronouncementoption to its consolidated financial statements.

7


In November 2016, the FASB has issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), which provides guidance on how restricted cash or restricted cash equivalents should be includedrecognize gross stock compensation expense with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shownactual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This amendmentThe following is effectivea summary of the impact the adoption of this ASU on the Company's consolidated financial statements:

7


In January 2017, the FASB has issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding 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.

In January 2017, the FASB has issued ASU No. 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 requireand instead requires an entity to record an impairment charge based on the excess of a reporting unit's carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has elected to early and prospectively adopt the provisions of ASU 2017-04 in the third quarter of fiscal 2018. The early adoption resulted in the Company recognizing goodwill impairment of the amount by which a reporting unit's carrying value exceeds its fair value.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, along with amendments issued in 2015, 2016, and 2017, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will become effective for the Company on April 1, 2018 and permits the use of either the full retrospective or modified retrospective transition method. The Company has preliminarily selected the modified retrospective method as the transition method.

The Company is currentlyin the middle stages of assessing the impact of this pronouncementthe 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 itsassist with the assessment and implementation. The Company currently believes the most significant impact will be to the allocation of consideration in a contract between product and service performance obligations and allocations to professional services performance obligations, as well as the deferral of certain sales commission as capitalized contract costs, which are expensed under current accounting principles.

In May 2017, the FASB issued ASU No. 2017-09,Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting. The amendments in the update provide guidance on types of changes to the terms or conditions of share-based payment awards that would be required to apply modification accounting under ASC 718,Compensation-Stock Compensation. The amendments are effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. Upon adoption, the amendment is not expected to have a material impact to the consolidated financial statements.

8


2. FAIR 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 December 31, 2016 Costs Gain Loss Fair Value Equivalents Investments
As of December 31, 2017 Costs Gain Loss Fair Value Equivalents Investments
Cash $27,382  $ $ $27,382  $27,382  $ $15,602  $ $ $15,602  $15,602  $
Level 1:            
Money market funds  6,075    6,075  6,075    16,167    16,167  16,167  
Mutual funds 2,000   (202) 1,798   1,798 
Subtotal 35,457   (202) 35,255  33,457  1,798  31,769    31,769  31,769  
Level 2:  
Commercial paper 20,945   (2) 20,947   20,947  18,277   (5) 18,272   18,272 
Corporate debt  90,469  57  (65) 90,461   90,461   78,987  11  (70) 78,928   78,928 
International government securities 2,496   (4) 2,492   2,492 
Asset backed securities 22,630   (15) 22,622   22,622  25,407   (32) 25,375   25,375 
Mortgage backed securities 367   (2) 365   365 
Agency bond 2,000    2,001   2,001  4,141    4,141    4,141 
International government securities 1,000    1,000   1,000 
Subtotal  137,411  69  (84) 137,396   137,396   129,308  11  (111) 129,208   129,208 
Total assets $172,868  $69  $(286) $172,651  $33,457  $139,194  $161,077  $11  $(111) $160,977  $31,769  $129,208 
Level 3: 
Contingent consideration $ $ $ $148  $ $
Total liabilities $ $ $ $148  $ $

 

8


  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, 2016 Costs Gain Loss Fair Value Equivalents Investments
As of March 31, 2017 Costs Gain Loss Fair Value Equivalents Investments
Cash $18,596  $ $ $18,596  $18,596  $ $29,122  $ $ $29,122  $29,122  $
Level 1:                        
Money market funds 14,980    14,980  14,980   11,908    11,908  11,908  
Mutual funds 2,000   (187) 1,813   1,813  2,000   (194) 1,806   1,806 
Subtotal 35,576   (187) 35,389  33,576  1,813  43,030   (194) 42,836  41,030  1,806 
Level 2:  
Commercial paper 6,794    6,796   6,796  19,144    19,152   19,152 
Corporate debt 85,164  78  (28) 85,214   85,214  83,995  61  (58) 83,998   83,998 
Municipal securities 1,007   (1) 1,006   1,006 
Asset backed securities 24,614   (11) 24,610   24,610  26,906   (22) 26,888   26,888 
Mortgage backed securities 2,045   (17) 2,028   2,028  116   (1) 115   115 
Agency bond 6,805    6,806   6,806  2,000    2,000   2,000 
International government securities 1,000    1,001   1,001 
Subtotal 127,429  89  (57) 127,461   127,461  132,161  73  (81) 132,153   132,153 
Total assets $163,005  $89  $(244) $162,850  $33,576  $129,274  $175,191  $73  $(275) $174,989  $41,030  $133,959 
Level 3:  
Contingent consideration $ $ $ $148  $ $ $ $ $ $148  $ $
Total liabilities $ $ $ $148  $ $ $ $ $ $148  $ $

Contractual maturities of investments as of December 31, 2016,2017 are set forth below (in thousands):

   Estimated
   Fair Value
Due within one year $86,84287,647 
Due after one year  52,35241,561 
     Total $139,194129,208 

9


Contingent Consideration and Escrow Liability

The Company's contingent consideration liability, and escrow liability, included in other accrued liabilities and noncurrent liabilities on the condensed consolidated balance sheets as of March 31, 2017, was associated with the Quality Software Corporation (QSC) acquisition made in the first quarter of fiscal year 2016. Amounts held in escrow were measured at fair value using present value computations. TheThis contingent considerationliability was measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract milestones be reached. There is 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 evaluateclassified as level 3 within the fair value hierarchy. The remaining liability of the liability. As such, the contingent consideration is classified within Level 3$0.1 million was settled and paid as described below.

9


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):December 31, 2017.

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Balance at beginning of period $216  $391  $341  $
     Purchase price contingent consideration        541 
     Fair value adjustment  107     107   
     Contingent consideration payments  (175)  (50)  (300)  (200)
Balance at end of period $148  $341  $148  $341 

3. INVENTORIES

   December 31,  March 31,
   2016  2016
Inventory (in thousands)   
     Work-in-process $ $76 
     Finished goods  572   444 
          $572  $520 

4. INTANGIBLE ASSETS AND GOODWILL

The carrying value of intangible assets consisted of the following (in thousands):

 December 31, 2016 March 31, 2016 December 31, 2017 March 31, 2017
 Gross Net Gross Net Gross Net Gross Net
 Carrying Accumulated Carrying Carrying Accumulated Carrying Carrying Accumulated Carrying Carrying Accumulated Carrying
 Amount Amortization Amount Amount Amortization Amount Amount Amortization Amount Amount Amortization Amount
Technology$17,402  $(6,318) $11,084  $18,640  $(4,622) $14,018  $19,194  (9,540) $9,654  $18,685  $(7,010) $11,675 
Customer relationships 9,383  (5,858) 3,525  9,993  (4,847) 5,146  9,631  (7,084) 2,547  9,419  (6,187) 3,232 
Trade names/domains 2,022   2,022  2,205   2,205  2,108  (1,632) 476  2,036   2,036 
In-process research and development 95   95  95   95   95  (95)  95   95 
Total acquired identifiable intangible assets$28,902  $(12,176) $16,726  $30,933  $(9,469) $21,464  $31,028  $(18,351) $12,677  $30,235  $(13,197) $17,038 

At December 31, 2016,2017, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):

   Amount
Remaining 2017 $869 
2018  3,229 
2019  2,983 
2020  2,983 
2021  2,644 
Thereafter  1,901 
     Total $14,609 

10


Impairment of Long-Lived Assets

   Amount
Remaining 2018 $1,017 
2019  3,918 
2020  3,087 
2021  2,719 
2022  1,715 
Thereafter  221 
Total $12,677 

During the three months ended December 31, 2016,first quarter of fiscal year 2018, the Company decided to discontinue a certain customer segmentdetermined that the tradename/domains no longer have an indefinite life and has assigned those assets an estimated life of its United Kingdom based platform-as-a-service (DXI PaaS) that was acquiredtwo years. Amortization expenses associated with tradename/domains are included 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,selling 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 DXI PaaS customer relationship intangiblemarketing expenses in the third fiscal quarter. The impairment recorded during the fiscal year was immaterial to thecondensed consolidated statements of operations. Revenues and net income (loss) from DXI PaaS were not material for all periods presented.

During the three months ended December 31, 2015,third quarter of fiscal 2018, 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 recordrecorded an impairment charge equal tofor technology and tradenames/domains associated with 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 materialDXI acquisition. See Footnote 1 for all periods presented.further discussion.

4. 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 as of March 31, 2016 $25,729  $21,691  $47,420 
     Foreign currency translation    (3,093)  (3,093)
Balance as of December 31, 2016 $25,729  $18,598  $44,327 
   Americas  Europe  Total
Balance at March 31, 2017 $27,309  $18,827  $46,136 
     Impairment loss    (8,036)  (8,036)
     Foreign currency translation    1,476   1,476 
Balance at December 31, 2017 $27,309  $12,267  $39,576 

5. RESEARCH, DEVELOPMENT AND SOFTWARE COSTS

InDuring the first nine monthsthird quarter of fiscal 2017 and 2016,2018, the Company expensed all research and development costs in accordance with ASC 985-20,Costs of Software to be Sold, Leased or Marketed (ASC 985-20).

The Company accountsrecorded an impairment charge for computer software developed or obtained for internal use in accordance with ASC 350-40,Internal Use Software (ASC 350-40). Capitalized costs are classified as either long-term assets or property and equipment on the consolidated balance sheets.

Other Long-Term Assets

In the first nine months of fiscal 2017, the Company capitalized $3.9 million as other long-term assets. In the first nine months of fiscal 2016, the Company capitalized $1.1 million as other long-term assets. At December 31, 2016 and March 31, 2016, total completed capitalized software development cost included in other long-term assets was approximately $1.7 million. At December 31, 2016 and March 31, 2016, accumulated amortization costgoodwill related to completed capitalized software in other long term assets was approximately $0.4 million and $0, respectively.

Property and Equipmentits DXI reporting unit. See Footnote 1 for further discussion.

In the first nine months of fiscal 2017, the Company capitalized $0.7 million as property and equipment. In the first nine months of fiscal 2016, the Company capitalized $0.2 million as property and equipment. At December 31, 2016 and March 31, 2016, total completed capitalized software cost included in property and equipment was approximately $2.5 million and $1.2 million, respectively. At December 31, 2016 and March 31, 2016, accumulated amortization cost related to completed capitalized software in property and equipment was approximately $0.6 million and $0.2 million, respectively.

1110


6.5. COMMITMENTS AND CONTINGENCIES

Facility and Equipment Leases

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 also leases facilities for office space under non-cancelable operating leases for itsin various domestic and international locations. Future minimum annual lease payments as of December 31, 2017 were as follows (in thousands):

   Amount
Remaining 2018 $1,434 
2019  5,797 
2020  5,108 
2021  2,637 
2022  2,330 
Thereafter  5,167 
     Total $22,473 

The Company has entered into a series of noncancelable capital lease agreements for data center and office equipment bearing interest at various rates. Assets under capital lease at December 31, 2016 totaled $2.3 million with accumulated amortization of $0.8 million.

Guarantees

Other Commitments, Indemnifications and Contingencies

InWith 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 amountexception of the claim. In addition, the Company has entered intonew San Jose, California headquarter lease (Footnote 10), there were no material changes in our other commitments under contractual obligations, 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 the Company's product warranty liability, which is included in cost of product revenues in the consolidated statements of operations, were as follows (in thousands):

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Balance at beginning of period $333  $325  $326  $339 
     Accruals for warranties  24   88   251   263 
     Settlements  (26)  (70)  (201)  (223)
     Adjustments  (41)  (21)  (86)  (57)
Balance at end of period $290  $322  $290  $322 

Minimum Third Party Customer Support Commitments

In the third quarter of 2010, the Company amended its contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million effective April 1, 2010. The agreement requires a 150-day notice to terminate. At Decemberother contingencies since March 31, 2016, the total remaining obligation upon a termination of the contract was $2.2 million.2017.

12


Minimum Third Party Network Service Provider Commitments

The Company has entered into contracts with multiple vendors for third party network service which expire on various dates in fiscal 2017 through 2020. At December 31, 2016, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:      
     Remaining 2017    $478 
     2018     1,363 
     2019     132 
     2020     
          Total minimum payments    $1,981 

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 FebruaryAugust 22, 2011, the Company was named a defendant in 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.  Collectively this patent litigation is referred to as In re Bear Creek Technologies, Inc. (MDL No.: 2344).  In August 2011, the suit was dismissed without prejudice but then refiled in the Delaware Court against the Company. On November 28, 2012, the USPTO initiated and has since maintained a Reexamination Proceeding in which the claims of a patent (asserted against the Company) were rejected as being invalid based on four separate grounds.  In response to the USPTO invalidity rejections, the Company filed an informational pleading (on July 10, 2013) to join a motion to stay the proceeding in the Delaware Court, which this motion was granted on July 17, 2013. On May 5, 2015 and presumably in light of the Reexamination Proceeding, the Court administratively closed this case with leave to reopen if needed. The Reexamination Proceeding was appealed to the USPTO Patent Trial and Appeal Board ("PTO Board of Appeals"), which affirmed the rejection of all claims in a Decision (December 29, 2015), which is now on appeal before the Court of Appeals for the Federal Circuit.  The matter is briefed and oral argument before the Court of Appeals for the Federal Circuit is scheduled for March 13, 2017.

On November 14, 2016,2017, the Company was named as a defendant in SerenitivaVenadium LLC v. 8x8 Inc., filed in U.S.the District Court for the E.D. of TexasDelaware (Civil Action No. 6:16-cv-1290).1:17-cv-1176-LPS-CJB) along with five other defendants. Plaintiff SerenitivaVenadium LLC is suing sued the Company based onfor alleged patent infringement of U.S. Patent No. 6,865,268 byconcerning alleged Company activities in connection withinvolving the Company's Virtual Contact Center Agent Console (alleged as providing interactive, real-time call tracking and resolutionalleged methods for protecting computer programs. Based on the Company's subscription to certain patent risk management overservices, the Company settled the suit without needing to respond to the Complaint. The settlement amount was immaterial. On October 5, 2017, PlaintiffVenadium LLC filed a communications network). Plaintiff Serenitiva LLC also sued nine other defendants regarding the same patent asserted in the complaint filed against the Company. The Company is currently assessing factual and legal defensesNotice of Voluntary Dismissal of Defendant (with prejudice) pursuant to these claims and expect to present a vigorous defense. The Company has not answered the complaint yet and 8x8 cannot estimate potential liability in this case at this early stageFederal Rule of Civil Procedure 41(a)(1), thereby effecting formal dismissal of the litigation. Plaintiff Serenitivasuit without a Court Order. Accordingly, the lawsuit was resolved and three of these other defendants have already settled/resolved their respective suits.withdrawn before the Company was obligated to respond to the Complaint.

On December 2, 2016,August 25, 2017, the Company was named as a defendant in Paluxy MessagingHublink, LLC v. 8x8 Inc., based on a Complaint filed in U.S.the District Court for the E.D. of Texas, Tyler DivisionDelaware (Civil Action No. 6:16-cv-1346).1:17-cv-1214-GMS) along with four other defendants. Plaintiff Paluxy MessagingHublink, LLC is suing sued the Company based onfor alleged patent infringement U.S. Patent No. 8,411,829 byconcerning alleged activities in connection withinvolving alleged implementations of the Company's usevideophone communications uses and/or offerings. Based on the Company's subscription to certain patent risk management services provided by a third party on October 31, 2017, Plaintiff Hublink, LLC filed a Notice of a voicemail system (alleged in the complaint as providing a system for managing messages). Plaintiff Paluxy Messaging LLC also sued seven other defendants regarding the same patent asserted in the complaint filed against the Company. The Company is currently assessing factual and legal defensesVoluntary Dismissal of Defendant (with prejudice) pursuant to these claims and expect to present a vigorous defense. The Company has not answered the complaint yet and the Company cannot estimate potential liability in this case at this early stageFederal Rule of Civil Procedure 41(a)(1), thereby effecting formal dismissal of the litigation. Plaintiff Paluxy Messagingsuit without a Court Order. Accordingly, the lawsuit was resolved and three of these other defendants have already settled/resolved their respective suits.

On April 16, 2015,withdrawn before the Company was named as a defendant in Slocumb Law Firm v. 8x8, Inc. The Slocumb Law Firm has alleged that it purchased certain business services fromobligated to respond to the Company that did not perform as advertised or expected, and has asserted causes of actions for fraud, breach of contract, violations of the Alabama Deceptive Trade Practices Act and negligence. On May 7, 2015, the Company filed a motion with the U.S. District Court for the Middle District of Alabama, seeking an order compelling 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 for the motion has been set as of this time. Discovery has not yet commenced in the case. The Company intends to vigorously defend against the Slocumb Law Firm's claims.Complaint.

1311


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. The Company adjusts its accrual when facts relating to specific exposures warrant such adjustment.

During the period ended December 31, 2016, the City of San Francisco levied an assessment for utility taxes against the Company. The Company plans to vigorously appeal the assessment. Based on historical experience of the Company, management has determined the probable loss relating to this exposure to be approximately $0.4 million, which was recorded in the consolidated financial statements as of December 31, 2016. Although the outcome cannot be predicted, the estimated reasonable additional loss is between $0 to $0.6 million.

7.6. STOCK-BASED COMPENSATION

The following table summarizes information pertaining to the stock-based compensation expense (in thousands):

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Cost of service revenue $538  $346  $1,338  $828 
Cost of product revenue        
Research and development  1,061   850   2,811   2,107 
Sales and marketing  2,452   1,689   6,118   4,308 
General and administrative  2,020   1,778   5,363   3,959 
Total stock-based compensation expense             
     related to employee stock options and             
     employee stock purchases, pre-tax  6,071   4,663   15,630   11,202 
             
Tax benefit        
Stock-based compensation expense             
     related to employee stock options and             
     employee stock purchases, net of tax $6,071  $4,663  $15,630  $11,202 

Stock Options, Stock Purchase Right and Restricted Stock Unit Activity

Stock Option activity under all the Company's stock option plans for the nine months ended December 31, 2016, is summarized as follows:

     Weighted Average
  Number of  Exercise Price
  Shares  Per Share
Outstanding at March 31, 2016 4,793,266  $6.29 
     Granted  358,832   14.54 
     Exercised (338,781)  2.17 
     Canceled/Forfeited (42,469)  9.87 
Outstanding at December 31, 2016 4,770,848  $7.17 
      
Vested and expected to vest at December 31, 2016 4,770,848  $7.17 
Exercisable at December 31, 2016 3,265,483  $5.99 

14


Stock Purchase Right activity for the nine months ended December 31, 2016 is summarized as follows:

     Weighted  Weighted
     Average  Average
     Grant-Date  Remaining
  Number of  Fair Market  Contractual
  Shares  Value  Term (in Years)
Balance at March 31, 2016 82,171  $6.30   0.76 
Granted      
Vested (68,426)  5.98    
Forfeited (1,125)  6.73    
Balance at December 31, 2016 12,620  $8.00   1.20 

Restricted Stock Unit activity for the nine months ended December 31, 2016 is summarized as follows:

        Weighted
     Weighted  Average
     Average  Remaining
  Number of  Grant Date  Contractual
  Shares  Fair Value  Term (in Years)
Balance at March 31, 2016 4,544,799  $8.09   1.67 
Granted 2,115,744   15.07    
Vested (1,351,014)  7.99    
Forfeited (284,431)  9.35    
Balance at December 31, 2016 5,025,098  $10.99   1.66 

The following table summarizes stock options outstanding and exercisable at December 31, 2016:

  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 $4.26 991,768  $1.43  1.6  $12,760,718  991,768  $1.43  $12,760,718 
$4.32 to $6.86 1,288,863  $6.26  6.7   10,368,791  969,263  $6.06   7,990,967 
$7.52 to $9.21 1,047,938  $8.38  8.1   6,207,461  481,286  $8.44   2,821,376 
$9.35 to $10.97 1,017,107  $9.86  6.9   4,517,121  759,962  $9.80   3,418,142 
$11.26 to $15.40 425,172  $13.95  9.2   389,388  63,204  $11.96   156,748 
  4,770,848       $34,243,479  3,265,483     $27,147,951 

As of December 31, 2016, there was $49.7 million of unamortized stock-based compensation expense related to unvestedfrom stock options and stock awards which is expected to be recognized over a weighted average period of 2.12 years.

Unamortized stock-based compensation expense related to shares issued as part of a prior year acquisition was approximately $1.5 million, which will be recognized over a weighted average period of 2.42 years.

15


Assumptions Used to Calculate Stock-Based Compensation Expense

The(in thousands, except weighted-average grant-date 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:and recognition period):

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Expected volatility  42%  51%  44%  53%
Expected dividend yield        
Risk-free interest rate  1.20%  1.75%  1.17%  1.60%
Weighted average expected option term  4.50 years  5.25 years  4.69 years  5.44 years
             
Weighted average fair value of options granted $5.54 $4.92 $5.47 $4.12
   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2017  2016  2017  2016
Cost of service revenue $455  $538  $1,319  $1,338 
Cost of product revenue        
Research and development  1,794   1,061   4,445   2,811 
Sales and marketing  3,362   2,452   8,577   6,118 
General and administrative  2,519   2,020   6,797   5,363 
     Total $8,130  $6,071  $21,138  $15,630 

The estimated fair value of options granted under the Employee Stock Purchase Plan was estimated at the date of grant using Black-Scholes pricing model with the following weighted average assumptions:

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Expected volatility      40%  45%
Expected dividend yield        
Risk-free interest rate      0.45%  0.30%
Weighted average expected ESPP option term      0.76 years  0.75 years
             
Weighted average fair value of            
     ESPP options granted $ $ $4.04 $2.78

As of December 31, 2016, there were approximately $0.2 million of total unrecognized compensation cost related to employee stock purchases. This cost is expected to be recognized over a weighted average period of 0.2 years.

   Nine Months Ended
   December 31,
   2017  2016
Stock options outstanding at the beginning of the period:  4,462   4,793 
     Options granted  427   359 
     Options exercised   (421)  (339)
     Options canceled and forfeited  (176)  (42)
Options outstanding at the end of the period:  4,292   4,771 
Weighted-average fair value of grants during the period $5.30  $5.47 
Total intrinsic value of options exercised during the period $4,312  $3,704 
Weighted-average remaining recognition period at period-end (in years)   2.14   2.12 
       
Stock awards outstanding at the beginning of the period:  4,950   4,627 
     Stock awards granted  2,884   2,116 
     Stock awards vested   (1,615)  (1,419)
     Stock awards canceled and forfeited  (447)  (286)
Stock awards outstanding at the end of the period:   5,772   5,038 
Weighted-average fair value of grants during the period $13.89  $15.07 
Weighted-average remaining recognition period at period-end (in years)   2.67   2.56 
       
Total unrecognized compensation expense at period-end $64,625  $51,372 

Performance Stock Units

During the nine months ended December 31, 2016,2017, the Company issued restricted performance stock units (PSUs) to a group of executives with vesting that is contingent on both market performance and continued service. These PSUs vest (1) 50% on September 22, 201819, 2019 and (2) 50% on September 27, 2019,19, 2020, in each case subject to the performance of the Company's common stock relative to the Russell 2000 Index (the benchmark) during the period from grant date through such vesting date. A 2x multiplier will be applied to the total shareholder returns (TSR) for each 1% of positive or negative relative TSR, and the number of shares earned will increase or decrease at the end of each respective performance measurement period by 2% of the target numbers. In the event 8x8'sthe Company's common stock performance is below negative 30%, relative to the benchmark, no shares will be issued. These PSU grants are included in the restricted stock unit activity disclosure for the nine months ended December 31, 2016.2017.

To value these market-based restricted performance stock unitsPSUs under the Equity Compensation Plans, the Company used 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 free interest rates, and future dividend payments.

1612


Stock Repurchases

In February 2015,May 2017, the Company's board of directors authorized the Company to purchase up to $20.0$25.0 million of its common stock from time to time until February 29, 2016under the 2017 Repurchase Plan (the "2015 Repurchase"2017 Plan"). In October 2015,The 2017 Plan expires when the Company'smaximum purchase amount is reached, or upon the earlier revocation or termination by the board of directors authorizeddirectors. The remaining amount available under the Company to2017 Plan at December 31, 2017 was approximately $7.1 million.

The stock repurchase activity as of December 31, 2017 is summarized as follows (in thousands):

      Weighted Average   
   Shares  Price  Amount
   Repurchased  Per Share  Repurchased (1)
Balance as of September 30, 2017  1,064  $13.23 $14,081 
Purchase of common stock under 2017 Repurchase Plan  299   12.81  3,826 
   1,363  $13.14 $17,907 
          
(1) Amount excludes commission fees.         

The total purchase an additional $15.0 millionprice of itsthe common stock from timerepurchased and retired was reflected as a reduction to time until October 20, 2016. There were no stock repurchasesconsolidated stockholders' equity during the nineperiod of repurchase.

7. INCOME TAXES

EFFECTIVE TAX RATE AND VALUATION ALLOWANCE

The Company's effective tax rate was -400.7% and -2.2% for the three months ended December 31, 2016.2017 and 2016, respectively. The plan expireddifference in October 2016 with an unused authorized repurchase amountthe effective tax rate and the blended U.S. federal statutory rate of $15.0 million.

8. INCOME TAXES

For31.5% for the three months ended December 31, 2017 was due primarily to the recording of a full valuation allowance against our deferred tax assets in the period. The difference in the effective tax rate and the U.S. federal statutory rate of 34% for the three months ended December 31, 2016 was due primarily to the geographic mix of profits and losses.

The Company accounts for income taxes under the asset and liability approach and records deferred taxes based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In evaluating the ability to utilize deferred tax assets, management considers available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. A valuation allowance against deferred tax assets is recorded if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Judgment is required in evaluating this ability to utilize deferred tax assets.

The Company recorded a full valuation allowance against its U.S. deferred tax assets in the period ended December 31, 2017, as it considered its cumulative loss in recent years to be substantial negative evidence for establishing the valuation allowance. As a result, the Company recognized a discrete tax expense of $71 million in the period. The Company will continue to assess the future realization of our deferred tax assets in each applicable jurisdiction and will adjust the valuation allowance accordingly.

ASU 2016-09 IMPACT

As described in Note 1, the Company adopted the updated accounting standard for share-based payment accounting in first quarter of fiscal 2018. As a result, the Company recorded deferred tax assets of approximately $17.6 million with a corresponding increase to retained earnings related to previously unrecognized excess tax benefits. For the first quarter of fiscal 2018, the Company recognized approximately $0.4 million of excess tax benefits within the provision for income taxes. Additionally, the Company elected to prospectively apply the change in presentation of excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Accordingly, prior period classification of cash flows related to excess tax benefits were not adjusted.

THE TAX CUTS AND JOBS ACT ("the Act")

The Act was enacted on December 22, 2017. Among numerous provisions, the Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.

13


Deferred Tax Assets and Liabilities Impact

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Accordingly, deferred tax assets decreased approximately $22 million in the period ended December 31, 2017. However, because the Company recorded a benefitfull valuation allowance, the decrease in deferred tax assets from income taxes of $30,000, whichthe tax rate change was primarily attributablefully offset by a corresponding decrease in valuation allowance. As a result, there was no impact to loss from operations. For the three months ended December 31, 2015, the Company recorded a provision for income taxes of $0.6 million, which was primarily attributabledue to loss from operations.the change in tax rate.

Foreign Tax Impact

The one-time transition tax on foreign sourced earnings is based on the Company's total post-1986 earnings and profits (E&P) for which U.S. income taxes have been previously deferred. The Company estimated the annual effective rate at the end of each quarterly period, and recorded thedid not record a one-time transition tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. The determinationliability for its foreign subsidiaries as it does not have any untaxed foreign accumulated earnings as of the effective tax rate reflects tax expense and benefit generated in certain domestic and foreign jurisdictions. However, jurisdictions with a year-to-date loss where no tax benefit can be recognized are excluded from the annual effective tax rate.measurement dates.

At March 31, 2016, the Company had a liability for unrecognized tax benefits of $2.9 million, all of which, if recognized, would decrease the company's effective tax rate. The Company does not believe that there has been any significant change in the unrecognized tax benefits for the three and nine months ended December 31, 2016, and does not expect the remaining unrecognized tax benefit to change materially in the next 12 months. To the extent that the remaining unrecognized tax benefits are ultimately recognized, they will have an impact on the effective tax rate in future periods.

The Company is subject to taxation in the U.S., California and various other states and foreign jurisdictions in which it has or had a subsidiary or branch operations or it is collecting sales tax. All tax returns from fiscal 2013 to fiscal 2016 may be subject to examination by the Internal Revenue Service, California and various other states. Net operating losses and tax credits carried forward to March 31, 2016 may still be subject to adjustment by the taxing authorities until the period is closed to examination. As of January 30, 2017, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2011 to 2016.

17


9.8. 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 loss per share (in thousands, except share and per share data):

 Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended
 December 31, December 31, December 31, December 31,
 2016 2015 2016 2015 2017 2016 2017 2016
Numerator:  
Net loss available to common stockholders $(1,325) $(1,680) $(1,826) $(4,044) $(88,520) $(1,325) $(91,235) $(1,826)
     
Denominator:        
Common shares used in basic and diluted calculation  90,774  88,289   90,062  88,812 
Common shares - basic and diluted  92,029  90,774   91,709  90,062 
  
Basic and diluted net loss per share $(0.01) $(0.02) $(0.02) $(0.05)
Net loss per share    
Basic  $(0.96) $(0.01) $(0.99) $(0.02)
Diluted  $(0.96) $(0.01) $(0.99) $(0.02)

The following shares attributable to outstanding stock options and restricted stock purchase rightsawards were excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive (in thousands):

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Employee stock options  368   1,232   243   2,539 
Stock purchase rights  352     653   55 
Total anti-dilutive employee stock-based securities  720   1,232   896   2,594 
   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2017  2016  2017  2016
Stock options  4,292   4,771   4,292   4,771 
Stock awards  5,772   5,038   5,772   5,038 
Total anti-dilutive shares  10,064   9,809   10,064   9,809 

10.9. 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.

The Company manages its operations primarily on a geographic basis. 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 geographic 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 CODMs evaluate the performance of its operating segments based on revenues and net income. Revenues are attributed to each segment based on the ordering location of the customer or ship to location. The Company allocates corporate overhead costs such as research and development, sales and marketing, general and administrative, amortization expense, stock-based compensation expense, and commitment and contingencies to the Americas segment.

1814


The Company's revenue distribution byfollowing tables set forth the segment and geographic region (basedinformation for each period (in thousands):

   Revenue for the
   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2017  2016  2017  2016
Americas (principally US) $67,826  $57,654  $195,342  $167,686 
Europe (principally UK)  7,749   6,022   21,814   19,214 
  $75,575  $63,676  $217,156  $186,900 

Revenue is based upon the destination of shipments and the customer'scustomers' service address) was as follows:

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Americas (principally US)  90%  87%  89%  87%
Europe (principally UK)  10%  13%  10%  12%
Asia-Pacific  0%  0%  1%  1%
   100%  100%  100%  100%

Geographic area data is based upon the location of the property and equipment and is as follows (in thousands):

   December 31,  March 31,
   2016  2016
Americas (principally US) $10,973  $9,165 
Europe (principally UK)  4,123   2,642 
Asia-Pacific  128   568 
     Total $15,224  $12,375 

The following table provides financial information by segment foraddress. For the three and nine months ended December 31, 2017 and 2016, intersegment revenues of approximately $3.9 million and 2015 (in thousands):$1.8 million, and $10.6 million and $4.4 million, respectively, were eliminated in consolidation, and have been excluded from the table above.

   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2016  2015  2016  2015
Americas (principally US):            
     Net revenues $57,654  $46,503  $167,686  $134,177 
     Net income $831  $467  $4,341  $733 
Europe (principally UK):            
     Net revenues $6,022  $6,665  $19,214  $17,826 
     Net loss $(2,156) $(2,147) $(6,167) $(4,777)
   Depreciation and Amortization for the
   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2017  2016  2017  2016
Americas (principally US) $2,591  $1,647  $7,460  $4,923 
Europe (principally UK)  1,366   871   3,854   2,738 
  $3,957  $2,518  $11,314  $7,661 

11.

   Net Income (Loss) for the
   Three Months Ended  Nine Months Ended
   December 31,  December 31,
   2017  2016  2017  2016
Americas (principally US) $(76,854) $831  $(75,468) $4,341 
Europe (principally UK)  (11,666)  (2,156)  (15,767)  (6,167)
  $(88,520) $(1,325) $(91,235) $(1,826)

   December 31, 2017  March 31, 2017
   Total  Property and  Total  Property and
   Assets  Equipment, net  Assets  Equipment, net
Americas (principally US) $235,054  $24,880  $284,011  $19,480 
Europe (principally UK)  39,871   7,671   49,844   4,581 
  $274,925  $32,551  $333,855  $24,061 

10. SUBSEQUENT EVENTS

InOn January 2017,23, 2018, the Company acquiredentered into a technology company132-month lease to rent approximately 162,000 square feet for a new Company headquarters in San Jose, California. The lease term begins on January 1, 2019 or such earlier date on which the Company first commences to conduct business on the premises. The Company has the option to extend the lease for one additional five-year term, on substantially the same terms and conditions as the prior term but with the base rent rate adjusted to fair market value at that time.

Base rent is approximately $512,000 per month for the first 12 months of the lease, and the rate increases 3% on each anniversary of the lease commencement date. The Company is entitled to full rent abatement during the first 10 months of the lease term and 50% rent abatement during the next four months of the lease term. The Company is also responsible for paying its proportionate share of building and common area operating expenses, property taxes and insurance costs.

The Company is entitled to a one-time tenant improvement allowance of approximately $13.3 million, the full amount of which must be used within 12 months of the lease commencement date.

The Company has procured a standby letter of credit in the collaboration space,amount of $8.1 million (Footnote 5) for approximately $3.0 million. Total acquisition related costs were immaterial.the benefit of the landlord, which may be drawn down in the event the Company defaults in the payment of its obligations under the lease.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Management Discussion and Analysis of Financial Condition and Results of Operations contains 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.Act. 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 or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to market- customer acceptance of new or existing services and features, successdemand for our cloud communications and collaboration services; the quality and reliability of our efforts to target mid-market and larger distributed enterprises, changes inservices; the competitive dynamics of the markets in which we compete,prices for our services; customer cancellations and rate of churn, impact of current economic climate and adverse credit markets on our target customers,renewal rates; customer acquisition costs; our ability to scalecompete effectively in the hosted telecommunications and cloud-based computing services business; actions by our business, our reliance on infrastructure of third-party networkcompetitors, including price reductions for their competitive services, providers, risk of failure in our physical infrastructure software, as well as other causes of interruptions in services to our customers, our ability to maintainprovide cost-effective and timely service and support to larger distributed enterprises; the compatibilityimpact of risks associated with our software with third-party applicationsinternational operations; potential federal and mobile platforms, continuedstate regulatory actions; compliance with industry standardscosts; potential warranty claims and regulatory requirements inproduct defects; our need for and the United States and foreign countries in which we makeavailability of adequate working capital; our software solutions available, risks relatingability to innovate technologically; the timely supply of products by our contract manufacturers; our management's ability to execute its plans, strategies and objectives for future operations, including the execution of integration plans, and realizationthe timing and extent of improvements in operating results from increased spending for marketing, sales and R&D; our management's ability to realize the expected benefits of our acquisitions, the amount and timing of costs associated with recruiting, trainingpotential future intellectual property infringement claims and integrating new employees, introduction and adoption of our cloud software solutions in markets outside of the United States, and general economic conditionsother litigation that could adversely affect our business and operating results. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to the factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 20162017 Form 10-K. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

BUSINESS OVERVIEW

We provide cloud-based, enterprise-class software solutions that transform the way businesses communicate and collaborate globally. Delivered throughare a SaaS (Software as a Service) business model, our solutions are at the forefrontleading provider of a disruptive technology shift that is occurring in business communications where enterprises are increasingly replacing costly and unwieldy on-premises communications equipment with agile, cloud-based software services delivered over the public Internet.

Our integrated, "pure-cloud" offering combines global voice, conferencing, messaging and video with integrated workflows and big data analytics on a single platform to enable increased team productivity, better customer engagement and real-time insights into business performance. Through a combination of open API's (application program interface) and pre-built integrations, our solutions seamlessly leverage critical customer context from internal data systems and industry-leading Customer Relationship Management (CRM) systems, including cloud-based solutions from Salesforce.com, NetSuite, and Zendesk.

Powered by internally owned and managed technologies, our cloud communications and customer engagement solutions to over a million business users worldwide, empowering them to deliver exceptional customer experiences. Our suite of products weaves together unified cloud communications, conferencing, collaboration, and contact center offerings readily serve businessessolutions so today's organization can provide a positive customer and employee engagement experience by any channel and with real time access to systems of all sizesrecord and scale to large, globally distributed enterprise customers.subject matter experts. Our turnkeytechnology provides one integrated management platform with one communication experience for employees and scalable solutions spancustomers, as well as a broad spectrum of communicationsreal-time data analytics platform for constant learning and collaboration needs, are provided with industry-leading reliability at an affordable cost and are readily deployable through our proprietary deployment methodology. This allows customers to focus on their businesses instead of managing the complexities of disparate communications and collaboration platforms and the integration of these platforms with other cloud-based business applications.improvement.

Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this report refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 20172018 refers to the fiscal year ending March 31, 2017)2018).

20


SUMMARY AND OUTLOOK

In the third quarter of fiscal 2017,year 2018, our service revenue from mid-market and enterprise customers grew 36% year-over-year28% year-over year and represented 55%59% of total service revenue. New monthly recurring revenue (MRR) bookings from mid-market and enterprise customers and by our channel sales teams accounted for 60%was 65% of the total MRR bookedbookings for the quarter and represented a 40% increase from the year ago quarter, reflecting strong demand for our services in our target market segments. Also, average monthly service revenue per mid-market and enterprise business customer (ARPU) increased 12%8% to a record $414,$4,765, compared with $369$4,412 in the same period last year. Our abilityThe increase resulted from our success in selling a greater number of subscriptions to offerlarger, more established customers.

In October 2017, we launched the new 8x8 Virtual Office Editions, in three product bundles: X2, X5 and X8. X8, our most unified offering, weaves together communications, collaboration with our contact center all into one solution. It includes an unlimited calling zone to 45 countries and a broad rangefull suite of cloud- based mission critical communications8x8 Virtual Office features, such as HD voice, Virtual Office Meetings, HD Video, integrations with Salesforce, Zendesk and NetSuite CRM, Salesforce analytics for better and faster data insights, call recording, call quality reporting, and barge monitor whisper capabilities.

16


In order to position ourselves most effectively for our next phase of growth, we will pursue the following strategic initiatives:

First, we aligned global business units around our core market segments to optimize for growth. We bifurcated our internal sales operations into two separate sales operations - Small Business & eCommerce and Mid-market & Enterprise. These operations will align sales and delivery, connecting demand generation, services is bringing usand support to drive revenue growth and profitability globally. Small Business & eCommerce will focus on our high-volume, transactional business, with the objective of accelerating growth and productivity through eCommerce and self-service. Midmarket & Enterprise will focus on creating leads through our internal demand generation portal and leveraging channel relationships to drive our consultative approach to our land and expand strategy for larger deals whereaccounts in the North America, Europe, Middle East and Asia, and Asia-Pacific regions.

Second, we continuemade executive appointments in our engineering, product, marketing and sales organizations to displace incumbent, premises-based systems.

We are beginning to see the enterprise market move beyond early adopters to more mainstream customers. These customers tend to use the same traditional procurement methods that drive other corporate buying decisions,align with our new sales operations and are increasingly employing a "land and expand" deployment strategy, initially committing to a subset of their organization and subsequently adding new locations and users. By comparison, manyaccelerate adoption of our previous early adopter enterprise customers placed an initial ordersolutions across all market segments.

Third, we are transforming our product packaging and pricing through 8x8 Editions to streamline customer acquisition and leverage our integrated communications platform.

In the first fiscal quarter of 2018, we announced increased investments for most or allsales and marketing expenses to accelerate the growth of their locations, resulting in large initial bookings but with gradual deployments generating revenue recognition over subsequent quarters. Although these recent enterprise customers have represented comparatively smaller initial bookings, and new MRR growth in this sector was essentially flatour business in the fiscal third quarter, we expect them to deploy additional locations at a rate similar to othermid-market and enterprise customers and do not anticipate an adverse long-term revenue impact.

Our recentsegments. We commenced these investments in the contact center capabilities of our platform, including Global Tenant, Analytics and Quality Management, are beginning to show good results. Revenue from Virtual Contact Center grew 32% in the thirdsecond quarter of fiscal 2017, compared with 16%2018 and intend to incur them over several quarters. The precise timing of these additional expenditures, and the reporting periods in which they occur, will depend in part on when our management can implement the steps, particularly hiring additional personnel, necessary for achieving anticipated growth in our bookings and revenues. In addition, though we believe our new marketing and sales expenditures, and, to a lesser extent, our product development expenditures will help us achieve the same period last year. Of our top 20 customers, 15 subscribe to both our Unified Communicationsbookings and Contact Center solutions.

Our patent portfolio continues to grow with our recent notification of three new patents, for a total of 128 awarded patents to date.

Despite increases in total revenue year-over-year,growth we are expecting a continued depreciationseeking, such growth in not assured, and will be impacted not only by the timing of those expenditures but also by our ability to effectively implement such plans and limit disruptions to our current operations while we do so. If we do not timely and effectively implement our new marketing, sales and product development plans, and productively utilize the British Pound (GBP)increased expenditures, we may fail to realize the U.S. Dollar (USD). A significantly weaker GBP compared to the USD could materially reduceanticipated increase in growth rates in our revenues after considering foreign currency translation adjustments.bookings and revenues.

CRITICAL ACCOUNTING POLICIES & ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the third fiscal quarter of 2018, we conducted an impairment test of the Company's goodwill. As a result of the test, we recorded impairment charges for goodwill and other assets in one of our reporting units in the United Kingdom totaling $9.5 million. Refer to Note 1 to our Condensed Consolidated Unaudited Financial Statements in Part I, Item 1.  We also recorded a full valuation allowance against our deferred tax assets of $71 million. Refer to Note 7 to our Condensed Consolidated Unaudited Financial Statements in Part I, Item 1. Actual results may differ from these estimates under different assumptions or conditions.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

See Item 1 of Part I, "Financial Statements - Note 1 - Basis of Presentation - Recent Adopted Accounting Pronouncements."

RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1 of Part I, "Financial Statements - Note 1 - Basis of Presentation - Recent Accounting Pronouncements."

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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
 Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Dec. 31, Sept. 30, June 30, March 31, Dec. 31,
 2016 2016 2016 2016 2015 2017 2017 2017 2017 2016
Business customers average monthly 
service revenue per customer (1) $ 414  $ 409  $ 399  $ 385  $ 369 
Business customers average monthly service revenue per customer (1) $454 $442 $432 $426 $414
Monthly business service revenue churn (2)(3) 1.0% 0.6% 0.5% 0.4% 1.2% 0.4% 0.4% 0.6% 0.7% 1.0%
  
Overall service margin 83% 81% 81% 81% 80% 83% 81% 82% 83% 83%
Overall product margin -20% -6% -16% -18% -21% -27% -17% -22% -9% -20%
Overall gross margin 77% 74% 74% 72% 72% 78% 75% 76% 77% 77%

_____________

(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.

(2)

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.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto.

  December 31,  Dollar Percent  December 31,  Dollar Percent
Service revenue 2016 2015 Change Change 2017 2016 Change Change
 (dollar amounts in thousands)  (dollar amounts in thousands) 
Three months ended $60,149  $48,948  $11,201  22.9% $71,891  $60,149  $11,742  19.5%
Percentage of total revenue  94.5% 92.1%   95.1% 94.5% 
Nine months ended $173,162  $140,068  $33,094  23.6% $205,105  $173,162  $31,943  18.4%
Percentage of total revenue  92.6% 92.1%   94.5% 92.6% 

Service revenue consists primarily of revenue attributable to the provision of our 8x8 cloud communication cloud based contact center software, and collaboration services. We expect that cloud software solutions service revenues will continue to comprise nearly all of our service revenues for the foreseeable future.

8x8 service revenues increased in the third quarterthree and nine months of fiscal 2017year 2018 compared withto the third quartersame period of the previous fiscal year primarily due to an increase in our business customer subscriber base (net of customer churn), and an increase in the average monthly service revenue per customer. Average monthly service revenue per customer increased from $369 at December 31, 2015 to $414 at December 31, 2016. 2016 to $454 at December 31, 2017.

We expect growth in the number of business customers and average monthly service revenue per customer to continue to increase infor the remainder of fiscal 2017.2018.

   December 31,  Dollar Percent
Product revenue  2017  2016  Change Change
   (dollar amounts in thousands)  
     Three months ended $3,684  $3,527  $157  4.5%
     Percentage of total revenue  4.9%  5.5%     
     Nine months ended $12,051  $13,738  $(1,687) -12.3%
     Percentage of total revenue  5.5%  7.4%     

2218


We translate revenue denominated in foreign currency into U.S. dollars for our financial statements. If the exchange rate for the GBP to the USD persists at current levels, or declines further, our revenues will be adversely impacted due to the foreign currency translation adjustment. We estimate the total negative impact on revenues to be approximately $4.2 million for fiscal 2017.

   December 31,  Dollar Percent
Product revenue  2016  2015  Change Change
   (dollar amounts in thousands)  
Three months ended $3,527  $4,220  $(693) -16.4%
Percentage of total revenue  5.5%  7.9%     
Nine months ended $13,738  $11,935  $1,803  15.1%
Percentage of total revenue  7.4%  7.9%     

Product revenue consists primarily of revenue from sales of IP telephones in conjunction with our 8x8 cloud communication service. Product revenue increased and decreased for the three and nine months ended December 31, 2016 in part2017, respectively, primarily due to aan increase and decrease in equipment sales to business customers as such customers have been replacing equipment in the work place with soft phones, cell phones, or using existing phones. Product revenue increased for the nine months ended December 31, 2016 primarily due toand an increase in equipment salesrebates offered to larger business customers.customers for the purchase of IP telephones.

No customer represented greater than 10% of the Company's total revenues for the three and nine months ended December 31, 20162017 or 2015.2016.

  December 31,  Dollar Percent  December 31,  Dollar Percent
Cost of service revenue 2016 2015 Change Change 2017 2016 Change Change
 (dollar amounts in thousands)  (dollar amounts in thousands) 
Three months ended $10,525  $9,713  $812  8.4% $12,318  $10,525  $1,793  17.0%
Percentage of service revenue  17.5% 19.8%   17.1% 17.5% 
Nine months ended $31,597  $27,359  $4,238  15.5% $36,737  $31,597  $5,140  16.3%
Percentage of service revenue 18.2% 19.5%   17.9% 18.2% 

The cost of service revenue primarily consists of costs associated with network operations and related personnel, communication origination and termination services provided by thirdthird- party carriers, and technology licenses, and royalty expenses.licenses.

Cost of service revenue for the three months ended December 31, 20162017 increased over the comparable period in the prior fiscal year primarily due to a $0.6 million increase in amortization of intangibles and capitalized software expenses, a $0.5 million increase in third partythird-party network services expenses, a $0.4 million increase in license and fee expenses, a $0.2 million increase in stock-based compensation expenses,payroll and related costs, and a $0.1$0.2 million increase in payroll and related expenses, offset by a $0.5 million decrease in amortization of intangiblesdepreciation expense.

Cost of service revenue for the nine months ended December 31, 20162017 increased over the comparable period in the prior fiscal year primarily due to a $2.1$1.2 million increase in third partyamortization of intangibles and capitalized software expenses, a $1.1 million increase in third-party network services expenses, a $0.7$0.6 million increase in license and feecomputer supply expenses, a $0.5 million increase in payroll and related expenses, a $0.5 million increase in stock-based compensation expenses,depreciation expense, and a $0.4 million increase in amortizationlicense and fee expenses.

We expect cost of capitalized software expense, andservice revenue to increase moderately as a $0.2 million increase in computer supplies expense, with a $0.2 million decrease in amortizationpercentage of intangibles expense.service revenue during the remainder of fiscal year 2018.

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  December 31,  Dollar Percent  December 31,  Dollar Percent
Cost of product revenue 2016 2015 Change Change 2017 2016 Change Change
 (dollar amounts in thousands)  (dollar amounts in thousands) 
Three months ended $4,240  $5,087  $(847) -16.7% $4,675  $4,240  $435  10.3%
Percentage of product revenue  120.2% 120.5%   126.9% 120.2% 
Nine months ended $15,527  $14,065  $1,462  10.4% $14,657  $15,527  $(870) -5.6%
Percentage of product revenue 113.0% 117.8%   121.6% 113.0% 

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. The amount of revenue allocated to product revenue based on relative selling price under our customer subscription agreements is less than the cost of the IP phone equipment.

The cost of product revenue for the three and nine months ended December 31, 2016 decreased slightly2017 changed over the comparable period in the prior fiscal year primarily due to the decrease in product revenue resulting from a decrease inamount of equipment shipped to customers. The cost of product revenue for the nine months ended December 31, 2016 increased over the comparable period in the prior fiscal year primarily due to an increase in equipment shipped to customers. The improvement in negative margin iswas due to higher product revenue in that period, lessadditional discounting of equipment in the current period and an increase in rebates offered to a decrease in our standard costscustomers for certain phone equipment.the purchase of IP telephones.

  December 31,  Dollar Percent  December 31,  Dollar Percent
Research and development 2016 2015 Change Change 2017 2016 Change Change
 (dollar amounts in thousands)  (dollar amounts in thousands) 
Three months ended $7,095  $6,404  $691  10.8% $8,527  $7,095  $1,432  20.2%
Percentage of total revenue  11.1% 12.0%   11.3% 11.1% 
Nine months ended $20,310  $17,930  $2,380  13.3% $24,781  $20,310  $4,471  22.0%
Percentage of total revenue 10.9% 11.8%  11.4% 10.9% 

Historically, our research19


Research and development expenses have consistedconsist primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our development and engineering efforts.

The research and development expenses for the three months ended December 31, 20162017 increased over the comparable period in the prior fiscal year primarily due to a $0.9$0.5 million increase in payroll and related costs, net of costs capitalized in accordance with ASC 350-40, a $0.3 million increase of facility allocation costs (which is based on employee headcount), a $0.3$0.4 million increase in consulting and outside services,stock-based compensation expense, a $0.2 million increase in stock-based compensation expenses, a $0.1 million increase in travel expenses, a $0.1 million increase in recruiting expenses, partially offset by $1.2 million of payroll and related costs, consulting and outside services capitalized in accordance with ASC 350-40.as well as other smaller cost increases.

The research and development expenses for the nine months ended December 31, 20162017 increased over the comparable period in the prior fiscal year primarily due to a $3.0$1.5 million increase in payroll and related costs, net of costs capitalized in accordance with ASC 350-40, a $0.9 million increase in facility allocation costs, a $0.6$1.3 million increase in stock-based compensation expenses, a $0.5 million increase in consulting, temporary personnel,travel expenses, and outside servicea $0.2 million increase in recruiting expenses, partially offset by $2.9 million of payroll and related costs, consulting and outside services capitalized in accordance with ASC 350-40. as well as other smaller cost increases.

We expect research and development expenses to increase forremain a consistent percentage of total revenue during the foreseeable futureremainder of fiscal year 2018 as we continue to invest in our DXI unit and in the continued expansion of our research and development team in Romania.product offerings.

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  December 31,  Dollar Percent  December 31,  Dollar Percent
Sales and marketing 2016 2015 Change Change 2017 2016 Change Change
  (dollar amounts in thousands)   (dollar amounts in thousands) 
Three months ended $35,667  $27,585  $8,082  29.3% $48,830  $35,667  $13,163  36.9%
Percentage of total revenue  56.0% 51.9%   64.6% 56.0% 
Nine months ended $101,049  $78,138  $22,911  29.3% $131,103  $101,049  $30,054  29.7%
Percentage of total revenue 54.1% 51.4%  60.4% 54.1% 

Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service which includes deployment engineering. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses.

Sales and marketing expenses for the third quarter of fiscalthree months ended December 31, 2017 increased over the same quartercomparable period in the prior fiscal year primarily due to a $4.0$6.6 million increase in payroll and related costs, a $1.2$1.7 million increase in facility allocation costs, a $1.0 million increase in indirect channel commission expenses, a $0.7 million increase in stock-based compensation expenses, a $0.6$1.1 million increase in lead generation expenses, a $0.4$1.0 million increase in travel, meals and entertainment expense,stock-based compensation costs, a $0.2$1.0 million increase in bad debt expense, a $0.1 million increase in trade show expenses, a $0.1 million increase in public relation expenses, which were partially offset by a $0.5 million decrease in consulting, temporary personnel, and outside service expenses,services, and a $0.2$1.0 million decreaseincrease in amortization of intangibles expense.travel expenses.

Sales and marketing expenses for the nine months ended December 31, 20162017 increased over the same period in the prior fiscal year primarily because of a $12.9due to an $15.5 million increase in payroll and related costs, a $3.5 million increase in departmental allocation costs, a $1.9 million increase in indirect channel commissions, a $1.7$2.6 million increase in stock-based compensation expenses, a $1.1$2.2 million increase in lead generation expenses, a $0.9$1.8 million increase in travel mealsexpenses, and entertainment expenses, a $0.4$1.7 million increase in public relations expenses, a $0.3 million increase in recruiting expenses, a $0.3 million increase in bad debt expense, a $0.2 million increase in facility costs, a $0.2 million increase in depreciation expense, which were partially offset by a $0.6 million decrease in consulting, temporary personnel, and outside service expenses, and a $0.3 million decrease in sales promotion expenses. In addition, total sales and marketing expense increased for the nine months ended December 31, 2016 increased by $1.1 million from expenses incurred from our DXI entity acquired in May 2015. services.

We expect sales and marketing expenses to increase foras percentage of total revenue during the foreseeable futureremainder of fiscal year 2018 as we continue to increase our efforts to sell to larger businessesinvest in the acquisition of mid-market and to deploy our cloud communication and collaboration services globally to enterprise customers.

  December 31,  Dollar Percent  December 31,  Dollar Percent
General and administrative 2016 2015 Change Change 2017 2016 Change Change
  (dollar amounts in thousands)   (dollar amounts in thousands) 
Three months ended $7,852  $6,888  $964  14.0% $10,003  $7,852  $2,151  27.4%
Percentage of total revenue  12.3% 13.0%   13.2% 12.3% 
Nine months ended $21,400  $18,614  $2,786  15.0% $28,575  $21,400  $7,175  33.5%
Percentage of total revenue 11.4% 12.2%  13.2% 11.4% 

General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources, legal and general management.

20


General and administrative expenses for the third quarter of fiscalthree months ended December 31, 2017 increased over the same quartercomparable period in the prior fiscal year primarily due to a $0.4$0.8 million increase in payroll and related expenses,costs, a $0.4 million increase in consulting, temporary personnel, and outside service expenses, a $0.2$0.5 million increase in stock-based compensation expenses,costs, a $0.2$0.5 million increase in facility expenses, a $0.1 million increase in accounting and tax fees, offset by a $0.4 million decrease in departmental allocation costs.depreciation expense, as well as other smaller cost increases.

General and administrative expenses for the nine months ended December 31, 20162017 increased over the same period in the prior fiscal year primarily because of a $2.6 million increase in payroll and related expenses, a $1.4 million increase in stock-based compensation expenses, a $0.8$1.1 million increase in payrollconsulting, temporary personnel, and related expenses,outside services, a $0.7$0.4 million increase in facilitycomputer supply expenses, partially offset byas well as other smaller cost increases.

We expect general and administrative expenses to increase moderately as a $0.3 million decreasepercentage of total revenue during the remainder of fiscal year 2018.

   December 31,  Dollar Percent
Impairment of equipment, intangible assets, and goodwill  2017  2016  Change Change
   (dollar amounts in thousands)  
     Three and Nine months ended $9,469     9,469  100%

As described in legal fees, primarily as legal expenses were higherNote 1 to the consolidated financial statements, in the firstthird fiscal quarter of fiscal 2016 due to acquisitions of new businesses.2018, we recorded a $9.5 million impairment charge for goodwill and other assets associated with DXI.

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  December 31,  Dollar Percent  December 31,  Dollar Percent
Other income, net 2016 2015 Change Change 2017 2016 Change Change
  (dollar amounts in thousands)   (dollar amounts in thousands) 
Three months ended $408  $272  $136  50.0% $569  $408  $161  39.5%
Percentage of total revenue  0.6% 0.5%   0.8% 0.6% 
Nine months ended $1,209  $710  $499  70.3% $3,084  $1,209  $1,875  155.1%
Percentage of total revenue 0.6% 0.5%  1.4% 0.6% 

Other income, net, primarily consisted of interest income earned on our cash, cash equivalents and investments and amortization or accretion of investments in fiscal 2017years 2018 and 2016.2017. During the first quarter of fiscal year 2018, $1.4 million of the cash held in an escrow fund from our 2015 acquisition of DXI was returned to us and recorded as other income.

   December 31,  Dollar Percent
Provision (benefit) for income tax  2016  2015  Change Change
   (dollar amounts in thousands)  
Three months ended $30  $(557) $587  -105.4%
Percentage of loss before provision           
     (benefit) for income taxes  -2.3%  24.9%     
Nine months ended $52  $651  $(599) -92.0%
Percentage of loss before provision           
     (benefit) for income taxes  -2.9%  -19.2%     
   December 31,  Dollar  
Provision (benefit) for income tax  2017  2016  Change  
   (dollar amounts in thousands)  
     Three months ended $70,842  $30  $70,812 
     Percentage of loss before          
          provision for income taxes  -400.7%  -2.3%   
     Nine months ended $66,153  $52  $66,101 
     Percentage of income loss before          
          provision for income taxes  -263.7%  -2.9%   

For the three months and nine months ended December 31, 2016,2017, we recorded a benefit froman income taxestax expense of $30,000, all of which$70.8 million and $66.1 million, respectively, mostly related to net loss from operations.the recording of a full valuation allowance established against our deferred tax assets in the current quarter. For the three months ended December 31, 2015, we recorded a provision for income taxes of $0.6 million, all of which related to net loss from operations.

For theand nine months ended December 31, 2016, we recorded a provision foran income taxestax expense of $30,000 and $52,000, respectively, all of which related to net lossincome from operations. ForOur effective tax rate was -400.7% and -2.2% for the ninethree months ended December 31, 2015,2017 and 2016, respectively. The change in our effective tax rate was mainly due to the recording of a full valuation allowance against our deferred tax assets.

21


As described in Note 7 of our notes to Condensed Consolidated Financial Statements, we record deferred taxes based on differences between the financial statement basis and tax basis of assets and liabilities and available tax loss and credit carryforwards. In evaluating our ability to utilize our deferred tax assets, we consider available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. We record a valuation allowance against deferred tax assets if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A significant item of objective negative evidence considered was the historical three-year cumulative pretax loss at December 31, 2017. As a result, we recorded a provision for income taxes of $0.7 million, which was primarily attributable to domestic income from operations.full valuation allowance against our U.S. deferred tax assets in the period ended December 31, 2017.

The effectiveTax Cuts and Jobs Act ("the Act") enacted December 22, 2017, significantly reforms the Internal Revenue Code of 1986, as amended. The Act contains significant changes to corporate taxation, including reduction of the corporate income tax rate set forthfrom 35% to 21%, limitation of the tax deduction for interest expense to 30% of earnings (subject to certain tests), limitation of the deduction for net operating losses to 80% of current year taxable income, elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. We remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the previous tablefuture, which is calculated by dividing the incomegenerally 21%. We recorded no one-time transition tax provision by net income before income tax expense. liability for our foreign subsidiaries as we do not have any untaxed foreign accumulated earnings.

We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we in consultation with our tax advisors, consider, among other things, annual pre-tax income, permanent tax differences, the geographic mix of pre-tax income and the application and interpretations of existing tax laws.

We estimate our annual effective rate at the end of each quarterly period, and we record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. The determination of the effective tax rate reflects tax expense and benefit generated in certain domestic and foreign jurisdictions. However, jurisdictions with a year-to-date loss where no tax benefit can be recognized are excluded from the annual effective tax rate.

Liquidity and Capital Resources

As of December 31, 2016,2017, we had approximately $172.7$161 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities for the nine months ended December 31, 20162017 was approximately $22.2$19.4 million, compared with $15.4$22.2 million for the nine months ended December 31, 2015.2016. Cash provided by operating activities has historically been affected by the amount of net loss, sales of subscriptions,income (loss), changes in working capital accounts particularly in deferred revenue due tothe timing and collection of annual plan renewals,payments, add-backs of non-cash expense items such as the use of deferred tax assets,taxes, depreciation and amortization, and the expense associated with stock-based awards.compensation.

26


The net cash used in investing activities for the nine months ended December 31, 2017 was $9.2 million, during which we had proceeds from maturity and sale of short term investments of approximately $4.6 million, net of purchases of short term investments. We also had proceeds of $1.4 million from the settlement of an escrow claim in relation to our acquisition of DXI. We spent approximately $6.5 million on the purchase of property and equipment and capitalized $8.7 million of software costs in accordance with ASC 350-40. The net cash used in investing activities for the nine months ended December 31, 2016 was $20.6 million, during which we purchased approximately $10.2 million of short term investments, net of sales and maturities of short term investments, weinvestments. We spent approximately $6.5 million on the purchase of property and equipment, and we capitalized $3.9 million of internal use software. Net cash used in investing activities was approximately $35.6 million, during the nine months ended December 31, 2015, during which we spent approximately $3.3 million on the purchase of property and equipment, $1.3 million of internal use software costs capitalized in accordance with ASC 350-40, spent approximately $23.4 million on acquisitions of two businesses, and we purchased approximately $7.6 million short term investments, net of proceeds and maturities of short term investments.

Net cash used in financing activities for the nine months ended December 31, 20162017 was approximately $19.8 million, which primarily resulted from $22.1 million of repurchases of our common stock related to shares withheld for payroll taxes and common stock repurchased under the 2017 Repurchase Plan, and $0.9 million in capital leases payments, offset by $3.3 million of cash received from the issuance of common stock under our employee stock plans. Net cash used in financing activities for the nine months ended December 31, 2017 was approximately $0.9 million, which primarily resulted from $2.7 million of cash received from the issuance of common stock under our employee stock purchase plan, reduced by $2.8 million of repurchases of our common stock related to shares withheld for payroll taxes, (primarily for net share settlements of restricted stock awards), $0.5 million of payments on capital leases, and $0.3 million of payments of contingent consideration and escrow, offset by $2.7 million of cash received from the issuance of common stock under our employee stock purchase plan. Net cash used in financing activities for the nine months ended December 31, 2015 were approximately $9.3 million, which was primarily due from cash used to repurchase our common stock as part of our Repurchase Plan in the amount of approximately $11.6 million, partially offset by cash received from the issuance of common stock under our employee stock purchase plan of approximately $2.8 million.escrow.

Contractual Obligations

Except as set forth below,With the exception of the new San Jose, California headquarter lease (Footnote 10), there were no significant changes in our commitments under contractual obligations during the nine months ended December 31, 2017, as disclosed in the Company's Annual Report on Form 10-K, for the nine monthsyear ended DecemberMarch 31, 2016.2017.

In June 2016, we entered into a new lease in London UK for our DXI location for approximately 16,000 square feet under an operating lease that expires in June 2026. We received an 18 month rent holiday from rent payments. After the rent holiday, the lease has a base monthly rent of approximately $90,000, and requires us to pay service charges and normal maintenance costs. The lease contains a break clause, which allows us to end the lease in June 2022, subject to certain conditions.22


In August 2016, we entered into a new lease in New York City for additional office space for approximately 5,200 square feet under an operating lease that expires in October 2021. The lease has a base monthly rent of approximately $26,000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency

Our financial market risk consists primarily of risks associated with international operations and related foreign currencies. We derive a portion of our revenue from customers in Europe and Asia. In order to reduce the risk from fluctuation in foreign exchange rates, the vast majority of our sales are denominated in U.S. dollars. In addition, almost all of our arrangements with our contract manufacturers are denominated in U.S. dollars. We have not entered into any currency hedging activities.

We translate revenue denominated in foreign currency into U.S. dollars for our financial statements. During periods of a strengthening dollar, our reported European revenue is reduced because foreign currencies translate into fewer U.S. dollars. However, our UK segments are currently in a net loss position. Therefore, during periods of a strengthening dollar, our net loss from our UK segment could be reduced as well.

To date, our exposure to exchange rate volatility has not been significant. However, the June 2016 vote on a referendum to exit the European Union decision has resulted in a steep decline in the exchange rate for GBP to USD. The impact of Brexit to our results of operations for the period ended December 31, 2016 was approximately $3.0 million.

27


InvestmentsInterest 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 shorter term 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%hypothetical change in interest rates of 100 basis points would have a significant impact on our interest income.

We do 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. 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 4. CONTROLS AND PROCEDURES

Evaluation of Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Disclosure Controls) that are designed to ensure that information we are required to disclose in reports filed or submitted under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our Disclosure Controls. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our Disclosure Controls were effective as of December 31, 2016.2017.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and Chief Financial Officer, do not expect that our Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Changes in Internal Control over Financial Reporting

During the third quarter of fiscal 2016,year 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II -- OTHER INFORMATION

ITEM 1. Legal ProceedingsLEGAL PROCEEDINGS

Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated Financial Statements - "Note 6"5".

ITEM 1A. Risk FactorsRISK FACTORS

We face many significant risks in our business, some of which are unknown to us and not presently foreseen. These risks could have a material adverse impact on our business, financial condition and results of operations in the future. We have disclosed a number of material risks under Part I, Item 1A of our annual report on Form 10-K for the fiscal year ended March 31, 2016,2017, which we filed with the Securities and Exchange Commission on May 31, 2016. 30, 2017.Except as presented below, there have been no material changes from the risk factors described in our Form 10-K.

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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.

BecauseOur products and services depend on the ability of our long-term growth strategy involves further expansion outsideusers to access the United States,internet, and certain of our business will be susceptibleproducts require significant bandwidth to risks associated with international operations.

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 WiFi, 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, including 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 software solutions.

On January 4, 2018, the Federal Communications Commission, or FCC, released an order (the Order) that largely repeals rules that the FCC had in place which prevented broadband internet access providers from degrading or otherwise disrupting a broad range of services provisioned over consumers' and enterprises' broadband Internet access lines. The FCC's January 4, 2018, Order is not yet effective and there are efforts in Congress to prevent the Order from becoming effective. Additionally, a number of state attorneys' general have filed an appeal of the FCC's January 4, 2018, Order and others may also appeal the Order. We cannot predict whether the FCC's January 4, 2018, Order will become effective or whether it will withstand appeal.

Many of the largest providers of broadband services, like cable companies and traditional telephone companies, have publicly stated that they will not degrade or disrupt their customers' use of applications and services, like ours. If such providers were to degrade, impair or block our services, it would negatively impact our ability to provide services to our customers, likely result in lost revenue and profits, and we would incur legal fees in attempting to restore our customers' access to our services. Broadband internet access providers may also attempt to charge us or our customers additional fees to access services like ours that may result in the loss of customers and revenue, decreased profitability, or increased costs to our retail offerings that may make our services less competitive. We cannot predict the potential impact of the FCC's January 4, 2018, Order on June 23, 2016,us at this time nor can we evaluate our potential liability at this time.

The regulatory treatment of prioritization or degradation of traffic over the UK held a referenduminternet, also known as net neutrality, varies widely among the jurisdictions in which a majority of voters voted to exitwe operate. While certain jurisdictions, such as the European Union (Brexit). 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 could result in a loss of existing users and increased costs, decreased profitability and could impair our ability to attract new users, thereby negatively impacting our revenue, profitability and growth.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The result ofactivity under the Brexit vote adversely impacted global markets and foreign currencies. In particular,Repurchase Plan for the value of the Pound Sterling has sharply declinedthree months ended December 31, 2017 is summarized as compared to the U.S. Dollar and other currencies. This volatility in foreign currencies is expected to continue as the UK negotiates and executes its exit from the European Union but it is uncertain over what time period this will occur. A significantly weaker Pound Sterling compared to the U.S. Dollar could materially reduce our revenues after taking into account foreign currency translation adjustments.follows:

        Total Number  Approximate Dollar
   Total Number  Average of Shares Purchased  Value of Shares that
   of Shares  Price Paid as Part of Publicly  May Yet be Purchased
   Purchased  Per Share Announced Program  Under the Program
             
October 1 - October 31, 2017  298,713  $12.81  298,713  $7,065,978 
            
November 1 - November 30, 2017  -    -   -    7,065,978 
            
December 1 - December 31, 2017  -    -   -   $7,065,978 
            
Total  298,713  $12.81  298,713    

ITEM 5. OTHER INFORMATION

None.

ITEM 6. ExhibitsEXHIBITS

Exhibit
Number


Description


31.1 

Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 

Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

XBRL Instance Document

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

 

 

2925


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 7, 20171, 2018

8X8, INC. 

(Registrant) 

By: /s/ MARYELLEN GENOVESE          

MaryEllen Genovese  

Chief Financial Officer
(Principal Financial and Chief Accounting Officer and Duly Authorized Officer)

 

 

 

 

 

3026