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, 2017June 30, 2018

OR

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

For the transition period from ________to _________

Commission file number 000-21783

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

 

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

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

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

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.   x YES     ¨ NO   

      Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES  x     NO  ¨

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

      If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   ¨        NO   x

      The number of shares of the Registrant's Common Stock outstanding as of January 26,July 30, 2018 was 92,162,543.93,321,888.

FORM 10-Q
TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	Page No.
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets at December 31, 2017June 30, 2018 and March 31, 20172018	2
Condensed Consolidated Statements of Operations for the three and nine            months ended December 31,June 30, 2018 and 2017 and 2016	3
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine            months ended December 31,June 30, 2018 and 2017 and 2016	4
Condensed Consolidated Statements of Cash Flows for the ninethree months            ended December 31,June 30, 2018 and 2017 and 2016	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	1618
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2322
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	2423
Item 1A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	2524
Item 5. Other Information	2524
Item 6. Exhibits	25
Signature	26

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Part I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

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

2

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

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

3

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

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

4

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

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

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

1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

8x8, Inc. (8x8 or the Company)The Company is a leading provider of globalenterprise cloud communications solutions, including unified communications, team collaboration, contact center, and customer engagement solutions toanalytics, integrated over a million business users worldwide.single Software-as-a-Service (SaaS) platform. The Company's suite of products weaves together8x8 Communications Cloud^TM offers businesses a secure, reliable and simplified approach to transitioning their legacy, on-premises communications systems to the cloud. This comprehensive solution, built from owned and managed cloud technologies, enables customers to rely on a single provider for their global communications conferencing, collaboration and contact center solutions so today's organization can deliver exceptional employee and customer experiences. 8x8 technology provides one integrated platform for employees and customers engagement solutions,capabilities as well as a real-time data analytics platform for constant learningcustomer support requirements. 8x8 customers are spread across more than 100 countries and improvement.range from small businesses to large enterprises.

BASIS OF PRESENTATION

The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the consolidated financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 20182019 refers to the fiscal year ending March 31, 2018)2019).

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared on substantially the same basis as our annual consolidated financial statements for the fiscal year ended March 31, 2017.2018, with the exception of new revenue recognition guidance discussed in the recently adopted accounting principles section below. In the opinion of the Company's management, these interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of our financial position, results of operations, and cash flows for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from these estimates.

The March 31, 20172018 year-end condensed consolidated balance sheet data in this document were derived from audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements as of and for the fiscal year ended March 31, 20172018 and notes thereto included in the Company's fiscal 20172018 Annual Report on Form 10-K.

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

RECLASSIFICATIONACQUISITION

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

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

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DXI

Acquisition

In May 2015,April 2018, the Company entered into a sharean asset purchase agreement with the shareholders of DXI Limited for aMarianaIQ, Inc. The total aggregate purchase price of $22.5was $3.5 million, consisting of $18.7approximately $2.6 million in cash paid to the DXI shareholders at closing and $3.8$0.9 million in cash deposited into escrow to be held for two yearsfifteen months as security against indemnity claims made by the Company after the closing date. During the fiscal quarter ended June 30, 2017, $1.4 million of the cash held in escrow was returned to the Company and the escrow fund was closed. Since the purchase accountingSee Note 11 for the acquisition was finalized by March 31, 2016, the proceeds are realized as a gain and reported as other income in the consolidated statements of operations.

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

PRINCIPLES OF CONSOLIDATION

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

SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies used in preparation of these condensed consolidated financial statements are disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 20172018 filed with the SEC on May 30, 2017,2018, and there have been no changes to the Company's significant accounting policies during the ninethree months ended December 31, 2017,June 30, 2018 except for the accounting policies described below that were updated as describeda result of adopting Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09 or ASC 606). ASU 2014-09 also included Subtopic 340-40,Other Assets and Deferred Costs - Contracts with Customers,which sets forth the requirement of deferring incremental costs of obtaining a contract with a customer. All amounts and disclosures set forth herein are in the "Recently Adopted Accounting Pronouncements" section below.compliance with these standards.

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RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

• The ASU also requires excess tax benefits to be presented as an operating activity on the statement of cash flows rather than as a financing activity on either a retrospective or prospective basis. The Company has elected to apply this provision of the ASU only on a prospective basis beginning with the first quarter of fiscal 2018.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill and instead requires an entity to record an impairment charge based on the excess of a reporting unit's carrying value over its fair value. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company has elected to early and prospectively adopt the provisions of ASU 2017-04 in the third quarter of fiscal 2018. The early adoption resulted in the Company recognizing goodwill impairment of the amount by which a reporting unit's carrying value exceeds its fair value.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, along with amendments issued in 2015, 2016, and 2017, whichcustomers. ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existingcustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates are required with the revenue recognition process than were required under the previous guidance in U.S. GAAP when it becomes effective. (ASC 605).

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

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

In January 2016, the FASB issuedASU No. 2016-01Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amends various aspects of the recognition, measurement, presentation, and disclosure of financial instruments This amendment is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Therefore, the Company has prospectively adopted this new standard on April 1, 2018. The adoption of this standard did not have a material impact on the Company's accounting policies, processes and system requirements. The Company has assigned internal resources and engaged third-party service providers to assist with the assessment and implementation. The Company currently believes the most significant impact will be to the allocation of consideration in a contract between product and service performance obligations and allocations to professional services performance obligations, as well as the deferral of certain sales commission as capitalized contract costs, which are expensed under current accounting principles.consolidated financial statements.

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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2. REVENUE RECOGNITION

Revenue Recognition under ASC 606

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

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

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

Judgement and Estimates

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

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

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

Service Revenue

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

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

Product Revenue

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

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

Contract Assets

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

Deferred Revenue

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

Costs to Obtain a Customer Contract

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

Practical Expedients

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

Adoption Impact of ASC 606

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

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

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

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

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

Disaggregation of Revenue

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

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Contract Balances

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

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

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

Remaining Performance Obligations

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

3. FAIR VALUE MEASUREMENTS

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

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Contractual maturities of investments as of December 31, 2017June 30, 2018 are set forth below (in thousands):

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Contingent Consideration and Escrow Liability

The Company's contingent consideration liability, included in other accrued liabilities and noncurrent liabilities on the condensed consolidated balance sheets as of March 31, 2017, was associated with the Quality Software Corporation (QSC) acquisition made in the first quarter of fiscal year 2016. This contingent liability was classified as level 3 within the fair value hierarchy. The remaining liability of $0.1 million was settled and paid as of December 31, 2017.

3.4. INTANGIBLE ASSETS

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

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At December 31, 2017,June 30, 2018, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):

During the first quarter of fiscal year 2018, the Company determined that the tradename/domains no longer have an indefinite life and has assigned those assets an estimated life of two years. Amortization expenses associated with tradename/domains are included in selling and marketing expenses in the condensed consolidated statements of operations. During the third quarter of fiscal 2018, the Company recorded an impairment charge for technology and tradenames/domains associated with the DXI acquisition. See Footnote 1 for further discussion.

4.5. GOODWILL

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

During the third quarter of fiscal 2018, the Company recorded an impairment charge for goodwill related to its DXI reporting unit. See Footnote 1 for further discussion.

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5.6. COMMITMENTS AND CONTINGENCIES

Facility and Equipment Leases

The Company leases its headquarters in San Jose, California, and also leases office space under non-cancelable operating leases in various domestic and international locations. During the first quarter of fiscal 2019 as it commenced the build-out of its new corporate headquarters, the Company began to record additional straight-line rent expenses. Total rent expense for the three months ended June 30, 2018 and 2017 was $2.6 million and $1.4 million, respectively. Future minimum annual lease payments as of December 31, 2017June 30, 2018 were as follows (in thousands):

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

Other Commitments, Indemnifications and Contingencies

With the exception of the new San Jose, California headquarter lease (Footnote 10), thereThere were no material changes in our other commitments under contractual obligations, indemnification and other contingencies since March 31, 2017.2018.

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Legal Proceedings

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

On August 22, 2017, the Company was named as a defendant inVenadium LLC v. 8x8 Inc., filed in the District of Delaware (Civil Action No. 1:17-cv-1176-LPS-CJB) along with five other defendants. PlaintiffVenadium LLC sued the Company for alleged patent infringement concerning alleged activities involving the Company's alleged methods for protecting computer programs. Based on the Company's subscription to certain patent risk management services, the Company settled the suit without needing to respond to the Complaint. The settlement amount was immaterial. On October 5, 2017, PlaintiffVenadium LLC filed a Notice of Voluntary Dismissal of Defendant (with prejudice) pursuant to Federal Rule of Civil Procedure 41(a)(1), thereby effecting formal dismissal of the suit without a Court Order. Accordingly, the lawsuit was resolved and withdrawn before the Company was obligated to respond to the Complaint.

On August 25, 2017, the Company was named as a defendant inHublink, LLC v. 8x8 Inc., based on a Complaint filed in the District of Delaware (Civil Action No. 1:17-cv-1214-GMS) along with four other defendants. PlaintiffHublink, LLC sued the Company for alleged patent infringement concerning alleged activities involving alleged implementations of the Company's videophone communications uses and/or offerings. Based on the Company's subscription to certain patent risk management services provided by a third party on October 31, 2017, Plaintiff Hublink, LLC filed a Notice of Voluntary Dismissal of Defendant (with prejudice) pursuant to Federal Rule of Civil Procedure 41(a)(1), thereby effecting formal dismissal of the suit without a Court Order. Accordingly, the lawsuit was resolved and withdrawn before the Company was obligated to respond to the Complaint.

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6.7. STOCK-BASED COMPENSATION

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

Performance Stock Units

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

To value these market-based PSUs 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.

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Stock Repurchases

In May 2017, the Company's board of directors authorized the Company to purchase $25.0 million of its common stock from time to time under the 2017 Repurchase Plan (the "2017 Plan"). The 2017 Plan expires when the maximum purchase amount is reached, or upon the earlier revocation or termination by the board of directors. The remaining amount available under the 2017 Plan at December 31, 2017June 30, 2018 was approximately $7.1 million.

The There were no stock repurchase activity as of December 31,repurchases under the 2017 is summarized as follows (in thousands):

The total purchase price of the common stock repurchased and retired was reflected as a reduction to consolidated stockholders' equityPlan during the three month period of repurchase.ended June 30, 2018.

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8. INCOME TAXES

EFFECTIVE TAX RATE AND VALUATION ALLOWANCE

The Company's effective tax rate was -400.7%-0.6% and -2.2%36.3% for the three months ended December 31,June 30, 2018 and 2017, and 2016, respectively. The difference in the effective tax rate andis calculated by dividing the blended U.S. federal statutory rate of 31.5% for the three months ended December 31, 2017 was due primarily to the recording of a full valuation allowance against our deferredincome tax assets in the period.provision by net income before income tax expense. The difference in the effective tax rate and the U.S. federal statutory rate of 34% for the three months ended December 31, 2016 was due primarily to the change in pretax profitability, and geographic mix of profits and losses.

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

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

ASU 2016-09 IMPACT

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

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

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

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Deferred Tax Assets and Liabilities Impact

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Accordingly, deferred tax assets decreased approximately $22 million in the period ended December 31, 2017. However, because the Company recorded a full valuation allowance, the decrease in deferred tax assets from the tax rate change was fully offset by a corresponding decrease in valuation allowance. As a result, there was no impact to the provision for income taxes due to the change in tax rate.

Foreign Tax Impact

The one-time transition tax on foreign sourced earnings is based on the Company's total post-1986 earnings and profits (E&P) for which U.S. income taxes have been previously deferred. The Company did not record a one-time transition tax liability for its foreign subsidiaries as it does not have any untaxed foreign accumulated earnings as of the measurement dates.

8.9. NET INCOME (LOSS) PER SHARE

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

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

9.10. SEGMENT REPORTING AND GEOGRAPHICAL INFORMATION

ASC 280,Segment Reporting, establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Under ASC 280, the method for determining what information to report is based upon the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance. The Company manages its operations primarily on a geographic basis. The Chief Executive Officer, the Chief Financial Officer, and the Chief Technology Officer or the Company's Chief Operating Decision Makers (CODMs), evaluate performance of the Company and make decisions regarding allocation of resources based on geographic results. The Company's reportable segments are the Americas and Europe. The Americas segment is primarily North America. The Europe segment is primarily the United Kingdom. Each operating segment provides similar products and services.

Revenues are attributed to each segment based on the ordering location of the customer or ship to location.

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

Revenue is based upon the destination of shipments and the customers' service address. For the three and nine months ended December 31,June 30, 2018 and 2017, and 2016, intersegment revenues of approximately $3.9$6.6 million and $1.8 million, and $10.6 million and $4.4$2.5 million, respectively, were eliminated in consolidation, and have been excluded from the table above.

10. SUBSEQUENT EVENTS11. ACQUISITIONS

MarianaIQ

On January 23,April 12, 2018, the Company entered into a 132-month leasean Asset Purchase Agreement (the "Agreement") with MarianaIQ Inc. (MarianaIQ) for the purchase of certain assets of MarianaIQ. The total aggregate purchase price was $3.5 million, consisting of approximately $2.6 million in cash paid to rent approximately 162,000 square feet for a new Company headquartersMarianaIQ at closing, and $0.9 million in San Jose, California. The lease term begins on January 1, 2019 or such earlier date on whichcash to be held in escrow by the Company first commences to conduct businessfor fifteen months, as security against indemnity claims asserted by the Company after the closing date. The escrow amount is recorded as other accrued liabilities on the premises. The Company has the option to extend the lease for one additional five-year term, on substantially the same terms and conditionscondensed consolidated balance sheets as the prior term but with the base rent rate adjusted to fair market value at that time.of June 30, 2018.

Base rent is approximately $512,000 per month for the first 12 months of the lease, and the rate increases 3% on each anniversary of the lease commencement date. The Company is entitled to full rent abatement during the first 10 months of the lease term and 50% rent abatement during the next four months of the lease term. The Company is also responsible for paying its proportionate share of building and common area operating expenses, property taxes and insurance costs.16

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

The excess of approximately $13.3 million, the fullconsideration transferred over the aggregate fair value of the asset acquired was recorded as goodwill. The amount of which must be used within 12 monthsgoodwill recognized was primarily attributable to the expected contributions of the lease commencement date.entity to the overall corporate strategy in addition to the acquired workforce.

The Company has procured a standby letterpreliminary fair values of creditthe assets acquired are as follows (in thousands):

MarianaIQ did not contribute to revenue or net loss for the period of acquisition to June 30, 2018. Goodwill recognized upon acquisition is expected to be deductible for income tax purposes and is included in the amount of $8.1 million (FootnoteAmericas reporting unit (see Note 5) for the benefit of the landlord, which may be drawn down in the event the Company defaults in the payment of its obligations under the lease.. Total acquisition costs were immaterial.

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

FORWARD-LOOKING STATEMENTS

This Management Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as "may," "will," "should," "estimates," "predicts," "potential," "continue," "strategy," "believes," "anticipates," "plans," "expects," "intends," and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to - market acceptance of new or existing services and features, customer acceptance and demand for our cloud communicationscommunication and collaboration services;services, changes in the competitive dynamics of the markets in which we compete, the quality and reliability of our services; the prices for our services;services, customer renewal rates; customer acquisition costs;cancellations and rate of churn, our ability to compete effectivelyscale our business, customer acquisition costs, our reliance on infrastructure of third-party network services providers, risk of failure in the hosted telecommunications and cloud-based computing services business; actions by our competitors, including price reductions for their competitive services,physical infrastructure, risk of failure of our software, our ability to provide cost-effectivemaintain the compatibility of our software with third-party applications and timely servicemobile platforms, continued compliance with industry standards and support to larger distributed enterprises;regulatory requirements in the impact of risks associated withUnited States and foreign countries in which we make our international operations; potential federal and state regulatory actions; compliance costs; potential warranty claims and product defects; our need forsoftware solutions available, and the availabilitycosts of adequate working capital;such compliance, risks relating to our ability to innovate technologically; the timely supply of products by our contract manufacturers; our management's ability to execute its plans, strategies and objectives for future operations, including the execution of integration plans and realization of the expected benefits of our acquisitions, the amount and timing of costs associated with recruiting, training and integrating new employees, timing and extent of improvements in operating results from increased spending forin marketing, sales, and R&D; our management's ability to realize the expected benefitsresearch and development, introduction and adoption of our acquisitions,cloud software solutions in markets outside of the United States, risk of cybersecurity breaches, general economic conditions that could adversely affect our business and operating results, implementation and effects of new accounting standards and policies in our reported financial results, and potential future intellectual property infringement claims and other litigation that could adversely affect our business and operating results.

All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. In addition to the factors discussed elsewhere in this Form 10-Q, see the Risk Factors discussion in Item 1A of our 20172018 Form 10-K. The forward-looking statements included in this Form 10-Q are made only as of the date of this report, and we undertake no obligation to update the forward-looking statements to reflect subsequent events or circumstances.

BUSINESS OVERVIEW

We are a leading provider of global cloud communications and customer engagement solutions to over a million business users worldwide, empowering them to deliver exceptional customer experiences.worldwide. Our suite of products weaves together unifiedintegrates cloud communications, conferencing, collaboration and contact center solutions so today's organization can provide a positivedeliver exceptional employee and customer and employee engagement experience by any channel and with real time access to systems of record and subject matter experts.experiences. Our technology provides one integrated management platform with one communication experience for employees and customers engagement solutions, as well as a real-time data analytics platform for constant learning and improvement.

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

SUMMARY AND OUTLOOK

In the thirdfirst quarter of fiscal year 2018,2019, our service revenue from mid-market and enterprise customers grew 28% year-over year and represented 59%61% of total service revenue. New monthly recurring revenue (MRR) bookings from mid-market and enterprise customers was 65% of total bookings for the quarter and represented a 40% increase from the year ago quarter, reflecting strong demand for our services in our target market segments. Also, averageAverage monthly service revenue per mid-market and enterprise business customer (ARPU) increased 8% to a record $4,765,$4,953, compared with $4,412$4,592 in the same period last year. The increase resulted from our success in selling a greater number of subscriptions to larger, more established customers.

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

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

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

Second, we made executive appointments in our engineering, product, marketing and sales organizations to align with our new sales operations and accelerate adoption of our solutions across all market segments.

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

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

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

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RESULTS OF OPERATIONS

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

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

Service revenues increased investments for the three months ended June 30, 2018 compared with the same period of the previous fiscal year primarily due to an increase in our business customer subscriber base (net of customer churn), and an increase in the average monthly service revenue per customer. Average monthly service revenue per customer increased from $432 at June 30, 2017 to $480 at June 30, 2018.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We expect sales and marketing expenses to accelerateremain consistent as a percentage of total revenue during the growthremainder of our businessfiscal year 2019 as we continue to invest in the mid-marketacquisition of customers.