8x8's Surprise Q4 Loss Triggers BofA Merrill Lynch Downgrade, Plunge In Share Price

8x8, Inc. EGHT — a provider of cloud phone, meeting collaboration and contact center solutions — reported Thursday afternoon with fourth-quarter results that fell short of expectations and prompted Bank of America Merrill Lynch to drop its bullish stance. 

The Analyst

Bank of America's Nikolay Beliov downgraded 8x8 from Buy to Neutral with a price target lifted from $22 to $23.

The Thesis

One of the most notable takeaways from 8x8's earnings report is yet another quarter of lower margins due to increased investments, Beliov said in the downgrade note. (See the analyst's track record here.) 

The company wants to increase its total headcount by 30 percent in fiscal 2019 across all functions, an effort which began in the reported quarter, Beliov said. While the increase in headcount should result in higher revenue, the average SaaS company operates at sales efficiency, or sales and marketing over incremental total revenue, of 1.6x, the analyst said. 8x8 was at 2.6x, which implies investors may want to stay on the sidelines given the many "moving pieces to digest," Beliov said. 

• Several factors areworking in 8x8's favor, the analyst said:
• Inflection in the cloud communications market.
• The early stages of mid-market and enterprise cloud adoption.
• Competitor Avaya Holdings Corp AVYA's weakened position from its 2017 bankruptcy.
• The enterprise business with more than $10,000 in monthly bookings grew by a promising 44 percent.

Bottom line, 8x8's worsening sales and marketing efficiency implies the stock should now trade at a 5.2x multiple on calendar year 2019E EV/revenue, which is a 30-percent discount to the SaaS group, according to BofA. 

Price Action

Shares of 8x8 were trading lower by 16.55 percent at the time of publication Friday. 

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Earnings Scheduled For May 24, 2018