# 8X8 INC /DE/ (EGHT) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from 8X8 INC /DE/'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1023731/000102373124000042/eght-20240331.htm
Accession: 0001023731-24-000042
Filing date: 2024-05-21
Report date: 2024-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/EGHT/
All MD&A years: /company/EGHT/mda/
Previous year: /company/EGHT/mda/fy2023/ (FY 2023)
Next year: /company/EGHT/mda/fy2025/ (FY 2025)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Annual Report. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

This section discusses items pertaining to and comparisons of financial results between fiscal 2024 and fiscal 2023. A discussion of fiscal 2023 items and comparisons between fiscal 2023 and fiscal 2022 financial results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2023 (the “2023 MD&A”), filed with the Securities and Exchange Commission on May 25, 2023.

OVERVIEW

We are a leading provider of software-as-a-service solutions for contact center, voice communications, video meetings, employee collaboration, and embeddable communication application program interfaces. Our solutions empower workforces worldwide by connecting individuals and teams so they can collaborate faster, work smarter, and better serve customers, from any location. The communications capabilities and advanced artificial intelligence/machine learning technologies of our contact center, communication and collaboration solutions are integrated into a comprehensive cloud-based offering powered by our global communications platform, which together comprise our 8x8 XCaaS platform solution. The XCaaS platform delivers our unified communications as-a-service, contact center as-a-service, and communications platform as-a-service services and includes artificial intelligence-driven digital assistance, intuitive user interfaces, and real-time business analytics and intelligence, enabling organizations of all sizes to design, deploy and adapt tailored communications and workflows for differentiated employee and customer experiences.

The 8x8 XCaaS platform offers a cloud technology stack for communication, collaboration, and customer interaction. It delivers the security, scalability, high availability, and ease-of-use of a modern cloud-based architecture while masking the complexity of a global communications infrastructure. A comprehensive data layer across the platform powers 8x8 artificial intelligence/machine learning algorithms, as well as vertical-specific and purpose-built applications from our ecosystem of technology partners. This enables data-driven business insights and intelligent integrated applications that can drive employee productivity, resource optimization, and more effective end-customer interactions through simplified and automated workflows. Built with core cloud technologies that we own and manage internally, as well as integrated third-party applications from our technology partners, our XCaaS platform enables agile workplaces and fosters seamless communications and collaboration between an organization’s customers, contact center agents, and employees, regardless of geographic location.

Our customers use our XCaaS platform to create tailored employee and customer experiences that increase productivity, improve responsiveness, and elevate customer and employee satisfaction and loyalty. Our service plans are structured with increasing levels of functionality and are designated as X1, X2, etc., through X8, based on the specific communication needs and customer engagement profile of each user.

Because our XCaaS platform includes unified communications as-a-service, contact center as-a-service and communications platform as-a-service and serves as a single integration framework for communications and customer interactions across an organization, customers can reduce costs associated with provisioning and management, increase customization based on use cases, and facilitate compliance with security and data privacy requirements on a global scale. In fiscal 2023, we introduced platform-wide integration of generative artificial intelligence from OpenAI, making it easier for organizations to unlock the potential of generative artificial intelligence to personalize self-service, bot-based and agent-based customer engagements. The XCaaS platform also integrates with a growing ecosystem of third-party applications, ranging from purpose-built and vertically-focused artificial intelligence-based applications to broadly deployed customer relationship management platforms and leading customer engagement and workforce management software.

Our solutions approach to third party integrations and platform-wide enablement of generative artificial intelligence, combined with flexibility to “mix and match” functionality based on users’ communication requirements and customer engagement profiles, allows organizations of all sizes to design and deploy tailored user experiences previously reserved to very large enterprises.

Our customers range from small businesses to large enterprises across all vertical markets, with users in more than 160 countries. In recent years, we have increased our focus on mid-market, small- and mid-sized enterprise, and public sector customers because these organizations typically have more complex communication and contact center requirements compared to the needs of small business customers. Organizations in these sectors – typically with 500 to 10,000 employees -- are more likely to adopt multiple services and realize greater value from our unified, global communications platform and our growing product portfolio, including artificial intelligence-enabled solutions.

We generate service revenue from subscriptions to our communications services subscriptions as well as from usage of our platform. We generate other revenue from professional services and the sale of office phones and other hardware equipment.

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We define a “customer” as one or more legal entities to which we provide services pursuant to a single contractual arrangement. In some cases, we may have multiple billing relationships with a single customer (for example, where we establish separate billing accounts for a parent company and each of its subsidiaries).

SUMMARY AND OUTLOOK

In fiscal 2024, our total revenue decreased $15.2 million, or approximately 2% year-over-year, to $728.7 million. Our service revenue decreased $9.5 million, or approximately 1% year-over-year, to $700.6 million.

As part of our long-term strategy to expand our enterprise customer base, grow our revenue, and increase our profitability and cash flow, we have focused on reducing the cost of delivering our services and improving our sales efficiency while increasing our investment in research and development. To improve our sales efficiency, we have focused our sales and marketing resources on mid-market and enterprise customers, since these customers are likely to derive the greatest benefit from our unified XCaaS platform. We have also expanded our partner programs to extend our reach within this market, placing increased emphasis on developing a community of value-added resellers who provide implementation services and Tier 1 customer support in addition to sales. To support our customers and partners, we are expanding our customer success organization and investing in improvements to our back-office processes to increase our operational efficiency over time.

We believe that continued innovation is a critical factor in attracting and retaining mid-market and enterprise customers and is an important variable in achieving sustainable growth. We are committed to maintaining a high level of investment in engineering to deliver product innovation across our XCaaS platform, expand our ecosystem of integrated third-party applications, and maintain the high availability our customers require.

In August 2022, we refinanced approximately $403.8 million of the $500.0 million aggregate principal amount of 2024 Notes through an exchange for approximately $201.9 million in 2028 Notes plus approximately $181.8 million in cash. The cash payment was funded with the partial proceeds of a new $250.0 million senior secured term loan due in 2027 entered into in August 2022. Concurrently with the issuance of the 2028 Notes, we repurchased 10,695,000 shares of our common stock for approximately $60.0 million in privately negotiated transactions with a limited number of holders. In September 2022, December 2022 and February 2023, we repurchased $6.0 million, $21.8 million and $5.0 million in aggregate principal amount of the 2024 Notes, respectively, in separate privately negotiated transactions. On February 1, 2024, we paid the remaining aggregate principal of $63.3 million, and accrued interest of $0.2 million, related to the 2024 Notes, which matured on February 1, 2024. See Note 8, Convertible Senior Notes and Term Loan to our consolidated financial statements for details. In May 2023, we voluntarily prepaid $25.0 million of principal on our senior secured term loan, reducing the total principal outstanding to $225.0 million. Due to the adjustable nature of the interest rate on our senior secured term loan, our net income may vary.

KEY BUSINESS METRICS

Our management periodically reviews certain key business metrics to evaluate our operations, allocate resources, and drive financial performance in our business.

Annualized Recurring Subscriptions and Usage Revenue

Our management has measured the success of our strategy to attract and retain customers, in part, by analyzing trends in annualized recurring and usage revenue, or ARR, and believes annualized recurring and usage revenue may be useful to investors in evaluating our performance. Our management believes annualized recurring and usage revenue has been a useful indicator for measuring the overall performance of the business because it includes new customer additions, add-on sales, renewals and customer churn within a single metric. However, as the nature of our business is evolving as we launch and grow multiple products that have consumption-based pricing, we are re-evaluating our methodology and key business metrics we use. Our management has historically used trends in annualized recurring and usage revenue to assess our ongoing operations, allocate resources, and drive the performance of the business. We currently define annualized recurring and usage revenue as (A) equal to the sum of the most recent month of (i) recurring subscription amounts and (ii) platform usage charges for all communications platform as-a-service customers that demonstrate consistent monthly usage above a minimum threshold over the prior six-month period, multiplied by 12, and (B) excluding any non-bundled or overage usage fees associated with unified communications as-a-service subscriptions.

ARR is a performance metric and should be viewed independently of revenue and deferred revenue, and ARR is not intended to be a substitute for, or combined with, any of these items. We caution that our presentation may not be consistent with that of other companies.

We have historically analyzed annualized recurring and usage revenue within three separate customer categories: enterprise, mid-market and small business. We define enterprise customers as customers generating more than $100,000 in annualized recurring and usage revenue, mid-market as customers with annualized recurring and usage revenue between $25,000 and $100,000, and small business as customers with up to $25,000 in annualized recurring and usage revenue. Customers can move between categories over time based on individual annualized recurring and usage revenue. The Company continues to review annualized recurring and usage revenue growth, as well as changes in the mix, within the enterprise, mid-market and small business categories and relies on the growth percentage as one of the measures of potential future performance within the specific annualized recurring and usage revenue by customer size categories.

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Total annualized recurring and usage revenue decreased 1% to $697.0 million at the end of fiscal 2024 from $703.0 million at the end of fiscal 2023. Enterprise annualized recurring and usage revenue decreased 1% to $402.0 million at the end of fiscal 2024 from $405.0 million the end of fiscal 2023. Mid-Market annualized recurring and usage revenue decreased 2% to $127.0 million at the end of fiscal 2024 from $130.0 million at the end of fiscal 2023. Small Business annualized recurring and usage revenue decreased 1% to $167.0 million at the end of fiscal 2024 from $168.0 million at the end of fiscal 2023.

COMPONENTS OF RESULTS OF OPERATIONS

Service Revenue

Service revenue consists of communication services subscriptions, platform usage revenue, and related fees from our unified communications as-a-service, contact center as-a-service, and communications platform as-a-service offerings. We plan to increase service revenue through a combination of new customer acquisition, cross-sell of additional products to existing customers, including new products resulting from our increased investment in innovation, geographic expansion of our customer base outside the United States, innovation in our products and technologies, and through strategic acquisitions of technologies and businesses.

Other Revenue

Other revenue consists of revenue from professional services, primarily in support of deployment of our solutions and/or platform, and revenue from sales and rentals of IP telephones in conjunction with our cloud telephony service. Other revenue is dependent on the number of customers who choose to purchase or rent an IP telephone hardware in conjunction with our service instead of using the solution on their cell phone, computer, or other compatible device, and/or choose to engage our professional services organization for implementation and deployment of our cloud services.

Cost of Service Revenue

Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of capitalized internal-use software, other communication origination and termination services provided by third-party carriers, outsourced customer service call center operations, and other costs such as customer service, and technical support costs. We allocate overhead costs, such as information technology and facilities, to cost of service revenue, as well as to each of the operating expense categories, generally based on relative headcount. Our information technology costs include costs for information technology infrastructure and personnel. Facilities costs primarily consist of office leases and related expenses.

Cost of Other Revenue

Cost of other revenue consists primarily of direct and indirect costs associated with the purchase and shipping and handling of IP telephones as well as the scheduling, shipping and handling, personnel costs, and other expenditures incurred in connection with the professional services associated with the deployment and implementation of our products, and allocated information technology and facilities costs.

Research and Development

Research and development expenses consist primarily of personnel and related costs, third-party development, software and equipment costs necessary for us to conduct our product, platform development and engineering efforts, as well as allocated information technology and facilities costs.

Sales and Marketing

Sales and marketing expenses consist primarily of personnel and related costs, sales commissions, including those to the channel, trade shows, advertising and other marketing, demand generation, and promotional expenses, as well as allocated information technology and facilities costs.

General and Administrative

General and administrative expenses consist primarily of personnel and related costs, professional services fees, corporate administrative costs, tax and regulatory fees, and allocated information technology and facilities costs.

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Impairment of Long-Lived Assets

Impairment of long-lived assets consists of non-cash impairment charges for right-of-use assets and capitalized software. During the third quarter of fiscal year 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the year ended March 31, 2024, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets. See Note 1, The Company and Significant Accounting Policies, for further details.

During the year ended March 31, 2023, the impairment charge of $6.4 million was due to capitalized software and right-of-use assets of $3.7 million and $2.7 million, respectively.

Other Expense, Net

Other expense, net, consists primarily of interest expense related to our term loan and convertible notes, amortization of debt discount and issuance costs, offset by gains on debt extinguishment, as well as other income.

Provision for (Benefit from) Income Taxes

Provision for (benefit from) income taxes consists primarily of foreign income taxes and state minimum taxes in the United States. As we expand the scale of our international business activities, any changes in the United States and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for our United States deferred tax assets, including federal and state non-operating loss carryforwards. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.

RESULTS OF OPERATIONS

Revenue

Service revenue

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Service revenue","$","700,579","","","$","710,044","","","$","(9,465)","","","(1.3)","%"],["Percentage of total revenue","96.1","%","","95.4","%"]]
[[/GREPCENT_TABLE]]

Service revenue decreased by $9.5 million, or 1.3%, for fiscal 2024 compared to fiscal 2023, and this change was driven by a decrease in subscription revenue of $9.5 million related to increased customer churn and down-sell.

We continue to monitor factors that could have an impact on customer buying behavior and demand, including macroeconomic conditions, contract duration, churn, upsell and down-sell, renewals, and payment terms, all of which could cause variability in our revenue.

Other revenue

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Other revenue","$","28,126","","","$","33,894","","","$","(5,768)","","","(17.0)","%"],["Percentage of total revenue","3.9","%","","4.6","%"]]
[[/GREPCENT_TABLE]]

Other revenue decreased by $5.8 million, or 17.0%, in fiscal 2024, as compared to fiscal 2023, due to lower professional service and product revenue of $4.1 million and $1.7 million, respectively.

Our business is diversified by vertical market and geography, and no single customer represented more than 10% of our total revenue during fiscal years 2024 and 2023.

Cost of Revenue

Cost of service revenue

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[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Cost of service revenue","$","192,960","","","$","198,871","","","$","(5,911)","","","(3.0)","%"],["Percentage of service revenue","27.5","%","","28.0","%"]]
[[/GREPCENT_TABLE]]

Cost of service revenue decreased $5.9 million, or 3.0%, during fiscal 2024 compared to fiscal 2023, due to decreases of $6.1 million related to the amortization of capitalized software and intangible assets and $2.6 million of combined employee, consulting and stock-based compensation expense. These decreases were partially offset by an increase of $2.8 million in costs to deliver our services.

We expect cost of service revenue will increase in absolute dollars but generally remain consistent or decline as a percentage of revenue in future periods.

Cost of other revenue

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Cost of other revenue","$","31,945","","","$","42,604","","","$","(10,659)","","","(25.0)","%"],["Percentage of other revenue","113.6","%","","125.7","%"]]
[[/GREPCENT_TABLE]]

Cost of other revenue decreased $10.7 million, or 25.0%, in fiscal 2024 compared to fiscal 2023, primarily due to $7.8 million decreased personnel-related costs to deliver our professional services coupled with $2.9 million lower product costs.

Operating Expenses

Research and development

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Research and development","$","136,216","","","$","142,491","","","$","(6,275)","","","(4.4)","%"],["Percentage of total revenue","18.7","%","","19.2","%"]]
[[/GREPCENT_TABLE]]

Research and development expenses decreased $6.3 million, or 4.4%, in fiscal 2024 compared to fiscal 2023, primarily due to decreases of $6.5 million in stock-based compensation, $1.8 million in amortization of capitalized software $0.6 million in software licenses. These decreases were partially offset by increases of $2.2 million in combined employee, consulting and facility costs and $0.3 million in internally-developed software and other costs.

Sales and marketing

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Sales and marketing","$","271,944","","","$","311,883","","","$","(39,939)","","","(12.8)","%"],["Percentage of total revenue","37.3","%","","41.9","%"]]
[[/GREPCENT_TABLE]]

Sales and marketing expenses decreased $39.9 million, or 12.8%, in fiscal 2024 compared to fiscal 2023 primarily due to decreases of $19.3 million in personnel-related and consulting costs, $17.2 million of combined paid media, marketing services and other costs, and $8.4 million in stock-based compensation expense. These decreases were partially offset by an increase of $5.2 million in channel commissions and amortization of deferred commission.

General and administrative

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["General and administrative","$","112,209","","","$","108,001","","","$","4,208","","","3.9","%"],["Percentage of total revenue","15.4","%","","14.5","%"]]
[[/GREPCENT_TABLE]]

General and administrative expenses increased $4.2 million, or 3.9%, in fiscal 2024 compared to fiscal 2023 primarily due a $13.9 million increase primarily due to Fuze regulatory charges and $3.4 million increase of combined acquisition, integration, contract termination and other costs. This increase was partially offset by decreases of $6.3 million in stock-based compensation and $6.9 million in personnel-related, consulting and other costs.

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Impairment of long-lived assets

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Impairment of long-lived assets","$","11,034","","","$","6,380","","","$","4,654","","","72.9","%"],["Percentage of total revenue","1.5","%","","0.9","%"]]
[[/GREPCENT_TABLE]]

Impairment of long-lived assets increased $4.7 million in fiscal 2024 compared to fiscal 2023. During the third quarter of fiscal 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the year ended March 31, 2024, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the consolidated statements of operations and consisted of an $11.0 million impairment of operating lease right-of-use assets. See Note 1, The Company and Significant Accounting Policies, for further details.

During the year ended March 31, 2023, the impairment charge of $6.4 million was due to capitalized software and right-of-use assets of $3.7 million and $2.7 million, respectively.

Other expense, net

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Other expense, net","$","(36,347)","","","$","(4,044)","","","$","(32,303)","","","NM"],["Percentage of total revenue","(5.0)","%","","(0.5)","%"]]
[[/GREPCENT_TABLE]]

We recognized $36.3 million of other expense, net during fiscal 2024 compared to $4.0 million of other expense, net during fiscal 2023 primarily due to $18.5 million gain from debt extinguishment from the 2024 convertible notes recorded in the prior year compared to a $1.8 million loss on debt extinguishment in fiscal 2024, $12.3 million increase in interest expense on our variable-rate term loan entered into in the second quarter of fiscal 2023, an increase of $2.0 million in unrealized foreign exchange losses, and $1.8 million of gain on sale of assets recorded in the prior year. These were partially offset by $2.8 million of other income driven by interest income earned on available-for-sale investments and $1.8 million gain on remeasurement of warrants issued in connection with the term loan.

Provision for income taxes

[[GREPCENT_TABLE]]
[["","For the years ended March 31,"],["(in thousands, except percentages)","2024","","2023","","Change"],["Provision for income taxes","$","3,642","","","$","2,807","","","$","835","","","29.7","%"],["Percentage of total revenue","0.5","%","","0.4","%"]]
[[/GREPCENT_TABLE]]

For the year ended March 31, 2024, we recorded an income tax provision of $3.6 million compared to an income tax provision of $2.8 million in fiscal 2023, primarily due to higher federal and state income taxes as a result of the application of certain 2017 Tax Cuts and Jobs Act tax law changes that limited the amount of taxable income that can be offset by net operating loss carryforwards.

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Liquidity and Capital Resources

We believe that our existing cash, cash equivalents and investment balances and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months and the foreseeable future. Although we believe we have adequate sources of liquidity for the next 12 months and the foreseeable future, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets could impact our business and liquidity.

Cash, Cash Equivalents, and Investments

As of March 31, 2024, we had $117.3 million of cash and cash equivalents and short-term investments. In addition, we had $0.5 million in restricted cash in support of letters of credit securing leases for office facilities.

Our primary requirements for liquidity and capital are working capital, research and development and marketing activities, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. Our current capital deployment strategy for fiscal 2024 is to invest excess cash on hand to support our continued growth initiatives into select markets and planned software development activities, and pay down our debt. As of March 31, 2024, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the upcoming fiscal year include our interest payments related to our debt obligations, operating lease obligations, and operating and capital purchase commitments. For information regarding our expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 6, Leases, and Note 7, Commitments and Contingencies, respectively, to the consolidated financial statements. Additionally, refer to Note 8, Convertible Senior Notes and Term Loan, to the consolidated financial statements for more information related to our debt obligations and applicable covenants.

Cash Flows

The following is a summary of our cash flows provided by (used in) operating, investing and financing activities:

[[GREPCENT_TABLE]]
[["","Years Ended March 31,"],["(In thousands)","2024","","2023","","2022"],["Net cash provided by operating activities","$","78,985","","","$","48,786","","","$","34,680"],["Net cash provided by (used in) investing activities","8,546","","","6,050","","","(159,978)"],["Net cash provided by (used in) financing activities","(83,411)","","","(37,784)","","","105,425"],["Effect of exchange rate changes on cash","(126)","","","(5,037)","","","(585)"],["Net increase (decrease) in cash and cash equivalents","$","3,994","","","$","12,015","","","$","(20,458)"]]
[[/GREPCENT_TABLE]]

Cash provided by operating activities increased by $30.2 million to $79.0 million for fiscal 2024, mainly due to an increase in cash received from customers, decrease in cash paid to suppliers, and a decrease in cash paid for sales commission costs. Cash provided by investing activities increased $2.5 million to $8.5 million for fiscal 2024, mainly due to decreases in the purchases, sales, and maturities of investments. Cash used in financing activities increased by $45.6 million to $83.4 million for fiscal 2024, due to principal repayments of $25.0 million on the term loan and $234.8 million proceeds in fiscal 2023 offset by a reduction in repayment and exchange of $154.0 million on the convertible senior notes and repurchase of common stock of $60.2 million in fiscal 2023.

Debt Obligations

See Note 8, Convertible Senior Notes and Term Loan in the audited consolidated financial statements included elsewhere in this Annual Report for information regarding our debt obligations.

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Material Cash Requirements and Other Obligations

The following table summarizes the payments due for our outstanding contractual obligations as of March 31, 2024:

[[GREPCENT_TABLE]]
[["","Total","","Less than 1 year","","1-3 years","","3-5 years","","Thereafter"],["2028 Notes"],["Principal payments","$","201,914","","","$","\u2014","","","$","201,914","","","$","\u2014","","","$","\u2014"],["Interest payments","32,307","","","8,077","","","24,230","","","\u2014","","","\u2014"],["Term loan(1)"],["Principal payments","225,000","","","\u2014","","","225,000","","","\u2014","","","\u2014"],["Interest payments(2)","92,393","","","27,718","","","64,675","","","\u2014","","","\u2014"],["Operating lease obligations(3)","77,284","","","13,737","","","23,964","","","21,148","","","18,435"],["Purchase obligations","61,154","","","44,855","","","15,150","","","877","","","272"],["Total","$","690,052","","","$","94,387","","","$","554,933","","","$","22,025","","","$","18,707"]]
[[/GREPCENT_TABLE]]

(1) See Note 8, Convertible Senior Notes and Term Loan, in the Notes to Consolidated Financial Statements included in this Annual Report for further information.

(2) Total interest payments of $92.4 million were determined using the effective interest rate of 11.9% as of March 31, 2024. See Note 8, Convertible Senior Notes and Term Loan, in the Notes to Consolidated Financial Statements included in this Annual Report regarding the interest rate terms.

(3) See Note 6, Leases, in the Notes to Consolidated Financial Statements included in this Annual Report for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Refer to Note 1, The Company and Significant Accounting Policies, in the Notes to Consolidated Financial Statements included in this Annual Report, which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.

We have identified the policies below as critical to our business and the understanding of our results of operations. These policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our consolidated financial statements. Although we believe our judgments and estimates are appropriate, actual future results may differ from our estimates. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. The impact and any associated risks related to these policies on our business operations is discussed throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations", where such policies affect our reported and expected financial results.

Revenue Recognition

Significant management judgments and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

Revenue is recognized when performance obligations are satisfied, based on the transaction price. We generally bill our customers on a monthly basis. Contracts typically range from annual to multi-year agreements, generally with payment terms of net 30 days.

We record reductions to revenue for estimated sales returns and customer credits at the time the related revenue is recognized. Sales returns and customer credits are estimated based on our historical experience, current trends, and our expectations regarding future service delivery and platform performance. We monitor the accuracy of its sales reserve estimates by reviewing actual returns and credits and adjust them for its future expectations to determine the adequacy of its current and future reserve needs. If actual future returns and credits differ from past experience, additional reserves may be required.

Service Revenue Recognition

Service revenue from subscriptions to our cloud-based technology platform is recognized on a ratable basis over the contractual subscription term beginning on the date that the platform is delivered to the customer until the end of the contractual period. Payments received in advance of subscription services being rendered are recorded as deferred revenue; revenue recognized for services rendered in advance of payments received are recorded as contract assets. Usage fees, when bundled, are billed in advance and recognized over time on a ratable basis over the contractual subscription term. Non-bundled usage fees are recognized as actual usage occurs.

Other Revenue Recognition

Other revenue is primarily comprised of product revenue and professional services revenue. We recognize product revenue for telephony equipment at a point in time when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience. Professional services for deployment,

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configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by us directly. Professional services revenue is recognized as services are performed or upon completion of the deployment.

Allowance for Credit Losses

We account for allowances for credit losses under the current expected credit loss, or CECL, impairment model for our financial assets, including accounts receivable, and present the net amount of the financial instrument expected to be collected. The current expected credit loss impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers forecasts of future economic conditions in addition to information about past events and current conditions. Using this model, we estimate the adequacy of the allowance for credit losses at the end of each reporting period based on the aging of the receivable balance, current and historical customer trends, communications with customers, and macro-economic conditions. Amounts are written off after considerable collection efforts have been made and the amounts are determined to be uncollectible.

Acquisitions

Acquisitions are accounted for as business combinations, which treatment requires that the various assets acquired and liabilities assumed be recognized based on their fair value, accordingly, significant estimates and judgments are made to arrive at the fair values. The use of estimates involves uncertainty, therefore, the initial accounting for goodwill, intangible assets (and related amortization in future periods), property, plant and equipment, right of use assets (and related operating lease liabilities and amortization), prepaid and other current assets, accrued liabilities, deferred revenue, holdback consideration, and other liabilities are all subject to estimates. The actual results could be significantly different from the estimates.

Capitalized Internal-Use Software Costs

Certain costs of software are capitalized during the application development phase. We begin to capitalize costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, it is probable that the project will be completed, and the software will be used as intended.

Capitalized internal-use software development costs are included in property and equipment. Once the project has been completed, these costs are amortized to cost of service revenue on a straight-line basis over the estimated useful life of the related asset as noted in Property and Equipment.

Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in research and development expense. We test capitalized internal-use software development costs for impairment on an annual basis, or as events occur or circumstances change that could impact the recoverability of the capitalized costs.

Accounting for Long-Lived Assets

We review the recoverability of our long-lived assets, such as property and equipment, right-of-use assets, definite lived intangibles, or capitalized internal-use software costs, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. Examples of such events could include the disposal of a significant portion of such asset, an adverse change in the market involving the business employing the related asset, or a significant change in the operation or use of an asset. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate the fair value of long-lived assets and asset groups through future cash flows.

During fiscal 2024, we recorded an impairment of long-lived assets related to the Company's right-of-use assets on the consolidated statements of operations. See Note 6, Leases, for further details.

Goodwill and Other Intangible Assets

Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested annually for impairment and more often if there is an indicator of impairment.

We perform testing for impairment of goodwill on an annual basis, or as events occur or circumstances change that would more likely than not reduce the fair value of our single reporting unit below its carrying amount. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value.

Intangible assets, consisting of acquired developed technology, domain names, and customer relationships, acquired in business combinations were initially measured at fair value and were determined to have definite lives. Thereafter, intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense related to developed technology is included in cost of revenue. Amortization expense related to customer relationships and domain names are included in sales and marketing expense. Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.

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