8x8, Inc.
8X8 INC /DE/ (Form: 10-Q, Received: 01/26/2015 06:01:15)


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, 2014

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. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting 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    ¨

      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 21, 2015 was 89,867,601.



TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION Page No.
     
Item 1. Financial Statements:
 
     
           Condensed Consolidated Balance Sheets at December 31, 2014 and March 31, 2014
3
     
           Condensed Consolidated Statements of Income for the three
           and nine months ended December 31, 2014 and 2013
4
     
           Condensed Consolidated Statements of Comprehensive Income (Loss) for the three
           and nine months ended December 31, 2014 and 2013
5
     
           Condensed Consolidated Statements of Cash Flows for the nine months
           ended December 31, 2014 and 2013
6
     
           Notes to Unaudited Condensed Consolidated Financial Statements
7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
31
     
Item 4. Controls and Procedures
31
     
PART II. OTHER INFORMATION
 
     
Item 1. Legal Proceedings
32
     
Item 1A. Risk Factors
32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
32
     
Item 6. Exhibits
33
     
Signature
34

2


Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

      December 31,     March 31,
      2014     2014
ASSETS            
Current assets:            
     Cash and cash equivalents   $ 52,598    $ 59,159 
     Short-term investments     135,291      47,181 
     Accounts receivable, net     7,233      5,503 
     Inventory     532      811 
     Deferred cost of goods sold     411      263 
     Deferred tax asset     1,731      2,065 
     Other current assets     2,521      1,951 
          Total current assets     200,317      116,933 
Long-term investments         72,021 
Property and equipment, net     10,179      7,711 
Intangible assets, net     13,032      15,095 
Goodwill     37,497      38,461 
Non-current deferred tax asset     45,686      47,797 
Other assets     1,307      1,185 
               Total assets   $ 308,018    $ 299,203 
             
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
     Accounts payable   $ 7,272    $ 6,789 
     Accrued compensation     6,612      4,583 
     Accrued warranty     423      660 
     Accrued taxes     2,879      2,323 
     Deferred revenue     1,491      1,857 
     Other accrued liabilities     1,375      1,909 
          Total current liabilities     20,052      18,121 
             
Non-current liabilities     1,425      1,619 
Non-current deferred revenue     760      1,285 
          Total liabilities     22,237      21,025 
             
Commitments and contingencies (Note 8)            
             
Stockholders' equity:            
     Common stock     90      88 
     Additional paid-in capital     391,766      384,325 
     Accumulated other comprehensive gain (loss)     (1,153)     430 
     Accumulated deficit     (104,922)     (106,665)
          Total stockholders' equity     285,781      278,178 
               Total liabilities and stockholders' equity   $ 308,018    $ 299,203 

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

3


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

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Service revenue   $ 37,802    $ 29,737    $ 108,199    $ 84,062 
Product revenue     3,570      3,008      10,684      8,749 
          Total revenue     41,372      32,745      118,883      92,811 
                         
Operating expenses:                        
     Cost of service revenue     7,544      5,584      22,046      15,579 
     Cost of product revenue     3,959      4,041      11,690      11,171 
     Research and development     3,868      3,325      10,770      8,301 
     Sales and marketing     20,559      16,051      59,159      42,868 
     General and administrative     4,617      5,547      12,388      11,444 
     Gain on patent sale             (1,000)    
          Total operating expenses     40,547      34,548      115,053      89,363 
Income (loss) from operations     825      (1,803)     3,830      3,448 
Other income, net     246      586      623      602 
Income (loss) from continuing operations before                        
     provision (benefit) for income taxes     1,071      (1,217)     4,453      4,050 
Provision (benefit) for income taxes     627      (1,306)     2,710      481 
Income from continuing operations     444      89      1,743      3,569 
Income from discontinued operations, net of income tax provision                 301 
Gain on disposal of discontinued operations,                        
     net of income tax provision of $463                 589 
Net income   $ 444    $ 89    $ 1,743    $ 4,459 
                         
Income per share - continuing operations:                        
     Basic   $ 0.01    $ 0.00    $ 0.02    $ 0.05 
     Diluted   $ 0.01    $ 0.00    $ 0.02    $ 0.05 
Income per share - discontinued operations:                        
     Basic   $ 0.00    $ 0.00    $ 0.00    $ 0.01 
     Diluted   $ 0.00    $ 0.00    $ 0.00    $ 0.01 
Net income per share:                        
     Basic   $ 0.01    $ 0.00    $ 0.02    $ 0.06 
     Diluted   $ 0.01    $ 0.00    $ 0.02    $ 0.06 
Weighted average number of shares:                        
     Basic     89,594      79,742      89,107      75,071 
     Diluted     91,974      83,182      91,752      78,389 

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

4


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

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Net income   $ 444    $ 89    $ 1,743    $ 4,459 
Other comprehensive income (loss), net of tax                        
     Unrealized gain (loss) on investments     (122)     (8)     (87)     (63)
     Foreign currency translation adjustment     (1,005)     326      (1,496)     326 
Comprehensive income (loss)   $ (683)   $ 407    $ 160    $ 4,722 

 

 

 

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

5


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

      Nine Months Ended
      December 31,
      2014     2013
Cash flows from operating activities:            
Net income   $ 1,743    $ 4,459 
Adjustments to reconcile net income to net cash            
     provided by operating activities:            
          Depreciation     2,513      1,888 
          Amortization of intangible assets     1,687      1,074 
          Amortization of capitalized software     255      92 
          Net accretion of discount and amortization of premium on             
               marketable securities     659     
          Gain on disposal of discontinued operations         (589)
          Gain on escrow settlement         (565)
          Stock-based compensation     6,489      5,245 
          Deferred income tax provision     2,444      87 
          Other     268      490 
Changes in assets and liabilities:            
          Accounts receivable, net     (2,062)     (1,104)
          Inventory     235      (245)
          Other current and noncurrent assets     (505)     (570)
          Deferred cost of goods sold     (179)     211 
          Accounts payable     (736)     (1,290)
          Accrued compensation     2,044      1,217 
          Accrued warranty     (237)     182 
          Accrued taxes and fees     561      62 
          Deferred revenue     (840)     757 
          Other current and non-current liabilities     (564)     172 
                    Net cash provided by operating activities     13,775      11,573 
             
Cash flows from investing activities:            
     Purchases of property and equipment     (4,523)     (2,081)
     Cost of capitalized software     (456)     (590)
     Acquisition of business, net of cash acquired         (18,474)
     Proceeds from disposition of discontinued operations, net of transaction costs         3,000 
     Proceeds from maturity of investments     31,400     
     Sales of investments - available for sale     29,580     
     Purchases of investments - available for sale     (77,821)    
                    Net cash used in investing activities     (21,820)     (18,145)
             
Cash flows from financing activities:            
     Capital lease payments     (115)     (26)
     Repurchase of common stock     (1,723)     (320)
     Proceeds from issuance of common stock, net of issuance costs         125,758 
     Proceeds from issuance of common stock under employee stock plans     2,666      2,959 
                    Net cash provided by financing activities     828      128,371 
             
Effect of exchange rate changes on cash     656      10 
Net (decrease) increase in cash and cash equivalents     (6,561)     121,809 
             
Cash and cash equivalents at the beginning of the period     59,159      50,305 
Cash and cash equivalents at the end of the period   $ 52,598    $ 172,114 
             
Supplemental cash flow information            
     Income taxes paid   $ 181    $ 479 
     Interest paid     25     

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

6


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

1. DESCRIPTION OF THE BUSINESS

THE COMPANY

8x8, Inc. ("8x8" or the "Company") develops and markets a comprehensive portfolio of cloud-based communications and collaboration solutions that include hosted cloud telephony, unified communications, contact center, video conferencing and virtual desktop software and services. These unified communications and collaboration services are offered from the Internet cloud via a software-as-a-service subscription. The Company also provides cloud-based computing services. As of December 31, 2014, the Company had approximately 41,100 business customers.

The Company was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996. The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the condensed consolidated financial statements refers to the fiscal year ending March 31 of the calendar year indicated (for example, fiscal 2015 refers to the fiscal year ending March 31, 2015).

2. BASIS OF PRESENTATION

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, 2014. 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, 2014 year-end condensed consolidated balance sheet data in this document was 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, 2014 and notes thereto included in the Company's fiscal 2014 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.

Service and Product Revenue

The Company recognizes service revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed or determinable and collectability is reasonably assured. The Company defers recognition of service revenues in instances when cash receipts are received before services are delivered and recognizes deferred revenues ratably as services are provided.

The Company recognizes revenue from product sales for which there are no related services to be rendered upon shipment to customers provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collection of resulting receivables is reasonably assured, there are no customer acceptance requirements, and there are no remaining significant obligations. Gross outbound shipping and handling charges are recorded as revenue, and the related costs are included in cost of goods sold. Reserves for returns and allowances for customer sales are recorded at the time of shipment. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 985-605, Software - Revenue Recognition , the Company records shipments to distributors, retailers, and resellers, where the right of return exists, as deferred

7


revenue. The Company defers recognition of revenue on sales to distributors, retailers, and resellers until products are resold to the customer.

The Company records revenue net of any sales-related taxes that are billed to its customers. The Company believes this approach results in consolidated financial statements that are more easily understood by users.

Under the terms of the Company's typical subscription agreement, new customers can terminate their service within 30 days of order placement and receive a full refund of fees previously paid. The Company has determined that it has sufficient history of subscriber conduct to make a reasonable estimate of cancellations within the 30-day trial period. Therefore, the Company recognizes new subscriber revenue in the month in which the new order was shipped, net of an allowance for expected cancellations.

Multiple Element Arrangements

ASC 605-25, Multiple Element Arrangements - Revenue Recognition , requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. The provisioning of the 8x8 cloud service with the accompanying 8x8 IP telephone constitutes a revenue arrangement with multiple deliverables.  For arrangements with multiple deliverables, the Company allocates the arrangement consideration to all units of accounting based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the relative selling price to be used for allocating arrangement consideration to units of accounting as follows: (i) vendor-specific objective evidence of fair value ("VSOE"), (ii) third-party evidence of selling price ("TPE"), and (iii) best estimate of the selling price ("BESP").

VSOE generally exists only when the Company sells the deliverable separately, on more than a limited basis, at prices within a relatively narrow range.  When VSOE cannot be established, the Company attempts to establish the selling price of deliverables based on relevant TPE. TPE is determined based on manufacturers' prices for similar deliverables when sold separately, when possible. When the Company is unable to establish selling price using VSOE or TPE, it uses a BESP for the allocation of arrangement consideration. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings. The Company determines BESP for a product or service by considering multiple factors including, but not limited to:

  • the price list established by its management which is typically based on general pricing practices and targeted gross margin of products and services sold; and

  • analysis of pricing history of new arrangements, including multiple element and stand-alone transactions.

In accordance with the guidance of ASC 605-25, when the Company enters into revenue arrangements with multiple deliverables the Company allocates arrangement consideration, including activation fees, among the 8x8 IP telephones and subscriber services based on their relative selling prices. Arrangement consideration allocated to the IP telephones that is fixed or determinable and that is not contingent on future performance or deliverables is recognized as product revenues during the period of the sale less the allowance for estimated returns during the 30-day trial period. Arrangement consideration allocated to subscriber services telephones that is fixed or determinable and that is not contingent on future performance or deliverables is recognized ratably as service revenues as the related services are provided, which is generally over the initial contract term.

Deferred Cost of Goods Sold

Deferred cost of goods sold represents the cost of products sold for which the end customer or distributor has a right of return. The cost of the products sold is recognized contemporaneously with the recognition of revenue, when the subscriber has accepted the service.

8


Cash, Cash Equivalents and Investments

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Management determines the appropriate categorization of its investments at the time of purchase and reevaluates the classification at each reporting date. The cost of the Company's investments is determined based upon specific identification.

The Company's investments are comprised of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, mortgage backed securities, international government securities, certificates of deposit and money market funds. At December 31, 2014 and March 31, 2014, all investments were classified as available-for-sale and reported at fair value, based either upon quoted prices in active markets, quoted prices in less active markets, or quoted market prices for similar investments, with unrealized gains and losses, net of related tax, if any, included in other comprehensive loss and disclosed as a separate component of consolidated stockholders' equity. Realized gains and losses on sales of all such investments are reported within the caption of "other income, net" in the consolidated statements of income and are computed using the specific identification method. The Company classifies its investments as current based on the nature of the investments and their availability for use in current operations. The Company's investments in marketable securities are monitored on a periodic basis for impairment. In the event that the carrying value of an investment exceeds its fair value and the decline in value is determined to be other-than-temporary, an impairment charge is recorded and a new cost basis for the investment is established. These available-for-sale investments are primarily held in the custody of a major financial institution.

Available-for-sale investments were (in thousands):

            Gross     Gross      
      Amortized     Unrealized     Unrealized     Estimated
As of December 31, 2014     Costs     Gain     Loss     Fair Value
Money market funds   $ 16,821    $   $   $ 16,821 
Fixed income                        
     Mutual funds     2,000          (129)     1,871 
     Commercial paper     22,948              22,952 
     Corporate debt     71,890      47      (22)     71,915 
     Municipal securities     5,435          (7)     5,431 
     Asset backed securities     23,598          (6)     23,594 
     Mortgage backed securities     6,583          (56)     6,527 
     International government securities     800              802 
     Certificates of deposit     2,200          (1)     2,199 
Total available-for-sale investments   $ 152,275    $ 58    $ (221)   $ 152,112 
                         
Reported as (in thousands):                        
     Cash and cash equivalents                     $ 16,821 
     Short-term investments                       135,291 
          Total                     $ 152,112 

9


Contractual maturities of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, mortgage backed securities, international government securities, certificates of deposit and money market funds as of December 31, 2014 are set forth below (in thousands):

Due within one year   $ 120,291 
Due after one year     31,821 
     Total   $ 152,112 

 

            Gross     Gross      
      Amortized     Unrealized     Unrealized     Estimated
As of March 31, 2014     Costs     Gain     Loss     Fair Value
Money market funds   $ 32,611    $   $   $ 32,611 
Fixed income                        
     Mutual funds     1,964          (55)     1,909 
     Commercial paper     30,374              30,379 
     Corporate debt     63,621      35      (39)     63,617 
     Municipal securities     5,435          (1)     5,439 
     Asset backed securities     17,049          (1)     17,054 
     International government securities     800              804 
Total available-for-sale investments   $ 151,854    $ 55    $ (96)   $ 151,813 
                         
Reported as (in thousands):                        
     Cash and cash equivalents                     $ 32,611 
     Short-term investments                       47,181 
     Long-term investments                       72,021 
          Total                     $ 151,813 

Contractual maturities of mutual funds, commercial paper, corporate debt, municipal securities, asset backed securities, international government securities and money market funds as of March 31, 2014 are set forth below (in thousands):

Due within one year   $ 79,792 
Due after one year     72,021 
     Total   $ 151,813 

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Intangible Assets

Amortization expense for the customer relationship intangible asset is included in sales and marketing expenses. Amortization expense for technology is included in cost of service revenue. The carrying values of intangible assets were as follows (in thousands):

    December 31, 2014     March 31, 2014
    Gross                 Gross            
    Carrying     Accumulated     Net Carrying     Carrying     Accumulated     Net Carrying
    Amount     Amortization     Amount     Amount     Amortization     Amount
Technology $ 8,242    $ (2,699)   $ 5,543    $ 8,242    $ (2,080)   $ 6,162 
Customer relationships   9,686      (3,154)     6,532      9,686      (1,710)     7,976 
Trade names/domains   957          957      957          957 
Total acquired identifiable                                  
     intangible assets $ 18,885    $ (5,853)   $ 13,032    $ 18,885    $ (3,790)   $ 15,095 

At December 31, 2014, 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 2015   $ 550 
2016     2,198 
2017     2,191 
2018     1,943 
2019     1,697 
Thereafter     3,496 
Total   $ 12,075 

Research, Development and Software Costs

The Company accounts for software to be sold or otherwise marketed in accordance with ASC 985-20 - Costs of Software to be Sold, Leased or Marketed , which requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs for software to be sold or otherwise marketed incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material.

In the first nine months of fiscal 2015, the Company expensed all research and development costs in accordance with ASC 985-20. At December 31, 2014 and March 31, 2014, total capitalized software development costs included in other long-term assets was approximately $1.5 million and $1.0 million, respectively, and accumulated amortization costs related to capitalized software was approximately $0.4 million and $0.1 million, respectively.

In the first nine months of fiscal 2014, the Company capitalized $0.6 million in accordance with ASC 985-20.

The Company accounts for computer software developed or obtained for internal use in accordance with ASC 350-40 - Internal Use Software , which requires capitalization of certain software development costs incurred during the application development stage. In the first nine months of fiscal 2015, the Company capitalized $1.1 million in accordance with ASC 350-40, of which $0.6 million is classified as property and equipment and $0.5 million is classified as long-term assets. No such costs were capitalized in the first nine months of fiscal 2014.

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Foreign Currency Translation

The Company has determined that the functional currency of its UK foreign subsidiary is the subsidiary's local currency, the British Pound Sterling ("GBP"), which the Company believes most appropriately reflects the current economic facts and circumstances of the UK subsidiary's operations. The assets and liabilities of the subsidiary are translated at the applicable exchange rate as of the end of the balance sheet period and revenue and expenses are translated at an average rate over the period presented. Resulting currency translation adjustments are recorded as a component of accumulated other comprehensive income or loss within the stockholders' equity in the consolidated balance sheets.

Stock Purchase Right/Restricted Stock Unit and Option Activity

Stock purchase right activity for the nine months ended December 31, 2014 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, 2014   489,627    $ 4.83      1.93 
Granted   31,432      7.88       
Vested   (202,575)     3.96       
Forfeited   (69,864)     5.36       
Balance at December 31, 2014   248,620    $ 5.77      1.68 

Restricted stock unit and performance stock unit activity for the nine months ended December 31, 2014 is summarized as follows:

                Weighted
          Weighted     Average
          Average     Remaining
    Number of     Purchase     Contractual
    Shares     Price     Term (in Years)
Balance at March 31, 2014   1,134,856    $     2.00 
Granted   1,849,300             
Vested   (166,758)            
Forfeited   (141,600)            
Balance at December 31, 2014   2,675,798    $     2.06 

12


Stock option activity and shares available for grant for all equity incentive plans for the nine months ended December 31, 2014 is summarized as follows:

          Shares     Weighted
    Shares     Subject to     Average
    Available     Options     Exercise Price
    for Grant     Outstanding     Per Share
Balance at March 31, 2014   1,613,943      6,002,382    $ 4.14 
     Additional shares authorized for grant   8,000,000             
     Granted - options (1)   (1,295,906)     992,764      7.09 
     Stock purchase rights/restricted stock unit (2)   (1,880,732)        
     Exercised       (1,041,982)     1.60 
     Canceled/forfeited - options   392,076      (392,076)     5.74 
     Canceled/forfeited - restricted stock unit   142,910           
Balance at December 31, 2014   6,972,291      5,561,088    $ 5.03 

(1) As reflected in the preceding table, for each share awarded as a stock option under the 2012 Amended and Restated Equity Incentive Plan, an equivalent of 1.5 shares were deducted from the shares available for grant balance.
(2) The reduction to shares available for grant includes awards granted of 1,880,732 shares.

The following table summarizes stock options outstanding and exercisable at December 31, 2014:

    Options Outstanding   Options Exercisable
          Weighted   Weighted               Weighted      
          Average   Average               Average      
          Exercise   Remaining     Aggregate         Exercise     Aggregate
Range of         Price   Contractual     Intrinsic         Price     Intrinsic
Exercise Price   Shares     Per Share   Life (Years)     Value   Shares     Per Share     Value
$0.55 - $1.26   1,204,815    $ 1.10    2.83    $ 9,702,578    1,204,815    $ 1.10    $ 9,702,578 
$1.27 - $2.58   1,118,397    $ 1.61    1.62      8,444,013    1,113,189    $ 1.61      8,407,885 
$2.81 - $6.86   1,700,263    $ 6.03    8.05      5,326,085    658,248    $ 5.35      2,505,175 
$7.52 - $9.74   1,387,613    $ 9.29    8.76      346,598    368,942    $ 9.63      1,866 
$10.97 - $11.26   150,000    $ 11.11    9.02        21,875    $ 10.97     
    5,561,088              $ 23,819,274    3,367,069          $ 20,617,504 

Stock-based Compensation Expense

The Company accounts for its employee stock options, stock purchase rights, restricted stock units including restricted performance stock units granted under the 1996 Stock Plan, 1996 Director Option Plan, the 2006 Stock Plan, the 2003 Contactual Plan, the 2012 Equity Incentive Plan, the 2013 New Employee Inducement Incentive Plan and stock purchase rights under the 1996 Employee Stock Purchase Plan (collectively "Equity Compensation Plans") under the provisions of ASC 718 - Stock Compensation . Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity grant), net of estimated forfeitures.

To value option grants, stock purchase rights and restricted stock units under the Equity Compensation Plans for stock-based compensation, the Company used the Black-Scholes option valuation model. Fair value determined using the Black-Scholes option valuation model varies based on assumptions used for the expected stock prices volatility, expected life, risk-free interest rates and future dividend payments. For the three and nine months ended December 31, 2014 and 2013, the Company used the historical volatility of its stock over a period equal to the expected life of the options. The expected life assumptions represent the weighted-average period stock-based awards are expecting to remain outstanding. These expected life assumptions were established through the review of historical exercise behavior of stock-based award grants with similar vesting periods. The risk-free interest rate is based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the expected term of the option. The dividend yield assumption is based on the Company's history and expectation of future dividend payout. Compensation expense for stock-based payment awards is recognized using the straight-line single-option method and includes the impact of estimated forfeitures.

13


The Company has issued restricted performance stock units to a group of executives with vesting that is contingent on both market performance and continued service. For the market-based restricted performance stock units issued during the nine months ended December 31, 2014:

  • the number of shares of the Company's stock to be received at vesting if applicable service requirements are also met will range from 0% to 100% of the target amount based total shareholder return ("TSR"), which compares the performance of the price per share of the Company's common stock with the NASDAQ Composite Index ("Index") for the three performance periods ending March 31, 2016, March 31, 2017 and March 31, 2018, in the following manner: where in each such measurement period, (1) if the performance return on the price per share of the Company's common stock exceeds the performance return on the NASDAQ Composite Index, (which shall be determined by subtracting the percentage return on the NASDAQ Composite Index from the percentage return on the price per share of the Common Stock), then all of the TSR Performance Shares for such measurement period will be deemed earned and will vest; (2) if the performance return on the price per share of Common Stock is more than 50% lower than the performance return on the NASDAQ Composite Index, then none of the TSR Performance Shares for such measurement period will be deemed earned and will vest; and (3) if the performance return on the price per share of Common Stock is between 0% and 50% lower than the performance return on the NASDAQ Composite Index, then the number of TSR Performance Shares deemed earned and vesting for such measurement period will be reduced by 2% for each 1% by which the performance return on the NASDAQ Composite Index exceeds the performance return on the Common Stock, and
  • the number of shares of the Company's stock to be received at vesting will range from 0% or 100% of the target amount based on four tranches, with each tranche vesting at the later of (a) the satisfaction of the applicable service-based vesting requirement for that tranche, and (b) on the first date that the average stock price of the Company's common stock for a consecutive 30 trading day period exceeds 150% of the grant date stock price. The minimum service vesting requirement for each tranche is as follows:
    • Tranche 1: One year following the date of the grant
    • Tranche 2: Two years following the date of the grant
    • Tranche 3: Three years following the date of the grant
    • Tranche 4: Four years following the date of the grant

To value these market-based restricted performance stock units 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.  For the nine months ended December 31, 2014, the Company used the historical volatility and correlation of our stock and the Index over a period equal to the remaining performance period as of the grant date. The risk-free interest rate was based on the closing market bid yields on actively traded U.S. treasury securities in the over-the-counter market for the expected term equal to the remaining performance period as of the grant date. The dividend yield assumption was based on our history and expectation of future dividend payout.  Compensation expense for restricted stock units with performance and market conditions is recognized over the requisite service period using the straight-line method on a tranche by tranche basis and includes the impact of estimated forfeitures.

As of December 31, 2014, unamortized stock-based compensation expense related to unvested stock awards was approximately $24.7 million, which is expected to be recognized over a weighted average period of 2.93 years.

14


The following table summarizes the assumptions used to compute reported stock-based compensation to employees and directors for the three and nine months ended December 31, 2014 and 2013:

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Expected volatility     61%     63%     61%     64%
Expected dividend yield                
Risk-free interest rate     1.71%     1.62%     1.71%     1.86%
Weighted average expected option term     6.10 years     5.59 years     6.00 years     6.00 years
Weighted average fair value of options granted   $ 4.02   $ 5.64   $ 4.01   $ 5.64

In accordance with ASC 718 -  Stock Compensation , the Company recorded $2.4 million and $2.1 million in compensation expense relative to stock-based awards for the three months ended December 31, 2014 and 2013, and $5.8 million and $4.8 million for the nine months ended December 31, 2014 and 2013, respectively.

Employee Stock Purchase Plan

Under the Company's Employee Stock Purchase Plan, or ESPP, eligible employees can participate and purchase common stock semi-annually through payroll deductions at a price equal to 85% of the fair market value of the common stock at the beginning of each one year offering period or the end of the applicable six month purchase period within that offering period, whichever is lower. The contribution amount may not exceed 10% of an employee's base compensation, including commissions but not including bonuses and overtime. The Company accounts for the ESPP as a compensatory plan and recorded compensation expense of $0.2 million and $0.1 million for the three months ended December 31, 2014 and 2013, and $0.7 million and $0.4 million for the nine months ended December 31, 2014 and 2013, respectively, in accordance with ASC 718.

The estimated fair value of ESPP 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,
      2014     2013     2014     2013
Expected volatility             46%     38%
Expected dividend yield                
Risk-free interest rate             0.90%     0.11%
Weighted average expected ESPP option term             0.75 years     0.75 years
Weighted average fair value of                        
ESPP options granted   $   $   $ 2.46   $ 2.60

As of December 31, 2014, 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 0.5 years.

ASC 718 requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow, rather than as an operating cash flow. The future realization of tax benefits related to stock-based compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock-based compensation charges incurred during the three and nine months ended December 31, 2014 and 2013, respectively.

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The following table summarizes the classification of stock-based compensation expense related to employee stock awards and employee stock purchases under ASC 718 among the Company's operating functions for the three and nine months ended December 31, 2014 and 2013 which was recorded as follows (in thousands):

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Cost of service revenue   $ 201    $ 101    $ 476    $ 237 
Cost of product revenue                
Research and development     420      339      1,049      634 
Sales and marketing     966      660      2,620      1,400 
General and administrative     1,047      2,132      2,344      2,974 
Total stock-based compensation expense related to employee                        
     stock awards and employee stock purchases, pre-tax     2,634      3,232      6,489      5,245 
Tax benefit                
Stock-based compensation expense related to employee                        
     stock awards and employee stock purchases, net of tax   $ 2,634    $ 3,232    $ 6,489    $ 5,245 

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,  Revenue from Contracts with Customers (Topic 606)  and the IASB has issued IFRS 15,  Revenue from Contracts with Customers . The issuance of these documents completes the joint effort by the FASB and the IASB to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and IFRS. The new guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605,  Revenue Recognition , and most industry-specific guidance.   For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period.  Early application is not permitted. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12,  Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period . This ASU requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in ASC 718,  Compensation - Stock Compensation , as it relates to such awards. ASU 2014-12 is effective for us in our first quarter of fiscal 2017 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date; or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. The Company is currently assessing the impact of this pronouncement to its consolidated financial statements.

In November 2014, the FASB issued ASU 2014-17,  Pushdown Accounting . This ASU provides companies with the option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity.  The election to apply pushdown accounting can be made either in the period in which the change of control occurred, or in a subsequent period.  If the election is made in a subsequent period, it would be considered a change in accounting principle and treated in accordance with Topic 250, Accounting Changes and Error Corrections . This ASU is effective as of November 18, 2014.  The adoption did not have a material impact on the Company's results of operations, cash flows or financial position.

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3. FAIR VALUE MEASUREMENT

The following tables present the Company's fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (in thousands):

    Quoted Prices in     Other     Significant      
    Active Markets for     Observable     Unobservable     Balance at
    Identical Assets     Inputs     Inputs     December 31,
December 31, 2014   (Level 1)     (Level 2)     (Level 3)     2014
                       
Cash equivalents:                      
     Money market funds $ 16,821        $   $ 16,821 
Short-term investments:                      
     Money market funds   1,871              1,871 
     Commercial paper       22,952          22,952 
     Corporate debt       71,915          71,915 
     Municipal securities       5,431          5,431 
     Asset backed securities       23,594          23,594 
     Mortgage backed securities       6,527          6,527 
     International government securities       802          802 
     Certificates of deposit       2,199          2,199 
                       
Total $ 18,692    $ 133,420    $   $ 152,112 

 

    Quoted Prices in     Other     Significant      
    Active Markets for     Observable     Unobservable     Balance at
    Identical Assets     Inputs     Inputs     March 31,
March 31, 2014   (Level 1)     (Level 2)     (Level 3)     2014
                       
Cash equivalents:                      
     Money market funds $ 32,611    $   $   $ 32,611 
Short-term investments:                      
     Mutual funds   1,909              1,909 
     Commercial paper       30,379          30,379 
     Corporate debt       14,893          14,893 
Long-term investments:                      
     Corporate debt       48,724          48,724 
     Municipal securities       5,439          5,439 
     Asset backed securities       17,054          17,054 
     International government securities       804          804 
                       
Total $ 34,520    $ 117,293    $   $ 151,813 

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4. BALANCE SHEET DETAIL

      December 31,     March 31,
      2014     2014
Inventory (in thousands):            
     Work-in-process   $ 11   $ 23
     Finished goods     521     788
    $ 532   $ 811

5. NET INCOME PER SHARE

Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the weighted average number of vested, unrestricted common shares outstanding during the period (denominator). Diluted net income per share is computed on the basis of the weighted average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include shares issuable upon exercise of outstanding stock options and under the ESPP.

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
      (in thousands, except per share amounts)
Numerator:                        
Income from continuing operations   $ 444    $ 89    $ 1,743    $ 3,569 
Income from discontinued operations, net of income tax provision                 890 
Net income available to common stockholders     444      89      1,743      4,459 
                         
Denominator:                        
Common shares     89,594      79,742      89,107      75,071 
                         
Denominator for basic calculation     89,594      79,742      89,107      75,071 
Employee stock options      1,963      2,982      2,210      2,938 
Stock awards     417      458      435      380 
Denominator for diluted calculation      91,974      83,182      91,752      78,389 
                         
Income per share - continuing operations                        
     Basic   $ 0.01    $ 0.00    $ 0.02    $ 0.05 
     Diluted   $ 0.01    $ 0.00    $ 0.02    $ 0.05 
Income per share - discontinued operations                        
     Basic   $ 0.00    $ 0.00    $ 0.00    $ 0.01 
     Diluted   $ 0.00    $ 0.00    $ 0.00    $ 0.01 
Net income per share                        
     Basic    $ 0.01    $ 0.00    $ 0.02    $ 0.06 
     Diluted    $ 0.01    $ 0.00    $ 0.02    $ 0.06 

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

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Employee stock options     2,106      1,266      1,634      550 
Stock purchase rights     370      18      59      190 
Total anti-dilutive employee stock-based securities     2,476      1,284      1,693      740 

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6. INCOME TAXES

For the three and nine months ended December 31, 2014, the Company recorded a provision for income taxes of $0.6 million and $2.7 million which was primarily attributable to income from continuing operations. For the three months ended December 31, 2013, the Company recorded a benefit for income taxes of $1.3 million. For the nine months ended December 31, 2013, the Company recorded a provision for income taxes of $0.5 million which was primarily attributable to income from continuing operations ($0.7 million), income from discontinued operations ($0.2 million), and gain on disposal of discontinued operations ($0.5 million), reduced by a tax benefit for an adjustment to credit carryforwards ($0.9 million).

The effective tax rate is calculated by dividing the income tax provision by net income before income tax expense.

At March 31, 2014, there were $2.2 million of unrecognized tax benefits that, if recognized, would have affected the effective tax rate.  The Company does not believe that there has been any significant change in the unrecognized tax benefits in the nine-month period ended December 31, 2014, 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 1995 to fiscal 2014 may be subject to examination by the Internal Revenue Service, California and various other states. As of January 21, 2014, there were no active federal or state income tax audits. Returns filed in foreign jurisdictions may be subject to examination for the fiscal years 2010 to 2014.

7. 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 has determined that it has only one reportable segment. The Company's chief operating decision makers, the Chief Executive Officer, Chief Financial Officer and Chief Technology Officer, evaluate performance of the Company and make decisions regarding allocation of resources based on total Company results.

No customer represented greater than 10% of the Company's total revenues for the three and nine months ended December 31, 2014 or 2013. The Company's revenue distribution by geographic region (based upon the destination of shipments and the customer's service address) was as follows:

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Americas (principally US)                                                     92%     96%     92%     98%
Europe     7%     3%     7%     1%
Asia Pacific     1%     1%     1%     1%
      100%     100%     100%     100%

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

      December 31,     March 31,
      2014     2014
Americas   $ 8,114    $ 6,305 
Europe     1,518      1,087 
Asia Pacific     547      319 
     Total   $ 10,179    $ 7,711 

8. COMMITMENTS AND CONTINGENCIES

Guarantees

Indemnifications

In the normal course of business, the Company indemnifies other parties, including customers, lessors and parties to other transactions with the Company, with respect to certain matters. Under these arrangements, the Company typically agrees to hold the other party harmless against losses arising from a breach of representations or covenants, intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors.

It is not possible to determine the maximum potential amount of the Company's exposure under these indemnification agreements due to the limited history of 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 revenue in the condensed consolidated statements of income, were as follows (in thousands):

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Balance at beginning of period   $ 538    $ 552    $ 660    $ 452 
     Accruals for warranties     54      274      123      744 
     Settlements     (86)     (192)     (277)     (562)
     Changes in estimate     (83)         (83)    
Balance at end of period   $ 423    $ 634    $ 423    $ 634 

Minimum Third Party Customer Support Commitments

In the third quarter of fiscal 2010, the Company amended a contract with one of its third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million. The agreement requires a 150-day notice to terminate. The total remaining obligation as of December 31, 2014 under the amended contract is $2.2 million.

20


Minimum Third Party Network Service Provider Commitments

The Company entered into contracts with multiple vendors for third party network services that expire on various dates in fiscal 2015 through 2018. At December 31, 2014, future minimum annual payments under these third party network service contracts were as follows (in thousands):

Year ending March 31:            
     Remaining 2015         $ 747 
     2016           3,014 
     2017           2,452 
     2018           891 
          Total minimum payments         $ 7,104 

Legal Proceedings

From time to time, the Company may become involved in various legal claims and litigation that arise in the normal course of its operations. While the results of such claims and litigation cannot be predicted with certainty, the Company is not currently aware of any such matters that it believes would have a material adverse effect on its financial position, results of operations or cash flows.

On February 22, 2011, the Company was named a defendant in a lawsuit, Bear Creek Technologies, Inc. v. 8x8, Inc.  et al. , along with 20 other defendants. On August 17, 2011, the suit was dismissed without prejudice as to the Company under Rule 21 of the Federal Rules of Civil Procedure. On August 17, 2011, Bear Creek Technologies, Inc. refiled its suit against the Company in the United States District Court for the District of Delaware. Further, on November 28, 2012, the U.S. Patent & Trademark Office initiated a Reexamination proceeding with a Reexamination Declaration explaining that there is a substantial new question of patentability, based on four separate grounds and affecting each claim of the patent which is the basis for the complaint filed against us.  On March 26, 2013, the USPTO issued a first Office Action in the Reexamination, with all claims of the '722 patent being rejected on each of the four separate grounds raised in the Request for Reexamination.  On July 10, 2013, the Company filed an informational pleading in support of and joining a motion to stay the proceeding in the District Court; the District Court granted the motion on July 17, 2013, based on the possibility that at least one of the USPTO rejections will be upheld and considering the USPTO's conclusion that Bear Creek's patent suffers from a defective claim for priority.  On March 24, 2014, the USPTO issued another Office Action in which the rejections of the claims were maintained.  On August 15, 2014, the USPTO issued a Right of Appeal Notice, as the USPTO maintained all rejections of the patent claims.  On September 15, 2014, Bear Creek Technologies, Inc. filed a Notice of Appeal of this decision with the Patent Trial and Appeal Board. The case is currently on appeal. The Company believes that it has meritorious defenses to these claims and is presenting a vigorous defense, but we cannot estimate potential liability in this case at this early stage of litigation.

On March 31, 2014, the Company was named as a defendant in a lawsuit, CallWave Communications LLC v. 8x8, Inc.  CallWave Communications also sued Fonality Inc. on March 31, 2014, and previously had sued other companies including Verizon, Google, T-Mobile, and AT&T. The Company answered the complaint and filed counterclaims in response thereto. We cannot estimate potential liability in this case at this early stage of the litigation.

On December 31, 2014, the Company was named as a defendant in a lawsuit, Adaptive Data, LLC v. 8x8, Inc.  Adaptive Data, LLC also sued another 36 other defendants on December 31, 2014 and another 16 defendants on January 5, 2015 regarding the same patents asserted in our case. Service of process has not yet been effected on the Company.

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 taxes. 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.

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9. PATENT SALE

On June 22, 2012, the Company entered into a patent purchase agreement and sold a family of patents to a third party for $12.0 million plus a future payment of up to a maximum of $3.0 million based on future license agreements entered into by the third party purchaser. In August 2014, the Company collected and recognized a gain of $1.0 million attributable to a license agreement obtained by the third party purchaser. As of December 31, 2014, there remained a maximum of $1.0 million of potential future payments under the agreement based on future license agreements obtained by the third party purchaser. Under the terms and conditions of the patent purchase agreement, the Company has retained certain limited rights to continue to use the patents. The patent purchase agreement contains representations and warranties customary for transactions of this type.

10. GAIN ON SETTLEMENT OF ESCROW CLAIM

In December 2013, the Company settled an escrow claim for indemnification with the sellers of Contactual, Inc. Under the terms of the settlement, the Company recorded a gain of $0.6 million. The settlement proceeds have been recognized in other income, net. Upon receipt of the cash or shares, the remaining escrow account balance was released to the sellers.

11. DISCONTINUED OPERATIONS

On September 30, 2013, the Company completed the sale of its dedicated server hosting business to IRC Company, Inc. ("IRC") and, as a result, no longer provides dedicated server hosting services. In the transaction, IRC purchased 100% of the stock of Central Host, Inc., which had been wholly owned by the Company and all of the assets specific to the dedicated server hosting business.

The Company sold its dedicated server hosting business for total consideration of $3.0 million in cash, which the Company received on October 1, 2013.

The dedicated server hosting business has been reported as discontinued operations. The results of operations of these discontinued operations is as follows (in thousands):

      Three Months Ended     Nine Months Ended
      December 31,     December 31,
      2014     2013     2014     2013
Revenue   $   $   $   $ 1,430 
Operating expense                 922 
Income before income taxes                 508 
Provision for income taxes                 207 
Income from discontinued operations                 301 
Gain on disposal of discontinued operations,                        
net of income tax provision of $463                 589 

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12. STOCK REPURCHASES

In July 2014, the Company's board of directors authorized the Company to purchase up to $15 . 0 million of its common stock from time to time until July 22, 2015 (the "Repurchase Plan"). Share repurchases, if any, will be funded with available cash. Repurchases under the Repurchase Plan may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws and other factors, and are at the discretion of the Company's management. Share repurchases under the Repurchase Plan may be commenced, suspended or discontinued at any time. The remaining authorized repurchase amount at December 31, 2014 was approximately $13.4 million. The activity under the Repurchase Plan for the three months ended December 31, 2014 is summarized as follows:

          Weighted      
    Shares     Average Price     Amount
    Repurchased     Per Share     Repurchased
Repurchase of common stock   216,965    $ 7.48    $ 1,627,210 
Balance at December 31, 2014   216,965    $ 7.48    $ 1,627,210 

 

 

 

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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, customer acceptance and demand for our cloud communications and collaboration services, the quality and reliability of our services, the prices for our services, customer renewal rates, customer acquisition costs, our ability to compete effectively in the hosted telecommunications and cloud-based computing services business, actions by our competitors, including price reductions for their competitive services, our ability to provide cost-effective and timely service and support to larger distributed enterprises, potential federal and state regulatory actions, compliance costs, potential warranty claims and product defects, our need for and the availability of adequate working capital, our ability to innovate technologically, the timely supply of products by our contract manufacturers, our management's ability to execute our plans, strategies and objectives for future operations, including the execution of integration plans, and to realize the expected benefits of our acquisitions, 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 fiscal 2014 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 develop and market a comprehensive portfolio of cloud-based communication and collaboration solutions that include hosted cloud telephony, unified communications, contact center, video conferencing and virtual desktop software and services. These communication and collaboration services are offered from the Internet cloud via a software-as-a-service subscription. We also provide cloud-based computing services. As of December 31, 2014, we had approximately 41,100 business customers. Since fiscal 2004, substantially all of our revenue has been generated from the sale, license and provision of these cloud products, services and technology. Prior to fiscal 2003, our focus was on our Voice over Internet Protocol semiconductor business.

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 2015 refers to the fiscal year ending March 31, 2015).

SUMMARY AND OUTLOOK

In the third quarter of fiscal 2015, our new monthly recurring revenue from midmarket and channel sales teams increased 42% year over year, reflecting strong demand for our services in our target market segment. Revenue from midmarket customers now represents 42% of our total service revenue. Average monthly service revenue per business customer increased 11% to a record $305, compared with $274 in the same period last year. Our ability to offer a broad range of cloud-based mission critical communications services is bringing us larger deals where we continue to displace incumbent, premises-based systems.

As we continue our focus on building a more profitable and sustaining midmarket customer base, one that contributes significantly greater lifetime value than the average small business customer, we are adding fewer one - two line business customers. During the quarter, we saw a reduction in net customer additions from our historical average. Our net customer additions were lower this quarter primarily due to the end of life reduction of very small iTelConnect customers, which we acquired in 2008, and an emphasis on the part of our sales team on selling larger deals. We expect this trend to continue with further reduction in our previously acquired iTel customer base and our continued focus on selling to larger businesses. As our average business customer size continues to grow, 8x8 management believes the net additional customer metric no longer correlates to our monthly recurring and top line revenue growth.

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In spite of our reduction in net new customer adds, our increased focus on customer support is yielding continued low monthly business service revenue churn across our entire business customer base at 1.0% during the quarter, compared with 1.5% in the same period a year ago. In addition to building a dedicated and responsive customer service organization, we have implemented a rapid customer deployment model that we believe is unparalleled in our industry.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

See Item 1 of Part I, "Financial Statements - Note 2 - 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:

    Selected Operating Statistics
    Dec 31,   Sept. 30,   June 30,   March 31,   Dec 31,
    2014   2014   2014   2014   2013
Total business customers (1)   41,051    40,434    39,340    37,933    36,753 
Business customers average monthly                    
     service revenue per customer (2)   $ 305    $ 299    $ 293    $ 287    $ 274 
Monthly business service revenue churn   1.0%   0.9%   0.4%   1.2%   1.5%
                     
Overall service margin   80%   79%   80%   79%   81%
Overall product margin   -11%   -8%   -9%   -23%   -34%
Overall gross margin   72%   72%   71%   70%   71%

 

(1)

Business customers are defined as customers paying for service. Customers that are currently in the 30-day trial period are considered to be customers that are paying for service. Customers subscribing to Virtual Office Solo, DNS or Cloud VPS services are not included as business customers.

(2)

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.

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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.

      December 31,     Dollar   Percent
Service revenue     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 37,802    $ 29,737    $ 8,065    27.1%
Percentage of total revenue     91.4%     90.8%          
Nine months ended   $ 108,199    $ 84,062    $ 24,137    28.7%
Percentage of total revenue     91.0%     90.6%          

Service revenue consists primarily of revenue attributable to the provision of our 8x8 cloud communication and collaboration services. We expect that cloud communication and collaboration service revenues will continue to comprise nearly all of our service revenues for the foreseeable future. Cloud and collaboration service revenues increased in the third quarter of fiscal 2015 primarily due to the increase in our business customer subscriber base (net of customer churn). Our business subscriber base grew from approximately 36,800 business customers on December 31, 2013, to approximately 41,100 on December 31, 2014, and average monthly service revenue per customer increased from $274 at December 31, 2013 to $305 at December 31, 2014. 

Cloud communication and collaboration service revenues increased in the nine months of fiscal 2015 also primarily due to the increases in our business customer subscriber base (net of customer churn) and average monthly service revenue per customer. Our business service subscriber base increased approximately 37,900 business customers on April 1, 2014, to approximately 41,100 on December 31, 2014, and average monthly service revenue per customer increased from $287 at April 1, 2014 to $305 at December 31, 2014.  The increase in business customers included approximately 1,000 customers obtained through our acquisition of Voicenet Solutions Limited (Voicenet), on November 29, 2013.

      December 31,     Dollar   Percent
Product revenue     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 3,570    $ 3,008    $ 562    18.7%
Percentage of total revenue     8.6%     9.2%          
Nine months ended   $ 10,684    $ 8,749    $ 1,935    22.1%
Percentage of total revenue     9.0%     9.4%          

Product revenue consists primarily of revenue from sales of IP telephones in conjunction with our 8x8 cloud telephony service. Product revenue increased for the three and nine months ended December 31, 2014 primarily due to an increase in equipment sales to business customers.

No customer represented greater than 10% of our total revenues for the three months ended December 31, 2014 or 2013.

      December 31,     Dollar   Percent
Cost of service revenue     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 7,544    $ 5,584    $ 1,960    35.1%
Percentage of service revenue     20.0%     18.8%          
Nine months ended   $ 22,046    $ 15,579    $ 6,467    41.5%
Percentage of service revenue     20.4%     18.5%          

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The cost of service revenue primarily consists of costs associated with network operations and related personnel, telephony origination and termination services provided by third party carriers and technology license and royalty expenses. Cost of service revenue for the three months ended December 31, 2014 increased over the comparable period in the prior fiscal year primarily due to a $1.1 million increase in third-party network service expenses, a $0.4 million increase in payroll and related expenses, a $0.3 million increase in depreciation, and a $0.1 million increase in stock-based compensation expenses.

Cost of service revenue for the nine months ended December 31, 2014 increased over the comparable period in the prior fiscal year primarily due to a $3.5 million increase in third party network services expenses, a $1.3 million increase in payroll and related expenses, a $0.7 million increase in depreciation expense, and a $0.3 million increase in stock-based compensation expenses.

      December 31,     Dollar   Percent
Cost of product revenue     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 3,959    $ 4,041    $ (82)   -2.0%
Percentage of product revenue     110.9%     134.3%          
Nine months ended   $ 11,690    $ 11,171    $ 519    4.6%
Percentage of product revenue     109.4%     127.7%          

The cost of product revenue consists primarily of IP Telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, shipping and handling. The amount of revenue allocated to product revenue based on the relative selling price is less than the cost of the IP phone equipment. The cost of product revenue for the three months ended December 31, 2014 was consistent with the comparable period. The cost of product revenue for the nine months ended December 31, 2014 increased over the comparable period in the prior fiscal year primarily due to an increase in equipment shipped to customers. The decrease in negative margin was due to reduced discounting of equipment in the most recent period.

      December 31,     Dollar   Percent
Research and development     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 3,868    $ 3,325    $ 543    16.3%
Percentage of total revenue     9.3%     10.2%          
Nine months ended   $ 10,770    $ 8,301    $ 2,469    29.7%
Percentage of total revenue     9.1%     8.9%          

Our research and development expenses consist primarily of personnel, system prototype design, and equipment costs necessary for us to conduct our development and engineering efforts. During the three and nine months ended December 31, 2014, we expensed all research and development costs as they were incurred in accordance with ASC 985-20. The research and development expenses for the three months ended December 31, 2014 increased over the comparable period in the prior fiscal year primarily due to a $0.2 million increase in consulting, temporary personnel, and outside service expenses, a $0.1 million increase in payroll and related costs, a $0.1 million increase in stock-based compensation expenses, offset by $0.1 million of payroll and related costs capitalized in accordance with ASC 350-40.

The research and development expenses for the nine months ended December 31, 2014 increased over the comparable period in the prior fiscal year primarily due to a $0.8 million increase in consulting, temporary personnel, and outside service expenses, a $0.7 million increase in payroll and related costs, a $0.4 million increase in stock-based compensation expenses, offset by $0.3 million of payroll and related costs capitalized in accordance with ASC 350-40.

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      December 31,     Dollar   Percent
Sales and marketing     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 20,559    $ 16,051    $ 4,508    28.1%
Percentage of total revenue     49.7%     49.0%          
Nine months ended   $ 59,159    $ 42,868    $ 16,291    38.0%
Percentage of total revenue     49.8%     46.2%          

Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service. Such costs also include outsourced customer service call center operations, sales commissions, as well as trade show, advertising and other marketing and promotional expenses. The three months ended December 31, 2014 included three months of sales and marketing expenses of Voicenet compared to approximately one month for the same quarter in the prior period. In addition, the increase in sales and marketing expenses for the three months ended December 31, 2014 over the same quarter in the prior fiscal year included a $2.7 million increase in payroll and related costs, which is a result of increased headcount in both our customer success and deployment teams, a $0.3 million increase in stock-based compensation expenses, a $0.3 million increase to in trade show expenses, a $0.2 million increase in indirect channel commission expenses, a $0.2 million increase in temporary personnel, consulting and outside service expenses, and a $0.2 million increase in travel expenses.

The sales and marketing expenses for the nine months ended December 31, 2014 included marketing expenses of Voicenet for the full period compared with approximately one month of such expenses in the same period of the prior fiscal year. In addition, sales and marketing expenses for the nine months ended December 31, 2014 increased over the same period in the prior fiscal year primarily because of a $9.7 million increase in payroll and related costs, which is a result of increased headcount in both our customer success and deployment teams, a $1.2 million increase in indirect channel commissions, a $1.1 million increase in stock-based compensation expenses, a $0.9 million increase in temporary personnel, consulting and outside service expenses, a $0.6 million increase in travel expenses, and a $0.4 million increase in trade show expenses. The increases are in line with our strategy of increasing our business with customers in the mid-market and distributed enterprises segments.

      December 31,     Dollar   Percent
General and administrative     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 4,617    $ 5,547    $ (930)   -16.8%
Percentage of total revenue     11.2%     16.9%          
Nine months ended   $ 12,388    $ 11,444    $ 944    8.2%
Percentage of total revenue     10.4%     12.3%          

General and administrative expenses consist primarily of personnel and related overhead costs for finance, human resources and general management. General and administrative expenses for the three months ended December 31, 2014 decreased from the same quarter in the prior fiscal year primarily because of a $1.0 million decrease in stock-based compensation expenses, a $0.4 million decrease in legal fees, a $0.1 million decrease in accounting and tax services, offset by a $0.5 million increase in payroll and related costs.

General and administrative expenses for the nine months ended December 31, 2014 increased over the same period in the prior fiscal year primarily because of a $1.3 million increase in payroll and related expenses, a $0.4 million increase in recruiting expenses, and a $0.2 million increase in rent expense, offset by a $0.6 million decrease in stock-based compensation expenses and a $0.4 million decrease in legal expenses.

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      December 31,     Dollar   Percent
Other income, net     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 246    $ 586    $ (340)   -58.0%
Percentage of total revenue     0.6%     1.8%          
Nine months ended   $ 623    $ 602    $ 21    3.5%
Percentage of total revenue     0.5%     0.6%          

In the three and nine months ended December 31, 2014, other income, net primarily consisted of interest income earned on our cash, cash equivalents and investments.

In the three and nine months ended December 31, 2013, other income, net primarily consisted of $0.6 million gain related to settlement in December 2013 of an escrow claim related to the acquisition of Contactual, Inc. and interest income earned on our cash, cash equivalents and investments.

      December 31,     Dollar   Percent
Provision (benefit) for income tax     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $ 627    $ (1,306)   $ 1,933    -148.0%
Percentage of income                      
before provision (benefit) for income taxes     58.5%     107.3%          
Nine months ended   $ 2,710    $ 481    $ 2,229    463.4%
Percentage of income                      
before provision (benefit) for income taxes     60.9%     11.9%          

For the three months ended December 31, 2014, we recorded a provision for income taxes of $0.6 million which was primarily attributable to income from continuing operations. For the three months ended December 31, 2013, we recorded a benefit for income taxes of $1.3 million which was primarily attributable to income from continuing operations reduced by a tax benefit for an adjustment to credit carryforwards treated as a one-time item for the quarter. 

For the nine months ended December 31, 2014, we recorded a provision for income taxes of $2.7 million which was primarily attributable to income from continuing operations. For the nine months ended December 31, 2013, we recorded a provision for income taxes of $0.5 million which was primarily attributable to income from continuing operations, and was net of a one-time $0.9 million adjustment to credit carryforwards and other true-ups for prior years. We calculate our effective tax rate by dividing the income tax provision by net income before income tax expense. 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. Operating losses in non-US tax jurisdictions cannot presently be used to offset profits and therefore increases our effective tax rate.

Income from discontinued operations,     December 31,     Dollar   Percent
     net of income tax provision     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $   $   $  
Percentage of total revenue     0.0%     0.0%          
Nine months ended   $   $ 301    $ (301)   -100.0%
Percentage of total revenue     0.0%     0.3%          

On September 30, 2013, we sold our dedicated server hosting business. The current historical results of our dedicated server hosting business have been reclassified to income from discontinued operations, net of income tax provision.

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Gain on disposal of discontinued     December 31,     Dollar   Percent
     operations, net of income tax provision     2014     2013     Change   Change
      (dollar amounts in thousands)    
Three months ended   $   $   $  
Percentage of total revenue     0.0%     0.0%          
Nine months ended   $   $ 589    $ (589)   -100.0%
Percentage of total revenue     0.0%     0.6%          

For the nine months ended December 31, 2013, we recorded a gain on disposal of our dedicated server hosting business of $1.1 million, net of a tax provision of $0.5 million.

Liquidity and Capital Resources

As of December 31, 2014, we had approximately $187.9 million in cash, cash equivalents and short-term investments.

Net cash provided by operating activities for the nine months ended December 31, 2014 was approximately $13.8 million, compared with $11.6 million for the nine months ended December 31, 2013. Cash provided by operating activities has historically been affected by the amount of net income, sales of subscriptions, changes in working capital accounts particularly in deferred revenue due to timing of annual plan renewals, add-backs of non-cash expense items such as the use of deferred tax assets, depreciation and amortization and the expense associated with stock-based awards.

Net cash used in investing activities was approximately $21.8 million during the nine months ended December 31, 2014. We spent approximately $4.5 million on the purchase of property and equipment, and we purchased $16.8 million of short term investments, net of sales, proceeds and maturities of short-term investments. The net cash used in investing activities for the nine months ended December 31, 2013 was $18.1 million during which period we acquired Voicenet for $18.5 million, net of cash acquired, we spent approximately $2.0 million on the purchase of property and equipment, and we capitalized $0.6 million of software development costs. The cash used in investing activities was partially offset by the proceeds from disposition of our dedicated server hosting business.

Our financing activities for the nine months ended December 31, 2014 consisted primarily of cash from the issuance of shares due to exercise of employee stock options and the purchase of shares under the employee stock purchase plan of $2.7 million offset by cash used to repurchase shares of our common stock of $1.7 million and payments under capital leases of $0.1 million.

Our financing activities for the nine months ended December 31, 2013 consisted primarily of cash from the underwritten registered offering of common stock in which it sold 14,375,000 shares for total cash proceeds of approximately $125.8 million, net of issuance costs of $0.6 million and the exercise of employee stock options and the purchase of shares under the employee stock purchase plan of $3.0 million and cash used to repurchase shares of our common stock of $0.3 million.

Contractual Obligations

We lease our headquarters facility in San Jose, California under an operating lease agreement that expires in October 2019. The lease is an industrial net lease that requires us to pay property taxes, utilities and normal maintenance costs. At December 31, 2014, future minimum annual payments under the facility lease were $0.4 million in fiscal 2015, $1.7 million for fiscal 2016, $1.7 million for fiscal 2017, $1.8 million for fiscal 2018 and $1.8 million for fiscal 2019.

We lease our UK headquarters in Aylesbury UK under an operating lease agreement that expires in March 2017, with a break clause in March 2015 exercisable with nine months' notice.  The lease requires us to pay property taxes, service charges, utilities and normal maintenance costs. The lease was amended in September 2014 for additional space. At December 31, 2014, future minimum annual payments under the facility lease were $29,000 in fiscal 2015, $0.2 million for fiscal 2016, and $0.2 million for fiscal 2017.

We entered into a series of noncancelable capital lease agreements for office equipment bearing interest at various rates. Assets under capital lease at December 31, 2014 totaled $0.5 million with accumulated amortization of $0.3 million.

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In the third quarter of 2010, we amended the contract with one of our third party customer support vendors containing a minimum monthly commitment of approximately $0.4 million. The agreement requires a 150-day notice to terminate. At December 31, 2014, the total remaining obligation under the contract was $2.2 million.

We have entered into contracts with multiple vendors for third party network services. At December 31, 2014, future minimum annual payments under these third party network service contracts were $0.7 million in fiscal 2015, $3.0 million for fiscal 2016, $2.5 million for fiscal 2017, and $0.9 million for fiscal 2018.

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. To date, our exposure to exchange rate volatility has not been significant; however, there can be no assurance that there will not be a material impact in the future.

Investments

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Some of the securities in which we invest may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. The risk associated with fluctuating interest rates is limited to our investment portfolio and we do not believe that a 10% change in interest rates would have a significant impact on our interest income.

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, 2014.

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.

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Changes in Internal Control over Financial Reporting

During the third quarter of fiscal 2015, 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.

PART II -- OTHER INFORMATION

ITEM 1. Legal Proceedings

Descriptions of our legal proceedings are contained in Part I, Item 1, Financial Statements - Notes to Condensed Consolidated Financial Statements - "Note 8."

ITEM 1A. Risk 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, 2014, which we filed with the Securities and Exchange Commission on May 27, 2014.

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

Issuer Purchases of Equity Securities

The activity under the Repurchase Plan for the three months ended December 31, 2014 is summarized as follows:

                Total Number     Approximate
                of Shares     Dollar
                Purchased     Value of Shares
      Total         as Part of     that May Yet
      Number of     Average   Publicly     be Purchased
      Shares     Price Paid   Announced     Under the
      Purchased     Per Share   Program     Program
                       
October 1 - October 31, 2014     -     $ -     -     $ 15,000,000 
                       
November 1 - November 30, 2014     216,965      7.48   216,965      13,372,790 
                       
December 1 - December 31, 2014     -       -     -     $ 13,372,790 
                       
Total     216,965    $ 7.48   216,965       

32


ITEM 6. EXHIBITS

Exhibit
Number


Description


10.2

Employment Agreement dated October 17, 2014 between the Company and Enzo Signore

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

  

 

33


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: January 23, 2015

8X8, INC. 

(Registrant)  

By: /s/ M ARY E LLEN G ENOVESE          

MaryEllen Genovese  

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

 

 

 

 

 

34


Exhibit 10.2

October 17, 2014

Enzo Signore
2125 O'Nel Drive
San Jose, CA 95131

RE: SVP & Chief Marketing Officer (Nasdaq: EGHT)

Dear Enzo,

On behalf of 8x8, Inc., a Delaware corporation (the "Company"), I am pleased to offer you the position of SVP and Chief Marketing Officer beginning November 3, 2014. The terms of your new employment relationship with the Company will be as set forth below and will be subject to the approval of the Company's Chief Executive Officer.

1. Position . You will become SVP and Chief Marketing Officer. As such, you will have responsibilities as determined by the Company's Chief Executive Officer. Your duties and responsibilities are subject to change depending on the needs of the Company.

2. Compensation .

a. Base Salary . You will be paid an annualized salary of $290,000 payable in accordance with the Company's standard payroll policies subject to normal required withholding.

b. Salary Review . Your base salary will be reviewed as part of the Company's normal salary review process.

c. Expenses . You will be reimbursed for all reasonable and necessary business expenses incurred in the performance of your duties as provided in the Company's Employee Handbook.

3. Management Incentive Plan . You will be eligible to participate in the Company's Management Incentive Plan, with a target annual bonus of 50% of your annual base salary. The Management Incentive Plan will be paid (if minimum targets are met) in the calendar year in which the relevant fiscal year ends, promptly after the completion of each fiscal year's audit. Your eligibility will begin after 90 days of service with 8x8.

4. Stock Awards.

(a) Initial Equity Grants : Subject to approval by the Board of Directors, you will receive the following awards of stock-based compensation, with the number of shares subject to each award to be calculated by dividing the value of each award stated below based on 30 trading-day average closing price of a share of the Company's Common Stock immediately prior to the grant date, and vesting commencing on the your start date:


Page 2

  1. a nonstatutory stock option valued currently at $600,000 to purchase shares of Common Stock at an exercise price per share equal to Market Value on the grant date, vesting as to one-fourth (1/4) of the shares subject to the option on the first anniversary of your start date and as to one thirty-sixth (1/36) of the remaining shares at the end of each consecutive month thereafter, subject to your continued service;
  2. RSUs of Common Stock valued currently at $300,000 which vest at a rate of one-fourth (1/4) of the shares after the 1st, 2nd, 3rd, 4th anniversary of your start date, subject to your continued service.
  3. RSUs for shares of Common Stock currently valued at $150,000, which shares are subject to two vesting conditions: (A) none of such RSUs shall vest unless and until the average of the Market Value of the Common Stock exceeds 150% of the Market Value on grant date for at least one period of 30 consecutive trading-days during the four-year period following your start date; and (B) if condition (A) is met, then 25% of such RSUs will vest on each consecutive anniversary of your start date, subject to your continued service. If condition (A) is met prior to an annual vesting date in condition (B), the unvested RSUs shall remain subject to the annual vesting requirement in condition (B). If condition (A) is not met within the four-year period, none of such RSUs will ever vest;
  4. RSUs for shares of Common Stock ("TSR Performance Shares") currently valued at $150,000, which shares will vest subject to your continued service and the performance of the price per share of the Common Stock relative to the NASDAQ Composite Index (^IXIC) over the following three measurement periods:
  5. (A) 25% of the TSR Performance Shares can be earned between the grant date and March 31, 2016;

    (B) 50% of the TSR Performance Shares can be earned between the grant date and March 31, 2017;

    (C) 25% of the TSR Performance Shares can be earned between the grant date and March 31, 2018;

    where in each such measurement period, (1) if the performance return on the price per share of Common Stock exceeds the performance return on the NASDAQ Composite Index, (which shall be determined by subtracting the percentage return on the NASDAQ Composite Index from the percentage return on the price per share of the Common Stock), then all of the TSR Performance Shares for such measurement period will be deemed earned and will vest; (2) if the performance return on the price per share of Common Stock is more than 50% lower than the performance return on the NASDAQ Composition Index, then none of the TSR Performance Shares for such measurement period will be deemed earned or vest; and (3) if the performance return on the price per share of Common Stock is between 0% and 50% lower than the performance return on the NASDAQ Composite Index, then the number of TSR Performance Shares deemed earned and vesting for such measurement period will be reduced by 2% for each 1% by which the performance return on the NASDAQ Composite Index exceeds the performance return on the Common Stock. The performance return on each of the price per share of Common Stock and the NASDAQ Composite Index will be determined in the manner described in SEC Regulation S-K, Item 201(e)(1), which assumes a dollar amount invested in


Page 3

    each at the applicable price of the Common Stock and the NASDAQ Composite Index at the beginning of the measurement period, and which shall be compared with the dollar value of the investment at the end of the measurement period based on the 30-day trading average price of each of the Common Stock and the NASDAQ Composite Index prior to and through the grant date and the last trading day of each of the relevant measurement periods, as the case may be.

    Ex.1 - Assume that for the period from the grant date through March 31 2016 the beginning and ending prices per share of Common Stock (determined as provided above) are $9.50 and $12.00, respectively, and the beginning and ending ^IXIC are 3,660 and 3,750, respectively. Assume no dividends are paid by the Company during the period. Therefore, $100 invested in Common Stock at the beginning of the period is worth $126 at the end, a 26% return, and $100 invested in ^IXIC at the beginning of the period is worth $103 at the end, a return of 3%. Therefore, the performance return on the price per share of Common Stock exceeds the performance return on the NASDAQ Composite Index so if you are in continued service to the Company on March 31, 2016 you will earn and vest as to 25% of the TSR Performance Shares.

    Ex.2 - Assume that for the period from the grant date through March 31, 2017, the beginning and ending prices per share of Common Stock (determined as provided above) are $9.50 and $8.00, respectively, and the beginning and ending ^IXIC are 3,660 and 3,250, respectively. Assume no dividends are paid by the Company during the period. Therefore, $100 invested in Common Stock at the beginning of the period is worth $84 at the end, (-16%) return, and $100 invested in ^IXIC at the beginning of the period is worth $89 at the end, (-11%) return. The performance return on the price per share of Common Stock compared with the ^IXIC is (-5%) worse than the performance return on the NASDAQ Composite Index. Therefore, the total number of TSR Performance Shares for the period is reduced by 10% (5% x 2) and 90% of the 50% of the TSR Performance Shares eligible to be earned during such measurement period, or 45% of the total number of TSR Performance Shares will be earned and vest, if you were in continuous service to the Company through March 31, 2017.

(b) Share Retention : You agree to acquire and retain an ownership interest in Common Stock which is equal in value to one times the amount of your base salary in Paragraph 2(a). Shares counted for this purpose will consist of shares of Common Stock you own directly by whatever means acquired, shares under unvested RSUs that are subject only to time-based vesting, shares held in a 401(k) or similar plan, and shares acquired under the Company's Employee Stock Purchase Plan. You will have five years from your start date in which to meet this stock ownership threshold. If at any time thereafter, while you remain SVP and Chief Marketing Officer of the Company, your aggregate share ownership as defined in this Paragraph 4(b) should fall below the threshold, you agree to retain shares as they vest and you acquire them, and not to sell any of your shares of Common Stock, until your share ownership exceeds the threshold. In the event of a termination of your employment, or a Corporate Transaction, this Paragraph 3(b) shall become inapplicable.

(c) Corporate Transaction : In the event that you are subject to an Involuntary Termination (as defined below) within one year following a Corporate Transaction:

  1. if the condition in Paragraph 4(a)(iii) has been met as of the closing date of the Corporate Transaction (based on the price per share of Common Stock being paid in such transaction), vesting shall accelerate with respect to the percentage of then

Page 4

    unvested RSUs still subject to the condition in Paragraph 4(a)(iii)(B), which equals 100% times the quotient of the number of months from the grant date to such closing date divided by 48, and the remainder of the unvested RSUs will continue to vest in accordance with the original vesting schedule, subject only to your continued service subsequent to the Corporate Transaction;

  1. any TSR Performance Shares for which the performance conditions in Paragraph 4(a)(iv) have been met as of the closing date of the Corporate Transaction (based on the price per share of Common Stock being paid in such transaction) shall be settled by delivery of the corresponding number of shares of Common Stock, and all other unvested TSR Performance Shares shall vest over the remainder of the original period expiring March 31, 2018, subject only to your continued service subsequent to the Corporate Transaction with no further performance conditions; and
  2. all remaining unvested options and RSUs as of the closing date of the Corporate Transaction shall continue to vest thereafter subject only to your continued service and if, your employment is terminated without Cause (as defined below) within 12 months following a Corporate Transaction of the Company, all of your remaining unvested options and RSUs granted under Paragraph 4 will vest in full.

(d) "Involuntary Termination" means any of the following events: (i) without your express written consent, a significant reduction of your duties, position or responsibilities relative to your duties, position or responsibilities in effect immediately prior to such reduction; (ii) without your express written consent, a material reduction by the Company (or its successor) of your base salary as in effect immediately prior to such reduction; (iii) without your express written consent, a material reduction by the Company (or its successor) in the kind or level of employee benefits to which you were entitled immediately prior to such reduction with the result that your overall benefits package is significantly reduced; (iv) without your express written consent, your relocation to a facility or a location more than 25 miles from our San Jose, CA. location immediately prior to such relocation; or (v) any purported termination of you other than for Cause (as defined below); and

(e) "Cause" means: (i) any act of personal dishonesty taken by you in connection with your responsibilities in your service to the Company which is intended to result in your personal enrichment; (ii) your conviction of a felony; (iii) any act by you that constitutes material misconduct and is injurious to the Company; (iv) any breach of fiduciary duty to the company, (v) a material breach of any agreement with the company, or (vi) your initiating litigation against the company.

5. Benefits . The Company will make available to you standard vacation, medical and dental insurance benefits. The Company will also make available to you a 401(k) Plan. You are eligible for benefits on the first day of your employment. Medical benefits will start on your date of hire and your dental will start on the first day of the month following your date of hire. You will be eligible to participate in the employee stock purchase plan upon enrollment by Feb 1st or August 1 st of any year.


Page 5

6. Standard Confidentiality and Inventions Assignment Agreement . Like all Company employees, you will be required to sign the Company's standard Confidential Information and Inventions Assignment Agreement (the "Confidentiality Agreement") relating to protection of the Company's proprietary and confidential information and assignment of inventions.

7. At-Will Employment . You will continue to be an employee-at-will, meaning that either you or the Company may terminate your employment at any time, without notice, for any reason or no reason without further obligation or liability to either party. Such termination will not affect the parties' respective obligations under the Confidentiality Agreement. You will receive the Company's Employee Handbook with all of our policies and procedures on your first day of employment.

8. No Outside Consulting . You agree to not sit on any board of directors, or do any outside consulting work for any other person or company while employed full-time at the Company other than with the advance written approval of the Chief Executive Officer of the Company.

9. Background Check . This offer letter is contingent upon the results of a background check and the completion of your reference checks and may be rescinded at anytime in the event the background check fails to meet the employment qualifications of the Company.

10. Expiration Date . If not accepted, this offer will expire on October 24, 2014

11. Start Date . Your new position will be become effective as of November 3, 2014.

Please indicate your acceptance by signing and returning a copy of the signed letter to me via e-mail or facsimile at 408-436-6417.

Congratulations on your new assignment!

Sincerely,

8X8, INC.

By: ____________________________
Vikram Verma
Chief Executive Officer

ACCEPTED:

_____________________________
Enzo Signore

Date: ________________________


Exhibit 31.1

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Vikram Verma, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

January 23, 2015

/s/ V IKRAM V ERMA
Vikram Verma
Chief Executive Officer








Exhibit 31.2

CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, MaryEllen Genovese, certify that:

1. I have reviewed this quarterly report on Form 10-Q of 8x8, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

  1. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  2. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  3. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
  4. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

  1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

January 23, 2015

/s/ M ARY E LLEN G ENOVESE
MaryEllen Genovese
Chief Financial Officer and Secretary








Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vikram Verma, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ V IKRAM V ERMA
Vikram Verma
Chief Executive Officer

January 23, 2015

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.








Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S. C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of 8x8, Inc. (the "Company") for the period ended December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, MaryEllen Genovese, Chief Financial Officer and Secretary of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

  1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ M ARY E LLEN G ENOVESE
MaryEllen Genovese
Chief Financial Officer and Secretary

January 23, 2015

This certification accompanies this Report pursuant to § 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.