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 June 30, 20172018

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, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

      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 July 26, 201730, 2018 was 91,828,699.93,321,888.

FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page No.
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at June 30, 20172018 and March 31, 20172018	2
Condensed Consolidated Statements of Operations for the three            months ended June 30, 20172018 and 20162017	3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three            months ended June 30, 20172018 and 20162017	4
Condensed Consolidated Statements of Cash Flows for the three months            ended June 30, 20172018 and 20162017	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	1418
Item 3. Quantitative and Qualitative Disclosures About Market Risk	1922
Item 4. Controls and Procedures	1923
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	2023
Item 1A. Risk Factors	2024
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2024
Item 5. Other Information	2024
Item 6. Exhibits	2125
Signature	2226

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Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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)

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)

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)

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)The Company is a leading provider of cloud-based, enterprise-class softwareenterprise cloud communications solutions, that transformincluding unified communications, team collaboration, contact center, and analytics, integrated over a single Software-as-a-Service (SaaS) platform. The 8x8 Communications Cloud^TM offers businesses a secure, reliable and simplified approach to transitioning their legacy, on-premises communications systems to the way businesses communicatecloud. This comprehensive solution, built from owned and collaborate globally. The Company's integrated, "pure-cloud" offering combines global voice, conferencing, messaging and video with integrated workflows and big data analyticsmanaged cloud technologies, enables customers to rely on a single platformprovider for their global communications and contact center capabilities as well as customer support requirements. 8x8 customers are spread across more than 100 countries and range from small businesses to enable increased team productivity, better customer engagement and real-time insights into business performance.large enterprises.

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 20182019 refers to the fiscal year endedending March 31, 2018)2019).

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, 2017.2018, with the exception of new revenue recognition guidance discussed in the recently adopted accounting principles section below. 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, liabilities, 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, 20172018 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, 20172018 and notes thereto included in the Company's fiscal 20172018 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.

RECLASSIFICATIONACQUISITION

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 consolidated balance sheet as of June 30, 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. Total net capitalized software development costs were $12.5 million and $10.4 million as of June 30, 2017 and March 31, 2017.

Certain amounts previously reported within the Company's consolidated balance sheets and statements of cash flows have been reclassified 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.

ACQUISITIONS

In May 2015,April 2018, the Company entered into a sharean asset purchase agreement with the shareholders of DXI Limited for aMarianaIQ, Inc. The total aggregate purchase price of $22.5was $3.5 million, consisting of $18.7approximately $2.6 million in cash paid to the DXI shareholders at closing and $3.8$0.9 million in cash deposited into escrow to be held for two yearsfifteen months 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 accountingSee Note 11 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.additional information.

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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, 20172018 filed with the SEC on May 30, 2017,2018, and there have been no changes to the Company's significant accounting policies during the three months ended June 30, 2017,2018 except for the accounting policies described below that were updated as describeda result of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606). ASU 2014-09 also included Subtopic 340-40,Other Assets and Deferred Costs - Contracts with Customers,which sets forth the requirement of deferring incremental costs of obtaining a contract with a customer. All amounts and disclosures set forth herein are in the "Recently Adopted Accounting Pronouncements" section below.compliance with these standards.

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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In March 2016,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,Compensation - Stock Compensation (Topic 718): Improvements to Employee Stock-based Payment Accounting,ASU 2014-09, which simplified certain aspects of accountingreplaces numerous requirements in U.S. GAAP and provide companies with a single revenue recognition model for stock-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expenserecognizing revenue from contracts with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The following is the impact of the adoption on the Company's consolidated financial statements:

• In recording stock-based compensation expense, the ASU allows companies to make a policy election as to whether they will include an estimate of awards expected to be forfeited or whether they will account for forfeitures as they occur. The Company has elected to continue to include an estimate of forfeitures in its stock-based compensation expense. Therefore, there was no impact to the Company's consolidated financial statements.

• The ASU requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows. Previously, the Company already included these cash flows in financing activities. Therefore, the adoption of this provision had no impact.

• The ASU requires previously unrecognized excess tax benefits from stock-based compensation to be recognized on a modified retrospective basis. Unrecognized tax benefits result when a deduction for stock-based compensation does not reduce taxes payable. The impact to deferred tax assets is disclosed in Note 7.

• The ASU also requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity on either a retrospective or prospective basis. The Company has elected to apply this provision of the standard on a prospective basis.

In July 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.

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, whichcustomers. ASC 606 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 existingcustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates are required with the revenue recognition process than were required under the previous guidance in U.S. GAAP when it becomes effective. (ASC 605).

The new standard will become effective for the Company on April 1, 2018 and permits the use of either the full retrospective or cumulative effectmodified retrospective transition method. The Company has preliminary selectedadopted the new standard effective April 1, 2018 using the modified retrospective method. Under the modified retrospective method, the comparative periods' information is not restated and continues to be reported under the accounting standards in effect in those prior periods. Instead, on April 1, 2018, the Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to the transition method.

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opening balance of accumulated deficit and the corresponding balance sheet accounts, which resulted in a net decrease to accumulated deficit of $39.9 million. The Company isimpact on the Company's opening balances primarily relates to the capitalization of additional commission costs under ASC 606 in the initial stagesamount of $38.2 million. Under ASC 605, the Company expensed all commission costs as incurred. Under the ASC 606, the Company defers all incremental commission costs to obtain the contract and amortizes these costs over a period of benefit of five years. The remaining $1.7 million impact of adopting the standard relates to revenue being recognized earlier under ASC 606 than it would have been under ASC 605. See Note 2 for additional impact and transition disclosures.

In January 2016, the FASB issuedASU No. 2016-01Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the assessmentrecognition, measurement, presentation, and disclosure of financial instruments This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Therefore, the impact of theCompany has prospectively adopted this new standard on April 1, 2018. The adoption of this standard did not have a material impact on the Company's accounting policies, processes and system requirements. The Company has assigned internal resources and engaged third-party service providers to assist with the assessment and implementation. The Company currently believes the most significant impact relates to:consolidated financial statements.

• The allocation of consideration in a contract between product and service performance obligations; and
• The determination of performance obligations for professional services.

In May 2017,August 2016, the FASB issued ASU No. 2017-09,2016-15Compensation-Stock Compensation, Statement of Cash Flows (Topic 718) - Scope230): Classification of Modification Accounting.Certain Cash Receipts and Cash Payments The amendments, which provides guidance on how certain cash receipts and cash payments are to be presented and classified in the update provide guidance on typesstatement of changes to the terms or conditions of share-based payment awards would be required to apply modification accounting under ASC 718,Compensation-Stock Compensation. The amendments arecash flows. This amendment is effective for annual reporting periodsfiscal years beginning after December 15, 2017, with earlyand interim periods within those fiscal years. Therefore, the Company has prospectively adopted this new standard on April 1, 2018. The adoption permitted. Upon adoption, the amendment isof this standard did not expected to have a material impact toon the consolidated statement of cash flows.

In October 2016, the FASB has issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which provides guidance on how an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Therefore, the Company has prospectively adopted this new standard on April 1, 2018. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The update also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases.  The update requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.

In June 2018, the FASB issued 2018-07,Compensation-Stock Compensation (Topic 718), which now provides guidance for share-based payments to non-employees, resulting in alignment in accounting for employees and non-employees. The amendment is effective for public companies with fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.

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2. REVENUE RECOGNITION

Revenue Recognition under ASC 606

The Company recognizes service revenue, mainly from subscription services to its cloud-based voice, call center, video and collaboration solutions using the five-step model as prescribed by ASC 606:

• Identification of the contract, or contracts, with a customer;
• Identification of the performance obligations in the contract;
• Determination of the transaction price;
• Allocation of the transaction price to the performance obligations in the contract; and
• Recognition of revenue when or as, the Company satisfies a performance obligation.

The Company identifies performance obligations in contracts with customers, which may include subscription services and related usage, product revenue and professional services. The transaction price is determined based on the amount expected to be entitled to in exchange for transferring the promised services or product to the customer. The Transaction price in the contract is allocated to each distinct performance obligation in an amount that represents the relative amount of consideration expected to be received in exchange for satisfying each performance obligation. Revenue is recognized when performance obligations are satisfied. Revenues are recorded based on the transaction price excluding amounts collected on behalf of third parties such as sales and telecommunication taxes, which are collected on behalf of and remitted to governmental authorities. The Company usually bills its customers on a monthly basis. Contracts typically range from annual to multi-year agreements with payment terms of net 30 days or less. The Company occasionally allows a 30-day period to cancel a subscription and return products shipped for a full refund.

Judgement and Estimates

The estimation of variable consideration for each performance obligation requires the Company to make subjective judgments. The Company has service-level agreements with customers warranting defined levels of uptime reliability and performance. Customers may get credits or refunds if the Company fails to meet such levels. If the services do not meet certain criteria, fees are subject to adjustment or refund representing a form of variable consideration. The Company also imposes minimum revenue commitments (MRC) on its customers at the inception of the contract. Thus, in estimating variable consideration for each of these performance obligations, the Company assesses both the probability of (MRC) occurring and the collectability of the MRC, of which both represent a form of variable consideration.

The Company enters into contracts with customers that regularly include promises to transfer multiple service and products, such as subscriptions, product, and professional services. For arrangements with multiple services, the Company evaluates whether the individual services qualify as distinct performance obligations. In its assessment of whether a service is a distinct performance obligation, the Company determines whether the customer can benefit from the service on its own or with other readily available resources and whether the service is separately identifiable from other services in the contract. This evaluation requires the Company to assess the nature of each individual service offering and how the services are provided in the context of the contract, including whether the services are significantly integrated, highly interrelated, or significantly modify each other, which may require judgment based on the facts and circumstances of the contract.

When agreements involve multiple distinct performance obligations, the Company allocates arrangement consideration to all performance obligations at the inception of an arrangement based on the relative standalone selling prices (SSP) of each performance obligation. Where the Company has standalone sales data for its performance obligations which are indicative of the price at which the Company sells a promised good or service separately to a customer, such data is used to establish SSP. In instances where standalone sales data is not available for a particular performance obligation, the Company estimates SSP by the use of observable market and cost-based inputs. The Company continues to review the factors used to establish list price and will adjust standalone selling price methodologies as necessary on a prospective basis.

Service Revenue

Service revenue from software subscriptions to the Company's cloud-based technology platform is recognized over time on a ratable basis over the contractual subscription term beginning on the date that the subscription is made available to the customer. Payments received in advance of subscription services being rendered are recorded as a deferred revenue. Usage fees, either bundled or not bundled, are recognized when the Company has a right to invoice. Professional services for configuration, system integration, optimization or education are primarily billed on a fixed-fee basis and are performed by the Company directly or, alternatively, clients may also choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time, generally as customer sites go live.

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When a contract with a customer is signed, the Company assesses whether collection of the fees under the arrangement is probable. The Company estimates the amount to reserve for uncollectible amounts at the end of each reporting period based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded against the contract asset (Accounts Receivable). The Company also records reductions to revenue for estimated customer credits at the end of each reporting period. Customer credits are estimated based on current and historical customer trends, and communications with its customers.

Product Revenue

The Company recognizes product revenue at a point in time, when transfer of control has occurred, which is generally when delivery has occurred.

Sales returns are recorded as a reduction to revenue based on historical experience.

Contract Assets

Contract assets are recorded for those parts of the contract consideration not yet invoiced but for which the performance obligations are completed. The revenue is recognized the customer receives services or equipment for a reduced consideration at the onset of an arrangement, for example when the initial month's services or equipment are discounted. Contract assets are included other current assets in the condensed consolidated balance sheets

Deferred Revenue

Deferred revenues represent billings or payments received in advance of revenue recognition and is recognized upon transfer of control. Balances consist primarily of annual plan subscription services and professional and training services not yet provided as of the balance sheet date. Deferred revenues that will be recognized during the succeeding 12-month period are recorded as current deferred revenues in the condensed consolidated balance sheets, with the remainder recorded as other non-current liabilities in the condensed consolidated balance sheets.

Costs to Obtain a Customer Contract

Sales commissions and related expenses are considered incremental and recoverable costs of acquiring customer contracts. These costs are capitalized and amortized on a straight-line basis over the anticipated benefit period, which is five years. The benefit period was estimated by taking into consideration the length of customer contracts, technology lifecycle, and other factors. This amortization expense is recorded in sales and marketing expense within the Company's condensed consolidated statement of operations.

Practical Expedients

The Company applies a practical expedient that permits the Company to apply Subtopic 340-40 to a single portfolio of contracts, as they are similar in their characteristics, and the financial statement effects of applying Subtopic 340-40 to that portfolio would not differ materially from applying it to the individual contracts within that portfolio.

Adoption Impact of ASC 606

The Company recognized the cumulative effect of initially applying ASC 606 as an adjustment to retained earnings in the condensed consolidated balance sheet as of April 1, 2018 (in thousands).

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The following tables summarize the impacts of ASC 606 adoption on the Company's condensed consolidated financial statements for the quarter ended June 30, 2018.

Selected Condensed Consolidated Balance Sheet Line Items (in thousands):

Selected Condensed Consolidated Statement of Operations Line Items (in thousands, except per share amounts):

Selected Condensed Consolidated Statement of Cash Flows Line Items (in thousands):

Disaggregation of Revenue

The Company disaggregates its revenue by geographic region. See Note 10 for more information.

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Contract Balances

The following table provides information about receivables, contract assets and deferred revenues from contracts with customers (in thousands):

Changes in the contract assets and the deferred revenues balances during the three months ended June 30, 2018 are as follows (in thousands):

The decrease in contract assets was primarily driven by the recognition of revenue that has not yet been billed. The increase in deferred revenues was due to billings in advance of performance obligations being satisfied. During the three months ended June 30, 2018, $1.4 million of revenue recognized was included in the deferred revenues balance at the beginning of the period, which was offset by additional deferrals during the period.

Remaining Performance Obligations

The Company's subscription terms range from one to three years. Contract revenue as of June 30, 2018, that has not yet been recognized was approximately $130 million. This excludes contracts with an original expected length of one year or less. The Company expects to recognize revenue on the vast majority of the remaining performance obligation over the next 24 months.  

3. FAIR VALUE MEASUREMENTS

Cash, cash equivalents, and available-for-sale investments and contingent consideration were (in thousands):

811

						Gross			Gross						Cash and
			Amortized			Unrealized			Unrealized			Estimated			Cash			Short-Term
As of March 31, 2018			Costs			Gain			Loss			Fair Value			Equivalents			Investments
Cash		$	16,499		$	-		$	-		$	16,499		$	16,499		$	-
Level 1:
Money market funds			15,204			-			-			15,204			15,204			-
Subtotal			31,703			-			-			31,703			31,703			-
Level 2:
Commercial paper			13,254			-			(8)			13,246			-			13,246
Corporate debt			70,631			6			(296)			70,341			-			70,341
Municipal securities			3,385			3			(1)			3,387			-			3,387
Asset backed securities			27,063			1			(119)			26,945			-			26,945
Agency bond			4,183			-			(35)			4,148			-			4,148
International government securities			2,497			-			(5)			2,492			-			2,492
Subtotal			121,013			10			(464)			120,559			-			120,559
Total assets		$	152,716		$	10		$	(464)		$	152,262		$	31,703		$	120,559

Contractual maturities of investments as of June 30, 20172018 are set forth below (in thousands):

Contingent Consideration and Escrow Liability

The Company's contingent consideration liability, included in other accrued liabilities and noncurrent liabilities on the consolidated balance sheets, was associated with the Quality Software Corporation (QSC) acquisition made in the first quarter of fiscal 2016. The remaining liability of $0.1 million was settled and paid during the Company's second quarter of fiscal year 2018. Amounts held in escrow were measured at fair value using present value computations. The contingent consideration was measured at fair value using a probability weighted average of the potential payment outcomes that would occur should certain contract milestones be reached. 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 evaluate the fair value of the liability. As such, the contingent consideration is classified within Level 3.

3.4. INTANGIBLE ASSETS

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

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At June 30, 2017,2018, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):

For the quarter ended June 30, 2017, the Company determined that the tradename/domains no longer have an indefinite life, and has assigned those assets an estimated life of two years. Amortization expenses associated with tradename/domains are included in selling and marketing expenses in the consolidated statements of operations.

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4.5. GOODWILL

The following table provides a summary of the changes in the carrying amounts of goodwill by reporting segment (in thousands):

5.6. COMMITMENTS AND CONTINGENCIES

Facility and Equipment Leases

The Company leases its headquarters facility in San Jose, California, and also leases office space under non-cancelable operating leases in various domestic and international locations. During the first quarter of fiscal 2019 as it commenced the build-out of its new corporate headquarters, the Company began to record additional straight-line rent expenses. Total rent expense for the three months ended June 30, 2018 and 2017 was $2.6 million and $1.4 million, respectively. Future minimum annual lease payments as of June 30, 2018 were as follows (in thousands):

The Company has entered into a series of noncancelable capital lease agreements for data center and office equipment bearing interest at various rates.

Other Commitments, Indemnifications and Contingencies

There were no material changes in our other commitments under contractual obligations, indemnification and other contingencies since March 31, 2017.2018.

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Legal Proceedings

The Company, from time to time, is involved in various legal claims or litigation, including patent infringement claims that can arise in the normal course of the Company's operations. Pending or future litigation could be costly, could cause the diversion of management's attention and could upon resolution, have a material adverse effect on the Company's business, results of operations, financial condition and cash flows.

On February 22, 2011, the Company was named a defendant in 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 U.S. Patent and Trademark Office ("USPTO") initiated a Reexamination Proceeding through which the claims of the patent asserted against the Company were found to be invalid based on four separate grounds. During the Reexamination Proceeding, the Delaware Court granted the Company's motion to stay the proceeding (July 17, 2013) and administratively closed the case on May 5, 2015 with leave to reopen if needed.  The outcome of the Reexamination Proceeding was first appealed to the USPTO Patent Trial and Appeal Board which affirmed the invalidity bases of all claims in a Decision dated Dec. 29, 2015 ("the Board Decision").  The Board Decision was then appealed to the United States Court of Appeals for the Federal Circuit ("Federal Circuit"), which also affirmed the invalidity bases of all claims as the Federal Circuit noted in a Judgment dated March 15, 2017.  On April 21, 2017, the Federal Circuit issued a Mandate, which formally concluded the appeal and, absent any unforeseen circumstances, formally ended the Federal Circuit's jurisdiction of this matter, thereby effecting finality of the Delaware Court's May 5, 2015 decision. 

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On November 14, 2016, the Company was named as a defendant inSerenitiva LLC v. 8x8, Inc., filed in U.S. District Court for the E.D. of Texas (Civil Action No. 6:16-cv-1290). Plaintiff Serenitiva sued the Company based on alleged infringement of U.S. Patent No. 6,865,268 concerning alleged activities involving the Company's Virtual Contact Center Agent Console (Plaintiff Serenitiva sued nine other defendants, concurrently, based on the same patent). Pursuant to an agreement executed by both parties in mid-April 2017, the Company settled the suit prior to answering the complaint under the terms of a settlement agreement between the plaintiff and the Company, under which the Company agreed to pay plaintiff an amount that was not material to our business, and obtained a limited license to the patent. A Joint Motion to Dismiss was filed April 20, 2017, and an Order of Dismissal With Prejudice should be forthcoming from the Court.

6.7. STOCK-BASED COMPENSATION

The following table summarizes information pertaining to the stock-based compensation expense from stock options and stock awards (in thousands, except weighted-average grant-date fair value and recognition period):

Stock Repurchases

In May 2017, the Company's board of directors authorized the Company to purchase $25.0 million of its common stock from time to time under the 2017 Repurchase Plan (the "2017 Plan"). The 2017 Plan expires when the maximum purchase amount is reached, or upon the earlier revocation or termination by the board of directors. The remaining amount available under the 2017 Plan at June 30, 2018 was approximately $7.1 million. There were no stock repurchases under the 2017 Plan forduring the three month period ended June 30, 2017.2018.

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7.8. INCOME TAXES

The Company's effective tax rate was 36.3%-0.6% and negative 7.5%36.3% for the three months ended June 30, 20172018 and 2016,2017, respectively. The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense. The difference in the effective tax rate and the U.S. federal statutory rate of 34% in both periods was due primarily to the change in pretax profitability, and geographic mix of profits and losses and adoption of new accounting guidance effective April 1, 2017.the full valuation allowance recorded during fiscal 2018.

As described in Note 1, the Company adopted the updated accounting standard for share-based payment accounting in the three months ended June 30, 2017. 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 three months ended June 30, 2017, 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.

8.9. NET INCOME (LOSS) PER SHARE

The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income (loss)loss per share (in thousands, except share and per share data):

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

9.10. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION

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.

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The Company's CODMs evaluate the performance of its operating segments based on revenues and net income. The Company does not allocate research and development, sales and marketing, general and administrative, amortization expense, stock-based compensation expense, and commitment and contingencies for each segment as management does not consider this information in its evaluation of the performance of each operating segment. Revenues are attributed to each segment based on the ordering location of the customer or ship to location.

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The following tables set forth the segment and geographic information for each period (in thousands):

Revenue is based upon the destination of shipments and the customers' service address. For the three months ended June 30, 20172018 and 2016,2017, intersegment revenues of approximately $2.5$6.6 million and $1.1$2.5 million, respectively, were eliminated in consolidation, and have been excluded from the table above.

11. ACQUISITIONS

MarianaIQ

On April 12, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with MarianaIQ Inc. (MarianaIQ) for the purchase of certain assets of MarianaIQ. The total aggregate purchase price was $3.5 million, consisting of approximately $2.6 million in cash paid to MarianaIQ at closing, and $0.9 million in cash to be held in escrow by the Company for fifteen months, as security against indemnity claims asserted by the Company after the closing date. The escrow amount is recorded as other accrued liabilities on the condensed consolidated balance sheets as of June 30, 2018.

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The Company recorded the acquired developed technology as an identifiable intangible asset with an estimated useful life of two years. The fair value of the technology was based on estimates and assumptions made by management using a cost approach method. The intangible asset is amortized on a straight-line basis over two years.

The excess of the consideration transferred over the aggregate fair value of the asset acquired was recorded as goodwill. The amount of goodwill recognized was primarily attributable to the expected contributions of the entity to the overall corporate strategy in addition to the acquired workforce.

The preliminary fair values of the assets acquired are as follows (in thousands):

MarianaIQ did not contribute to revenue or net loss for the period of acquisition to June 30, 2018. Goodwill recognized upon acquisition is expected to be deductible for income tax purposes and is included in the Americas reporting unit (see Note 5). Total acquisition costs were immaterial.

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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 and Section 21E of the Exchange 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 acceptance of new or existing services and features, customer acceptance and demand for our cloud communicationscommunication and collaboration services;services, changes in the competitive dynamics of the markets in which we compete, the quality and reliability of our services; the prices for our services;services, customer renewal rates; customer acquisition costs;cancellations and rate of churn, our ability to compete effectivelyscale our business, customer acquisition costs, our reliance on infrastructure of third-party network services providers, risk of failure in the hosted telecommunications and cloud-based computing services business; actions by our competitors, including price reductions for their competitive services,physical infrastructure, risk of failure of our software, our ability to provide cost-effectivemaintain the compatibility of our software with third-party applications and timely servicemobile platforms, continued compliance with industry standards and support to larger distributed enterprises;regulatory requirements in the impact of risks associated withUnited States and foreign countries in which we make our international operations; potential federal and state regulatory actions; compliance costs; potential warranty claims and product defects; our need forsoftware solutions available, and the availabilitycosts of adequate working capital;such compliance, risks relating to our ability 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 realization of the expected benefits of our acquisitions, the amount and timing of costs associated with recruiting, training and integrating new employees, timing and extent of improvements in operating results from increased spending forin marketing, sales, and R&D; our management's abilityresearch and to realize the expected benefitsdevelopment, introduction and adoption of our acquisitions,cloud software solutions in markets outside of the United States, risk of cybersecurity breaches, general economic conditions that could adversely affect our business and operating results, implementation and effects of new accounting standards and policies in our reported financial results, and potential future intellectual property infringement claims and other 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 20172018 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 are a leading provider of enterpriseglobal cloud communications and customer engagement solutions helping businesses get their employees, customersto over a million business users worldwide. Our suite of products integrates cloud communications, conferencing, collaboration and applications talking, to make people more connected and productive, no matter where they are in the world. From a single, proprietary platform, which we refer to as the 8x8 Communications Cloud, we offer unified communications, team collaboration, contact center solutions so today's organization can deliver exceptional employee and customer experiences. Our technology provides one integrated platform for employees and customers engagement solutions, as well as a real-time data analytics platform for constant learning and other services to our business customers on a Software-as-a Service (SaaS) model.

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 2018 refers to the fiscal year ending March 31, 2018).improvement.

SUMMARY AND OUTLOOK

In the first quarter of fiscal 2018,2019, our service revenue from mid-market and enterprise customers grew 29%28% year-over year and represented 57%61% of total service revenue. New monthly recurring revenue (MRR) bookings from mid-market and enterprise customers and by our channel sales teams was 61% of total bookings for the quarter, reflecting strong demand for our services in our target market segments. Also, averageAverage monthly service revenue per mid-market and enterprise business customer (ARPU) increased 8% to a record $4,592,$4,953, compared with $4,230$4,592 in the same period last year. The increase resulted from our success in selling a greater number of subscriptions to larger, more established customers.

Also,In July 2018, we announced general availability of 8x8 X Series -- a single cloud platform which delivers a system of intelligence for voice, video conferencing, contact center, team messaging and collaboration across mobile and desktop devices.  8x8 X Series is available in the U.S. and U.K. with multiple plans from X1 to X8 to meet different business needs for our small, mid-market and enterprise customers.

Our focus is on disrupting the market and pursuing the resulting opportunity. We will continue to invest in talent, marketing and demand generation activities, product innovation and global expansion to grow revenue, drive brand awareness, and deliver exceptional customer and employee engagement experiences to our customers through 8x8 X Series. We expect our operating expenses to grow materially in all categories as we continue to invest in accelerating revenue growth. In achieving these objectives, we face many risks, including those described under "RISK FACTORS", disclosed in our Form 10-K for the fiscal year ended March 31, 2018.

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RESULTS OF OPERATIONS

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

Service revenue consists primarily of our 8x8 cloud communication and collaboration services.

Service revenues increased for the three months ended June 30, 2018 compared with the same 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 $432 at June 30, 2017 to $480 at June 30, 2018.

We expect growth in the number of business customers and average monthly service revenue per customer to continue for the remainder of fiscal 2019.

Product revenue consists primarily of revenue from sales of IP telephones in conjunction with our 8x8 cloud communication service. Product revenue increased for the three months ended June 30, 2018, respectively, primarily due to an increase in equipment sales to business customers.

No customer represented greater than 10% of the Company's total revenues for the three months ended June 30, 2018 or 2017.

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

Cost of service revenue for the three months ended June 30, 2018 increased over the comparable period in the prior fiscal year primarily due to a $1.4 million increase in amortization of intangibles and capitalized software expenses, a $1.0 million increase in third-party network services expenses, and a $0.4 million increase in payroll and related costs.

We expect cost of service revenue to remain at a consistent as a percentage of service revenue during the remainder of fiscal year 2019.

The cost of product revenue consists primarily of telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, shipping and handling.

The cost of product revenue for the three months ended June 30, 2018 increased over the comparable period in the prior fiscal year primarily due to the increase in the number of telephones shipped to customers. The increase in negative margin was due to additional discounting of phones in the current period.

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			June 30,						Dollar		Percent
Research and development			2018			2017			Change		Change
			(dollar amounts in thousands)
Three months ended		$	13,110		$	7,943		$	5,167		65.1%
Percentage of total revenue			15.8%			11.5%

Research and development expenses consist primarily of personnel, consulting, and equipment costs necessary for us to conduct our development and engineering efforts.

The research and development expenses for the three months ended June 30, 2018 increased over the comparable period in the prior fiscal year primarily due to a $2.4 million increase in payroll and related costs (primarily related to a department reclassification from sales and marketing), net of costs capitalized in accordance with ASC 350-40, a $1.3 million increase in consulting and outside services, a $0.8 million increase in stock-based compensation expense, a $0.4 million increase in purchased software expenses, as well as other smaller cost increases.

We expect research and development expenses to moderately increase as a percentage of total revenue during the remainder of fiscal year 2019 as we continue to invest in our product offerings.

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 three months ended June 30, 2018 increased over the comparable period in the prior fiscal year primarily due to a $4.0 million increase in payroll and related costs (partially offset by a department reclassification to research and development), a $1.9 million increase in travel expenses, a $1.3 million increase in lead generation expenses, a $1.2 million increase in stock-based compensation costs, a $1.0 million increase in consulting, temporary personnel, and outside services, and a $0.6 million increase in recruiting expenses.

We expect sales and marketing expenses to remain consistent as a percentage of total revenue during the remainder of fiscal year 2019 as we continue to invest in the acquisition of customers.

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

General and administrative expenses for three months ended June 30, 2018 increased over the comparable period in the prior fiscal year primarily due to a $1.2 million increase in rent expense related to our new headquarters, which we started to build out during the first quarter of fiscal 2018, we began2019, and a $0.9 million increase related to offer 8x8 ContactNow™ in the US market, an intelligent, scalablepayroll and easy-to-use cloud contact center solution for teams. ContactNow expands upon the Company's cloud contact center portfolio to include a solution for teams, such as sales, marketing, human resources, recruiting and help desks that regularly interact with internal and external customers. The new solution offers companies complete flexibility with pay-as-you-go as well as monthly pricing models. 8x8 ContactNow enables teams to be more efficient and productive by providing advanced contact center capabilities for improved customer engagement, all at an affordable cost.related costs.

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We recently announced a reduction of pretax profit of approximately $15.0 million as compared to our previous projections for fiscal 2018. This reduction is primarily due to expected investments for salesexpect general and marketingadministrative expenses to acceleratemoderately increase as a percentage of total revenue during the growthremainder of fiscal year 2019 to support business growth.

Other income, net, primarily consisted of interest income earned on our businesscash, cash equivalents and investments and amortization or accretion of investments in fiscal years 2019 and 2018. 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.

For the three months ended June 30, 2018, we recorded income tax expense of $0.1 million, related to state minimum taxes and income from our profitable operations. For the three months ended June 30, 2017, we recorded an income tax benefit of $1.2 million, related to loss from operations. Our effective tax rate was -0.6% and 36.3% for the three months ended June 30, 2018 and 2017, respectively. The change in our effective tax rate was due primarily to the full valuation allowance recorded in fiscal 2018, the change in pretax profitability, and geographic mix of profits and losses.

We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we 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 record the tax effect of certain discrete items, which are unusual or occur infrequently, in the mid-market and enterprise segments. The timing of these additional expenditures, and the reporting periodsinterim period in which they occur, will dependincluding changes in partjudgment 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 June 30, 2018, we had $153 million in cash, restricted cash, cash equivalents and short-term investments.

Net cash provided by operating activities for the three months ended June 30, 2018 was approximately $0.8 million, compared with $6.2 million for the three months ended June 30, 2017. Cash provided by operating activities has historically been affected by the amount of net income (loss), changes in working capital accounts particularly in the timing and collection of payments, add-backs of non-cash expense items such as deferred taxes, depreciation and amortization, and with stock-based compensation.

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The net cash provided by investing activities for the three months ended June 30, 2018 was $1.8 million, during which we had proceeds from maturity and sale of short term investments of approximately $10.8 million, net of purchases of short term investments, capitalized $5.1 million of software costs in accordance with ASC 350-40, invested in $2.6 million in the acquisition of MarianaIQ, and spent approximately $1.2 million on whenthe purchase of property and equipment. The net cash provided by investing activities for the three months ended June 30, 2017 was $6.4 million, during which we had proceeds from maturity and sale of short term investments of $9.4 million, net of purchases of short term investments. We spent approximately $2.3 million on the purchase of property and equipment, and we capitalized $2.1 million of internal use software.

Net cash provided by financing activities for the three months ended June 30, 2018 was $0.5 million, which consisted of $1.0 million of cash received from the issuance of common stock under our management can implementemployee stock plans, offset by $0.3 million of capital lease payments and $0.2 million of repurchases of our common stock related to shares withheld for payroll taxes. Net cash used in financing activities for the steps, particularly hiring additional personnel, necessarythree months ended June 30, 2017 was $0.7 million, which consisted of by $1.1 million of repurchases of our common stock related to shares withheld for achieving anticipated growthpayroll taxes, $0.4 million of payments on capital leases, offset by $0.7 million of cash received from the issuance of common stock under our employee stock plans.

Contractual Obligations

There were no significant changes 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 achievecommitments under contractual obligations during the bookings and revenue growth we are seeking, such growththree months ended June 30, 2018, as disclosed 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 utilizeCompany's Annual Report on Form 10-K, for the increased expenditures, we may fail to realize the anticipated increase in growth rates in our bookings and revenues.year ended March 31, 2018.

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. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes during the three months ended June 30, 2018 to our critical accounting policies and estimates previously disclosed in our Form 10-K for the fiscal year ended March 31, 2018, except for our adoption of ASC 606 as discussed in Notes 1 and 2 of the Notes to Condensed Consolidated Financial Statements.

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."

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: