Company Quick10K Filing
Quick10K
8X8
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$23.79 96 $2,280
10-Q 2019-06-30 Quarter: 2019-06-30
10-K 2019-03-31 Annual: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-K 2018-03-31 Annual: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-K 2017-03-31 Annual: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-K 2016-03-31 Annual: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-K 2015-03-31 Annual: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-K 2014-03-31 Annual: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-08-01 Shareholder Vote
8-K 2019-07-30 Earnings, Exhibits
8-K 2019-07-17 Enter Agreement, M&A, Sale of Shares
8-K 2019-07-03 Off-BS Arrangement
8-K 2019-06-19 Officers, Exhibits
8-K 2019-05-14 Earnings, Exhibits
8-K 2019-05-06 Officers, Exhibits
8-K 2019-04-30 Enter Agreement, Leave Agreement
8-K 2019-02-19 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2019-02-12 Other Events, Exhibits
8-K 2019-02-05 Officers
8-K 2019-01-29 Earnings, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-10-23 Officers
8-K 2018-10-05 Officers
8-K 2018-08-07 Shareholder Vote
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-24 Earnings, Exhibits
8-K 2018-01-25 Earnings, Exhibits
8-K 2018-01-23 Enter Agreement, Off-BS Arrangement
CMI Cummins 26,040
HSII Heidrick & Struggles 670
OASM Oasmia Pharmaceutical 148
ULBI Ultralife 133
CLPS CLPS 97
INNT Innovate Biopharmaceuticals 55
ITP IT Tech Packaging 24
NMUS Nemus Bioscience 0
PCYN Procyon 0
GAIFB Graham Alternative Investment Fund II 0
EGHT 2019-06-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II -- Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-2.1 exhibit201-sharepurcha.htm
EX-10.1 exhibit101-8x8employee.htm
EX-31.1 exhibit311-8x863019.htm
EX-31.2 exhibit312-8x863019.htm
EX-32.1 exhibit321-8x863019.htm
EX-32.2 exhibit322-8x863019.htm

8X8 Earnings 2019-06-30

EGHT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM
10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
a8x8logoa03.jpg
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
COMMON STOCK, PAR VALUE $.001 PER SHARE
EGHT
New York Stock Exchange
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.    Yes      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).     Yes       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 the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
Non-accelerated filer 
Smaller reporting company  
Emerging growth company  
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    The number of shares of the Registrant's Common Stock outstanding as of July 24, 2019 was 99,287,508.



Table of Contents

FORM 10-Q
TABLE OF CONTENTS
 
Page No.


1

Table of Contents

Forward-Looking Statements and Risk Factors
Statements contained in this quarterly report on Form 10-Q, or Quarterly Report, regarding our expectations, beliefs, estimates, intentions or strategies are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. 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 and 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 modified existing services and features we may offer from time to time,
customer acceptance and demand for our cloud communication and collaboration services, including voice, contact center, video, messaging, and communication APIs,
competitive pressures, and any changes in the competitive dynamics of the markets in which we compete,
the quality and reliability of our services,
customer cancellations and rate of churn,
our ability to scale our business,
customer acquisition costs,
our reliance on infrastructure of third-party network services providers,
risk of failure in our physical infrastructure,
risk of defects or bugs in our software,
our ability to maintain the compatibility of our software with third-party applications and mobile platforms,
continued compliance with industry standards and regulatory requirements in the United States and foreign countries in which we make our software solutions available, and the costs of such compliance,
risks relating to the acquisition and integration of businesses we have acquired (most recently, Wavecell Pte. Ltd.) or may acquire in the future, particularly if the acquired business operates in a different market space from us or is based in a region where we do not have significant operations,
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 in marketing, sales, and research and development,
introduction and adoption of our cloud software solutions in markets outside of the United States,
risk of cybersecurity breaches,
risks related to our senior convertible notes and the related capped call transactions,
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 impact our business and operating results.
The forward-looking statements may also be impacted by the additional risks faced by us as described in this Quarterly Report, including those set forth under the section entitled "Risk Factors." All forward-looking statements included in this Quarterly Report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report, which attempts to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Our fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in this Quarterly Report, refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2020 refers to the fiscal year ended March 31, 2020). Unless the context requires otherwise, references to "we," "us," "our," "8x8" and the "Company" refer to 8x8, Inc. and its consolidated subsidiaries.

2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
8X8, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
 
 
June 30, 2019
 
March 31, 2019
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
269,025

 
$
276,583

Short-term investments
 
27,486

 
69,899

Accounts receivable, net
 
23,361

 
20,181

Deferred sales commission costs
 
16,815

 
15,601

Other current assets
 
20,441

 
15,127

     Total current assets
 
357,128

 
397,391

Property and equipment, net
 
57,717

 
52,835

Operating lease, right-of-use assets
 
18,058

 

Intangible assets, net
 
10,125

 
11,680

Goodwill
 
39,403

 
39,694

Long-term investments
 
21,667

 

Restricted cash
 
8,100

 
8,100

Deferred sales commission costs, non-current
 
36,843

 
33,693

Other assets
 
9,452

 
2,965

          Total assets
 
$
558,493

 
$
546,358

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
32,723

 
$
32,280

Accrued compensation
 
22,088

 
18,437

Accrued taxes
 
11,602

 
13,862

Operating lease liabilities, current
 
7,063

 

Deferred revenue
 
4,088

 
3,336

Other accrued liabilities
 
11,270

 
6,790

     Total current liabilities
 
88,834

 
74,705

 
 
 
 
 
Operating lease liabilities, non-current
 
12,044

 

Convertible senior notes, net
 
219,208

 
216,035

Other liabilities, non-current
 
8,260

 
6,228

Total liabilities
 
328,346

 
296,968

Commitments and contingencies (Note 7)
 


 


Stockholders' equity:
 
 
 
 
Common stock
 
97

 
96

Additional paid-in capital
 
522,501

 
506,949

Accumulated other comprehensive loss
 
(7,884
)
 
(7,353
)
Accumulated deficit
 
(284,567
)
 
(250,302
)
     Total stockholders' equity
 
230,147

 
249,390

          Total liabilities and stockholders' equity
 
$
558,493

 
$
546,358

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

3

Table of Contents

8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts; unaudited)
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Service revenue
 
$
92,372

 
$
78,121

Product revenue
 
4,303

 
5,104

     Total revenue
 
96,675

 
83,225

Cost of revenue and operating expenses:
 
 
 
 
Cost of service revenue
 
31,967

 
24,549

Cost of product revenue
 
5,724

 
6,281

Research and development
 
18,331

 
13,050

Sales and marketing
 
53,599

 
40,495

General and administrative
 
19,607

 
14,833

     Total operating expenses
 
129,228

 
99,208

Loss from operations
 
(32,553
)
 
(15,983
)
Other (expense) income, net
 
(1,564
)
 
719

Loss before provision for income taxes
 
(34,117
)
 
(15,264
)
Provision for income taxes
 
148

 
91

Net loss
 
$
(34,265
)
 
$
(15,355
)
Net loss per share:
 
 
 
 
Basic and diluted
 
$
(0.36
)
 
$
(0.16
)
Weighted-average common shares outstanding:
 
 
 
 
Basic and diluted
 
96,429

 
93,064

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


4

Table of Contents

8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands, unaudited)
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Net loss
 
$
(34,265
)
 
$
(15,355
)
Other comprehensive loss, net of tax
 
 
 
 
Unrealized gain on investments in securities
 
121

 
113

Foreign currency translation adjustment
 
(652
)
 
(1,672
)
Comprehensive loss
 
$
(34,796
)
 
$
(16,914
)
  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents

8X8, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except shares, unaudited)
 
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
 
Shares
Amount
Balance at March 31, 2019
96,119,888

96

506,949

(7,353
)
(250,302
)
249,390

Issuance of common stock under stock plans, less withholding
451,308

1

1,493



1,494

Stock-based compensation expense


14,059



14,059

Unrealized investment gain (loss)



121


121

Foreign currency translation adjustment



(652
)

(652
)
Net loss




(34,265
)
(34,265
)
Balance at June 30, 2019
96,571,196

97

522,501

(7,884
)
(284,567
)
230,147


 
Common Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Deficit
Total
 
Shares
Amount
Balance at March 31, 2018
92,847,354

93

425,790

(5,645
)
(201,464
)
218,774

Issuance of common stock under stock plans, less withholding
403,377


777



777

Stock-based compensation expense


9,304



9,304

Unrealized investment gain (loss)



113


113

Foreign currency translation adjustment



(1,672
)

(1,672
)
Adjustment from adoption of ASU 2016-9




39,901

39,901

Net loss




(15,355
)
(15,355
)
Balance at June 30, 2018
93,250,731

93

435,871

(7,204
)
(176,918
)
251,842


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

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8X8, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(34,265
)
 
$
(15,355
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
 
Depreciation
 
2,325

 
2,061

Amortization of intangible assets
 
1,524

 
1,432

Amortization of capitalized software
 
3,805

 
1,685

Amortization of debt discount and issuance costs
 
3,173

 

Amortization of deferred sales commission costs
 
4,189

 
3,253

Operating lease expense, net of accretion
 
2,085

 

Non-cash lease expenses
 

 
1,200

Stock-based compensation
 
13,597

 
8,911

Other
 
1,026

 
372

Changes in assets and liabilities:
 
 
 
 
Accounts receivable, net
 
(3,765
)
 
(1,497
)
Deferred sales commission costs
 
(8,707
)
 
(5,052
)
Other current and non-current assets
 
(5,740
)
 
(419
)
Accounts payable and accruals
 
(588
)
 
3,905

Deferred revenue
 
832

 
293

          Net cash (used in) provided by operating activities
 
(20,509
)
 
789

Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(1,984
)
 
(1,223
)
Purchase of businesses
 

 
(2,625
)
Capitalized software development costs
 
(7,738
)
 
(5,112
)
Proceeds from maturities of investments
 
4,600

 
18,400

Proceeds from sales of investments
 
29,793

 
11,914

Purchases of investments
 
(13,500
)
 
(19,534
)
          Net cash provided by investing activities
 
11,171

 
1,820

Cash flows from financing activities:
 
 
 
 
Finance lease payments
 
(130
)
 
(277
)
Tax-related withholding of common stock
 
(23
)
 
(229
)
Proceeds from issuance of common stock under employee stock plans
 
1,520

 
1,007

          Net cash provided by financing activities
 
1,367

 
501

Effect of exchange rate changes on cash
 
413

 
(256
)
Net (decrease) increase in cash and cash equivalents, and restricted cash
 
(7,558
)
 
2,854

Cash, cash equivalents, and restricted cash at the beginning of the period
 
284,683

 
39,803

Cash, cash equivalents, and restricted cash at the end of the period
 
$
277,125

 
$
42,657

Supplemental cash flow information
 
 
 
 
Income taxes paid
 
$
218

 
$
127

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
8x8, Inc. ("8x8" or the "Company") was incorporated in California in February 1987 and was reincorporated in Delaware in December 1996. The unaudited interim condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company conducts its operations through one reportable segment.
The Company is a leading cloud provider of enterprise Software-as-a-Service (SaaS) communications solutions, that enable businesses of all sizes to communicate faster and smarter across voice, video meetings, chat and contact centers, transforming both employee and customer experiences with communications that work simply, integrate seamlessly, and perform reliably. From one proprietary cloud technology platform, customers have access to unified communications, team collaboration, video conferencing, contact center, data and analytics and other services. Since fiscal 2004, substantially all revenue has been generated from the sale of communications services and related hardware. Prior to fiscal 2003, the Company's main business was Voice over Internet Protocol semiconductors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The Company's fiscal year ends on March 31 of each calendar year. Each reference to a fiscal year in these notes to the condensed consolidated financial statements refers to the fiscal year ended March 31 of the calendar year indicated (for example, fiscal 2020 refers to the fiscal year ending March 31, 2020).
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, 2019 with the exception of new lease accounting guidance discussed in the recently adopted accounting principles section below. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"), regarding interim financial reporting.
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 GAAP 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, 2019 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 GAAP. 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, 2019 and notes thereto included in the Company's fiscal 2019 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.
The condensed consolidated financial statements include the accounts of 8x8 and its subsidiaries. All material intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to bad debts, returns reserve for expected cancellations, income and sales tax liabilities, stock-based compensation, and litigation and other contingencies. The Company bases its estimates on historical experience

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and on various other assumptions. Actual results could differ from those estimates under different assumptions or conditions.
RECLASSIFICATIONS AND OTHER CHANGES
Certain prior year amounts in the statement of cash flows have been reclassified to conform with current year presentation.
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, 2019 filed with the SEC on May 21, 2019, and there have been no changes to the Company's significant accounting policies during the three months ended June 30, 2019 except for the accounting policies described below that were updated as a result of adopting Accounting Standards Update ("ASU") 2016-02, Leases. All amounts and disclosures set forth herein are in compliance with this standard.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Effective April 1, 2019, the Company adopted ASU No. 2016-02 (“ASU 2016-02”), Leases using the modified retrospective transition approach utilizing the effective date as the date of initial application.  ASU 2016-02 establishes a new lease accounting model for leases, which requires lessees to recognize right-of-use assets and lease liabilities on the balance sheet, but lease expense will be recognized on the income statement in a manner similar to previous requirements. Prior years presented have not been adjusted for ASU 2016-02 and continue to be reported in accordance with our historical accounting policy.
The new standard provides a number of optional practical expedients in transition. The Company has elected the package of practical expedients permitted under the new lease standard, which among other things, allows the carryforward the historical lease classification. As a result, there was no impact to opening retained earnings. The new standard also provides a practical expedient for an entity’s ongoing accounting. The Company has elected such practical expedient to not separate lease and non-lease components for all leases. It also made an accounting policy election to not recognize right-of-use assets and lease liabilities on the balance sheet for leases with a term of 12 months or less and will recognize lease payments as an expense on a straight-line basis over the lease term.
The adoption of the new lease standard resulted in the recognition of right-of-use assets and lease liabilities of approximately $20.0 million and $21.4 million, respectively, for existing operating leases. The adoption of the new lease standard did not have a material impact on the Company's accumulated deficit as of April 1, 2019.  For additional information on leases and the impact of the new lease standard, refer to Note 6.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-13, Fair Value Measurement (Topic 820), which makes modifications to disclosure requirements on fair value measurements. The amendment is effective for public companies with fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40), which reduces complexity for the accounting for costs of implementing a cloud computing service arrangement. The amendment is effective for public companies with fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently assessing the impact of this pronouncement to its condensed consolidated financial statements.
3. REVENUE RECOGNITION
Revenue Recognition
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

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• 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 the Company expects to be entitled to receive in exchange for transferring the promised services or products 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.
Judgments 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 may impose 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 services and products, such as subscriptions, products, 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. Usage fees deemed to be variable consideration meet the allocation exception for variable consideration. 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 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 platform 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, customer training or education are primarily billed on a fixed-fee basis and are performed by the Company directly or, alternatively, customers may also choose to perform these services themselves or engage their own third-party service providers. Professional services revenue is recognized over time as the services are rendered.
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 based on the aging of the contract balance, current and historical customer trends, and communications with its customers. These reserves are recorded as operating expenses against the contract asset (Accounts Receivable). In the normal course of business, the Company records revenue reductions for customer credits.
Product Revenue

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The Company recognizes 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.
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 when 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 in other current or non-current assets in the condensed consolidated balance sheets, depending on if their reduction will be recognized during the succeeding twelve-month period or beyond.
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 twelve-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 as current or non-current assets 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.
Disaggregation of Revenue
The Company disaggregates its revenue by geographic region. See Note 12 for more information.
Contract Balances
The following table provides information about receivables, contract assets and deferred revenues from contracts with customers (in thousands):
 
June 30, 2019
Accounts receivable, net
$
23,361

Contract assets
$
9,375

Deferred revenue - current
$
4,088

Deferred revenue - non-current
$
67

Changes in the contract assets and the deferred revenue balances during the three months ended June 30, 2019 are as follows (in thousands):
 
 
June 30, 2019
 
March 31, 2019
 
$ Change
Contract assets
 
$
9,375

 
$
5,717

 
$
3,658

Deferred revenue
 
$
4,155

 
$
3,342

 
$
813


The change 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. Revenues of $2.7 million recognized during the three months ended June 30, 2019, were 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 typically range from one to four years. Contract revenue as of June 30, 2019, that has not yet been recognized was approximately $190.0 million. This excludes contracts with an original expected length of one year or less. The Company expects to recognize revenue on most of the remaining performance obligation over the next 36 months.
4. FAIR VALUE MEASUREMENTS

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Cash, cash equivalents, and available-for-sale investments (in thousands):
 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
Estimated
 
Cash and
Cash
 
Short-Term
 
Long-Term
As of June 30, 2019
Costs
 
Gain
 
Loss
 
Fair Value
 
Equivalents
 
Investments
 
Investments
Cash
$
23,533

 
$

 
$

 
$
23,533

 
$
23,533

 
$

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
240,905

 

 

 
240,905

 
240,905

 

 

Treasury securities
2,910

 
2

 

 
2,912

 

 

 
2,912

     Subtotal
267,348

 
2

 

 
267,350

 
264,438

 

 
2,912

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate bonds
40,128

 
122

 
(3
)
 
40,247

 

 
23,613

 
16,634

Commercial paper
6,176

 

 
(2
)
 
6,174

 
4,587

 
1,587

 

Municipal securities
2,098

 
23

 

 
2,121

 

 

 
2,121

Agency bond
2,289

 

 
(3
)
 
2,286

 

 
2,286

 

     Subtotal
50,691

 
145

 
(8
)
 
50,828

 
4,587

 
27,486

 
18,755

     Total assets
$
318,039

 
$
147

 
$
(8
)
 
$
318,178

 
$
269,025

 
$
27,486

 
$
21,667

 
 
Amortized
 
Gross
Unrealized
 
Gross
Unrealized
 
Estimated
 
Cash and
Cash
 
Short-Term
As of March 31, 2019
 
Costs
 
Gain
 
Loss
 
Fair Value
 
Equivalents
 
Investments
Cash
 
$
25,364

 
$

 
$

 
$
25,364

 
$
25,364

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds
 
251,219

 

 

 
251,219

 
251,219

 

     Subtotal
 
276,583

 

 

 
276,583

 
276,583

 

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
 
46,516

 
51

 
(29
)
 
46,538

 

 
46,538

Municipal securities
 
5,511

 
17

 

 
5,528

 

 
5,528

Asset backed securities
 
13,596

 
9

 
(17
)
 
13,588

 

 
13,588

Agency bond
 
4,260

 

 
(15
)
 
4,245

 

 
4,245

     Subtotal
 
69,883

 
77

 
(61
)
 
69,899

 

 
69,899

     Total assets
 
$
346,466

 
$
77

 
$
(61
)
 
$
346,482

 
$
276,583

 
$
69,899


Contractual maturities of investments as of June 30, 2019 are set forth below (in thousands):
 
Estimated
 
Fair Value
Due within one year
$
27,486

Due after one year
21,667

Total
$
49,153


Historically, the Company had maintained all investments as short-term investments on its balance sheet, as the Company could liquidate these investments at any time and did not limit its liquidation of investments by contractual maturity date. Given the recent issuance of the convertible senior note, and the associated increased cash, cash equivalents and investment balances. The Company expects to hold certain investments for at least 12-months from the reporting date and will record these investments in either short-term or long-term investments in alignment with the contractual maturity dates.
As of June 30, 2019, the estimated fair value of the Company's outstanding convertible senior notes (the Notes) was $219.2 million. The fair value of the Notes was determined based on the closing price for the Notes on the last trading day of the reporting period and is considered as Level 2 in the fair value hierarchy.

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5. INTANGIBLE ASSETS AND GOODWILL
The carrying value of intangible assets consisted of the following (in thousands):
 
 
June 30, 2019
 
March 31, 2019
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Technology
 
$
19,894

 
$
(10,911
)
 
$
8,983

 
$
25,702

 
$
(15,409
)
 
$
10,293

Customer relationships
 
6,125

 
(4,983
)
 
1,142

 
9,467

 
(8,080
)
 
1,387

Total acquired identifiable intangible assets
 
$
26,019

 
$
(15,894
)
 
$
10,125

 
$
37,277

 
$
(25,597
)
 
$
11,680


At June 30, 2019, annual amortization of intangible assets, based upon our existing intangible assets and current useful lives, is estimated to be the following (in thousands):
 
Amount
Remaining 2020
$
4,573

2021
3,557

2022
1,766

2023
229

Total
$
10,125


The following table provides a summary of the changes in the carrying amounts of goodwill (in thousands):
 
Total
Balance at March 31, 2019
$
39,694

Foreign currency translation
(291
)
Balance at June 30, 2019
$
39,403


6. RIGHT-OF-USE ASSETS AND LEASES
The Company primarily leases facilities for office and data center space under non-cancellable operating leases for its U.S. and international locations that expire at various dates through 2026. For leases with a term greater than 12 months, the Company recognizes a right-of-use asset and a lease liability based on the present value of lease payments over the lease term. The Company’s leases have remaining terms of one to seven years and some of the leases include a Company option to extend the lease term for one to five years, or more, which if reasonably certain to exercise, the Company includes in the determination of lease payments. The lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company's leases do not provide a readily determinable implicit rate, the Company uses the incremental borrowing rate at lease commencement, which was determined using a portfolio approach, based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the implicit rate when a rate is readily determinable. Operating lease expense is recognized on a straight-line basis over the lease term.
Leases with an initial term of 12 months or less are not recognized on the balance sheet and the expense for these short-term leases is recognized on a straight-line basis over the lease term. Common area maintenance fees (or CAMs) and other charges related to these leases continue to be expensed as incurred. Short-term lease expense was not material to the Company’s condensed consolidated statements of operations for the three months ended June 30, 2019. Variable lease payments are not included in the lease payments to measure the lease liability and are expensed as incurred.

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The following table provides the components of the Company's lease right-of-use assets and liabilities as of June 30, 2019 (in thousands):
 
 
June 30, 2019
Assets
 
 
Operating lease, right-of-use assets
 
$
18,058

 
 
 
Liabilities
 
 
Operating lease liabilities, current
 
$
7,063

Operating lease liabilities, non-current
 
12,044

Total operating lease liabilities
 
$
19,107


During the three months ended June 30, 2019, operating lease expense was approximately $2.1 million. Variable lease cost and short-term lease cost were immaterial during the three months ended June 30, 2019.
The following table presents supplemental information for the three months ended June 30, 2019 (in thousands, except for weighted average):
Weighted average remaining lease term
 
3.9 years
Weighted average discount rate
 
4.0%
Cash paid for amounts included in the measurement of lease liabilities
 
$
2,252

Operating cash flow from operating leases
 
$
2,252


The following table presents maturity of lease liabilities under the Company's non-cancelable operating leases as of June 30, 2019 (in thousands):
Remaining 2020
 
$
6,008

2021
 
5,666

2022
 
4,275

2023
 
1,381

2024
 
1,111

Thereafter
 
2,221

Total lease payments
 
$
20,662

Less: imputed interest
 
(1,555
)
Present value of lease liabilities
 
$
19,107


As of June 30, 2019, the Company does not have any additional operating leases that have not yet commenced and as such, have not yet been recognized on the Company’s condensed condensed consolidated balance sheet.
The Company's lease agreement (the "Agreement") with CAP Phase I, a Delaware limited liability company (the "Landlord") for the Coleman property is not included in the right-of-use assets and operating lease liabilities as of June 30, 2019. On April 30, 2019, the Company entered into an assignment and assumption of the Company's previously executed lease agreement with the Landlord, and Roku Inc., a Delaware corporation ("Roku"), whereby the Company assigned to Roku this lease that had been executed between the Company and the Landlord on January 23, 2018. Pursuant to the Agreement, the Company expects to be released from all of its obligations under the Lease and related standby letter of credit by the end of the Company’s fiscal year ending March 31, 2022 or shortly thereafter. The Company has entered into a new lease for its headquarters in Campbell, California, see note 13.
7. COMMITMENTS AND CONTINGENCIES
Other Commitments, Indemnifications and Contingencies
From time to time, the Company receives inquiries from various state and municipal taxing agencies with respect to the remittance of sales, use, telecommunications, excise, and income taxes. Several jurisdictions currently are conducting tax audits of the Company's records. The Company collects from its customers or has accrued for taxes that it believes are required to be remitted. The amounts that have been remitted have historically been within the

14

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accruals established by the Company. The Company adjusts its accrued taxes when facts relating to specific exposures warrant such adjustment.
Legal Proceedings
The Company, from time to time may be involved in a variety of claims, lawsuits, investigations and other proceedings, including patent infringement claims, employment litigation, regulatory compliance matters and contractual disputes, that can arise in the normal course of the Company's operations.
Litigation is inherently unpredictable and subject to significant uncertainties, and there can be no assurances that favorable final outcomes will be obtained. Future litigation could be costly to defend, could impose significant burdens on employees and 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.
8. CONVERTIBLE SENIOR NOTES AND CAPPED CALL
Convertible Senior Notes
In February 2019, the Company issued $287.5 million aggregate principal amount of 0.50% convertible senior notes (the "Notes") due 2024 in a private placement, including the exercise in full of the initial purchasers' option to purchase additional notes. The Notes are senior unsecured obligations of the Company and interest is payable semiannually in arrears on February 1 and August 1 of each year, beginning on August 1, 2019. The Notes will mature on February 1, 2024, unless earlier repurchased, redeemed, or converted. The total net proceeds from the debt offering, after deducting initial purchase discounts, debt issuance costs, and costs of the capped call transactions described below, were approximately $245.8 million.
Each $1,000 principal amount of the Notes is initially convertible into 38.9484 shares of the Company’s common stock, par value $0.001, which is equivalent to an initial conversion price of approximately $25.68 share. The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of certain corporate events that occur prior to the maturity date or following the Company's issuance of a notice of redemption, in each case as described in the Indenture, the Company will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Notes in connection with such a corporate event or during the relevant redemption period.
The Notes will be convertible at certain times and upon the occurrence of certain events in the future. Further, on or after October 1, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their Notes, regardless of the foregoing circumstances.
Upon conversion, the Company will satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of common stock, or a combination of cash and shares of common stock, at the Company's election. The Company’s current intent is to settle the principal amount of the Notes in cash upon conversion. 
During the three months ended June 30, 2019, the conditions allowing holders of the Notes to convert were not met.
The Company may not redeem the Notes prior to February 4, 2022. On or after February 4, 2022, the Company may redeem for cash all or part of the Notes, at the redemption price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if the last reported sale price of the common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice. If a fundamental change (as defined in the indenture governing the notes) occurs at any time, holders of Notes may require the Company to repurchase for cash all or any portion of their Notes at a repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.
The Notes are senior unsecured obligations and will rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of payment with the Company’s existing and future liabilities that are not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of current or future subsidiaries of the Company.

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The net carrying amount of the liability component of the Notes was as follows (in thousands):
 
 
June 30, 2019
 
March 31, 2019
Principal
 
$
287,500

 
$
287,500

Unamortized debt discount
 
(67,730
)
 
(70,876
)
Unamortized issuance costs
 
(562
)
 
(589
)
Net carrying amount
 
$
219,208

 
$
216,035

Interest expense related to the Notes was as follows (in thousands):
 
 
Three Months Ended June 30, 2019
Contractual interest expense
 
$
359

Amortization of debt discount
 
3,146

Amortization of issuance costs
 
26

Total interest expense
 
$
3,531


Capped Call
In connection with the pricing of the Notes, the Company entered into privately negotiated capped call transactions ("Capped Calls") with certain counterparties. The Capped Calls each have an initial strike price of approximately $25.68 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $39.50 per share, subject to certain adjustments. The Capped Calls are expected to partially offset the potential dilution to the Company’s Common Stock upon any conversion of the Notes, with such offset subject to a cap based on the cap price. The Capped Calls cover, subject to anti-dilution adjustments, approximately 11.2 million shares of the Company’s Common Stock. The Capped Calls are subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events, tender offers and announcement events. In addition, the Capped Calls are subject to certain specified additional disruption events that may give rise to a termination of the Capped Calls, including nationalization, insolvency or delisting, changes in law, failures to deliver, insolvency filings and hedging disruptions. For accounting purposes, the Capped Calls are separate transactions, and not part of the terms of the Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders' equity and are not accounted for as derivatives. The cost of $33.7 million incurred to purchase the Capped Calls was recorded as a reduction to additional paid-in capital and will not be remeasured.
9. STOCK-BASED COMPENSATION
The following tables summarize 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):
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Cost of service revenue
 
$
1,731

 
$
1,026

Research and development
 
3,864

 
2,194

Sales and marketing
 
3,921

 
2,398

General and administrative
 
4,081

 
3,293

Total
 
$
13,597

 
$
8,911


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Three Months Ended June 30,
 
 
2019
 
2018
Stock options outstanding at the beginning of the period:
 
3,114

 
3,998

Options granted
 

 
81

Options exercised 
 
(124
)
 
(115
)
Options canceled and forfeited
 
(16
)
 
(73
)
Options outstanding at the end of the period:
 
2,974

 
3,891

Weighted-average fair value of grants during the period
 
$

 
$
8.57

Total intrinsic value of options exercised during the period
 
$
1,402

 
$
1,186

Weighted-average remaining recognition period at period-end (in years) 
 
2.46

 
2.35

 
 
 
 
 
Stock awards outstanding at the beginning of the period:
 
7,820

 
5,939

Stock awards granted
 
1,147

 
948

Stock awards vested 
 
(329
)
 
(299
)
Stock awards canceled and forfeited
 
(445
)
 
(168
)
Stock awards outstanding at the end of the period: 
 
8,193

 
6,420

Weighted-average fair value of grants during the period
 
$
22.40

 
$
22.20

Weighted-average remaining recognition period at period-end (in years) 
 
2.11

 
2.40

Total unrecognized compensation expense at period-end
 
$
109,422

 
$
67,025


Stock Repurchases
In May 2017, the Company's board of directors authorized the Company to purchase up to $25.0 million of its common stock from time to time (the "2017 Repurchase Plan"). The 2017 Repurchase 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 Repurchase Plan at June 30, 2019 was approximately $7.1 million. There were no stock repurchases under the 2017 Repurchase Plan during the three month period ended June 30, 2019.
10. INCOME TAXES
The Company's effective tax rate was -0.4% and -0.6% for the three months ended June 30, 2019 and 2018, respectively. The difference in the effective tax rate and the U.S. federal statutory rate was primarily due to the full valuation allowance the Company continues to maintain against its deferred tax assets. The effective tax rate is calculated by dividing the income tax provision by net loss before income tax expense.
11. NET LOSS PER SHARE
The following table summarizes the computation of basic and diluted net loss per share (in thousands, except share and per share data):
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Numerator:
 
 
 
 
Net loss available to common stockholders
 
$
(34,265
)
 
$
(15,355
)
Denominator:
 
 
 
 
Common shares - basic and diluted
 
96,429

 
93,064

Net loss per share
 
 
 
 
Basic and diluted
 
$
(0.36
)
 
$
(0.16
)


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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 anti-dilutive (in thousands):
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Stock options
 
2,974

 
3,891

Stock awards
 
8,188

 
6,420

Potential shares to be issued from ESPP
 
636

 
620

Total anti-dilutive shares
 
11,798

 
10,931


12. GEOGRAPHICAL INFORMATION
The following tables set forth the geographic information for each period (in thousands):
 
 
Three Months Ended June 30,
 
 
2019
 
2018
Revenue by geographic area:
 
 
 
 
Americas (principally US)
 
$
86,736

 
$
74,865

Europe (principally UK)
 
9,939

 
8,360

 
 
$
96,675

 
$
83,225


 
 
June 30, 2019
 
March 31, 2019
Property and equipment by geographic area:
 
 
 
 
Americas (principally US)
 
$
50,866

 
$
45,639

Europe (principally UK)
 
6,851

 
7,196

 
 
$
57,717

 
$
52,835


13. SUBSEQUENT EVENTS
New Company Headquarters
On July 3, 2019, the Company entered into a lease for a new company headquarters to rent approximately 177,815 square feet of office space as the sole tenant in a new five-story office building located at 675 Creekside Way, Campbell, CA 95008. The Company plans to move to this new location by March 31, 2020.
The lease is for a 132-month term, anticipated to begin on January 1, 2020. The Company has the option to extend the lease for two additional five-year terms, on substantially the same terms and conditions as the prior term, but with the base rent rate adjusted to fair market value at that time.
Base rent is approximately $657,900 per month for the first 12 months of the lease, with the rate increasing by approximately 3% on each anniversary of the lease. The Company is responsible for paying its share of building and common area expenses. The Company is entitled to full rent abatement during the first 12 months of the lease term. The Company is also entitled to a tenant improvement allowance of approximately $15.4 million. The Company will pay to the landlord a security deposit in the amount of approximately $2 million, which may be drawn down in the event the Company defaults under the lease.
Wavecell Acquisition
On July 17, 2019, the Company entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Wavecell Pte. Ltd., a corporation incorporated under the laws of the Republic of Singapore (“Wavecell”), the equity holders of Wavecell (collectively, the “Sellers”), and Qualgro Partners Pte. Ltd., in its capacity as the representative of the equity holders of Wavecell. Pursuant to the Share Purchase Agreement, the Company acquired all of the outstanding shares and other equity interests of Wavecell (the “Transaction”) for total consideration of approximately $125 million, comprised of approximately $69.0 million in cash and $56 million in shares of common stock of the Company. The Transaction is subject to customary purchase price adjustments and escrow and holdback arrangements as provided in the Share Purchase Agreement. Upon the closing of the Transaction, Wavecell became a wholly-owned subsidiary of the Company. The Share Purchase Agreement contains representations, warranties and covenants customary for acquisitions of this type.

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8x8 issued an aggregate of 2,628,761 shares of its common stock in connection with the closing of the Transaction, including certain shares for employee retention purposes subject to vesting based on time-based and performance-based criteria for Wavecell employees.
ITEM 2. 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 condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled “Forward-Looking Statements,” the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified below, those discussed in “Forward-Looking Statements” and those discussed in the section titled “Risk Factors” under Part II, Item 1A in this Quarterly Report on Form 10-Q.
BUSINESS OVERVIEW
We are a leading cloud provider of voice, video, chat, contact center, and enterprise-class API solutions powered by one global communications platform. From one proprietary cloud technology platform, customers have access to unified communications, team collaboration, video conferencing, contact center, data and analytics and other services.
As of June 30, 2019, our customers are spread across more than 150 countries and range from small businesses to large enterprises with more than 10,000 employees. In recent years, we have increased our focus on the mid-market and enterprise customer sectors, and for the three months ended June 30, 2019, we generated a majority of our new subscription services revenue from customers in these business sectors.
We generate revenue primarily from the sale of subscriptions to our software services to customers. The remainder of our revenues has historically been comprised of professional services revenue and product revenues from the sale of office phones and other equipment. 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).
Historically, our flagship services have been Virtual Office, a unified communications solution, and Virtual Contact Center, a contact center solution. In 2018, we began selling our 8x8 X Series, our next generation suite of services, which consist of service plans designated X1, X2, etc., through X8. With 8x8 X Series, we provide both unified communications and contact center functionality from a single platform, with a single interface, in the high-end set of our service plans (X5 through X8). We also offer more basic, cost-efficient unified communications services in X1 through X4. During the three months ended June 30, 2019, nearly all of our new customers purchased service plans for 8x8 X Series, although we continue to have a significant number of customers subscribed to our Virtual Office and Virtual Contact Center platforms. We have begun migrating these customers from our legacy platforms to 8x8 X Series, and we intend to accelerate the pace of migrations during the remainder fiscal years 2020 and fiscal 2021. These migrations will require us to incur professional services costs that we may not be able to recover from our customers, and there is also a risk that we will experience an increase in churn during this migration period.
SUMMARY AND OUTLOOK
Our first quarter results illustrate the fundamental strength in our business as service revenue for the quarter was $92.4 million and grew 18.2% year-over-year. We continued to show an increase in our average monthly service revenue per customer ("ARPC"), as we are selling more to mid-market and enterprise customers.
Since the beginning of fiscal 2018, we have de-emphasized profitability as a short-term corporate goal and have focused instead on making investments necessary to accelerate growth. This decision was based, in part, on our belief that the communications market is at an inflection point in the shift of businesses from legacy on-premise solutions to cloud services. We believe that this industry trend will continue in fiscal 2020 and beyond. Accordingly, we believe that it is in the Company's interest to continue to invest heavily in our business--in particular, to build our technology platform further, grow internationally, and expand our sales and marketing activities, particularly in the channel--in order to allow us to scale efficiently and capture market share during this phase of industry disruption.

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We plan to continue making significant upfront investments in activities to acquire more customers. We plan to continue investing in our direct marketing efforts, which includes our sales force, new e-commerce solutions, and digital marketing spend. We also intend to continue investing in our indirect channel to acquire more third-party selling agents to help sell our solutions. Should these upfront investments not result in additional revenue from new or existing customers, our operating results may be adversely impacted.
COMPONENTS OF RESULTS OF OPERATIONS
Service Revenue
Service revenue consists primarily of our cloud communication and collaboration subscription services, and to a lesser extent, usage and professional services fees.
We plan to continue to drive and increased service revenue through increased sales and marketing efforts, geographic expansion of our platform outside the United States, and through strategic acquisitions of new technologies and businesses.
Product Revenue
Product revenue consists primarily of revenues from sales of IP telephones in conjunction with our cloud telephony service. Product revenue is dependent on the number of customers who choose to purchase an IP telephone in conjunction with our service instead of using the solution on their cell phone, computer or other compatible device.
Cost of Service Revenue
Cost of service revenue primarily consists of costs associated with network operations and related personnel, technology licenses, amortization of internally developed software, and other costs such as customer service, which includes deployment and technical support costs. Cost of service also includes other communication origination and termination services provided by third-party carriers and outsourced customer service call center operations. We expect that cost of revenue will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
Cost of Product Revenue
The cost of product revenue consists primarily of IP telephones, estimated warranty obligations and direct and indirect costs associated with product purchasing, scheduling, shipping and handling.
Research and Development
Research and development expenses consist primarily of personnel and related costs, consulting, and equipment costs necessary for us to conduct our development and engineering efforts.
We plan to continue to hire employees to support our research and development efforts to expand the capabilities and scope of our platform and enhance the user experience. We expect that research and development expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
Sales and Marketing
Sales and marketing expenses consist primarily of personnel and related overhead costs for sales and marketing. Such costs also include sales commissions, trade shows, advertising and other marketing, demand generation, channel, and promotional expenses. We plan to continue to invest in sales and marketing to attract and retain customers on our platform and increase our brand awareness. We expect that sales and marketing expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
General and Administrative
General and administrative expenses consist primarily of personnel and related costs for finance, human resources, legal and general management, as well as professional services fees. We expect that our general and administrative expenses will increase in absolute dollars in future periods as we grow our business and vary from period-to-period as a percentage of revenue.
Other (Expense) Income, net
Other (expense) income, net, primarily consisted of interest expense related to the convertible notes, offset by income earned on our cash, cash equivalents and investments.
Provision for Income Taxes

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Our provision for income taxes consists primarily of state minimum taxes in the United States. As we expand the scale of our international business activities, any changes in the U.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for our U.S. deferred tax assets, including federal and state net operating loss carryforwards, or NOLs. 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
The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Service revenue
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
92,372

 
$
78,121

 
$
14,251

 
18.2
%
Percentage of total revenue
 
95.5
%
 
93.9
%
 
 
 
 
Service revenue increased for the three months ended June 30, 2019 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 service revenue from each customer on a monthly basis in the three months ended June 30, 2019 as compared to the same prior year period.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Product revenue
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
4,303

 
$
5,104

 
$
(801
)
 
(15.7
)%
Percentage of total revenue
 
4.5
%
 
6.1
%
 
 
 
 
Product revenue decreased during the three months ended June 30, 2019 compared with the same period in the prior fiscal year, primarily due to decreased equipment unit sales to customers combined with product discounts and promotions during the three months ended June 30, 2019.
No customer represented greater than 10% of the Company's total revenues for the three months ended June 30, 2019 or 2018.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Cost of service revenue
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
31,967

 
$
24,549

 
$
7,418

 
30.2
%
Percentage of service revenue
 
34.6
%
 
31.4
%
 
 
 
 
Cost of service revenue for the three months ended June 30, 2019 increased over the same prior year period and faster than revenue growth primarily due to a $2.7 million increase in personnel and related costs, a $1.8 million increase in amortization of intangibles and capitalized software expenses, and a $0.8 million increase in consulting and outside services. These increases were partially offset by a decrease of $0.8 million in third-party network services expenses.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Cost of product revenue
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
5,724

 
$
6,281

 
$
(557
)
 
(8.9
)%
Percentage of product revenue
 
133.0
%
 
123.1
%
 
 
 
 
The cost of product revenue for the three months ended June 30, 2019 decreased over the same prior year period primarily due to the decrease in the number of telephones shipped to customers. The increase in negative margin

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was due to the product discounts and promotions during the three months ended June 30, 2019.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Research and development
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
18,331

 
$
13,050

 
$
5,281

 
40.5
%
Percentage of total revenue
 
19.0
%
 
15.7
%
 
 
 
 
Research and development expenses for the three months ended June 30, 2019 increased over the same prior year period primarily due to a $4.2 million increase in personnel and related costs, a $2.0 million increase in stock-based compensation expense, as well as other smaller cost increases. These increases were offset by a $2.2 million increase in costs that were capitalized for internally developed software.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Sales and marketing
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
53,599

 
$
40,495

 
$
13,104

 
32.4
%
Percentage of total revenue
 
55.4
%
 
48.7
%
 
 
 
 
Sales and marketing expenses for the three months ended June 30, 2019 increased over the same prior year period primarily due to a $6.5 million increase in personnel and related costs, a $7.1 million increase in advertising and marketing expenses, and a $2.7 million increase in stock-based compensation costs, as well as other smaller cost increases. These cost increases were partially offset by $2.7 million commission costs that were capitalized.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
General and administrative
 
2019
 
2018
 
Change
 
Change
 
 
(dollar amounts in thousands)
 
 

Three months ended
 
$
19,607

 
$
14,833

 
$
4,774

 
32.2
%
Percentage of total revenue
 
20.3
%
 
17.8
%
 
 
 
 
General and administrative expenses for the three months ended June 30, 2019 increased over the same prior year period primarily due to a $2.9 million increase related to personnel and related costs and $1.2 million in expenses incurred related our recent acquisition. Refer to Part I, Note 13 of Notes to Unaudited Consolidated Financial Statements.
 
 
Three Months Ended June 30,
 
Dollar
 
Percent
Other (expense) income, net