8X8 INC /DE/ (EGHT) FY 2022 MD&A

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.