Despite years of shareholder value destruction, deceptive non-GAAP figures, significant losses, and an inflated stock price, 8x8 (EGHT) is a corporation that asserts sustained profitability and ongoing success.
The genuine cash flows of the company, or economic earnings, have decreased at 8x8 from $1 million in 2011 to -$16 million in 2016 and to -$18 million during the past twelve months (TTM). This decline occurs despite revenue increasing by 24% yearly, or from $70 million in 2011 to $209 million in 2016, representing a growth of 24%. The disparity between revenue and economic earnings is seen in Figure 1. Here you may get a reconciliation of economic earnings to 8x8's GAAP net income.
All areas of the business might have fundamental issues. From 12% in 2011 to a bottom quintile -3% TTM, 8x8's return on invested capital (ROIC) has decreased. The business's NOPAT margins have decreased from 9% in 2011 to -2% TTM. Last but not least, since 2011, 8x8 has spent a total of $73 million in free cash flow.
Investors that rely on management's non-GAAP figures may not be aware of the risks associated with them. In fact, according to the CEO of 8x8, 8x8 stays profitable on a non-GAAP basis for the 25th consecutive quarter during the company's 1Q17 earnings conference call. The company's CFO says later on the call, We're good stewards of the shareholders' money. We have now had 25 straight profitable quarters. Although they appear to be genuine, those assertions do not represent the interests of the stockholders.
Being profitable is not difficult to do when so many typical operating expenses are cut out. The financial results of 8x8 are significantly impacted by these expenses, especially stock-based compensation. From their non-GAAP net profits in 2016, EGHT deducted $16 million in stock-based compensation. Similar to 2014, the business cut $9 million in stock-based compensation from its books in 2015. This amount was roughly five times more than GAAP net income. 8x8 produces non-GAAP measures that are significantly better than economic profitability by excluding this significant expenditure in addition to others. Non-GAAP net income increased by 16% each year, from $7 million in 2011 to $15 million in 2016.
The rationale for investing in EGHT centers upon its potential to achieve critical mass, unseat the competition, expand into the sizable communications industry, turn a profit, or any combination of the aforementioned. 8x8 is not a newcomer trying to make it big. For more over 20 years, the corporation has been collecting losses.
One may argue that 8x8 had a significant first mover advantage at the time it completely integrated its present product suite of unified communication tools, contact center, and cloud capabilities. Cloud solutions were still a new feature for Cisco, which was still primarily concentrating on its equipment-based business communications. Since then, other companies have developed or enhanced cloud services, including Cisco, Microsoft, who has accelerated the growth of its communications business and moved quickly to implement cloud integration.