8X8 INC /DE/ (EGHT)

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

This section discusses items pertaining to and comparisons of financial results between fiscal 2025 and fiscal 2024. A discussion of fiscal 2024 items and comparisons between fiscal 2024 and fiscal 2023 financial results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2024 (the “2024 MD&A”), filed with the Securities and Exchange Commission on May 21, 2024.

Overview

8x8, Inc. is a global provider of integrated customer experience and business communications solutions, purpose-built to unify customer and employee engagement across the enterprise. Our Platform for CX™ combines contact center, business communications, and application programmable interfaces, or APIs, for communications into a single, secure, AI-powered system that delivers seamless, data-driven interactions. Designed for agility and scale, our platform helps businesses eliminate silos, improve operational efficiency, and turn every conversation into actionable intelligence. By aligning technology with measurable outcomes, we empower organizations to transform how they connect, serve, and grow — from first interactions to lasting relationships.

We serve a broad customer base—from small businesses to large global enterprises—across every major industry and in over 160 countries. Our strategic focus has increasingly shifted toward mid-market, small and mid-sized enterprise, and public sector organizations, particularly those with 500 to 10,000 employees. These customers often have more complex communication and customer service needs and are more likely to benefit from—and invest in—multiple services across our platform. This focus aligns with our strengths, eliminating communication silos and enabling businesses to transform every customer interaction into a strategic asset. We also invest resources in retaining our small business customers, including world class onboarding and customer care specialists that are a single point of contact for all service and support needs.

We reach customers through a diversified go-to-market strategy that includes both direct and indirect channels. We utilize a diversified partner ecosystem to complement our direct sales efforts and expand our global market reach. Our go-to-market strategy includes technology solutions distributors, or TSDs, and their sub-agent networks, who contribute to pipeline growth through referrals. We also engage value-added resellers, or VARs, who market, sell, implement, and support our solutions, helping to drive customer acquisition and optimize our routes to market.

In addition, we collaborate closely with strategic technology partners—particularly those with whom we maintain deep integrations or original equipment manufacturer, or OEM, relationships—via structured referral agreements and coordinated lead flow processes. Our carrier partnerships extend our service availability to over 100 countries and territories, ensuring high-quality, reliable communications that support our international footprint.

To further enhance deployment speed and geographic coverage, we leverage third-party service providers, enabling us to deliver implementation and support services efficiently at a global scale.

With our unified approach to communication and a commitment to continuous innovation, 8x8 enables businesses to deliver intelligent, connected experiences that securely scale across the enterprise.

We generate service revenue from subscriptions to our communications services, as well as from usage of our platform. Our service subscription plans are sold on a per-user basis and are structured with increasing levels of functionality, based on the specific communication needs and customer engagement profile of each user. Platform usage, including telephony minutes, messaging, SMS, and digital and voice chat bot interactions, encompasses committed usage, which may be bundled with our service subscription plans, and uncommitted usage, which is sold on an as-used basis.

We generate other revenue from professional services and the sale of office phones and other hardware 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).

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Macroeconomic and Other Factors

We are subject to risks and exposures, including those caused by adverse economic conditions. Macroeconomic conditions that could adversely affect our business include geopolitical instability, tariffs, continued inflation, increased interest rates, supply chain disruptions, decreased economic output and fluctuations in currency exchange rates. We continuously monitor the direct and indirect impacts of these factors, as well as the overall global economy and geopolitical landscape on our business and financial results.

While the implications of macroeconomic events on our business, results of operations, and overall financial position remain uncertain over the long term, we expect that adverse economic conditions could adversely impact our business in future periods. For example, our installed base includes more than 50,000 small businesses, which tend to be disproportionately impacted by macroeconomic headwinds.

Summary and Outlook

As part of our long-term strategy to grow our revenue and increase profitability and cash flow, we are focused on retaining our existing customers and expanding our mid-market, enterprise and public sector customer base. We believe that continued innovation is a critical factor in attracting and retaining our customers and is an important variable in achieving sustainable growth. We are committed to maintaining a high level of investment in research and development to deliver innovation across our Platform for CX, expand our ecosystem of integrated third-party applications, and maintain the high platform availability our customers require.

Our primary focus involves the following: (i) accelerating innovation, particularly in enhancing our platform and contact center with artificial intelligence-based capabilities, and (ii) leveraging our CPaaS leadership in the Asia Pacific region to expand globally. We continue to introduce new products like 8x8 Engage, add capabilities that allow our customers to enhance employee and customer experience, and expand our Technology Partner Ecosystem to provide complete solutions tailored to specific use cases. We are also enhancing our platform foundation with cutting edge technology, such as the Customer Interaction Data Platform and composable agent and supervisor user interfaces. These innovations enable tightly integrated solutions that prioritize ease-of-use, out-of-the-box functionality, and rapid deployment.

Our investment in innovation has been complemented by initiatives to manage the cost of delivering our services and improve our sales efficiency. We continue to monitor factors that could have an impact on customer buying behavior and demand, including macroeconomic conditions, the competitive environment, contract duration, churn, upsell and down-sell, renewals, and payment terms, all of which have caused variability in our results and may continue to do in the future. We expect the cost of delivering our communication services — both in total dollars and as a percentage of service revenue — to vary with the amount of service revenue and the mix of subscription and usage revenue within service revenue. To improve our sales efficiency over time, we continue to invest in marketing programs to drive awareness for our solutions, and we have increased training for our sales teams, and invested in tools to increase productivity. We have also expanded our reseller partner programs to extend our reach within our target customer market, placing increased emphasis on developing a community of value-added resellers who provide implementation services and Tier 1 customer support in addition to sales. To support our customers and partners, we have expanded our customer success organization and continue to invest in improvements to our back-office processes to increase our operational efficiency over time.

Key GAAP Operating Results

To assess the success of our strategies to achieve growth and increase our cash flow, management reviews our financial performance as presented in our consolidated financial statements, including trends in revenue, gross profit margin, income (loss) from operations, and cash flow generated by operations in absolute dollars and as a percentage of revenue as presented in the following table:

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Components of Results of Operations

Service Revenue

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

Other Revenue

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

Cost of Service Revenue

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

Cost of Other Revenue

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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

Impairment of Long-Lived Assets

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

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

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Interest Expense

Interest expense consists primarily of interest expense related to our term loan and convertible notes, and amortization of debt discount and issuance costs.

Other Expense, Net

Other expense, net, consists primarily of losses on debt extinguishment, gain or loss on warrant remeasurement, interest income, gains or losses on foreign exchange transactions, as well as other income.

Provision for Income Taxes

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

Results of Operations

Revenue

Service revenue

Service revenue decreased by $7.7 million, or 1.1%, for fiscal 2025 compared to fiscal 2024. This change was driven by a decrease in revenue from subscriptions of $19.9 million primarily due to a decline in revenue from customers on the Fuze platform offset by an increase of $12.2 million in platform usage revenue.

Our business is diversified by vertical market and geography, and no single customer represented more than 10% of our total revenue during fiscal years 2025 and 2024. We continue to monitor factors that could have an impact on customer buying behavior and demand, including macroeconomic conditions, contract duration, churn, upsell and down-sell, renewals, and payment terms, all of which could cause variability in our revenue.

Other revenue

Other revenue decreased by $6.0 million, or 21.3%, in fiscal 2025, as compared to fiscal 2024, due to lower product and professional service revenue of $3.2 million and $2.8 million, respectively.

Cost of Revenue

Cost of service revenue

Cost of service revenue increased $7.1 million, or 3.7%, during fiscal 2025 compared to fiscal 2024, primarily due to an increase of $17.5 million in costs to deliver our subscription and platform usage services. This increase was partially offset by decreases of $5.7 million from amortization of capitalized software and intangible assets, $3.1 million in stock-based compensation driven by lower weighted average grant date fair values for awards granted, $1.1 million in software costs, and $0.5 million in salaries, benefits, and consulting costs.

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Cost of other revenue

Cost of other revenue decreased $2.2 million, or 7.0%, in fiscal 2025 compared to fiscal 2024, primarily due to decreases of $1.6 million in lower product costs associated with IP telephone hardware and $0.8 million of stock-based compensation. These decreases were offset by an increase of $0.2 million in salaries, benefits, and consulting costs to deliver our professional services.

Operating Expenses

Research and development

Research and development expenses decreased $13.0 million, or 9.5%, in fiscal 2025 compared to fiscal 2024, primarily due to decreases of $9.5 million in stock-based compensation driven by lower weighted average grant date fair values for awards granted, $4.3 million in combined salaries, benefits, and consulting costs driven by lower headcount, and $3.5 million in facilities costs. These decreases were partially offset by increases of $2.3 million to operate data centers, $1.4 million in internally-developed software, and $0.6 million in other costs necessary for us to conduct our product, platform development and engineering efforts.

Sales and marketing

Sales and marketing expenses decreased $7.5 million, or 2.8%, in fiscal 2025 compared to fiscal 2024 primarily due to decreases of $8.2 million in channel commissions and amortization of contract acquisition costs and $6.7 million in stock-based compensation expense driven by lower weighted average grant date fair values for awards granted. These decreases were partially offset by an increase of $5.3 million in salaries, benefits, and consulting costs driven by increased sales organization headcount and $2.1 million in digital marketing and other costs.

General and administrative

General and administrative expenses decreased $29.8 million, or 26.6%, in fiscal 2025 compared to fiscal 2024 primarily due to a $24.2 million decrease associated with regulatory and state and local tax matters. During fiscal 2025, we adjusted accruals related to USF and other legal, regulatory and state and local tax matters and recognized a benefit of $9.9 million, compared to $14.3 million of expenses recognized during fiscal 2024. The decrease was also due to decreases of $3.9 million in salaries, benefits, and consulting costs and $3.8 million in stock-based compensation driven by lower weighted average grant date fair values for awards granted. These decreases were partially offset by an increase of $2.1 million in other general corporate costs.

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Impairment of long-lived assets

Impairment of long-lived assets decreased $11.0 million in fiscal 2025 compared to fiscal 2024. During the third quarter of fiscal 2024, we partially ceased use of the Company's Headquarters and an international office space. We reviewed the recoverability of the related right-of-use assets and determined an impairment indicator was identified as these events indicated the carrying value of the right-of-use assets may not be recoverable. In connection with partially ceasing use of the Company’s Headquarters and an international office space, the Company recorded impairment charges of $9.9 million and $1.1 million, respectively, as the carrying amount of the right-of-use assets related to the leases exceeded its fair value based on the Company’s estimate of future discounted cash flows related to the leased facility. During the year ended March 31, 2024, the non-cash charge of $11.0 million was recorded as an impairment of long-lived assets on the consolidated statements of operations and comprehensive loss and consisted of an $11.0 million impairment of operating lease right-of-use assets. See Note 1, The Company and Significant Accounting Policies, for further details.

Other expense, net

Interest expense

Interest expense decreased by $11.0 million, or 27.5%, in fiscal 2025 compared to fiscal 2024, primarily due to the 2022 Term Loan Debt extinguishment and decreased interest rate and principal on the Term Loan. See Note 8, Convertible Senior Notes and Term Loan, for further details.

Other expense, net

We recognized $10.4 million of other expense, net during fiscal 2025 compared to $3.5 million of other income, net during fiscal 2024 primarily due to a $10.6 million increase on loss of debt extinguishment due to the payoff of the 2022 Term Loan, an increase of $2.0 million in unrealized foreign exchange losses, a decrease of $0.7 million in interest income, and a $0.6 million increase in other expense.

Provision for income taxes

For the year ended March 31, 2025, we recorded an income tax provision of $3.1 million compared to $3.6 million in fiscal 2024, primarily due to a reduction in state income taxes as a result of a reduction in state taxable income offset by an increase in foreign taxes primarily due to the exhaustion of NOL carryforwards and a change in income mix of our foreign jurisdictions.

Liquidity and Capital Resources

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

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Cash, Cash Equivalents, and Investments

The following is a summary of our cash and cash equivalents and investments (in thousands):

(1) Restricted cash supports letters of credit securing leases for office facilities and certain equipment for the same periods, and an accrued holdback related to a business combination (see Note 1, The Company and Significant Accounting Policies).

Our primary requirements for liquidity and capital are working capital needs due to delivery of our various products to customers, research and development, sales and marketing activities, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met from cash provided by operating activities and our cash and cash equivalents balances. Our current capital deployment strategy for fiscal year 2026 is to invest excess cash on hand to support our continued growth initiatives into select markets and planned software development activities, and pay down our debt. As of March 31, 2025, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the fiscal year include our operating lease obligations, interest payments related to our debt obligations, and operating and capital purchase commitments. For information regarding our expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 6, Leases, and Note 7, Commitments and Contingencies, respectively, to the consolidated financial statements. Additionally, refer to Note 8, Convertible Senior Notes and Term Loan, to the consolidated financial statements for more information related to our debt obligations and applicable covenants.

Our outstanding Term Loan allows for voluntary prepayments. In order to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption, we may, from time to time, make prepayments. The Company evaluates opportunities for stock repurchases, and may utilize cash and cash equivalents to repurchase shares under the 2017 Repurchase Plan. For more information, see Note 9, Stock-Based Compensation and Stockholders' Equity.

As of March 31, 2025, our 2028 Notes were trading at a discount to their respective principal amount. We may seek to retire or purchase our outstanding debt through open-market purchases, privately negotiated transactions or otherwise which may have an impact on our liquidity requirements. Any such transactions will be dependent upon several factors, including our liquidity requirements, contractual restrictions, prevailing market conditions, and other factors. Whether or not we engage in any such transactions will be determined at our discretion. For historical debt payments, see Note 8, Convertible Senior Notes and Term Loan.

Cash Flows

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

Cash provided by operating activities decreased by $15.4 million to $63.6 million for fiscal 2025, mainly due to an increase in cash paid to suppliers and employees partially offset by an increase in cash received from customers. Cash used in investing activities decreased $25.0 million to $16.4 million for fiscal 2025, mainly due to decreases in the purchases, sales, and maturities of investments and $3.2 million of cash paid for the business combination. Cash used in financing activities decreased by $8.3 million to $75.1 million for fiscal 2025, due to principal repayments for our term loan and payoff of a perpetual license related to our enterprise resource planning software.

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Debt Obligations

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

2024 Delayed Draw Term Loan

On July 11, 2024, we entered into a new term loan credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders thereto (the “2024 Credit Agreement”). The 2024 Credit Agreement establishes a delayed draw term loan facility in an aggregate principal amount of up to $200.0 million maturing on August 15, 2027.

On August 5, 2024, we drew upon the entire facility of $200.0 million under the delayed draw term loan facility (the "Term Loan") and used the proceeds of the Term Loan and cash on hand of approximately $29.0 million to repay in full the $225.0 million of outstanding principal amount and accrued interest of the 2022 Term Loan and the fees incurred in connection with the repayment (the "Repayment").

The Term Loan bears interest at an annual rate equal to the Term SOFR, plus a margin of either 2.50%, 2.75% or 3.00% based on the consolidated total net leverage ratio of the Company and its subsidiaries. The initial margin will be 3.00% for the fiscal quarter ending September 30, 2024. We have the option to pay interest monthly, quarterly, or semi-annually. During the three months ended March 31, 2025, we elected monthly payment terms which resulted in cash payments of $2.7 million. During the three months ended June 30, 2025, we have elected monthly interest payment terms, which will result in cash payments of approximately $2.6 million. As of August 5, 2024, the scheduled principal repayments of $22.5 million in fiscal year 2025 ($7.5 million on October 31, 2024, December 31, 2024 and March 31, 2025, respectively), $37.5 million in fiscal year 2026 ($7.5 million on June 30, 2025 and $10.0 million on September 30, 2025, December 31, 2025 and March 31, 2026, respectively), and $47.5 million in fiscal year 2027 ($10.0 million on June 30, 2026, $12.5 million on September 30, 2026 and each quarter thereafter through maturity) are required, and the remaining $92.5 million principal is due before or upon maturity in fiscal year 2028. These annualized repayments will be made in quarterly installments. As of March 31, 2025, the debt issuance costs are amortized to interest expense over the term of the Term Loan at an effective interest rate of 8.67%.

Under the terms of the 2024 Credit Agreement, we have the right to prepay the Term Loan at any time without any premium or penalty. We completed three principal payments of the Term Loan during fiscal 2025 for a total payment of $48.0 million in aggregate principal amount as follows:

•On October 7, 2024, we paid $15.0 million of quarterly principal payments due October 31, 2024 and December 31, 2024.

•On November 1, 2024, we prepaid $18.0 million of additional principal payments due March 31, 2025, June 30, 2025 and September 30, 2025.

•On January 10, 2025, we paid $15.0 million of quarterly principal payments due September 30, 2025 and December 31, 2025.

These short-term principal debt payments are accounted for as partial debt extinguishment transactions. The carrying value of the Term Loan, including the unamortized debt discount and issuance costs, was derecognized. The difference of $0.3 million between the cash consideration paid to partially extinguish the Term Loan and the carrying value of the Term Loan was recognized as a loss on debt extinguishment included in the loss on debt extinguishment line item recorded in other expense in the consolidated statement of operations. The remaining principal amount of the Term Loan after the payments is $152.0 million. As of March 31, 2025, we have paid $22.5 million and $25.5 million of the originally scheduled principal repayments for fiscal year 2025 and fiscal year 2026, respectively. On April 11, 2025, we paid $15.0 million of quarterly principal payments due October 31, 2025, January 31, 2026, and April 30, 2026 under the Term Loan. The Company has no remaining short-term obligations due for fiscal year 2026. See Note 13, Subsequent Events, for more information regarding this prepayment.

2022 Term Loan Extinguishment

On August 5, 2024, we repaid in full the outstanding principal amount and accrued interest of the 2022 Term Loan using the proceeds of the Term Loan and cash on hand. The Repayment was accounted for as a debt extinguishment. The carrying value of the 2022 Term Loan, including the unamortized debt discount and issuance costs, was derecognized. The difference of $12.0 million between the cash consideration paid to extinguish the 2022 Term Loan and the carrying value of the 2022 Term Loan was recognized as a loss on debt extinguishment included in the loss on debt extinguishment line item recorded in other expense in the consolidated statement of operations. The Warrants continued to be outstanding with no change in terms in connection with the Repayment or issuance of the Term Loan.

We previously used the proceeds from the 2022 Credit Agreement to fund the cash portion of an exchange of the Company's approximately $403.8 million principal amount of 0.50% convertible senior notes due 2024 for cash plus approximately $201.9 million of 4.00% convertible senior notes due 2028, and the concurrent repurchase of approximately $60.0 million of our common stock with the counterparties to such exchange. Loans made under the 2022 Credit Agreement bore interest at an annual rate equal to the Term SOFR, subject to a floor of 1.00% and a credit spread adjustment of 0.10%, plus a margin of 6.50%. During the year ended March 31, 2025, we paid $9.4 million of interest under the 2022 Term Loan. See Note 8, Convertible Senior Notes and Term Loan, to our consolidated financial statements for details.

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Material Cash Requirements and Other Obligations

The following table summarizes the payments due for our outstanding contractual obligations as of March 31, 2025:

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

(2) Total interest payments of $21.3 million were determined using the year-end Term SOFR rate of 7.32% plus 3.00% as of March 31, 2025. See Note 8, Convertible Senior Notes and Term Loan, in the Notes to Consolidated Financial Statements included in this Annual Report regarding the interest rate terms.

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

Revenue is recognized on a gross basis when the Company is considered the principal in the transaction with discretion on pricing and control, as performance obligations are satisfied, based on the transaction price. The Company recognizes revenue on a net basis when the Company is considered the agent in third party license sales, if material. We generally bill our customers on a monthly basis. Contracts typically range from annual to multi-year agreements, generally with payment terms of net 30 days.

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

Service Revenue Recognition

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

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Other Revenue Recognition

Other revenue is primarily comprised of product revenue and professional services revenue. We recognize product revenue for telephony equipment at a point in time when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience. Professional services for deployment, configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by us directly. Professional services revenue is recognized as services are performed or upon completion of the deployment.

Allowance for Credit Losses

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

Acquisitions

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

Capitalized Internal-Use Software Costs

Certain costs of software are capitalized during the application development phase. We begin to capitalize costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, it is probable that the project will be completed, and the software will be used as intended. Capitalized internal-use software development costs are included in property and equipment. Once the project has been completed, these costs are amortized to cost of service revenue on a straight-line basis over the estimated useful life of the related asset as noted in Property and Equipment. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded in research and development expense. We test capitalized internal-use software development costs for impairment on an annual basis, or as events occur or circumstances change that could impact the recoverability of the capitalized costs.

Accounting for Long-Lived Assets

We review the recoverability of our long-lived assets, such as property and equipment, right-of-use assets, definite lived intangibles, or capitalized internal-use software costs, when events or changes in circumstances occur that indicate that the carrying value of the asset or asset group may not be recoverable. Examples of such events could include the disposal of a significant portion of such asset, an adverse change in the market involving the business employing the related asset, or a significant change in the operation or use of an asset. The assessment of possible impairment is based on our ability to recover the carrying value of the asset or asset group from the expected future cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset or asset group, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to estimate the fair value of long-lived assets and asset groups through future cash flows. During fiscal 2024, we recorded an impairment of long-lived assets related to the Company's right-of-use assets on the consolidated statements of operations and comprehensive loss. See Note 6, Leases, for further details.

Goodwill and Other Intangible Assets

Goodwill represents the excess fair value of consideration transferred over the fair value of net assets acquired in business combinations. Goodwill and intangible assets with indefinite useful lives are not amortized but are tested annually for impairment and more often if there is an indicator of impairment. We perform testing for impairment of goodwill on an annual basis, or as events occur or circumstances change that would more likely than not reduce the fair value of our single reporting unit below its carrying amount. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value.

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

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

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

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

OVERVIEW

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

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

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

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

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

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

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

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

SUMMARY AND OUTLOOK

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

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

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

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

KEY BUSINESS METRICS

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

Annualized Recurring Subscriptions and Usage Revenue

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

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

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

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

COMPONENTS OF RESULTS OF OPERATIONS

Service Revenue

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

Other Revenue

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

Cost of Service Revenue

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

Cost of Other Revenue

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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

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Impairment of Long-Lived Assets

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

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

Other Expense, Net

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

Provision for (Benefit from) Income Taxes

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

RESULTS OF OPERATIONS

Revenue

Service revenue

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

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

Other revenue

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

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

Cost of Revenue

Cost of service revenue

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

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

Cost of other revenue

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

Operating Expenses

Research and development

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

Sales and marketing

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

General and administrative

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

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Impairment of long-lived assets

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

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

Other expense, net

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

Provision for income taxes

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

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Liquidity and Capital Resources

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

Cash, Cash Equivalents, and Investments

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

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

Cash Flows

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

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

Debt Obligations

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

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Material Cash Requirements and Other Obligations

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

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

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

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

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

Service Revenue Recognition

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

Other Revenue Recognition

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

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

Allowance for Credit Losses

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

Acquisitions

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

Capitalized Internal-Use Software Costs

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

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

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

Accounting for Long-Lived Assets

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

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

Goodwill and Other Intangible Assets

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

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

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

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

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

This section discusses items pertaining to and comparisons of financial results between fiscal 2023 and fiscal 2022. A discussion of fiscal 2022 items and comparisons between fiscal 2022 and fiscal 2021 financial results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2022 (the “2022 MD&A”), filed with the SEC on May 27, 2022.

OVERVIEW

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

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

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

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

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

Our customers range from small businesses to large enterprises across all vertical markets, with users in more than 180 countries. In recent years, we have increased our focus on mid-market, small and medium enterprise, and public sector customers because these organizations typically have more complex communication and contact center requirements compared to the needs of small business customers. Organizations in these sectors – typically with 500 to 10,000 employees -- are more likely to adopt multiple services and realize greater value from our unified, global communications platform and portfolio of AI-enabled solutions.

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

In January 2022, we acquired Fuze, Inc. ("Fuze"), a competitor in enterprise-grade unified communications-as-a-service (UCaaS), for approximately $213.8 million in stock and cash. The acquisition of Fuze increased our installed base of enterprise customers and added research and development resources that enabled us to accelerate innovation on our XCaaS platform.

SUMMARY AND OUTLOOK

In fiscal 2023, our total revenue grew $105.8 million, or approximately 16.6% year-over-year, to $743.9 million. Excluding revenue from the Fuze customer base, our total revenue increased approximately 3% for the year ended March 31, 2023. Our service revenue grew $107.7 million, or approximately 17.9% year-over-year, to $710.0 million. Excluding revenue from Fuze customers, our service revenue grew approximately 4% for the year ended March 31, 2023.

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

We believe that continued innovation is a critical factor in attracting and retaining mid-market and enterprise customers and is an important variable in achieving sustainable growth. We are committed to maintaining a high level of investment in engineering to deliver product innovation across our XCaaS platform, expand our ecosystem of integrations, and maintain the high availability our customers require. Approximately two-thirds of our investment in research and development is focused on extending the contact center capabilities of our XCaaS platform, including AI integrations, advanced data capture and analytics.

We use annualized recurring and usage revenue ("ARR") to measure the success of our strategy to attract and retain customers. Total ARR at the end of fiscal 2023 was $703 million and increased 2% from the end of fiscal 2022. ARR from mid-market and enterprise customers represented 76% of total ARR and increased 3% compared to the end of fiscal 2022. We define enterprise customers as customers generating more than $100,000 in ARR, mid-market as customers with ARR between $25,000 and $100,000, and small business as customers with up to $25,000 in ARR. Mid-market customers, often become enterprise customers over time as they expand their deployments and adopt more solutions from our XCaaS portfolio.

ARR from enterprise customers has increased steadily as a percentage of total ARR, increasing from 35% of total ARR in fiscal 2019 to 58% of total ARR at the end of fiscal 2023. We have increased our focus on mid-market and enterprise customers because these organizations typically have more complex communication and contact center requirements compared to the needs of small business customers.

ARR associated with small business customers was 24% of total ARR for fiscal 2023. We remain committed to retaining our installed base of small business customers but have reduced sales and marketing investment in attracting new small business UCaaS-only customers. See "Key Business Metrics" section below for further discussion on how we define ARR.

In August 2022, we refinanced approximately $403.8 million of the $500.0 million aggregate principal amount of 2024 Notes through an exchange for approximately $201.9 million in 2028 Notes plus approximately $181.8 million in cash. The cash payment was funded with the partial proceeds of a new $250.0 million senior secured term loan due in 2027 entered into in August 2022. Concurrently with the issuance of the 2028 Notes, we repurchased 10,695,000 shares of our common stock for approximately $60.0 million in privately negotiated transactions with a limited number of holders. In September 2022, December 2022 and February 2023, we repurchased $6.0 million, $21.8 million and $5.0 million in aggregate principal amount of the 2024 Notes, respectively, in separate privately negotiated transactions. Approximately $63.3 million of the 2024 Notes remained outstanding as of March 31, 2023. See Note 7, Convertible Senior Notes, Term Loan and Capped Calls to our condensed consolidated financial statements for details. In May 2023, we voluntarily prepaid $25.0 million of principal on our senior secured term loan, reducing the total principal outstanding to $225 million.

To align our resources with our long-term strategy to grow revenue and increase profits and cash flow through increased focus on mid-market and enterprise customers, we conducted two separate workforce reductions involving approximately 300 employees, primarily in the sales and marketing and general and administration functions. We expect these workforce reductions and accompanying organizational restructurings to align our resources to our critical areas of focus, including streamlining sales and marketing, enhancing customer support, accelerating innovation, and strengthening our financial position.

IMPACT OF COVID-19

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The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including those set forth under the section entitled "Risk Factors."

KEY BUSINESS METRICS

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

Annualized Recurring Subscriptions and Usage Revenue

Our management measures the success of our strategy to attract and retain customers by analyzing trends in ARR and believes ARR may be useful to investors in evaluating our performance. Our management believes ARR is an important indicator for measuring the overall performance of the business because it encompasses new customer additions, add-on sales, renewals and customer churn in a single metric. Our management uses trends in total ARR and ARR by customer segment to assess our ongoing operations, allocate resources, and drive the financial performance of the business. We define ARR as equal to the sum of the most recent month of (i) recurring subscription amounts and (ii) platform usage charges for all CPaaS customers (subject to a minimum billings threshold for a period of at least six consecutive months), multiplied by 12.

We are not aware of any uniform standards for calculating ARR and caution that our presentation may not be consistent with that of other companies. For example, to the extent our ARR is used to evaluate trends in future revenue, such an evaluation would assume a sustained level of usage from existing customers which may fluctuate in future periods.

COMPONENTS OF RESULTS OF OPERATIONS

Service Revenue

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

Other Revenue

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

Cost of Service Revenue

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

Cost of Other Revenue

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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

Other Expense, Net

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

Provision for (Benefit from) Income Taxes

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

RESULTS OF OPERATIONS

Fiscal 2023 includes a full year of Fuze's results of operations. The results of operations for fiscal 2022, includes approximately ten weeks of Fuze's results of operations since its acquisition on January 18, 2022.

Revenue

Service revenue

Service revenue increased for fiscal 2023, as compared to fiscal 2022, primarily due to a net increase in our installed base of mid-market and enterprise customers, expanded deployments by existing customers, and growth in related telecom usage by our customers.The increase in service revenue reflected increased sales of our UCaaS and CCaaS solutions, and increased adoption of our XCaaS integrated communication and collaboration platform. A substantial portion of the growth in service revenue for the year ended March 31, 2023 was attributable to Fuze, which contributed approximately an $86.5 million increase compared to the year ended March 31, 2022. The increase was partially offset by a decrease in usage revenue generated by our CPaaS products, primarily in the Asia-Pacific region.

We expect our service revenue to grow over time with our diverse platform offering as we increase the features and functionality of our platform, acquire new customers, increase cross-selling to our existing customers, and expand geographically outside the United States.

Other revenue

Other revenue decreased by $1.9 million in fiscal 2023, as compared to fiscal 2022, due to a decrease in professional service revenue.

Our business is diversified by vertical market and geography, and no single customer represented more than 10% of our total revenue during fiscal years 2023 and 2022.

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Cost of Revenue

Cost of service revenue

Cost of service revenue increased in dollars but decreased as a percentage of service revenue as we achieved operating efficiencies. The increase in cost of service during fiscal 2023, as compared to fiscal 2022, was primarily due to increases of $2.7 million in amortization of intangibles, $2.6 million in employee and consulting costs, and $1.5 million in software costs. These increases were partially offset by a decrease of $3.4 million in amortization of capitalized software.

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

Cost of other revenue

Cost of other revenue decreased in dollars and as a percentage of other revenue in fiscal 2023, as compared to fiscal 2022, primarily due to decreases in product costs and efficiencies in our professional services.

Research and development

Research and development expenses increased in dollars and as percentage of revenue during fiscal 2023, as compared to fiscal 2022, primarily due to increases of $23.8 million in employee and consulting costs, $6.7 million in internally-developed software, $4.8 million in software licenses, and $3.6 million in public cloud hosting costs; primarily as a result of our acquisition of Fuze. These increases were partially offset by decreases of $3.1 million in stock-based compensation and $1.8 million in amortization of capitalized software.

We plan to continue to invest in research and development to accelerate our efforts to expand the capabilities and scope of our XCaaS platform to enhance our users' experience. While we expect to continue to improve our overall cost structure and achieve operational efficiencies, we expect that research and development expenses will increase in absolute dollars in future periods as we continue to invest in our development efforts and vary from period-to-period as a percentage of revenue as we continue to invest in our development efforts.

Sales and marketing

Sales and marketing expenses decreased in dollars and as a percentage of revenue in fiscal 2023, as compared to fiscal 2022, primarily due to decreases of $22.3 million in stock-based compensation expense, $6.6 million in employee and consulting costs, and $3.5 million in paid media and marketing services. These decreases were partially offset by increases of $17.8 million in commissions, $9.1 million in amortization of intangibles, and $3.5 million in amortization of deferred commissions.

We expect sales and marketing costs as a percentage     of revenue to decrease from fiscal 2023 to fiscal 2024 as we achieve continued efficiencies in sales and marketing.

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General and administrative

General and administrative expenses decreased both in dollars and as a percentage of revenue in fiscal 2023, as compared to fiscal 2022, primarily due to decreases of $17.7 million in stock-based compensation expenses and $13.2 million in acquisition and integration costs related to the Fuze acquisition in fiscal 2022. These decreases were partially offset by increases of $13.1 million in personnel-related and consulting costs, $6.3 million in professional services fees, and $4.6 million in facilities and overhead costs.

We expect general and administrative expenses as a percentage of total revenue will decline over time as we achieve greater operational efficiencies.

Other expense, net

Other expense, net decreased by $17.6 million in fiscal 2023, as compared to fiscal 2022, primarily due to a $18.5 million gain from debt extinguishment from the 2024 Notes, $16.2 million decrease in debt amortization expenses as a result of exchange and subsequent repurchase of the 2024 Notes, $1.8 million gain from sale of intangibles, $1.0 million gain from foreign exchange transactions, and $0.4 million gain on remeasurement of the Warrants issued in connection with the Term Loan, Our decreases were partially offset by a $20.7 million increase in interest expenses primarily related to our Term Loan.

Provision for (benefit from) income taxes

For the year ended March 31, 2023, we recorded an income tax provision of $2.8 million compared to an income tax benefit of $0.4 million in fiscal 2022, primarily due to higher state and foreign income taxes. The higher state taxes were a result of change in U.S. tax laws requiring the capitalization and amortization of research and development costs, and the limitation of certain state net operating loss carryforwards that can be utilized to offset the additional taxable income. The higher foreign income taxes reflect the inclusion of the full year operational results of the foreign Fuze subsidiaries.

We record 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 our ability to utilize our deferred tax assets, we consider available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. We record a valuation allowance against deferred tax assets 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. We continue to remain in a cumulative pretax loss position, and therefore, continue to maintain a full valuation allowance against our United States, United Kingdom, and Singapore deferred tax assets.

Liquidity and Capital Resources

As of March 31, 2023, we had $137.6 million of cash and cash equivalents and short-term investments. In addition, we had $1.3 million in restricted cash in support of letters of credit securing leases for office facilities and certain equipment.

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Our primary requirements for liquidity and capital are working capital, research and development and marketing activities, principal and interest payments on our outstanding debt and other general corporate needs. Historically, these cash requirements have been met through cash provided by operating activities and cash and cash equivalents. Our current capital deployment strategy for fiscal 2024 is to invest excess cash on hand to support our continued growth initiatives into select markets and planned software development activities, and pay down our debt. As of March 31, 2023, we are not party to any off-balance sheet arrangements that have had or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. Significant cash requirements for the upcoming fiscal year include our operating lease obligations, interest payments related to our debt obligations, retirement of our 2024 Notes, and operating and capital purchase commitments. For information regarding our expected cash requirements and timing of payments related to leases and noncancellable purchase commitments, see Note 5, Leases, and Note 6, Commitments and Contingencies, respectively, to the consolidated financial statements. Additionally, refer to Note 7, Convertible Senior Notes, Term Loan and Capped Calls, to the consolidated financial statements for more information related to our debt obligations and applicable covenants.

We believe that our existing cash, cash equivalents and investment balances and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months and the foreseeable future. Although we believe we have adequate sources of liquidity for the next 12 months and the foreseeable future the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the ongoing impact of the COVID-19 pandemic and Russia's invasion of Ukraine, among other factors, could impact our business and liquidity.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed into law, which amended portions of relevant tax laws and provided relief to certain qualifying entities. In connection with the CARES Act, the Company elected to defer certain employer payroll taxes, which reduced cash usage by approximately $5.0 million through December 31, 2020, of which approximately $2.5 million was remitted to tax authorities during the third quarter of fiscal 2022 and fiscal 2023. Other jurisdictions around the world have also provided similar tax relief, which the Company has elected to receive, where applicable; these benefits were not material to our cash flows during fiscal 2022.

Year over Year Changes

Net cash provided by operating activities for fiscal 2023 was $48.8 million, as compared to $34.7 million for fiscal 2022. Cash used in or provided by operating activities is primarily affected by:

•net income or loss;

•cash paid for interest expense associated with the outstanding Term Loan, 2024 Notes and 2028 Notes;

•non-cash expense items, such as depreciation, amortization, and impairments;

•non-cash expense associated with stock options and stock-based compensation and awards; and

•changes in working capital accounts, particularly related to the timing of collections from receivables and payments of obligations, such as commissions.

In fiscal 2023, net cash provided by operating activities was $48.8 million, reflecting an adjustment of $183.9 million in non-cash charges to our net loss, including stock-based compensation expense of $89.5 million, depreciation and amortization of $52.3 million, amortization of deferred sales commissions of $38.2 million, operating lease expenses of $12.0 million, and amortization of debt discount of $4.3 million, These adjustments for non-cash charges were partially offset by $62.0 million of working capital changes, including deferrals of sales commissions of $31.1 million and $24.4 million in accounts payable. In fiscal 2022, net cash provided by operating activities was a result of an adjustment of non-cash charges, such as stock-based compensation expense of $133.3 million, amortization of capitalized internal-use software costs of $28.9 million, amortization of debt discount of $20.4 million, and operating lease expenses of $13.5 million. These adjustments for non-cash charges were partially offset by cash outflow from sales commissions of $9.5 million and other working capital changes.

Net cash provided by investing activities was $6.1 million in fiscal 2023, as compared to $160.0 million net cash used in fiscal 2022. Cash provided in investing activities during fiscal 2023 primarily related to net purchases of $21.2 million of investments, capitalized internal-use software development costs of $11.9 million, and purchases of property and equipment of $3.0 million. Cash used in investing activities for fiscal 2022 was primarily related to the acquisition of Fuze for $125.4 million and net purchase of investments of $10.1 million.

Net cash used in financing activities was $37.8 million in fiscal 2023, as compared to $105.4 million cash provided by financing activities used in fiscal 2022. The cash used in financing activities in fiscal 2023 was primarily driven by $217.3 million of net repayment of the 2024 Notes and $60.2 million of shares repurchased, which were substantially offset by $234.8 million of net proceeds from the Term Loan. Cash provided by financing activities in fiscal 2022 was primarily driven by $134.6 million of net proceeds from the issuance of 2024 Notes and $16.1 million from employee stock purchase plans and employee option exercises. These were partially offset by the $45.0 million in repurchase of the Company's common stock from certain qualified investors in connection with the Fuze acquisition.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

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

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

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

Service Revenue Recognition

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

Other Revenue Recognition

Other revenue is primarily comprised of product revenue and professional services revenue. We recognize product revenue for telephony equipment at a point in time when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience. Professional services for deployment, configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by us directly. Professional services revenue is recognized as services are performed or upon completion of the deployment.

Allowance for Credit Losses

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

Acquisitions

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

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Capitalized Internal-Use Software Costs

Certain software development costs for computer software developed internally or obtained for internal use are capitalized during the application development stage. We begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Once the project has been completed, these costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred and recorded in the applicable income statement category, typically research and development, in our consolidated statements of operations.

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

OVERVIEW

We are a leading SaaS provider of voice, video, contact center, and communication APIs powered by a global cloud communications platform. From our proprietary cloud technology platform, organizations across all their locations and employees have access to unified communications, team collaboration, video conferencing, contact center, data and analytics, communication APIs, and other services, enabling them to be more productive and responsive to their customers.

Our customers range from small businesses to large enterprises and their users are spread across more than 170 countries. In recent years, we have increased our up-market focus on the mid-market and enterprise customer sectors.

We have a portfolio of cloud-based offerings that are subscription-based, made available at different rates, varying by the specific functionalities, services, and number of users. We generate service revenue from communications services subscriptions and platform usage. We generate other revenue from professional services and the sale of office phones and other hardware 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).

Our flagship service is our 8x8 X Series, a suite of UCaaS and CCaaS solutions, which consists of service plans with increasing functionality designated as X1, X2, etc., through X8. With the 8x8 X Series, we provide enterprise-grade voice, unified communications, video meetings, team collaboration, and contact center functionalities from a single platform. We call this combined offering XCaaSTM (eXperience Communications as a ServiceTM). We also offer standalone SaaS services for contact center, video meetings, and enterprise communication APIs. In January 2022, we acquired Fuze, a competitor in UCaaS for the enterprise, for approximately $213.8 million in stock and cash. This enables us to add Enterprise ARR, accelerate innovation, and expand our global presence.

SUMMARY AND OUTLOOK

In fiscal 2022, our total service revenue grew approximately 21% year-over-year to $602.4 million. Annualized Recurring Subscriptions and Usage Revenue from mid-market and enterprise customers represented 76% of total ARR and increased 33% over the prior year. At the end of fiscal 2022, approximately one-third of our ARR was derived from our XCaaS customers. See "Key Business Metrics" section below for further discussion of how we define ARR.

We continue to focus on achieving improved operating efficiencies while delivering revenue growth. In fiscal 2022, while we continued to make important investments in our products and technology platform, management recognized the importance of driving toward profitability for sustainable scale. We focused on key areas of spend in our go-to-market strategy and improving gross margin and operating margin through increased spend discipline. Additionally, we looked to drive improved efficiencies in our customer acquisition and operations and focused on expanding our business upmarket with mid-market and enterprise customers. We believe that this approach will enable the Company to grow and capture market share during this phase of industry disruption in a cost-effective way and support the Company in pursuit of its path to profitability and operating cash flow improvement.

In prior years, we made strategic investments in R&D and marketing, which we considered necessary and important for delivering a robust platform to our customers and establishing the appropriate demand generation channels to connect our customers to our solutions. In fiscal 2019, we launched 8x8 X Series, our single-technology platform, and re-aligned our channel and marketing functions to support a more scalable, higher-growth, go-to-market strategy, in response to the shift of businesses from legacy on-premise communication solutions to cloud-based services. We believe that this industry trend continued throughout our fiscal 2022. Accordingly, we continued to invest in our business, but with a concurrent focus on scale and managing costs.

In fiscal 2023, we plan to continue making investments in activities to acquire more customers, including investing in our marketing efforts, internal and field sales capacity, and research and development. We also intend to continue investing in our indirect channel programs to acquire more third-party selling agents to help sell our solutions, including VARs and master agent programs. Lastly, we are adding sales capacity to cross sell to our installed base, including both 8x8 and the recently acquired Fuze base.

IMPACT OF COVID-19

The full extent of the impact of the COVID-19 pandemic on our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including those set forth under the section entitled "Risk Factors." In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, including orders to close non-essential businesses, isolate residents to their homes, and practice social distancing. To protect the health and safety of our employees, our workforce has spent significant time working from home and travel has been curtailed for our employees as well as our customers. While we anticipate that the global health crisis caused by COVID-19 and the

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measures enacted to slow its spread will negatively impact business activity across the globe, it is not clear what its full potential effects will be on our business, including the effects on our customers, suppliers or vendors, or on our financial results.

KEY BUSINESS METRICS

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

Annualized Recurring Subscriptions and Usage Revenue

Our management reviews Annualized Recurring Subscriptions and Usage Revenue (“ARR”) and believes it may be useful to investors to evaluate trends in future revenues of the Company. Our management believes ARR is an important indicator for measuring the overall performance of the business. Our management uses trends in ARR to assess our ongoing operations, allocate resources, and drive the financial performance of the business. We define ARR as equal to the sum of the most recent month of (i) recurring subscription amounts and (ii) platform usage charges for all CPaaS customers (subject to a minimum billings threshold for a period of at least six consecutive months), multiplied by 12. We are not aware of any uniform standards for calculating ARR and caution that our presentation may not be consistent with that of other companies. For example, to the extent our ARR is used to evaluate trends in future revenue, such an evaluation would assume a sustained level of usage from existing customers which may fluctuate in future periods.

COMPONENTS OF RESULTS OF OPERATIONS

Service Revenue

Service revenue consists of communication services subscriptions, platform usage revenue, and related fees from our UCaaS, CCaaS, and CPaaS offerings. We plan to continue driving our business to increase service revenue through a combination of increased sales and marketing efforts, geographic expansion of our customer base outside the United States, and innovation in product and technology, and through strategic acquisitions of technologies and businesses.

Other Revenue

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

Cost of Service Revenue

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

Cost of Other Revenue

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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

Other Expense, Net

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Other expense, net, consists primarily of interest expense related to the convertible notes, offset by income earned on our cash, cash equivalents, investments, and foreign exchange gain/losses.

(Benefit from) Provision for Income Taxes

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

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report.

We have minimal seasonality in our business, but typically, sales of new subscriptions in our fourth fiscal quarter ending in March are greater than in any of the first three quarters of the fiscal year. We believe this occurs because our enterprise and mid-market customers tend to spend a relatively greater portion of their annual capital budgets at the beginning of the calendar year compared with each of the last three quarters of the year. This is partially offset by seasonal weakness in our CPaaS revenue in the fourth quarter due to national holidays in the Asia-Pacific region.

The results of operations for fiscal 2022, and the discussion below, includes approximately ten weeks of Fuze's results of operations since its acquisition on January 18, 2022.

Revenue

Service revenue

Service revenue increased for fiscal 2022, as compared to fiscal 2021, primarily due to a net increase in our installed base of mid-market and enterprise customers, expanded deployments by existing customers, growth in related telecom usage by our customers, and our acquisition of Fuze in January 2022, which contributed approximately $23.9 million in service revenue for fiscal 2022. The increase in service revenue reflected sales of our UCaaS and CCaaS solutions, increased adoption of our XCaaS integrated communication and collaboration platform, and growth in sales of our UCaaS direct routing solution for Microsoft Teams users. The increase in service revenue was also attributable to growth in usage revenue generated by our CPaaS products primarily in the APAC region. Our service subscriber base grew from approximately 58,000 customers on March 31, 2021 to more than 60,000 customers on March 31, 2022.

Service revenue increased for fiscal 2021, as compared to fiscal 2020, primarily due to a net increase in our customer base, expanded offerings to existing customers, and growth in related usage; service revenue from new customers was primarily driven by sales of standalone and bundled UCaaS and CCaaS deals globally to our mid-market and enterprise customers. The increase in service revenue was also attributable to growth in usage revenue generated by our CPaaS products, primarily in the APAC region. Our service subscriber base grew from approximately 55,000 customers on March 31, 2020 to approximately 58,000 customers on March 31, 2021.

We expect our service revenue to grow over time with our diverse platform offering as our business continues to expand globally and across broader customer categories.

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Other revenue

Other revenue decreased slightly in fiscal 2022, as compared to fiscal 2021, due to a decrease in product revenue as a result of difficulty in obtaining hardware due to supply chain issues, partially offset by increased professional services revenue resulting from the overall growth in our business and customer base. Our acquisition of Fuze in January 2022 also contributed approximately $0.2 million in other revenue for fiscal 2022.

Other revenue increased in fiscal 2021, as compared to fiscal 2020, primarily due to increased professional services revenue resulting from the overall growth in our business and customer base, partially offset by a decrease in product revenue as a result of a shift toward our hardware rental program and supply chain issues.

While we expect other revenue could decrease in fiscal year 2023 due to continued supply chain limitations, we expect other revenue to grow over time as our customer base grows, particularly with mid-market and enterprise customers as these customers expand their deployments and adopt additional features, and as supply chain issues begin to lessen.

No single customer represented more than 10% of our total revenues during fiscal years 2022, 2021, and 2020.

Revenues are attributed to countries based on the shipment destination and the customer's service address. The following table illustrates our revenues by geographic area:

Revenue generated from international customers has increased year over year due to an increase in the number of customers and expanded deployments by existing customers in both EMEA and APAC regions, including those added in connection with our acquisition of Wavecell Pte. Ltd. ("Wavecell") in July 2019 and Fuze in January 2022.

Cost of Revenue

Cost of service revenue

Cost of service revenue increased in fiscal 2022, as compared to fiscal 2021, primarily due to an increase in sales of our services, which resulted in an increase of $22.6 million in communication infrastructure costs incurred to deliver our services, including those in connection with CPaaS, a $1.6 million increase in software license costs, and a $1.0 million increase in amortization of capitalized software. These increases were partially offset by a decrease of $5.3 million in personnel and related costs.

Cost of service revenue increased in fiscal 2021, as compared to fiscal 2020, primarily due to a $33.6 million increase in communication infrastructure costs incurred to deliver our services, including those in connection with CPaaS, a $6.4 million increase in amortization of capitalized internal-use software, and a $3.4 million increase in stock-based compensation expense. These increases were partially offset by a decrease of $5.3 million in employee and consulting related expenditures and a decrease of $2.5 million in depreciation and amortization of intangible assets.

We expect cost of service revenue will increase in absolute dollars, but decrease as a percentage of revenue, in future periods as service revenue continues to grow.

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Cost of other revenue

Cost of other revenue increased in fiscal 2022, as compared to fiscal 2021, primarily due to an increase in personnel and related costs to deliver our professional services, partially offset by decreased product costs associated with lower product shipments.

Cost of other revenue decreased in fiscal 2021, as compared to fiscal 2020, primarily due to reductions in hardware shipment volume and increases in our hardware rental program, which has better margins than hardware sales.

Operating Expenses

Research and development

Research and development expenses increased in fiscal 2022, as compared to fiscal 2021, primarily due to a $10.0 million increase in personnel-related and consulting costs, including a $1.0 million increase in stock-based compensation expense and $3.5 million increase related to the acquisition of Fuze, a $8.4 million reduction in capitalized internal-use software costs, and a $4.1 million increase in software license and amortization. These increases were partially offset by a $4.7 million decrease in allocated facilities costs. Research and development as a percentage of revenue increased slightly in fiscal 2022 compared to fiscal 2021 primarily due to increased investment in developing our XCaaS platform, as well as the acquisition of Fuze.

Research and development expenses increased in fiscal 2021, as compared to fiscal 2020, primarily due to an $11.9 million increase in stock-based compensation expense, a $3.0 million reduction in capitalized internal-use software costs, and a $1.2 million increase in depreciation and amortization of software. These increases were partially offset by a $1.2 million decrease in travel-related costs.

We plan to continue to invest in research and development to support our efforts to expand the capabilities and scope of our platform and enhance our users' experience. While we expect to continue to improve our cost structure and achieve operational efficiencies, we expect that research and development expenses will increase in absolute dollars in future periods as we continue to invest in our development efforts and vary from period-to-period as a percentage of revenue.

Sales and marketing

Sales and marketing expenses increased in fiscal 2022, as compared to fiscal 2021, primarily due to a $23.0 million increase in personnel-related and consulting expenditures, including a $13.3 million increase in stock-based compensation expense, a $22.1 million increase in channel commissions including $3.7 million increase related to the acquisition of Fuze, a $6.9 million increase in amortization of deferred sales commission costs, and a $5.3 million increase in marketing software and application costs. These increases were partially offset by a decrease of $1.3 million in the marketing program and public cloud expenses due to gained efficiencies in lead generation and brand awareness, along with a reduction in travel-related costs. Sales and marketing increased slightly as a percentage of revenue in fiscal 2022 compared to fiscal 2021 primarily due to increased investment in building brand awareness for our XCaaS integrated communications and collaboration platform.

Sales and marketing expenses increased in fiscal 2021, as compared to fiscal 2020, primarily due to a $14.9 million increase in channel commissions, a $13.7 million increase in stock-based compensation expense, a $8.3 million increase in amortization of deferred sales commission costs, a $3.7 million increase in marketing software and application costs, and a $3.2 million increase in employee and consulting-related expenditures. These increases were partially offset by a decrease of $27.2 million in marketing program and public cloud expenses due to gained efficiencies in lead generation and brand awareness, along with a reduction in travel-related costs.

We plan to continue investing in sales and marketing to attract and retain customers on our platform and to increase our brand awareness. While we expect to continue to improve our cost structure and achieve operational efficiencies, 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.

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General and administrative

General and administrative expenses increased in fiscal 2022, as compared to fiscal 2021, primarily due to a $11.1 million increase in stock-based compensation expense, a $9.6 million increase in acquisition and integration costs resulting from the Fuze acquisition, and a $2.2 million increase in professional services and related expenses. These increases were partially offset by a $4.0 million decrease in legal services and a $2.5 million decrease in allowance for credit losses as our collections improved. General and administrative as a percentage of revenue decreased slightly in fiscal 2022 compared to fiscal 2021.

General and administrative expenses increased in fiscal 2021, as compared to fiscal 2020, primarily due to a $6.4 million increase in stock-based compensation expense, a $5.7 million increase in professional services and payroll and related expenses, including CEO succession costs, a $1.3 million higher allowance for credit losses, partially in response to external market factors and uncertainties in connection with the COVID-19 pandemic, and a $1.8 million increase in depreciation expense. These increases were partially offset by a $2.2 million decrease in acquisition and integration costs.

We expect to continue improving our cost structure and achieve operational efficiencies, and therefore also expect that general and administrative expenses as a percentage of total revenue will decline over time.

Other expense, net

The change in Other expense, net in fiscal 2022, as compared to fiscal 2021, was primarily due to a $3.2 million increase in expense related to contractual interest, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued in December 2021, partially offset by an increase in other income of $0.1 million.

The change in Other expense, net in fiscal 2021, as compared to fiscal 2020, was primarily due to $4.0 million of lower interest income and a $3.1 million increase in expense related to contractual interest, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued in November 2019. These amounts were partially offset by an increase in other income of $0.6 million.

With the adoption of ASU 2020-06, we expect our interest expense, including amortization of debt discount and issuance costs, to decrease, and expect to continue to be in a net expense position (net of interest and other income) for the foreseeable future.

(Benefit from) provision for income taxes

For the year ended March 31, 2022, we recorded an income tax benefit of $0.4 million. A deferred tax benefit of $1.2 million was recorded related to the release of an existing valuation allowance as a result of a change in circumstances caused by the acquisition of Fuze. This benefit was offset by income tax expense of $0.5 million, mostly related to the current tax liabilities of profitable foreign subsidiaries and United States state minimum taxes. Our effective tax rate for the period differs from the statutory rate primarily due to a full valuation allowance against our deferred tax assets.

For the year ended March 31, 2021, we recorded income tax expense of $0.8 million, mostly related to the current tax liabilities of profitable foreign subsidiaries and United States state minimum taxes. Our effective tax rate for the period differs from the statutory rate primarily due to a full valuation allowance against our deferred tax assets.

We record 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 our ability to utilize our deferred tax assets, we consider available evidence, both positive and negative, in determining future taxable income on a jurisdiction-by-jurisdiction basis. We record a valuation allowance against deferred tax assets if, based on the weight of the evidence, it is more likely than not that some

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portion or all of the deferred tax assets will not be realized. A significant item of objective negative evidence considered was the historical three-year cumulative pretax loss reached in fiscal 2018. We continue to remain in a cumulative pretax loss position, and therefore, continued to maintain a full valuation allowance against our United States, United Kingdom, and Singapore deferred tax assets.

Liquidity and Capital Resources

As of March 31, 2022, we had $136.1 million of cash and cash equivalents and short-term investments. In addition, we had $9.5 million in restricted cash in support of letters of credit securing leases for office facilities and certain equipment.

As of March 31, 2021, we had $152.9 million of cash and cash equivalents and short-term investments. In addition, we had $8.6 million in restricted cash in support of letters of credit securing leases for office facilities in California and New York. During fiscal 2021, $10.4 million previously held in escrow for our acquisition of Wavecell was released.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was passed into law, which amended portions of relevant tax laws and provided relief to certain qualifying entities. In connection with the CARES Act, the Company elected to defer certain employer payroll taxes, which reduced cash usage by approximately $5.0 million through December 31, 2020, of which approximately $2.5 million was remitted to tax authorities during the third quarter of fiscal 2022 and the remaining amount due will be remitted in the third quarter of fiscal 2023. Other jurisdictions around the world have also provided similar tax relief, which the Company has elected to receive, where applicable; these benefits were not material to our cash flows during fiscal 2022.

In June 2020, the Company offered its employees an opportunity to receive a portion of their fiscal 2021 cash compensation in shares of the Company's common stock, which reduced compensation paid in cash by approximately $4 million during fiscal 2021. In addition, for fiscal 2021, the Company's executives received performance share units in lieu of cash bonuses, which reduced compensation paid in cash by approximately $1.7 million. The Company also changed the timing of bonus payments for all other eligible employees to semi-annually (in the third and first quarter of each fiscal year) from quarterly payments as in prior fiscal years.

During the fourth quarter of fiscal 2021, we received $6.4 million of operating cash inflows from our Lease Assignment. Refer to Note 5, Leases, in the Notes to Consolidated Financial Statements included in this Annual Report.

In March 2021, the Company offered its employees another opportunity to receive a portion of their fiscal 2022 cash compensation in shares of the Company's common stock. Based on employee elected participation, we reduced compensation paid in cash by approximately $9 million during fiscal 2022.

We believe that our existing cash, cash equivalents and investment balances and our anticipated cash flows from operations will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months and the foreseeable future, although we expect we will need to refinance $500 million of convertible senior notes prior to maturity on February 1, 2024. Please refer to the Contractual Obligations table for our commitments during the next 12 months and beyond. Although we believe we have adequate sources of liquidity for the next 12 months and the foreseeable future, subject to such refinancing, the success of our operations, the global economic outlook, and the pace of sustainable growth in our markets, in each case, in light of the market volatility and uncertainty as a result of the COVID-19 pandemic and Russia's invasion of Ukraine, among other factors, could impact our business and liquidity.

Year over Year Changes

Net cash provided by operating activities for fiscal 2022 was $34.7 million, as compared to $14.1 million used for operations for fiscal 2021. Cash used in or provided by operating activities is primarily affected by:

•net income or loss;

•non-cash expense items, such as depreciation, amortization, and impairments;

•non-cash expense associated with stock options and stock-based compensation and awards; and

•changes in working capital accounts, particularly related to the timing of collections from receivables and payments of obligations, such as commissions.

In fiscal 2022, net cash provided in operating activities was a result of an adjustment to net loss of $175.4 million by non-cash charges, such as stock-based compensation expense of $133.3 million, amortization of capitalized internal-use software costs of $28.9 million, amortization of debt discount of $20.4 million, and operating lease expenses of $13.5 million. These adjustments for non-cash charges were partially offset by cash outflow from sales commissions of $9.5 million and other working capital changes.

In fiscal 2021, net cash used in operating activities was primarily related to our net loss of $165.6 million, cash outflow from sales commissions of $25.1 million, and other working capital changes, which were partially offset by non-cash charges such as stock-

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based compensation expense of $107.6 million, amortization of capitalized internal-use software costs of $26.9 million, amortization of the debt discount of $16.9 million, and operating lease expenses of $15.2 million.

Net cash used in investing activities was $160.0 million in fiscal 2022, as compared to $36.3 million in fiscal 2021. The cash used in investing activities during fiscal 2022 primarily related to $132.9 million cash paid for the acquisition of Fuze, capitalized internal-use software development costs of $20.4 million, net purchases of $10.1 million of investments, and purchases of property and equipment of $4.1 million.

Net cash used in investing activities was $36.3 million during fiscal 2021, as compared to $106.3 million provided by investing activities in fiscal 2020. The cash used in investing activities during fiscal 2021 was primarily related to purchases of property and equipment of $6.4 million, largely in connection with the build out of our corporate office, capitalized internal-use software development costs of $28.8 million, and net cash paid of $10.4 million in connection with our acquisition of Wavecell. This was partially offset by proceeds from sales and maturities of investments, net of purchases, of $9.3 million.

Net cash provided by financing activities was $105.4 million in fiscal 2022, as compared to $13.2 million in fiscal 2021. The cash provided by financing activities in fiscal 2022 was primarily from $134.6 million in additional aggregate principal amount of 0.5% Senior Convertible Notes due 2024 in December 2021, and to a lesser extent, the issuance of common stock of $16.1 million from employee stock purchase plans and employee option exercises. This was partially offset by $45.0 million in repurchases of the Company's common stock ahead of the Fuze acquisition in December 2021.

Net cash provided by financing activities was $13.2 million in fiscal 2021, as compared to $72.1 million provided by financing activities in fiscal 2020. The cash provided by financing activities in fiscal 2021 was primarily from the issuance of common stock under employee stock purchase plans of $13.3 million, partially offset by $0.1 million to settle payroll tax obligations.

Contractual Obligations

Obligations related to our convertible senior notes, operating lease payments, and purchase obligations on March 31, 2022 for the next five years were as follows:

(1) See Note 7, Convertible Senior Notes, in the Notes to Consolidated Financial Statements included in this Annual Report for further information.

(2) See Note 5, Leases, in the Notes to Consolidated Financial Statements included in this Annual Report for further information.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

Revenue Recognition

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

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

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

Service Revenue Recognition

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

Other Revenue Recognition

Other revenue is primarily comprised of product revenue and professional services revenue. We recognize product revenue for telephony equipment at a point in time, when transfer of control has occurred, which is generally upon shipment. Sales returns are recorded as a reduction to revenue estimated based on historical experience. Professional services for deployment, configuration, system integration, optimization, customer training or education are primarily billed on a fixed-fee basis and are performed by us directly. Professional services revenue is recognized as services are performed or upon completion of the deployment.

Allowance for Credit Losses

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

Acquisitions

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

Capitalized Internal-Use Software Costs

Certain software development costs for computer software developed internally or obtained for internal use are capitalized during the application development stage. We begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. Once the project has been completed, these costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three years. Costs incurred prior to meeting these criteria, together with costs incurred for training and maintenance, are expensed as incurred and recorded in the applicable income statement category, typically research and development, in our consolidated statements of operations.