8X8 Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 14 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Q2 2024 8x8 Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson. Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone. Today's agenda will include a review of our 2nd quarter results Samuel Wilson, our Chief Executive Officer and Kevin Krause, our Chief Financial Officer Lisa Martin, our Chief Revenue Officer has also joined our call today. Following our prepared remarks, there will be a question and answer session. Before we get started, let me remind you that our discussion today It includes forward looking statements about our future financial performance, including investments in innovation and our focus on profitability and cash flow, as well as statements regarding our business, products and growth strategies.

Speaker 1

We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward looking statements as described in our risk factors in our report filed with the SEC. Any forward looking statements made on this call and in the presentation slides reflect our analysis as of And we have no plans or obligations to update them. Certain financial metrics that will be discussed on this call, together with year over year comparisons in some cases, We're not prepared in accordance with U. S. Generally Accepted Accounting Principles or GAAP.

Speaker 1

A reconciliation of those non GAAP measures to the closest comparable GAAP measure is provided in our earnings press release and earnings presentation slides, which are available on 8x8's Investor Relations website at investors. 8x8.com. With that, I'll turn the call over to Sam Wilson.

Speaker 2

Much appreciated, Kate, and thank you to everyone on the call for joining us today. I am pleased to begin my remarks by saying we met or exceeded our guidance ranges for service revenue, total revenue and non GAAP operating margin for Q2. When I took over the CEO role, I outlined our innovation led strategy to drive growth along with improving profitability and cash flow through disciplined capital allocation. We believe this balanced approach is the best way to build a durable business and deliver value to all our stakeholders, That's customers, employees, partners and shareholders. Our continued progress on this journey was evident in our Q2 results.

Speaker 2

As a reminder, we are focused on investing in innovation to drive long term durable growth, leading with contact center and X Cast For new business and cross selling our product portfolio into the installed base. Focusing on our target customer, Small and medium sized enterprises with the same technology customer experience needs as large enterprises, but without the same internal development resources. And lastly, building and enabling channel and technology partners ecosystem that allows 8x8 platform customers to deliver best in class customer experiences. All of this while growing revenues faster than expenses and returning excess cash to investors. Our goal is to grow cash flow from operations By an average of 20% in fiscal years 2024 through fiscal 2026, we intend to return $250,000,000 to investors over this period.

Speaker 2

We have already returned $25,000,000 through early repayment of principal on our 2027 term loans. Let's take a look at the highlights for our Q2 performance. Service revenue increased sequentially by $2,500,000 and was roughly flat year over year. Improvement in our CPaaS business was a significant driver of the quarter on quarter growth as existing customers increased their business with us and we added new customers. The CPaaS team has done a great job retooling the business over the past year And I'm excited by the new opportunities we have identified both in the APAC region and worldwide.

Speaker 2

Now more than ever, I believe our CPaaS business will prove to be a competitive advantage for us. Our UCCC core business continues to perform as expected and we see new products as a bright spot. We demonstrated continued discipline in managing our operating costs, which allowed us to deliver non GAAP operating profit above our guidance range. Cash from operations for the quarter was $17,500,000 and cash and investments increased to approximately $150,000,000 We have doubled cash from operations in the 1st 6 months of the fiscal year compared to last year. Customer satisfaction and retention remained high within the 8x8 customer base, reflecting the investments we made in our customer success organization as well as continued innovation in our solutions.

Speaker 2

This is reflected in the feedback we received from the thousands of customers who participated in our first ever 8x8 Day on August 8, as well as the recent recognition from numerous industry organizations. To celebrate the 1st 8x8 Day, we asked customers what they loved about 8x8 and ask if we could publish their response. As a thank you, we sent them What's Cooking at 8x8, an ebook of employee recipes and case studies from our food and beverage customers. A few lucky winners also received e bikes from our customer, Trex, who we love. The volume and enthusiasm of the responses tell us the investments we are making in innovation and customer success are resonating.

Speaker 2

Check out the videos on the website. Adoption of our recently introduced CCaaS product portfolio continues to accelerate. Early adopters of our AI powered intelligent customer assistant, Both digital and voice versions are seeing high rates of case deflection for specific use cases. Customers are rapidly finding new use cases. The volume of conversations is up over 50% quarter on quarter and accelerating.

Speaker 2

Our ICA pipeline is up over triple digits quarter on quarter. We saw significant growth in our North American reseller channel. We are committed to a channel first strategy and have been investing in building out our network of value We have built a strong value added reseller channel in the U. K. And while it takes time and investment to build, it pays long term dividends in sales productivity, Customer satisfaction and durable growth.

Speaker 2

Partially offsetting these early indications of success was continued down sell and to a lesser extent attrition in the Fuze customer base. This created a headwind in our enterprise ARR metrics and the customer count. As we said before, we are 100% committed Retaining Fuse customers, the number of lost Fuse customers decreased significantly measured by logos quarter on quarter and we are accelerating the pace of customer upgrades on the 8x8 platform. Our progress this quarter gives me confidence that our strategy is working. We deliver value to our customers by enabling agile workplaces, empowering users across an organization to deliver great customer experiences and harnessing the power of AI and machine learning.

Speaker 2

We have dramatically increased our investment in innovation over the past 2 years and the products and features resulting from those investments are now coming to market. Customer interest has been high and we are seeing increasing adoption in use. Let me share a few examples of our innovation in action with our customers. First up, Westminster City Council, who has been an 8x8 voice and contact center customer since 2020. We recently introduced ICA As part of their user centered operating model, they are regularly achieving 80% resolution rates on inbound inquiries and in some days as high as 100%.

Speaker 2

I encourage you to watch the video of their experience. There is a link in the slides. Next up is Acer, A top technology company with customers in 160 countries. They are using our intelligent customer assistant to expedite customer assistance with millions of products including warranty information. I have spoken personally to them and they told me ICA was a game changer.

Speaker 2

Our superpower is empowering users and administrators in these organizations with best in breed capabilities, including AI powered apps, intuitive interfaces and ultra high reliability in a wrapper of extreme simplicity. Our goal is to make our users superheroes of their own organizations. CPaaS innovations further extend our UCaaS and CCaaS portfolios. We recently introduced Remotefix, a prepackaged 2nd generation video escalation solution targeting field service organizations. We also introduced OmniShield to our CPaaS customers, Safeguarding Enterprises from fraudulent SMS activity and a host of other enhancements outlined in our press release last week.

Speaker 2

Our strategy is to be a leading AI powered customer experience platform for small and medium enterprises. The quotes from all the customers profiled in our earnings slide demonstrate our progress in this strategy. They love 8x8 solutions for ease of use, simple deployment and deep native like integrations into the contact Our customers see tangible business benefits from our products every day. When I look back, I am amazed at how many innovations we have introduced in a very short time period. The list of significant product introduction enhancements include Conversational IQ for UCaaS, bringing CC level speech analytics to UCaaS integration of OpenAI's Whisper for We launched this within weeks of ChatGPT's unveiling and are now transcribing more than 3000000 hours a month with a 20% to 25% improved accuracy versus previous solutions.

Speaker 2

Composable user experiences, empowering agents and supervisors with the information they need to be more productive. Powerful user friendly AI enabled self-service capabilities in both voice and digital Expansion of our omni channel capabilities, including embedded secure video and enhancements in SMS and chat apps An updated version of Microsoft Teams phone app as well as deeper native integration with Teams that simplify administration and ease of use and so much more. We are pushing out hundreds of micro updates every week using our automated CICD process, adding incremental capabilities and improving performance. Before the end of the fiscal year, we plan to introduce a host of additional products into beta. Just a few big ones are AI powered interaction summarization and conversation categorization.

Speaker 2

A next generation version of our AI powered agent assist through our ecosystem partnerships and expanded contact center features for employees Outside the contact center, there will continue to blur the lines between UC and CC. Our CCaaS and UCaaS solutions have come a long way in the last 18 And this is reflecting the recent recognition from both industry analysts and customers. As I have traveled around the world talking with customers and partners Innovation roadshows in the U. S. And Europe, I have come to the conclusion that our biggest challenge is awareness.

Speaker 2

It is clear that our velocity of our new product introductions has outpaced our customers' and partners' awareness of our phenomenal innovation. Solving this issue and overcoming outdated perceptions of our solution is a multifaceted challenge. We must do a better job of keeping our customers informed, educating our channel, increasing our visibility and creating word-of-mouth references. We have barely scratched surface of the opportunity that exists within our installed base, let alone the tens of thousands of small and medium sized enterprises, SLED Organizations and Public Sector Entities that are just beginning to migrate their contact centers to the cloud. Lisa Martin, who joined 4 months ago as our Chief Revenue Officer is up to the challenge.

Speaker 2

She is joined by Bruno Bertini, who recently joined us As CMO, Lisa and Bruno both have extensive experience in the contact center and have a track record of building high performance teams in sales and marketing. They've worked together in the past, are fully aligned and are already having an impact within the organization. Transitions don't happen overnight, But I am confident we now have the right team in place, the right strategy for growth and the financial and technical resources necessary to achieve our goals. I've asked Lisa to join us on the call today to talk about her vision and priorities as she and Bruno build a world class go to market engine. Take it away, Lisa.

Speaker 3

Thank you for that nice introduction, Sam, and for inviting me to speak on today's call. I'm thrilled to be at 8x8. In fact, I accepted this role because I see tremendous opportunity for 8x8 as the UCaaS and CCaaS markets continue to evolve. I have spent the majority of my career focused on customer engagement solutions. The past 2 years at Twilio And prior to that, a number of years at both Genesis and Verizon, leading high performing sales organizations as the Customer experience and communications industries have dramatically changed.

Speaker 3

In well over a decade of sales leadership, I've learned to appreciate how important strong and well defined go to market motions are to successful sales organizations and how critical it is to align those motions with the buyer journey. I've spent the 1st few months at 8x8 doing a deep dive Into really understanding current sales processes, the channel strategy and marketing motions to figure out what was holding us back from better sales performance. We are transforming our organization as our go to market motions migrate from UC led to contact center led and from a single product focus to a portfolio of products. I am focused on optimizing sales operations and enablement, building the processes, playbooks and packages that make it easier for our customers to do business with us and for our business development team, salespeople and partners to position and sell our solutions. My go to market partner, our new Chief Marketing Officer, Bruno Bertini, will focus on lead generation and overall brand visibility and awareness in the CCaaS market.

Speaker 3

We are 100% aligned on our priorities. With the recent innovations introduced in last year, We can effectively compete head to head in the CCaaS market with or without the incredibly strong foundation of our market leading UCaaS solution. And the timing is right. I believe the market is at an inflection point and the adoption of AI will continue to drive migration to the cloud because of the benefits companies can realize. The fact is 8x8's portfolio offers the flexibility and innovative technologies For small and medium enterprise companies to optimize customer and employee experiences.

Speaker 3

I could not be more excited for our future. For my due diligence during the interview process and my 1st few months here, I'm extremely confident that there is tremendous potential for 8x8. We have great product market fit, we have strong leaders in our region, and we have the cross functional collaboration and support that is crucial to any successful revenue organization. I will now turn it over to Kevin for his review of our financial performance. Thank you.

Speaker 4

Thank you, Lisa, and good afternoon, everyone. Our Q2 performance exceeded expectations in several key areas as we delivered service revenue and total revenue above our guidance midpoints. We continued the trend of delivering solid bottom line profitability as we achieved 12.8 percent non GAAP operating margin, well above the high end of our guidance range. Year over year non GAAP operating profit grew 162% and cash flow from operations increased 26% versus the prior year. We have delivered positive non GAAP operating income and cash flow from operations for 11 consecutive quarters, and we plan to continue generating positive cash from operations and operating margin as we build momentum.

Speaker 4

Total revenue for Quarter was $185,000,000 and service revenue was 177,800,000 exceeding the midpoint of our guidance range by $2,300,000 Our service revenue performance reflected better than expected usage for our CPaaS business in the Asia Pacific region as well as contribution from new products. This quarter, we recorded year over year growth in CPaaS revenue for the first time in many quarters. Other revenue for the quarter was $7,200,000 slightly below the prior quarter and generally in line with expectations. Total ARR was $707,000,000 at quarter end, up 2% year over year. Enterprise customers accounted for 58% of total ARR, consistent with the prior quarter and prior year.

Speaker 4

Enterprise ARR was up approximately $3,000,000 sequentially and grew 1% year over year. We ended the quarter with approximately 12 50 enterprise customers. The number of enterprise customers was impacted by approximately 50 customers moving from enterprise to mid market as we saw some effects from the current economic environment. Turning to gross margin, operating expenses and operating profit, please remember that all items discussed are non GAAP unless otherwise noted. Overall, 2nd quarter gross margin was 71.5%, an increase of 140 basis points year over year.

Speaker 4

Q222grossprofitdollarsgrewapproximately1% year over year, higher than overall revenue growth as we continue to focus on profitability. Service revenue gross margin came in at 74.6 percent, up 50 basis points year over year. We continuously manage our COGS and expect service revenue gross margins to remain healthy. Other revenue gross margin came in at negative 3.5 percent for the quarter compared to negative 11.2% in Q2 2023. The timing of hardware shipments and professional services deployments impacted other revenue, which in turn impacted the gross margin on other revenue in the quarter.

Speaker 4

Turning to operating expenses. R and D was 15.2% of revenue, in line with our 15% target and indicative of the continued investment we are making in product innovation. As we mentioned on our previous earnings call, We expect our investment in R and D will generate a desirable return on investment, but this will take time as we build world class software, Generate awareness and close deals. Sales and marketing expense was 33.1% of revenue, slightly up from 32.8% in Q1, but well below the 37.4% of revenue in Q2 2023. Sales and marketing expenses were down year over year as we have realigned our resources to focus on our target customers.

Speaker 4

G and A as a percentage of revenue was 10.4% and down 50 basis points sequentially as we incurred lower compensation, employer taxes and benefits costs. Total non GAAP spending as measured by Cost of goods sold, plus R and D, plus sales and marketing, plus G and A was down approximately $17,000,000 We're nearly 10% year over year and reflects our strategic cost realignment actions taken in the prior fiscal year. Keep in mind that fiscal Q2 also included annual pay increases for our global employee population. At this point, we believe our overall cost structure is appropriate to drive our strategy. The combination of improved revenue and carefully managed operating expenses resulted in non GAAP operating profit of $23,800,000 up approximately 160% year over year.

Speaker 4

Adjusted EBITDA, which is reconciled to GAAP results in our Q2 twenty twenty four press release was $30,500,000 16.5 percent of revenue and up 75% year over year. We have generated over $120,000,000 of adjusted EBITDA over the past four quarters. Cash flow from operations was $17,500,000 for the quarter, driven by strong profitability and solid cash collections, partially offset by cash interest paid of $12,900,000 Given that cash flow can vary quarter to quarter due to the timing of interest payments, collections and changes in other balance sheet items, I prefer to look at rolling 4 quarters cash flow when I evaluate our performance. Over the last four quarters, We have generated approximately $73,000,000 in cash flow from operations, an increase of 62% compared to the comparable Trailing 12 month period ending September 30, 2022. We are very pleased with our financial performance so far this year.

Speaker 4

We ended the quarter with approximately $150,000,000 in cash, restricted cash and investments, up approximately $11,000,000 from the prior quarter. As we have said on prior calls, our plan remains to return $250,000,000 to our investors from fiscal 2024 through fiscal 2026. Our next step in that plan will be to repay the remaining $63,000,000 of the 2024 convertible notes using cash generated entirely from our operations. As we move into fiscal 2025, we intend to begin repaying the adjustable rate term loan as quickly as possible, which will have a significant and immediate impact on our operating cash flow by reducing our cash interest payments. You can expect us to begin voluntarily early repayment of principal immediately after the expiration of the prepayment penalty in August 2020 Remaining performance obligation or RPO was approximately $780,000,000 for the quarter, increasing $65,000,000 year over year on healthy multiyear customer commitments.

Speaker 4

Before turning to guidance, I want to recap what we are doing as a company to build shareholder value over time. 1st, We are investing in innovation with a goal to drive long term durable growth. 2nd, we are focused on leading with our CCaaS solutions to our target small and medium enterprise customers. 3rd, we are reducing the mix of equity based compensation, which will moderate The pace of new share issuances due to employee stock programs over the long term. And 4th, we are focused on growing revenue faster than expenses, leading to increased profitability and cash flow.

Speaker 4

Increasing cash flow from operations while reducing shareholder dilution is our financial North Star, and we are very focused on driving improvement in NILIS metrics over the long term as the best way to build shareholder value over time. For operating expenses, let me walk you through how our strategies to build shareholder value over time drive our expense structure. We expect sales and marketing to be in the range of 33% to 34% of revenue for fiscal 2024, down from 36% in fiscal 2023 as we focus our go to market motions on our target Small to medium enterprise customers and cross selling into our installed base. I believe this cost envelope We expect R and D as a percentage of revenue to remain about 15% as we continue on the path of investment in our customer focused product strategy. Finally, we expect G and A expense to remain at approximately 11% of revenue for fiscal 2024.

Speaker 4

We believe we can achieve leverage from our G and A functions over time as revenue increases and we achieve greater efficiencies through automation. However, in the near term, our expectation is for G and A to remain in the range of 10% to 11% of revenue as we absorb the increases in cash payroll expenses and investments in automation. Regarding non GAAP gross margin, We anticipate the second half of the fiscal year to be similar to the first half year average of 72%. And note that this metric can be influenced by product mix. With this framework in mind, we reiterate our fiscal year revenue and Operating margin guidance ranges and established outlook ranges for the Q3 of fiscal 2024 ending December 31, $173,000,000 to $178,000,000 We anticipate total revenue to be in the range of $180,000,000 to 186 We are targeting an operating margin between 11% 12%.

Speaker 4

We expect cash flow from operations to decline sequentially, but remain over $10,000,000 We anticipate interest expense of approximately $9,000,000 and cash interest payments of approximately $7,000,000 Note that interest expenses can change as our Term loan is subject to monthly interest rate adjustments. We estimate a fully diluted share count of approximately 125,000,000 shares. We are reiterating guidance for fiscal 2024 ending March 31, 2024. As a reminder, the ranges were service revenue in the range of $701,000,000 to $711,000,000 We anticipate total revenue to be in the range of $732,500,000 to $742,500,000 Please note that other revenue can vary based on customer specific deployment schedules and hardware shipments, so there could be some movement in the q4 twenty twenty four other revenue as a result of these dynamics. We continue to focus on delivering a solid operating margin and anticipate achieving 12% 13% for the year versus the 8.4% achieved in fiscal 2023.

Speaker 4

We expect cash flow from operations to be directionally aligned with the non GAAP operating margin trend subject to timing differences in collections, debt interest and other payables. We anticipate debt interest expense and cash paid for debt interest of $35,000,000 to $36,000,000 Again, noting that our term loan is subject to monthly interest rate adjustments, which have been increasing in recent quarters. We estimate an average fully diluted share count of approximately 123,000,000 shares for fiscal 2024. In closing, I believe that our continued focus on profitability and cash flow from operations is the correct financial strategy for us at this time. This approach will enable us to continue making targeted investments in innovation and growth, while we return value to our investors, primarily through debt prepayments.

Speaker 4

Fiscal 2024 is a period of transition, and our goal is To show some revenue reacceleration in fiscal 2025, I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results, and I look forward to the continued execution of our strategy as we move forward in our quest to become an innovation led growth company. Operator, we are ready for questions.

Speaker 2

Thank

Operator

you. Our first question comes from Meta Marshall with Morgan Stanley. Your line is open.

Speaker 5

Great. Thanks. And thanks for all the additional disclosure. It's very helpful. Sam, in the past, you've kind of talked pretty openly about Where there are opportunities in contact center with AI and where some of those are likely just given the amount of investment in the space To kind of reduce the opportunity, as you kind of build out that portfolio and start utilizing Your own services and some of these 3rd party services, just kind of how has that view evolved?

Speaker 5

And just kind of how do you view the gross margin

Speaker 2

All right. So, hesitant view, It's hard for me to answer this with a flat out quick sound bite answer, because the number one thing I see over and over again is that Partners and prospects and customers don't even know our full range of capabilities at 8x8. As we've brought things like intelligent customer Video, Intelligent Customer Assistant, Video Interaction 2.0 and everything to market, we have a gap. I would say just relative to what your question is, the first inclination here is, there's the day to day of a contact center manager trying to put an AI product Into production, have it feel native to its contact center, have it fully integrated, have a way to have it work well inside the contact center And the hype that CNN or whatever CNBC puts out about how AI is going to revolutionize the world. And so we are very much on the pragmatic side.

Speaker 2

We're seeing very rapid adoption of our AI based intelligent customer assistant voice and digital versions Because those are fully integrated into the contact center, they work really flawlessly and seamlessly. And it's just Sort of straightforward and easy to put into production. We've got Agent Assist available. We've got a new kind of a next generation version of Agent Assist that we're working on right now. So those are all things that I think are very practical, very easy to put into the contact center, show immediate agent productivity, case deflection benefits, those kinds of things.

Speaker 2

What's the second part of Meta's question?

Speaker 1

She wanted to know about the CECAS margin.

Speaker 2

Oh, CECAS gross margin. Was it CECAS? CECAS. Yes. The impact on gross margins.

Speaker 2

Look, what we see really clearly is as we start to sell a portfolio of products To a customer, our retention rates go up and our revenue ability to generate from a given customer goes up. And so when that happens, our gross margins have a tendency to trend higher, but it can also be offset by seasonality of the CPaaS business and everything else. And so the underlying trends is contact center is a more margin rich landscape for us as a business. And so there's upward ability to grow margins, but it's always in the overall product mix of the company.

Speaker 5

Great. Thanks.

Operator

Our next question comes from Ryan McWilliams with Barclays. Your line is open.

Speaker 6

Thanks for taking the question. I think your SMB ARR definitely held up better than investors might have expected. This is a tough environment. But Sam, maybe just on the macro overall, how do you think 8x8 fared during the quarter? And like do you see any changes throughout the quarter?

Speaker 6

And how has October been so far? Thanks.

Speaker 2

Well, I'll just sort of make it general about macro. So I think last quarter was a tougher quarter for macro. We definitely are starting to see the bite of the increasing interest rates and Change in economic sort of environment overall, I mean there's the natural places you would see a credit card default rates, A little bit more down sell pressure on renewals where customers, if they're at 100 seats before want 97 seats at renewal, Those kinds of things. I think we see a little bit more of that. It does make us a little bit more cautious in terms of our forward guidance and Expectations and just to be clear, sort of relating it back to the company.

Speaker 2

I don't think October is any different than the rest of the quarter. The last place we saw and I just sort of just give you a sense of I love to tell the story is, we set a DocuSign out to close a deal at the end of the quarter. I think originally it had 4 signatures on it from the customer. And by the time we went back and forth a couple more times, we ended up with 10 customer signatures required To get the deal done, now we got the deal done, but that's when people ask me like what does the economic slowdown look like, it's the customer requiring 10 people to sign it, including that one person who's on vacation in whatever the Poconos today and we had to track that person down and get them to sign on their phone. But that's what economic slowdown looks like.

Speaker 6

And you kind of front wrapped my weekend plans because I will be heading to the Poconos It's just making a look, but fair enough. And look, you guys have done a lot to get ahead of refinancing your debt And you've significantly improved the cost structure of your business over the last year. And look, I appreciate the information on the slide deck and Kevin's prepared remarks, just on your capital structure. But I think it might be worthwhile and helpful for folks just if you can walk through like the high level plan of the attack on how to address Your thoughts on like addressing the capital structure over the next few years?

Speaker 2

Yes. And I can wrap in the SMB comments also. So look, I mean, Kevin was really clear in last quarter we put out Financial North Star, right? So our Financial North Star is cash from operations per share. Because of SEC rules, we We can't guide to that number, but that's how we think about the company.

Speaker 2

We want to use that cash from operations that we generate to return money to investors. And that's primarily through debt repayments because that just makes the most logical sense. And then eventually if we sort of pay off majority of the debt or have all the debt, we'll start with stock repurchases. I mean, that would be the next logical step to do with some future point, especially with our valuation at bumfuzzling levels. And so I think the key there is all about capital allocation.

Speaker 2

We're cash flow positive business. We continue to generate very solid levels of cash. We're going to use that cash to strengthen our balance sheet first and then continue to invest in growth second. You also said something earlier about SMB held up particularly well Given the macroeconomic environment and I think a lot of that has been that we've restructured some things down there. We've got it running more Look, the comps are easier.

Speaker 2

I'm not a fool, but the comps are easier. We've also got to restructure. We've got the right people in the right seats doing the right things. And we care a lot about customers there. And so we're seeing some benefit from that and some efficiency improvement.

Speaker 7

Appreciate the color. Thanks guys.

Speaker 4

Thank you.

Operator

Our next question comes from Catharine Trebnick with Rosenblatt. Your line is open.

Speaker 8

Thank you very much. Yes, hey Sam, nice job. So two things. 1, can you parse The difference between your traditional channel partner and your Microsoft Elevate program and how are each one helping you layer in the new products for growth. Thank you.

Speaker 2

Okay. So the biggest difference, I mean, so Elevate is the name of our channel program And actually encapsulates TSD Agent, VAR, etcetera. It's just the general name of our program. The big difference between the Microsoft partners are these are traditional Microsoft VARs. And so they're best known for selling Office 365 and Exchange and Azure and those kinds of things.

Speaker 2

But with the rise in Teams, we obviously have a presence there. And so we've gone out over the last couple of years and recruited Microsoft I think it's very successful because we view Microsoft as a strong partnership and I think Microsoft and I don't want to speak for them, but at least from what I hear from them is they view us as a strong partner. We don't view each other as competitors. We think we enable Microsoft Teams deployment in the enterprise and we can do great things for it and we embrace it. And I'm sort of a big fan of Microsoft Teams.

Speaker 2

And so for that, it was just a matter of going out and getting partners that when they're selling teams know that we have a great direct routing solution. Stay tuned on the OperatorConnect side, but there's lots of great things to talk about on that. And since Lisa is here, Lisa, is there anything you'd care to add on Microsoft and the

Speaker 3

No, I mean, I think you covered it, Sam. I would also just add the Elevate program in general really drives loyalty and rewards our partners for Whether that's our solution or jointly with Microsoft.

Speaker 8

All right. Thanks. Thanks, Catherine.

Operator

Our next question comes from Josh Nichols with B. Riley. Your line is open.

Speaker 9

My question, great to The company coming in above the guidance range pretty much across the board with good cash flow. So I think most of the questions have been hit on At this point, one thing I did want to touch on a little bit is I know longer term you've talked about 1, seeing some more revenue growth acceleration next And maybe ultimately getting back to somewhere around like 10% growth longer term as some of these AI and ML investments come To fruition, like what's the timing on potentially monetizing that? And how are you approaching it differently, whereas You're not really competing with hyperscalers relative to some of the peers and what makes you kind of unique in that factor?

Speaker 2

I appreciate, Josh. I laughed as you were saying that because whatever answer I'm about to give you know in my heart, I'd like it to happen faster, But I just have to be realistic. Right. So I think you're asking a great question. And the question is really around, we are changing fundamentally.

Speaker 2

We're transforming as a company. And we're being innovation led and the place you see that the most is today we can sell 8 products to a customer. And just a couple of years ago, we sold 2. We sold UC and CC. And unlike some of our competitors, they fundamentally sell 1 UC, we can sell 8 UCCC, ICA Digital, ICA Voice, Workforce Management, Add On Professional Services, CPaaS and SecurePay.

Speaker 2

And so what now the question we're doing is we're restructuring our go to market motions around becoming that portfolio sale. As we sell more of the portfolio to a given customer, we see higher retention rates and higher ARPU, higher Now some of these are usage based and I don't want to get into all the sort of minutiae details. The timing behind that is a lot of the products are in beta or exiting beta now. So we saw, as I mentioned on my prepared remarks, we saw, for example, in ICA, the number of interactions double 50% quarter on quarter and accelerate on a month on month basis throughout the quarter as we're starting to expand out the number of customers. And the number of customers in the pipeline is up triple digits, a couple of 100% quarter on quarter as that moves to GA.

Speaker 2

And so I think we'll start to see that we see it internally. The question you're really asking is when will it be on the income statement? I think later this fiscal year, early next year, I'm hoping, knock on wood, it will be big enough that you'll see it in the income statement as moving the needle and starting to drive that reacceleration. And I

Speaker 4

think the important thing here is that we're really getting A positive response from the customers who are using some of these products in beta today. And it's really, really great to see the traction that we're developing internally, starting out small numbers, but the acceleration of this can be significant and The sooner the better.

Speaker 2

Okay. Your second question is great, which is like how am I not competing with the hyperscalers? So what we've done is we've built a platform that allows a Series of integrations, native like feeling integrations with this host of next generation startups. And you're seeing these startups that are raising, I mean, it's no have to raise $250,000,000 rounds or $500,000,000 rounds on these next generation technologies, but they need a contact center to work on. They need a contact center workflow to ride on top of.

Speaker 2

And we've developed and we've reengineered our platform over the last 3, 4 years to enable those next generation technologies to ride on top of our platform. This is very much different than most of our competitors in the contact center space who haven't reengineered their technology stack and therefore are mainly forced to fight a native battle, which means they buy companies, They hardwire in the integration and they basically need basically have to use their in house solution. For example, We offer 3 or 4 different agent assist platforms and we can offer a few more that are coming shortly. We offer our chatbot ICA, which is based on Cognigy, but we also have customers running Balto and Awake and others that are phenomenally successful. And so what's that enabling us is that we're not competing with those companies.

Speaker 2

They all want to partner with us. Lisa, anything you'd like to add?

Speaker 3

I mean, I think what these partners allow us to do is really continue to blur the lines between customer and employee engagement With those native integrations and that really gives the end customer, the right toolkit To be able to deliver that experience.

Speaker 2

Yes. I think right now, we as a company can handle more end use cases than just about anybody out there with our ecosystem. Thanks, Josh.

Operator

Our next question comes from George Sutton with Craig Hallum. Your line is open.

Speaker 10

Thank you. Sam, I wondered if you could walk through the math of the or the thought process of the push and pull between this $250,000,000 return to shareholders, which is great, against the potential for growth investments. How are you kind of driving that line?

Speaker 2

Yes. So let me tackle a couple of these things. So first off, I'll turn it To investors, not to shareholders, that would be all share buybacks. And my lawyers always like me to say that the bondholders are not considered shareholders. So I have Correct that because I'll get a nasty gram for my GC.

Speaker 2

Look, the push and pull, it's a fair comment. I think I would invest more in growth After we get our GTM engine sort of retooled for our next generation of portfolio selling. That's why I always leave the optionality out there. Now look, I think I want to strengthen the balance sheet. So I want to get rid of the term loans, that's the 250.

Speaker 2

We get that taken care of plus the 63 and 24s and we'll be like financially well set. We won't have a lot of interest costs, those kinds of things. But really to me, it's about retooling the GTM then spending more. We have enough money and we're generating enough operating income that if we See an investment opportunity with a very high ROIC, we'll go after it. We have more right now, We're more focused on putting the incremental dollar into reaccelerating growth in the company and just maintaining margins generally where they're at plusminus But really It's continued to strengthen the balance sheet, continued to strengthen the company overall and reaccelerate growth as quickly as possible.

Speaker 2

I don't think an incremental dollar right now In sales and marketing is the right play. As soon as it is the right play, we'll happily make that investment.

Speaker 4

And just to restate, We are and continue to be investing in innovation. So that investment is going, 15% of revenue is our Target, so we continue to do that because we believe it's going to result in fantastic products that are attractive in the market. So that investment is going to continue.

Speaker 10

As a follow-up on the contact center, a couple of your large competitors have come out and talked about Disrupted pricing with relatively new platforms. I think what I'm hearing from you is given your way of having built the platform, You really don't compete directly because you're offering a lot of things that none of them have really even contemplated. Is that am I hearing that correctly?

Speaker 2

I think that's absolutely true. And a lot of the disruptive pricing models aren't nearly as disruptive. I mean, the one that comes to mind is the one Interaction based and anybody with like a calculator, even a basic calculator can quickly figure out that an interaction based system in an average contact center Cost you more than buying a per seat. So it's great from a marketing billboard perspective, but it's actually not going to win that much business once anybody gets a calculator out.

Speaker 7

Got you. Thanks guys.

Speaker 2

Thank you, George.

Operator

Our next question comes from Michael Turrin with Wells Fargo. Your line is open.

Speaker 11

Hi. This is Michael Berg on for Michael Turrin. Thanks for taking the question. Just going back to the contact center space, Just be curious there on overall progress and pricing trends as you incorporate more and more AI into this. Any feedback there would be helpful.

Speaker 11

Thank you.

Speaker 2

I mean, I would say on average, I mean, it's hard to tease it out completely, but like when we sell a portfolio of products, we see the Dollars of revenue that we generate from a customer go up. Now part of that is a mix of seat plus usage or seat plus consumption based. Because like for example, when you have a bot, you can't charge a seat bot or a bot per seat. I don't know exactly how the math the English would work, Because it's not a user, you charge based on the interactions and so it's a little different. I think one of the things and I'm going to expand your question slightly.

Speaker 2

One of the things that people talk a lot about is, oh my goodness, AI is going to put the contact center out of business, completely false. I think that's completely false for at least Until I am 40 years retired. What we see today is when we deploy our next generation technologies, we get more productive agents. Maybe we get 1 agent or 2 agents less in a 250C contact center. But what we see generally is attrition rates, which are 40% 50% go down.

Speaker 2

The actual hourly pay to agents goes up because they're adding more value and The rope parts of their jobs go away and the value added parts of their jobs increase. And so I'm super bullish on AI making Contact center jobs substantially better. Last year based on Bureau of Labor Statistics data, the average contact center worker in the United States made 18.31 Corporate America is waking up that you can't have your lowest priced employees, the ones dealing with your customers, if you want customer loyalty. And that's what AI is enabling a change to. We can have more productive contact center agents that we pay more to They offer better customer experiences that improve reorder and renewal rates across industries.

Speaker 2

And I think that's the magic that's happening.

Speaker 7

Got it. Thank you.

Operator

Our next question comes from Peter Levine with Evercore. Your line is open.

Speaker 11

Great. Thanks for squeezing me in here. Maybe just one for Lisa, your experience at Twilio, Genasys. So I guess you've been in the role for a couple of months. Explain to us from a higher level, where do you see the opportunity?

Speaker 11

What are your priorities? And if you can share like what are some of the changes or I think anything to the technology to go to market that you're implementing today where you think will have a change to this business over the next, call it, 12 months?

Speaker 3

Yes. Thank you for that question. I think the first thing I would go back to is what I mentioned earlier, which is The way that our portfolio of products really starts to blur the lines between customer and employee engagement. And what that really allows companies to do, which is to use the insights and the analytics that we give them to drive the right business outcome. And I think we're really uniquely positioned to capture that.

Speaker 3

I think when I look at the organization that I've come into, we were very much Tooled to focus on the UC positioning in the marketplace. And the contact center discussion was not Front and center. And what I'm doing is building out the organization from a skill set perspective, From a tools and sales motion perspective, so that we are coming to the customers with the right use cases to drive the right business outcome. And that is number 1 my focus. So there's a lot of enablement going on within my organization.

Speaker 3

We're looking at The tools that we use, the insights that we're able to provide, our teams in terms of the accounts they're working with and making sure that we're able to capitalize on that.

Speaker 11

Thanks. And then maybe just a follow-up. Tim, you mentioned within the Fuze customer base, you saw I think More down sells or attrition,

Speaker 7

is that something that popped

Speaker 11

up this quarter or any color you can provide on when you think that kind of drops out here?

Speaker 2

Yes, we talked about it last quarter. So far, Fuze has performed better than our original financial model. And we had double industry churn rates the 1st year and then we expect it to moderate. In the 1st year, it was substantially better than we expected, but the 2nd year has been slightly worse than we expected. What we've seen is a little bit of, I think last quarter is probably the worst.

Speaker 2

It got a little bit better this quarter in the sense that We saw a quarter on quarter significant improvement in the number of logo churn. We're still dealing with a little bit of right Sizing, especially as we upgrade the customers to 8x8. I think it'll get better next quarter and the quarter after. What we are seeing really clearly as we've accelerated our move Of moving Fuse customers to 8x8 and the CSAT scores when they get to 8x8 are awesome. I'm super happy.

Speaker 2

The customer satisfaction once they're on the AFFA platform is outstanding and the renewal rates are high once they're on AFFA. So we just need to accelerate it, Kind of get through the bubble that we the sort of self inflicted gunshot wound that we had around it. I think probably the worst quarter was last quarter. We saw a little bit of Signs of improvement this quarter and knock on wood, hopefully it will be a little bit better next quarter.

Speaker 11

Thanks for the color.

Operator

Our next question comes from Michael Funk with Bank of America. Your line is open.

Speaker 2

Hey, guys. Thank you for

Speaker 11

the question. First on general contact center health, do you have any comments on agent hiring, maybe you're able to see during the quarter And usage trends as well, and if you do have any color, how did that trend during October heading into the holidays?

Speaker 2

It's a good question. I mean, Lisa, you can chime up here anytime you want. I mean, look, what we're seeing is the normal purchase of bursting seeds by our retail customers. So the seasonality, the normal activities that you would expect to see by the retail customers of adding Agents in September October getting them trained, I don't think I mean, I think that's happening. In general, I still see more On shoring than off shoring, I still see the trend of bringing contact centers back from developing countries, back onshore To drive higher CSAT scores and higher NPS scores to drive renewal and retention rates, those kinds of things.

Speaker 2

So I think underlying, I don't know. Yes, I

Speaker 3

think the other thing that I would add in terms of our retail customer base is that they're really looking to get More out of the folks who are front and center with their end consumer and giving them the tools to be more effective. So I think what we're seeing more is the interest in wanting to give someone who's in a retail store location Access to the same insights and tools that someone who does sit in the contact center, so that they're able to serve that consumer just like the person would in that contact Hunter?

Speaker 2

I think the other thing is, it's funny, as Lisa said, that kind of occurred to me is, look, it's a little hard for us. Like we've never been the world's biggest player in contact center, right? There's others. And so what we see is a lot of our customers, especially when we launched this host of new products, I mean, I'm utterly surprised by the Just the sheer volume and wonderfulness of the products we're launching right now, Gosh, our customers are just happy with us right now when they get these new products in their hands and they get to play with them and see what the capabilities are.

Speaker 11

That was great color. Thank you both. One more, Sam, if I could. I'm trying to parse your comments on SKUs. I think you said That churn had risen to about 2x the industry average.

Speaker 11

I think you mentioned this last quarter, You saw the highest level of pressure on the business. So just trying to map that to when Fuze may no longer be a headwind So if I try to do that math in my head, is it fair to assume that at the earliest second half of next year, We're back in line with industry type churn. Migrations are progressing and the These businesses are no longer a headwind. Is that the right way to think about timing for that?

Speaker 2

I'm trying to do it in my head, hard to say. I mean, if it's the second half of next year, I and Walter are going to have a bit of a discussion. I want it faster. Look, I think we've sort of peaked in the worstness. The question is how fast can we get it better.

Speaker 2

We're very we've got a Triple digit number of migrations underway or sorry, upgrades underway right now. And so I think like The basics are happening. I think we're past the worst. The question really is the top 400 customers And they're a little bit of a each one is a little bit of a snowflake and it's hard for me to nail down the timing when we'll get them all moved over and it will no longer be Nothing we ever mentioned again, right? Everybody will be on the 8x8 platform.

Speaker 2

I'm hoping in the next few years, I'm not going to force that top 400 to move over. I think what's also interesting is we are starting to see more cross sell opportunities in that top 400. So it's a balancing act right now. I don't have a good answer for you if I'm honest.

Speaker 11

One more quick one if I could. Renewals have been top of mind. A lot of companies talking about seat contraction at renewal Contact center, you see how are your renewals looking for the Q4 this year and then beginning of next Is there any kind of pig in the python to worry about?

Speaker 2

No, there's no snake in the python to worry about. We have seen that's earlier a little bit about economic pictures that I'm seeing, Michael. What I'm seeing is a little bit of down sell pressure, not So much on the logo side, but a little on the downward on the down sell side, 100 seats becomes 97 seats because they've shrunk their employee base. What's interesting is we'll usually pick that up a year or 2 later as a run rate order as they flex black up. So I would say, look, it's not It's a little worse than it was a quarter ago, but it's not meaningful worse.

Speaker 11

Okay, great. Thank you all for the time. I really appreciate it.

Speaker 2

Thank you.

Operator

Our next question comes from Ryan Coons with Needham and Company. Your line is open.

Speaker 12

Thanks for the question. Really nice job in the cash flow obviously here. When I asked you about the geographic theaters and any comments you could make either that or on your customer segments, Sam, Seems like the malaise is kind of broad based and as you've kind of retooled your go to market machine, but any kind of color you can share Across the theaters, be it your strength in the UK or APAC or across the different U. S. Segments would be helpful.

Speaker 12

Thanks.

Speaker 2

Well, I Look, I'd be remiss in not starting with the basic like CPaaS killed it in Southeast Asia. They had a great quarter. The changes we've made over the last 6 to 9 months Really started to kick in. Their pipeline activity is up. The revenue produced was up.

Speaker 2

It was a great quarter in CPaaS And there's a lot of room to run there. We have to get all the ducks lined up to make that show up in the income statement, but there's a lot of potential and activity there. So that'd be first and foremost. I think secondly, we are retooling our go to market, but there are a lot of green shoots around our new products And the uptake in customer activity, I mean the referenceability coming out of beta, the raw number of customers that are interested in our new products, those kinds of things, Pipeline activities, etcetera, big plus. Definitely was sort of a bent on airlines, retail, Public sector in the UK, we obviously mentioned Westminster, those kinds of things.

Speaker 2

Those are logical places for chatbots and those high velocity common questions to get answered over and over again. I think 3rd is we saw a sizable improvement in pipeline in our North American value added resellers, our VAR community. We've been making more investments in that space as I'm sure a number of your channel checks show that we've been investing more in the VAR side of the business than the TSD agent side of the business. And we're seeing some sizable pipeline increases there and I think that's a pretty sizable benefit. And then, I In terms of verticals, anything comes to mind, we've had good luck last quarter or 2 in healthcare.

Speaker 4

I mean, that's one of the questions.

Speaker 2

Yes, I think healthcare Field services

Speaker 3

is a great one where anyone who rolls a truck or has someone like a Car towing, all those types of things have really been resonating with the video APIs that we've introduced as well.

Speaker 2

Yes. Yes.

Speaker 12

Thanks. That's helpful. And on your comment on North America VARs, are you seeing Increased kind of engagement on the contact center arena from these VARs or do you have to really change out to a new set of VARs to drive that biz?

Speaker 2

No, no, no. We see them very interested in the contact center side of the house and we're adding new VARs. We're actively bidding on a number of our RFPs that are out there and recruiting new VARs in general. I think this actually plays in your earlier answer around Microsoft. It plays into contact center.

Speaker 2

And I think that Holy Grail of our community is really starting to open up.

Speaker 7

Got it. Thanks for the color.

Speaker 2

Thank you.

Operator

Our next question comes from William Power with Baird. Your line is open.

Speaker 13

Okay, great. Thanks. I guess a couple if I can squeeze in here. Sam, you just touched on this actually a bit, but on the CPaaS business, I think you noted upside in the quarter. I think you just indicated there was some Go to market improvement, but anything else there that you'd point to that really drove the better performance?

Speaker 13

And I guess even more importantly, The confidence level going forward, those improvements stick.

Speaker 2

Well, I mean, I'd be remiss. I mean, the guy we hired and I won't mention because he'll probably get in bad recruiting calls. He's done a phenomenal job. And so leadership matters and leadership matters, right? On top of that, we've announced new products.

Speaker 2

We've improved and streamlined our go to market activity. So as the company grew, it's go to market activities need to synchronize with what it was doing. I Can't speak highly enough about OmniShield and the new products and innovation we're driving. We've launched a new platform over the last year. So our stability, our availability, our dynamic routing capabilities on our platform, absolutely phenomenal.

Speaker 2

And we've been in the box because of those capabilities by the way, because of that omni channel and because of the platform capabilities, we're in the box for just some Super large CPaaS deals. I don't know if we're going to win them. They're certainly not in the financial model, but we're playing in the big leagues in CPaaS and Southeast Asia.

Speaker 13

Okay. Great to see the improvement there. And I guess second question would be around Teams, which I know has been a positive area for some time. Maybe just any other color you can share on trends, See growth and kind of what you're seeing competitively from others that are trying to go after that base of users too?

Speaker 2

So, Kate may kick me under the table, so I'm sliding away from her. To tell you, we just passed 400,000 seats of Microsoft Teams. It's in the slides, right. We have over 400,000 seats in Microsoft Teams. I think we're growing still Like 67%.

Speaker 2

67% year over year. So those are all like those are the we'll have the quantitative stuff. Here's what I'm most proud of to be fair. So Microsoft, I got a chance to see Microsoft's Partner slides, I think they presented in June. And we were listed as a strong partner of Microsoft versus our competitors, which were all listed as Microsoft competitors.

Speaker 2

So I am very happy with our relationship with Microsoft and I wish them nothing but the best of luck every day of the week.

Speaker 13

Yes. Sounds great. Thanks.

Operator

Our next question comes from Matthew Van Vliet with BTIG. Your line is open.

Speaker 11

Thanks for taking the question. Maybe I'll just ask 1 in the interest of time here. But, Sam, you talked about a number of years until the contact And so maybe more importantly, what are your customers' Sort of goals over the next couple of years in terms of whether it's call deflection or at least reduce time of the agent on the phone, What's realistic? What are the customers asking you to do? And then as you wrap that all together, how additive versus Moving revenue from one pocket to the other, can that be over the next couple of years as you embark on some of those goals for your customers?

Speaker 2

All right. So it's a great question. Like when I talk to contact center leaders and Lisa chime in anytime you want to hear. I think what I hear is like, it'd be great if we could get overall like a 20%, 30% case deflection type of number to get the Run of the mill cases, the simple use cases out of the system. Number 2 is, we've approved mean time to resolution through things like agent assist.

Speaker 2

And number 3 is, and The Street never talks about this, but it's such a day to day activity in a contact center leader is get attrition down. Almost every contact center leader I talk to deals with attrition at 40% to 50%. And through things like bots And agent assist and health scoring and those kinds of things, if they can make the job better and bring attrition down, I mean, I don't think Anyone on this call can imagine what it's like to literally turn over almost your entire workforce every other year. That would just be grinding In terms of trying to improve customer satisfaction and those kinds of things. And so to me the big three are case deflection, mean time to resolution and agent attrition.

Speaker 2

Okay. And then, what does it mean for us in terms of revenue? A lot more revenue and a lot higher retention rates, which means a lot more revenue, right? We generate more revenue. And we know, for example, when we sell and these are rough numbers, I'm not going to get it, but like when we sell one product to a customer, we have a mid-80s type of retention rate given our small business base.

Speaker 2

We sell 2 products, low 90s, 3 products, mid 90s, 4 more products, high 90s, right? And so as a recurring revenue model, The more products we sell, the higher our retention rates and the higher dollars of revenue we generate, not magic, every large software company, Oracle, Salesforce, Microsoft, etcetera does this. We're just at the point given our size to start to transition to that portfolio of products that allows us to sell more and more and get to the care and sticky world.

Speaker 11

Great. Thank you. Very helpful.

Speaker 2

Thank you.

Operator

I'm not showing any further questions. I'd like to turn the call back to Sam Wilson for any closing remarks.

Speaker 2

Thank you so much. I really appreciate it. To everyone out there, we remain confident in our future. We have all the building blocks in place to achieve our long term objectives. We saw early indications of success in our results this quarter as our adoption of new products increased.

Speaker 2

I just want to sort of reiterate transitions don't happen overnight, But the market we address is huge. We're coming at it from a position of strength. We have an installed base that loves us and the products we're launching. We have a terrific contact center platform that can enable next generation AI technologies. For Kevin's sake, I mentioned We're very cash flow positive and profitable and we're driving a return of money to investors.

Speaker 2

And lastly, I think most importantly for everybody on this call, I feel like we have the right team in place to drive this business to the next level. So thank you for your time today. Thank you to all the employees that are listening to this. Thank you to all the partners and customers that listen to this. And I look forward to talking to you again in 3 months.

Speaker 2

Thank you.

Operator

Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.

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Earnings Conference Call
8X8 Q2 2024
00:00 / 00:00