The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. As discussed in the section titled "Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report, particularly those set forth under the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year endedMarch 31, 2020 as modified by those in Part II, Item 1A of our Quarterly Report for the three-month period endedJune 30, 2020 on Form 10-Q under the heading "Risk Factors." BUSINESS OVERVIEW We are a leading software-as-a-service ("SaaS") provider of voice, video, chat, contact center, and enterprise-class application programming interfaces ("API") solutions powered by one 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 150 countries. In recent years, we have increased our focus on the mid-market and enterprise customer categories. 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 communication services subscriptions and platform usage. We generate other revenues from the sales and rentals of office phones and other hardware equipment, and professional services. 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 next generation suite of unified communications as a service ("UCaaS") and contact center as a service ("CCaaS") solutions, which consist of service plans of increasing functionality designated X1, X2, etc., through X8. With 8x8 X Series, we provide enterprise-grade voice, unified communications, video meetings, team collaboration, and contact center functionalities from a single platform. We also offer standalone SaaS services for contact center, video meetings, and enterprise communication APIs. Through ourJuly 2019 acquisition ofWavecell Pte. Ltd. , anAsia -based global communication platform as a service ("CPaaS") provider of SMS, messaging, voice and video APIs to enterprises, we expanded our API offerings both geographically and functionally. We expect to continue integrating these services into our platform, as we believe in the value of the collective solutions. As ofSeptember 30, 2020 , over 90% of our customer base has been migrated to the 8x8 X Series platform and we intend to migrate the remaining customer base through the end of the fiscal year. These migrations may require us to incur professional services and related engineering costs. While we may not be able to recover these costs from our customers, we believe that we will realize other benefits including reducing the number of platforms that we are required to support and improved customer retention. 19
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Table of Contents SUMMARY AND OUTLOOK In the second quarter of fiscal 2021, our total service revenue grew 19.3% year-over-year to$120.9 million . We continued to show an increase in our average annualized service revenue per customer, which grew to$8,052 in the second quarter of fiscal 2021, compared with$7,957 in the same period of fiscal 2020, as we are selling more to mid-market and enterprise customers. Service revenue from mid-market and enterprise customers represented 46% of total service revenue and grew 29% over the prior year. We increased the number of bundled deals where customers purchase our integrated communications and contact center solutions. Our continued business focus is on achieving improved operating efficiencies while delivering revenue growth. We continue to make important investments in our products and technology platform, and focus on key areas of spend in our go-to-market strategy. Additionally, we aim to drive efficiencies in our small business customer acquisition and operations, and are heavily focused on expanding our business upmarket with mid-market and enterprise customers. We believe that effective execution 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 the remainder of fiscal 2021, we plan to continue making investments in activities to acquire more customers, including global expansion and investing in our direct marketing efforts, sales force, e-commerce, and outbound marketing efforts. We also intend to continue investing in our indirect channel programs to acquire more third-party selling agents to help sell our solutions, including investments in our value added resellers ("VARs") and master agent programs. Should these upfront investments not result in additional revenue from new or existing customers, including as result of adverse impacts from the COVID-19 pandemic, and/or these cost reduction and efficiency efforts do not result in meaningful savings, our operating results may be adversely impacted. IMPACTS 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 our annual report on Form 10-K for the fiscal year endedMarch 31, 2020 as modified by the "Risk Factors" section of our Quarterly Report on Form 10-Q for the three-month period endedJune 30, 2020 . In an effort to contain COVID-19 or slow its spread, governments around the world have enacted various measures, some of which have been subsequently rescinded, modified or reinstated, 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 continues to spend a significant amount of time working from home with many of our offices around the world remaining closed and travel being curtailed for our employees as well as our customers as the number of COVID-19 cases continues to surge and retreat in various locations globally, and the availability and reliability of testing remains inconsistent. These restrictions have altered the ways we conduct sales activities and market to current and prospective customers and how we conduct our ongoing business operations, resulting in reductions in travel related expenses and, by some measures, has resulted in improved employee productivity in certain areas. Small business and mid-size customers have been more impacted by the COVID-19 pandemic than enterprise customers, which has necessitated greater flexibility and responsiveness to our customers evolving needs. While we anticipate that the global health crisis caused by COVID-19, including any resurgences, and the measures enacted to slow its spread will negatively impact certain business activity across the globe, to date, it has not resulted in as significant a negative impact on our business, as initially anticipated. We continue to proactively and closely monitor the health of our customers and suppliers and other impacts of the pandemic to determine whether risks of loss or other negative impacts upon our business exist. The effects of COVID-19 have also been considered in management's judgments around credit loss impairments. 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 to drive our business to increase service revenue through a combination of increased sales and marketing efforts, geographic expansion of our customer base outsidethe United States , innovation in product and technology, and through strategic partnerships and other business development. Other Revenue Other revenue consists primarily of revenues from sales and rentals of IP telephones in conjunction with our cloud telephony service, and revenues from non-recurring professional services, primarily in support of deployment of our solutions and/or platform. 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. 20
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Table of Contents Cost of Service Revenue Cost of service revenue consists primarily of costs associated with network operations and related personnel, technology licenses, amortization of internally developed software, and other costs such as customer service, and technical support costs. Cost of service revenue also includes other communication origination and termination services provided by third-party carriers and outsourced customer service call center operations. 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 and related 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 and related work, equipment costs necessary for us to conduct our product and 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, trade shows, advertising and other marketing, demand generation, channel costs, 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, human resources, legal, employee recruiting, general management, and allocated IT and facilities costs. Other Income (Expense), net Other income (expense), net consists primarily of interest expense related to the convertible notes, offset by income earned on our cash, cash equivalents, and investments, and foreign exchange gains/losses. Provision for Income Taxes Provision for income taxes consists primarily of state minimum taxes inthe United States and foreign income taxes. As we expand the scale of our international business activities, any changes in theU.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for ourU.S. deferred tax assets, including federal and state net operating loss carryforwards, or NOLs. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income inthe United States . RESULTS OF OPERATIONS The following discussion should be read in conjunction with our condensed consolidated financial statements and the notes thereto. Revenue September 30, Service revenue 2020 2019 Change (dollar amounts in thousands) Three months ended$ 120,942 $ 101,345 $ 19,597 19.3 % Percentage of total revenue 93.7 % 92.5 % Six months ended$ 235,125 $ 191,184 $ 43,941 23.0 % Percentage of total revenue 93.7 % 92.7 % Service revenue increased for the three and six months endedSeptember 30, 2020 compared with the same period of the previous fiscal year primarily due to a net increase in our subscriber 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 21
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Table of Contents CCaaS deals globally to our mid-market and enterprise customers. Increase in service revenue was also attributable to growth in usage revenue generated by our CPaaS products primarily in the APAC region. We expect total service revenue to grow over time with our expanding platform offering as our business continues to expand globally and across broader customer categories. September 30, Other revenue 2020 2019 Change (dollar amounts in thousands) Three months ended$ 8,191 $ 8,172 $ 19 0.2 % Percentage of total revenue 6.3 % 7.5 % Six months ended$ 15,815 $ 15,008 $ 807 5.4 % Percentage of total revenue 6.3 % 7.3 % Other revenue remained relatively flat during the three months endedSeptember 30, 2020 compared with the same period in the prior fiscal year the slight increase was in professional services revenue resulting from the overall growth in our business and subscriber base, largely offset by a decrease in product revenue as a result of shift towards hardware rental program and reduced demand for hardware caused by COVID-19 pandemic with increase in work from home policies. Other revenue increased during the six months endedSeptember 30, 2020 compared with the same period in the prior fiscal year primarily due to an increase in professional services revenue resulting from the overall growth in our business and subscriber base, partially offset by a decrease in product revenue as a result of shift toward hardware rental program and reduced demand for hardware caused by COVID-19 pandemic with increase in work from home policies. We expect other revenue to grow over time at a rate lower than our service revenue as we focus on delivering higher margin platform offerings to existing and new customers. No customer represented greater than 10% of the Company's total revenue for the three and six months endedSeptember 30, 2020 or 2019. Cost of Revenue September 30, Cost of service revenue 2020 2019 Change (dollar amounts in thousands) Three months ended$ 44,803 $ 35,813 $ 8,990 25.1 % Percentage of service revenue 37.0 % 35.3 % Six months ended$ 85,799 $ 61,113 $ 24,686 40.4 % Percentage of service revenue 36.5 % 32.0 % The increase in cost of service revenue for the three months endedSeptember 30, 2020 from the same period in the prior fiscal year was primarily attributable to a$7.2 million increase in communication infrastructure costs incurred to deliver our services primarily due to growth in usage across our platform including those in connection with CPaaS, a$1.9 million increase in amortization of capitalized software, and a$1.2 million increase in stock-based compensation expense. These increases were partially offset by a$0.7 million decrease in employee and consulting related expenditures and a$0.6 million decrease in depreciation and amortization of intangible assets. Cost of service revenue for the six months endedSeptember 30, 2020 increased over the same prior fiscal year period primarily due to$20.2 million increase in communication infrastructure costs incurred to deliver our services primarily due to growth in usage across our platform including those in connection with CPaaS, a$3.9 million increase in amortization of capitalized software, and a$2.0 million increase in stock-based compensation expense. These increases were partially offset by a decrease of$1.0 million in employee and consulting related expenditures and a decrease of$0.6 million in depreciation and amortization of intangible assets. We expect that cost of service revenue will increase in absolute dollars in future periods as revenue continues to grow. 22
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Table of Contents September 30, Cost of other revenue 2020 2019 Change (dollar amounts in thousands) Three months ended$ 11,693 $ 13,884 $ (2,191) (15.8) % Percentage of other revenue 142.8 % 169.9 % Six months ended$ 22,830 $ 26,275 $ (3,445) (13.1) % Percentage of product revenue 144.4 % 175.1 % Cost of other revenue for the three and six months endedSeptember 30, 2020 decreased compared to the same periods in the prior fiscal year primarily due to a decrease in cost of products as a result of decrease in hardware shipment volume, improved pricing, and increase in our hardware rental program, which has better margins than hardware sales. Operating Expenses September 30, Research and development 2020 2019 Change (dollar amounts in thousands) Three months ended$ 21,567 $ 19,434 $ 2,133 11.0 % Percentage of total revenue 16.7 % 17.7 % Six months ended$ 43,061 $ 37,765 $ 5,296 14.0 % Percentage of total revenue 17.2 % 18.3 % Research and development expenses for the three months endedSeptember 30, 2020 increased compared to the same prior fiscal year period primarily due to a$4.0 million increase in stock-based compensation expense, and a$0.3 million increase in public cloud expenses. These increases were partially offset by a$1.5 million higher allocation to capitalized software costs, and a$0.5 million decrease in travel related costs. Research and development expenses for the six months endedSeptember 30, 2020 increased compared to the same prior fiscal year period primarily due to a$6.7 million increase in stock-based compensation expense, a$0.8 million increase in public cloud expenses, and a$0.5 million increase in employee and consulting related expenditures. These increases were partially offset by a$1.9 million higher allocation of capitalized software costs from research and development expenses during the period and a decrease of$0.9 million in travel related costs. We plan to continue to invest in research and development to support our efforts to expand the capabilities and scope of our platform and to enhance the user experience. While we expect to continue to improve our cost structure and achieve operational efficiencies, we expect that research and development expenses will increase in absolute dollars in future periods as we continue to invest in our development efforts, and vary from period-to-period as a percentage of revenue. September 30, Sales and marketing 2020 2019 Change (dollar amounts in thousands) Three months ended$ 61,399 $ 57,895 $ 3,504 6.1 % Percentage of total revenue 47.5 % 52.9 % Six months ended$ 121,549 $ 111,494 $ 10,055 9.0 % Percentage of total revenue 48.4 % 54.1 % Sales and marketing expenses for the three months endedSeptember 30, 2020 increased over the same prior fiscal year period primarily due to a$2.8 million increase in channel commissions, a$2.1 million increase in amortization of deferred sales commission costs, a$1.7 million increase in stock-based compensation expense, a$0.6 million increase in employee and consulting related expenditures, and a$0.6 million increase in marketing software and application related expenditures. These increases were partially offset by a net decrease of$2.3 million in marketing program and public cloud expenses as we gained efficiencies in lead generation and brand awareness and a$1.9 million decrease in travel related costs. 23
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Table of Contents Sales and marketing expenses for the six months endedSeptember 30, 2020 increased over the same prior fiscal year period primarily due to a$5.4 million increase in employee and consulting related expenditures, a$4.3 million increase in channel commissions, a$4.0 million increase in amortization of deferred sales commission costs, a$3.5 million increase in stock-based compensation expense, and a$2.2 million increase in marketing software and application costs. These increases were partially offset by a net decrease of$7.2 million in marketing program and public cloud expenses as we gained efficiencies in lead generation and brand awareness, and a$2.7 million decrease in travel related costs. We plan to continue investing in sales and marketing to attract and retain customers on our platform and to increase our brand awareness. While we expect to continue to improve our cost structure and achieve operational efficiencies, we expect that sales and marketing expenses will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue. September 30, General and administrative 2020 2019 Change (dollar amounts in thousands) Three months ended$ 22,769 $ 20,435 $ 2,334 11.4 % Percentage of total revenue 17.6 % 18.7 % Six months ended$ 48,559 $ 40,042 $ 8,517 21.3 % Percentage of total revenue 19.4 % 19.4 % General and administrative expenses for the three months endedSeptember 30, 2020 increased as compared to the same prior fiscal year period due to a$0.7 million higher allowance for credit losses recognized partially in response to external market factors and uncertainties in connection with the COVID-19 pandemic, a$0.7 million increase in employee and consulting related expenditures, a$0.6 million increase in stock-based compensation expense, and a$0.7 million increase in facilities and other allocated expenses; these increases were partially offset by a$0.4 million decrease in acquisition and integration costs. General and administrative expenses for the six months endedSeptember 30, 2020 increased over the same prior fiscal year period primarily due to a$4.4 million increase in stock-based compensation expense, a$2.2 million increase in tax related expense, a$2.1 million higher allowance for credit losses recognized, a$1.6 million increase in employee and consulting related expenditures, and a$1.2 million increase in facilities and other allocated expenses. These increases were partially offset by a$1.5 million decrease in acquisition and integration costs and a$1.4 million decrease in contract termination cost. We expect to continue improving our cost structure and achieve operational efficiencies, and therefore also expect that general and administrative expenses as a percentage of total revenue will decline over time. September 30, Other expense, net 2020 2019 Change (dollar amounts in thousands) Three months ended$ (5,178) $ (2,732) $ (2,446) 89.5 % Percentage of total revenue (4.0) % (2.5) % Six months ended$ (9,103) $ (4,296) $ (4,807) 111.9 % Percentage of total revenue (3.6) % (2.1) % Other expense, net of other income increased for the three months endedSeptember 30, 2020 over the same prior fiscal year period primarily due to a$1.1 million of lower interest income and a$1.0 million increase related to contractual interest expense, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued inNovember 2019 . The remaining increase is attributable to fluctuations in foreign exchange rates. Other expense, net of other income for the six months endedSeptember 30, 2020 increased over the same prior fiscal year period primarily due to a$2.6 million of lower interest income and a$2.1 million increase related to contractual interest expense, amortization of debt discount, and amortization of issuance costs associated with additional convertible notes issued inNovember 2019 . The remaining increase is attributable to fluctuations in foreign exchange rates. With the recognition of interest expense and amortization of debt discount and issuance costs in connection with our convertible senior notes, we expect the net of other income and expense to continue to be in a net expense position in future periods. 24
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Table of Contents September 30, Provision for income taxes 2020 2019 Change (dollar amounts in thousands) Three months ended $ 137$ 256 $ (119) (46.5) % Percentage of loss before provision for income taxes (0.4) % (0.6) % Six months ended $ 365$ 404 $ (39) (9.7) % Percentage of loss before provision for income taxes (0.5) %
(0.5) %
We estimate our annual effective tax rate at the end of each quarter. In estimating the annual effective tax rate, we consider, among other things, annual pre-tax income, permanent tax differences, the geographic mix of pre-tax income and the application and interpretations of existing tax laws. We record the tax effect of certain discrete items, which are unusual or occur infrequently, in the interim period in which they occur, including changes in judgment about deferred tax valuation allowances. The determination of the effective tax rate reflects tax expense and benefit generated in certain domestic and foreign jurisdictions. However, jurisdictions with a year-to-date loss where no tax benefit can be recognized are excluded from the annual effective tax rate. Liquidity and Capital Resources As ofSeptember 30, 2020 , we had$159.4 million of cash, cash equivalents, and investments. In addition, as ofSeptember 30, 2020 , we had restricted cash including$8.6 million in support of letter of credits securing leases for office facilities and$6.9 million held in escrow for our acquisition of Wavecell inJuly 2019 , pursuant to the terms of the acquisition agreement. During the three months endedSeptember 30, 2020 ,$3.5 million of restricted cash was released, and the remaining amount of$6.9 million held in escrow for our acquisition of Wavecell is due to be released inJanuary 2021 . By comparison, atMarch 31, 2020 , we had$186.9 million of cash, cash equivalents, and investments as well as$19.0 million restricted cash. OnMarch 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 is expected to reduce cash usage by over$4 million throughout fiscal 2021. The amounts deferred will be remitted to tax authorities during the third quarter of fiscal 2022 and fiscal 2023, respectively, when they become due. Other jurisdictions around the world have also provided similar tax relief, which the Company has elected to receive, where applicable; these benefits have a lesser impact to our expected cash flows during fiscal 2021. InJune 2020 , the Company offered its employees a limited opportunity to receive a portion of their cash salary in shares of the Company's common stock. Based on employee elected participation, we expect lower cash usage from payroll compensation of over$4 million during fiscal 2021. Currently, the Company does not expect to offer this program beyond fiscal 2021. In addition, for fiscal 2021, the Company's executives received performance share units in place of a cash bonus plan. The timing of bonus payments for all other eligible employees was changed to semi-annually (in the third and first quarter of each fiscal year) from quarterly as in prior fiscal years. 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 and expenditure requirements for the next 12 months. Period-over-Period Changes Net cash used in operating activities for the six months endedSeptember 30, 2020 was$13.1 million , compared with$44.5 million in the six months endedSeptember 30, 2019 . Cash used in operating activities was affected by: •the amount of net income or loss; •the amount of depreciation and amortization; •the amortization associated with deferred sales commissions, debt discount and issuance costs; •the expense associated with stock options and stock-based awards; and •changes in working capital accounts, particularly in the timing of collections from receivable and payments of obligations, such as commissions. During the six months endedSeptember 30, 2020 , net cash used in operating activities was primarily related to the net loss of$80.3 million , net cash outflow from sales commissions of$14.0 million , which were partially offset by non-cash charges such 25
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Table of Contents as stock-based compensation expense of$48.1 million , depreciation and amortization of$22.6 million , amortization of debt discount of$8.3 million , and operating lease expenses of$7.6 million . Net cash used in investing activities was$11.5 million in the six months endedSeptember 30, 2020 , compared with$59.9 million in the six months endedSeptember 30, 2019 . The cash used in investing activities during the six months endedSeptember 30, 2020 was related to capitalized internal software development costs of$16.2 million , purchases of$4.2 million of property and equipment, and$3.5 million release of cash held in escrow associated with an acquisition during the second quarter of fiscal 2020, partially offset by$12.3 million of proceeds from maturities and sales of investments, net of purchase. Net cash provided by financing activities was$4.6 million in the six months endedSeptember 30, 2020 , compared with$0.5 million in the six months endedSeptember 30, 2019 . Cash provided by financing activities for the six months endedSeptember 20, 2020 was primarily related to the proceeds from issuance of common stock under the ESPP. CRITICAL ACCOUNTING POLICIES & ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures of assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. With the exception of changes described within Part I, Item 1, Note 2, "Summary of Significant Accounting Policies", due to the adoption of ASU 2016-03, there have been no significant changes during the three months endedSeptember 30, 2020 to our critical accounting policies and estimates previously disclosed in our Form 10-K for the fiscal year endedMarch 31, 2020 . RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS See Item 1 of Part I, "Notes to Unaudited Condensed Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies." RECENT ACCOUNTING PRONOUNCEMENTS See Item 1 of Part I, "Notes to Unaudited Condensed Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies." ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Fluctuation Risk We had cash, cash equivalents, restricted cash, and investments totaling$175.0 million as ofSeptember 30, 2020 . Cash equivalents and investments were invested primarily in money market funds,U.S. treasury, commercial paper, and corporate bonds. Our investment policy is focused on the preservation of capital and supporting our liquidity needs. Under the policy, we invest in highly rated securities, while limiting the amount of credit exposure to any one issuer other than theU.S. government. We do not invest in financial instruments for trading or speculative purposes, nor do we use leveraged financial instruments. We utilize external investment managers who adhere to the guidelines of our investment policy. A hypothetical 10% change in interest rates would not have a material impact on the value of our cash, cash equivalents, or available-for-sale investments. The Company issued$362.5 million aggregate principal amount of convertible senior notes of which the estimated fair value as ofSeptember 30, 2020 was$336.7 million . The fair value of the convertible senior notes is subject to interest rate risk, market risk and other factors due to the conversion feature. The fair value of the convertible senior notes will generally increase as our common stock price increases and will generally decrease as our common stock price declines. The interest and market value changes affect the fair value of the convertible senior notes but do not impact our financial position, cash flows, or results of operations due to the fixed nature of the debt obligation. Additionally, we carry the convertible senior notes at face value less unamortized discount on our consolidated balance sheets, and we present the fair value for required disclosure purposes only. Foreign Currency Exchange Risk We have foreign currency risks related to our revenue and operating expenses denominated in currencies other than theU.S. dollar, primarily the British Pound, causing both our revenue and our operating results to be impacted by fluctuations in the exchange rates. Gains or losses from the revaluation of certain cash balances, accounts receivable balances, and intercompany balances that are denominated in these currencies impact our net income (loss). A hypothetical decrease in all foreign currencies against the US dollar of 10% would not result in a material foreign currency loss on foreign-denominated balances atSeptember 30, 2020 . As 26
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our foreign operations expand, our results may be more impacted by fluctuations in the exchange rates of the currencies in which we do business. At this time, we do not, but we may in the future, enter into financial instruments to hedge our foreign currency exchange risk.
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