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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2012
Commission file number 000-21783
(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)
810 West Maude Avenue
Sunnyvale, CA 94085
(Address of Principal Executive Offices including Zip Code)
(408) 727-1885
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.001 PER SHARE NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES NO
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 such reports), and (2) has been subject to such filing requirements for
the past 90 days. 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 NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this
Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. 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 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 Act.) Yes No
Based on the closing sale price of the Registrant's common stock on the NASDAQ Capital Market System on September 30, 2011, the aggregate market value
of the voting stock held by non-affiliates of the Registrant was $276,930,119. For purposes of this disclosure, shares of common stock held by persons who
hold more than 5% of the outstanding shares of common stock and shares held by officers and directors of the Registrant have been excluded because such
persons may be deemed to be affiliates. The determination of affiliate status for this purpose is not necessarily a conclusive determination for any other
purpose.
The number of shares of the Registrant's common stock outstanding as of May 16, 2012 was 70,708,589.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the Proxy Statement to be filed within 120 days of March 31, 2012 for the
2012 Annual Meeting of Stockholders.

Table of contents

  • Page 1
    ...Maude Avenue Sunnyvale, CA 94085 (Address of Principal Executive Offices including Zip Code) (408) 727-1885 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered Title of each class COMMON STOCK, PAR...

  • Page 2
    8X8, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2012 Part I. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II. Item 5. ...Independence Principal Accountant Fees and Services 69 70 70 70 70 Market for Registrant's Common Stock and Related Security Holder Matters and ...

  • Page 3
    ... telephone system, including IP dial tone, long distance and all of the business class features typically associated with a traditional business phone system or PBX. Each business customer subscribes to a number of various lines and services (e.g. physical phone extensions, virtual extensions, fax...

  • Page 4
    ... differentiated services or functions, such as video communications, that the network was not originally designed to accommodate. Until recently, traditional telephone companies have avoided the use of packet-switched networks for transmitting voice calls due to the potential for poor sound quality...

  • Page 5
    ... with the Virtual Office product line including the call control engine, protocol stacks and network address translation ("NAT") traversal firmware for the customer premise equipment. As a result, we are able to update the software functionality of our services without third party assistance and...

  • Page 6
    ...businesses Auto-attendant providing dial by extension, name or group; Unlimited calling to the US, Canada, 20 additional countries and other 8x8 subscribers, as well as low international rates; Unlimited 8x8 extension-to-extension dialing anywhere in the world; Direct Inward Dial (DID) phone number...

  • Page 7
    ... equipment and service features including high definition HD audio, corporate directory display and lookup, intercom paging, shared line appearance and Power over Ethernet capability. In fiscal 2012, we began selling Cisco IP Phones. In the second quarter of fiscal 2009, we launched the 8x8 675xi...

  • Page 8
    ...on the service. Network Operations Center We maintain a network operations center at our headquarters in Sunnyvale, California and employ a staff of 32 individuals with experience in voice and data operations to provide 24-hour operations support, 7 days per week. We use various tools to monitor and...

  • Page 9
    ..., support of new customer premise equipment, new unified services and the enhancement of existing products and services that are essential to our success. We currently employ 39 individuals in research, development and engineering activities in our facilities in Sunnyvale, California. Research...

  • Page 10
    ...patents and additional United States and foreign patent applications are pending. Our patents expire on dates ranging from 2012 to 2028. We cannot predict whether our pending patent applications will result in issued patents. To protect our trade secrets and other proprietary information, we require...

  • Page 11
    ... services from broadband Internet service providers, telephone companies and cable companies must continue to invest in the deployment of high speed broadband networks to residential and business customers, over which we have no control. In addition, VoIP networks must improve quality of service...

  • Page 12
    ... that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies and mobile communications companies. Some of these providers offer products and services that directly compete with our own offerings, which...

  • Page 13
    ... companies, cable companies, competitive local exchange carriers, alternative voice communication providers and independent VoIP providers. In addition, our customers are not subject to long-term contractual commitments to purchase our services and can terminate our service and switch to competitors...

  • Page 14
    ... and terminate substantially all of our public switched telephone network calls. We leverage the infrastructure of third party network service providers to provide telephone numbers, PSTN call termination and origination services, and local number portability for our customers rather than deploying...

  • Page 15
    ... results. Our leased network and data centers are subject to various points of failure. Problems with cooling equipment, generators, uninterruptible power supply, routers, switches, or other equipment, whether or not within our control, could result in service interruptions for our customers as...

  • Page 16
    .... In addition, our business would suffer if our network suppliers increased the prices for their services and we were unable to pass along the increased costs to our customers. We depend on contract manufacturers to manufacture substantially all of our products and third party vendors for IP phones...

  • Page 17
    ..., state, local, country-specific and international regulations, and changes may require us to modify existing products and/or services. In addition to reliability and quality standards, the market acceptance of telephony over broadband IP networks is dependent upon the adoption of industry standards...

  • Page 18
    ... public switched telephone network services. Although we have consistently maintained that these taxes, fees or surcharges do not apply to our service for a variety of reasons depending on the statute or rule that establishes such obligations, a number of states have changed their statutes...

  • Page 19
    ... service as described above are supported by a national call center that is run by a third-party provider and operates 24 hours per day, seven days per week. These operators still receive the customer's registered service location and phone number automatically, and coordinate connecting the caller...

  • Page 20
    ...VoIP service to require an "Internet connection" rather than a broadband connection, and to "define connectivity in terms of the ability to connect calls to the United States E.164 telephone numbers...partner with to interface with the public switch telephone network. The rates we pay for the services ...

  • Page 21
    ... IP-based services. Specifically, tw telecom seeks direct IP-to-IP interconnection from incumbent local telephone companies for the transmission and routing of tw telecom's facilities-based VoIP services and for voice services that originate and terminate in Time Division Multiplexing format but...

  • Page 22
    ... information such as the phone numbers called by a consumer, the frequency, duration, and timing of such calls, and any services/features purchased by the consumer, such as call waiting, call forwarding, and caller ID, in addition to other information that may appear on a consumer' s bill. 20

  • Page 23
    ... our process for local number portability provisioning, our growth may be negatively affected. We support local number portability, or LNP, which allows our customers to retain their existing telephone numbers when subscribing to our services. Transferring numbers is a manual process that, in the...

  • Page 24
    ... future if customers are not satisfied with our service. Other factors, including increased competition from other VoIP providers, alternative technologies, and adverse business conditions also influence our churn rate. Because of churn, we have to acquire new customers on an ongoing basis just to...

  • Page 25
    ... of technical innovations; future legislation or regulation of the Internet and/or VoIP; loss of key personnel; new entrants into the VOIP service marketplace, including cable and incumbent telephone companies and other wellcapitalized competitors; • new products or new contracts by us...

  • Page 26
    ...space in San Jose, California for our principal headquarters. The scheduled commencement date for the San Jose, California facility is August 1, 2012, and the term of the lease is seven years. We believe our new facilities will adequately meet our current and foreseeable future needs. For additional...

  • Page 27
    ... OF EQUITY SECURITIES We completed our initial public offering on July 2, 1997 under the name 8x8, Inc. From that date through April 3, 2000, our common stock was traded on the NASDAQ National Market, or the NASDAQ, under the symbol "EGHT." From April 4, 2000 through July 18, 2001, our common...

  • Page 28
    ... year period assuming the investment of $100 on March 31, 2007 in each of 8x8' s common stock, the NASDAQ Composite Index and the NASDAQ Telecommunications Index. The graph is furnished, not filed, and the historical return cannot be indicative of future performance. COMPARISON OF 5 YEAR CUMULATIVE...

  • Page 29
    ...and 8x8 Cloud-Based Computing solutions. As of March 31, 2012, we had more than 28,500 business customers. Each business customer subscribes to a number of various lines and services (e.g. physical phone extensions, contact center seats, virtual extensions, fax lines, toll free numbers, receptionist...

  • Page 30
    .... In accordance with the guidance of ASC 605-25, we allocate 8x8 revenues, including activation fees, among the 8x8 IP telephones and subscriber services based on the fair value determined by their relative selling prices. Revenues allocated to these devices are recognized as product revenues during...

  • Page 31
    ...requests from several state, municipal and 9-1-1 taxing agencies seeking payment of taxes that are applied to or collected from the customers of providers of traditional public switched telephone network services. We recorded no expense for the years ended March 31, 2012, 2011 and 2010 for estimated...

  • Page 32
    ... the expected term equal to the expected term of the option. The dividend yield assumption was based on our history and expectation of future dividend payout. ASC 718 requires us to calculate the additional paid in capital pool ("APIC Pool") available to absorb tax deficiencies recognized subsequent...

  • Page 33
    ...9 and customers acquired directly from our acquisitions in the first quarter of fiscal and second quarter of fiscal Inc. "Central Host" and Contactual, respectively, and does not include customers of Virtual Office Solo or Zerigo, Inc. "Zerigo" . from Central Host, (3) Business customers...

  • Page 34
    ... 15, 2011. Our business service subscriber base grew from approximately 24,000 customers at the end of fiscal 2011 to approximately 28,500 customers on March 31, 2012. The increase was partially offset by a decrease in customers of our residential services. These changes were consistent with the...

  • Page 35
    ..., system manufacturing, assembly and testing performed by third party vendors, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, quality assurance, shipping and handling. We allocate a portion of service revenues to product revenues but...

  • Page 36
    ... 46.0% Year-over-Year Change 2011 to 2012 2010 to 2011 6,236 19.6% $ 2,610 9.0% Sales and marketing Percentage of total revenue $ Sales and marketing expenses consist primarily of personnel and related overhead costs for sales, marketing, and customer service. Such costs also include outsourced...

  • Page 37
    ... with the sale of shares of our common stock in fiscal 2005 and 2006, we issued warrants in three different equity financings. The change in income on change in fair value of the warrant liability for fiscal 2012 compared to fiscal 2011 is due to the partial exercise and expiration of all remaining...

  • Page 38
    ..., compared with $4.8 million used in financing activities in fiscal 2011. Our financing activities for fiscal 2012 used cash of $2.6 million for the repurchase of shares of common stock under our share repurchase plan, $0.4 million for the buyout of stock options under the existing provisions of our...

  • Page 39
    ... Third party customer support provider 2,158 2,158 Third party network service providers 664 70 7 741 Open purchase orders 48 48 $ 3,877 $ 1,680 $ 1,653 $ 1,682 $ 6,422 $ 15,314 On April 27, 2012, the Company entered into a seven-year lease for a new primary facility in San Jose, California, with...

  • Page 40
    ... AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE Page FINANCIAL STATEMENTS: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at March 31, 2012 and 2011 Consolidated Statements of Income for each of the three years in the...

  • Page 41
    ... of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of 8x8, Inc. as of March, 31, 2012 and...

  • Page 42
    ...: Authorized: 5,000,000 shares; Issued and outstanding: no shares at March 31, 2012 and 2011 Common stock, $0.001 par value: Authorized: 100,000,000 shares; Issued and outstanding: 70,679,493 shares and 62,379,030 shares at March 31, 2012 and 2011, respectively Additional paid-in capital Accumulated...

  • Page 43
    ... operations Other income (loss), net Income (loss) on change in fair value of warrant liability Income before provision (benefit) for income taxes Provision (benefit) for income taxes Net income Net income per share: Basic Diluted Weighted average number of shares: Basic Diluted 66,413 70,149 63,087...

  • Page 44
    ... Issuance of common stock under stock plans Issuance of common stock on exercise of warrant Issuance of common stock for acquisition of Central Host, Inc. Issuance of restricted common stock Repurchase of common stock Buyback of employee stock options Stock compensation charge Unrealized investment...

  • Page 45
    ... investment Acquisition of businesses, net of cash acquired Proceeds from the sale of property and equipment Net cash used in investing activities Cash flows from financing activities: Capital lease payments Repurchase of common stock Buyback of employee stock options and stock purchase rights...

  • Page 46
    ... services under the 8x8 brand. As of March 31, 2012, the Company had more than 28,500 business customers. Each business customer subscribes to a number of various lines and services (e.g. physical phone extensions, contact center seats, virtual extensions, fax lines, toll free numbers, receptionist...

  • Page 47
    ... 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...

  • Page 48
    ...' s manufacturing facilities. If the Company' s review indicates a reduction in utility below carrying value, it reduces inventory to a new cost basis. If future demand or market conditions are different than the Company' s current estimates, an inventory adjustment may be required, and would be...

  • Page 49
    ..., but are annually tested for impairment and more often if there is an indicator of impairment. Intangible assets with finite useful lives are amortized on a straight-line basis over the periods benefited. The Company reviews the recoverability of its long-lived assets when events or changes in...

  • Page 50
    ...2010, respectively. SUBSCRIBER ACQUISITION COSTS Subscriber acquisition costs are expensed as incurred and include the advertising, marketing, promotions, commissions, rebates and equipment subsidy costs associated with the Company' s efforts to acquire new subscribers. INCOME TAXES Income taxes are...

  • Page 51
    ... on their obligations to the Company, such failure to fulfill supply requirements of the Company could materially impact future operating results, financial position and cash flows. The Company also relies primarily on third party network service providers to provide telephone numbers and PSTN call...

  • Page 52
    ... of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and employee restricted purchase rights. 2012 Numerator: Net...

  • Page 53
    ...Company's consolidated results of operation and financial condition. In September 2011, the FASB issued ASU No. 2011-08, "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment," ("ASU 2011-08") which simplifies how entities test goodwill for impairment. This accounting update...

  • Page 54
    ...provision for income taxes. In addition, at March 31, 2012, the Company had research and development credit carryforwards for federal and state tax reporting purposes of approximately $1.8 million and $3.2 million, respectively. The federal credit carryforwards will expire at various dates beginning...

  • Page 55
    ... occurs in a future period when the Company has already determined that its deferred tax assets are more likely than not realizable. The Company does not expect the unrecognized tax benefits to change significantly over the next 12 months. The Company files U.S. federal, state and foreign income...

  • Page 56
    ... table presents the Company' s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and 2011 (in thousands): Quoted Prices in Active Markets for Identical Assets (Level 1) Cash equivalents: Money market funds Short-term investments: Mutual...

  • Page 57
    ...' 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...

  • Page 58
    ...lease agreement that expires in August 2012. The facility leases include rent escalation clauses, and require the Company to pay utilities and normal maintenance costs. On April 27, 2012, the Company entered into a seven-year lease for a new primary facility in San Jose, California, with a scheduled...

  • Page 59
    ..., the Company was named a defendant in a lawsuit, Klausner Technologies, Inc. v. Oracle Corporation et al., along with 30 other defendants. On November 1, 2011, Klausner dismissed the Complaint voluntarily and filed new complaints separating the defendants, including a new Complaint against 8x8. The...

  • Page 60
    ... for issuance thereunder. In fiscal 2001, the number of shares reserved for issuance was increased to 3,600,000 shares by the Company' s board of directors. Under the terms of the 1999 Plan, options may not be issued to either officers or directors of the Company unless granted to an officer in...

  • Page 61
    ... Plan (the "2003 Contactual Plan") and registered an aggregate of 171,974 shares of the Company's common stock that may be issued upon the exercise of stock options previously granted under the 2003 Contactual Plan and assumed by the Company when it acquired Contactual. No new stock options or other...

  • Page 62
    ... to options outstanding includes 171,974 shares subject to options assumed under the 2003 Contactual Plan. Significant option groups outstanding at March 31, 2012 and related weighted average exercise price and contractual life information for 8x8, Inc.'s stock option plans are as follows: Options...

  • Page 63
    ...969 shares, respectively, were issued under the Employee Stock Purchase Plan. In May 2006, the Company' s board of directors approved a ten-year extension of the Employee Stock Purchase Plan. Stockholders approved a ten-year extension of the Employee Stock Purchase Plan at the 2006 Annual Meeting of...

  • Page 64
    Years Ended March 31, 2012 Expected volatility Expected dividend yield Risk-free interest rate Weighted average expected rights term Weighted average fair value of rights granted $ 73% 0.10% 0.75 years 1.67 $ 2011 61% 0.23% 0.75 years 0.79 $ 2010 84% 0.30% 0.79 years 0.40 62

  • Page 65
    ...for making operating decisions and assessing financial performance. The Company has one reportable segment. The following table presents net revenues by groupings of similar products (in thousands): Years Ended March 31, 2012 8x8 service, equipment and other Technology licensing and related software...

  • Page 66
    ... of cloud services pursuant to which the Company acquired 100% of the outstanding stock of Zerigo from its sole shareholder. Under the terms of the agreement, the Company paid the selling shareholder $750,000 in cash and issued 207,756 shares of its common stock. In addition, the Company agreed to...

  • Page 67
    ..., the Company acquired 100% of the outstanding shares of capital stock of Contactual, Inc. ("Contactual"), a provider of cloud-based call center and customer interaction management solutions, pursuant to the terms of a merger agreement between the Company and Contactual. The Company issued a total...

  • Page 68
    ...had taken place at the beginning of each reporting period presented. The unaudited pro forma financial information for the year ended March 31, 2012 combined the historical results of the Company for the year ended March 31, 2012, the historical results of Contactual for the six months ended June 30...

  • Page 69
    ... entered into an agreement with Central Host pursuant to which the Company acquired this provider of managed hosting services from its sole shareholder. Under the terms of the agreement, the Company paid $1,000,000 in cash and issued 432,276 shares of 8x8 common stock, at an average price of $1.388...

  • Page 70
    ... is as follows (in thousands): Cash - 8x8, Inc. Cash - 8x8 Europe SARL Net tangible assets - 8x8 Europe SARL Total investment $ $ 250 65 41 356 In February 2012, the Company reviewed the recoverability of its strategic investment due to a change in circumstances that indicated that the carrying...

  • Page 71
    8X8, INC. CONSOLIDATED QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) QUARTER ENDED March 31, 2012 Dec. 31, 2011 Sept. 30, 2011 June 30, 2011 March 31, 2011 Dec. 31, 2010 Sept. 30, 2010 June 30, 2010 Service revenue Product revenue Total revenue Operating expenses: ...

  • Page 72
    ... because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Moss Adams LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K has issued an attestation report on...

  • Page 73
    ... presented in our definitive proxy statement for our 2012 Annual Meeting of Stockholders to be held on or about July 24, 2012, which information is incorporated into this report by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required to be provided in response to this item...

  • Page 74
    ... on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on May 23, 2012. 8X8, INC. By: /s/ BRYAN R. MARTIN Bryan R. Martin, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature...