8X8 Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 9 speakers on the call.

Operator

Welcome to the Q1 2024 8x8 Incorporated 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 To ask a question during the session, you will need to press star 11 on your telephone. Then you will hear an automated message advising your hand is raised. To withdraw your question.

Operator

Please be advised that today's conference is being recorded. And I would like to hand the call over to your speaker today, Kate Patterson of Investor Relations.

Speaker 1

Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our Q1 results with Sam Wilson, our Chief Executive and Kevin Krause, our Chief Financial Officer. Following our prepared remarks, there will be a question and answer session. Before we get started, me remind you that our discussion today includes forward looking statements about future financial performance, including our increased focus on profitability and cash flow as well as 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 today, and we have no plans or obligation to update them. Certain financial measures that will be discussed on this call, together with year over year comparisons in some cases, were 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 measures is provided in our earnings release and on the Investor Relations website at investors. 8x8.com. With that, I'll turn the call over to our CEO, Samuel Wilson.

Speaker 2

Much appreciated, Kate, and thank you to everyone for joining us today. This is my first earnings call as the CEO of 8x8. Over the past 6 months, I've spoken at length to our customers, employees and investors about the future direction of the company. As you will recall, we made the decision a year ago to balance our innovation led growth strategy with a focus on improving profitability and cash flow through disciplined capital allocation. In our Q1 results, you will see both progress on this journey as well as areas for further improvement.

Speaker 2

I plan to give you, our investors who own the company, a transparent view of how the business is doing today and where it's headed tomorrow. To this end, we will add some commentary about the long term financial path of the company the end of my remarks. Now let's get into some Q1 highlights. The increased investment in R and D drove the introduction of new products and enhancements to existing solutions. The reception from customers has been very positive.

Speaker 2

We increased our win rates, closed significant new customers and expanded our base of X Cast contact center users. We remained the direct routing solution of choice for customers deploying Microsoft Teams, expanding our 8x8 voice for team seats by over 80% year over year. We formally launched our contact center ecosystem and expanded the number of partners, extended our global industry reach to 59 countries, hosted innovation roadshows in the U. S. And UK and strengthened our management team with the hiring of Lisa Martin as Chief Revenue Officer.

Speaker 2

And we delivered record non GAAP operating profit and cash flow. Our innovation led strategy seems to be resonating with customers driving new business awareness in the industry. As we focus on the right customers, lead with contact center as a service and demonstrated the value of our integrated platform, we are building a higher quality pipeline and closing larger deals. Average ARR per enterprise customer excluding CPaaS was at an all time high and we also closed our largest new business win ever with a multimillion dollar total contract value. Ending ARR increased year over year in all three customer segments.

Speaker 2

The growth rates for small business and mid market both increased sequentially and small business posted its best year over year growth performance in a while. These metrics all demonstrated the continued progress we're making on our strategic initiatives. Our results were partially offset by a sequential decline in CPaaS usage revenue and higher than expected churn and down sell in the Fuze enterprise installed base. These headwinds resulted in service revenue and total revenue about $3,000,000 below guidance ranges. Let me give you a brief explanation of what happened with CPaaS and Fuse and what we are doing to turn the tide in each.

Speaker 2

First, CPaaS. We thought the CPaaS business had stabilized last quarter, but carrier pricing actions during fiscal Q1 had a negative impact on SMS traffic. We were forced to choose between passing along price increases to customers or accepting negative margins. We made the sound decision to forego negative margin business and higher prices caused some traffic to move to other channels. We didn't lose the customers.

Speaker 2

In fact, the number of CPaaS Enterprise customers increased sequentially, but usage declined. With new leadership in place, we are transitioning from an SMS traffic intermediary to a strategic business partner to our customers. We have identified white space opportunities to add value with dynamic routing, fraud detection and authentication, while continuing to maintain cost advantages due to our volumes. As in other areas of our business, we believe the innovation led approach will result in a more resilient business model and durable growth. Regarding the increase in churn and down sell within the Fuze base.

Speaker 2

As we've said on calls over the last year, the Fuze acquisition has outperformed our expectations. It has been accretive to gross margins, operating margins and cash flow. However, we did see a sequential increase in customer churn and down sell in Q1. This resulted in lower than expected revenue from the Fuze platform in Q1 as well as a decrease in the more forward looking ARR metric. I believe some of this is due to smaller customers actually moving off the platform, but a significant portion of lost ARR was due to rightsizing the customer subscription as they came up for renewal for upgrades.

Speaker 2

To be clear, the retention of Hughes customers is still above our original forecasts. While it may take a few quarters to right size all the customers, the acquisition has been a major success for us. We doubled the resources focused on innovation, expanded our enterprise customer base and increased our operating margins and cash flow. In combination, the headwinds from CPaaS and Fuse caused us to fall below our service revenue and total revenue guidance ranges for Q1 by less than 2%. The roll forward of the Q1 run rate and lowering beginning ARR caused us to reduce full year guidance for total and service revenue by 3% at the midpoint.

Speaker 2

Pegging the exact revenue performance of a $0.75 of a $1,000,000,000 revenue is complex at the best of times. It is infinitely more difficult during tougher economic times, integrating the operations of another company and shifting spending priorities. While we aim to achieve our forecast and guidance. Moving forward, I believe the most important takeaways from our quarterly results are: 1, our core 8x8 UC and CC business was solid and growing and is seeing the green shoots of early successes in our innovation led strategy. The challenges that resulted in the revenue shortfall versus the guidance are fixable and we have heightened management attention on them.

Speaker 2

2, we still expect to achieve 12% to 13% non GAAP operating margin for the year, representing operating income growth of at least 40% compared to fiscal 2023. 3, we expect to generate significantly higher cash from operations in fiscal 2024 compared to last year. More on that in a second. That's a quick review of our Q1 results. Let's talk about the 3 lanes we presented last quarter.

Speaker 2

1, we enable agile workplaces. 2, we empower users across an organization to deliver great customer experiences. And 3, we harness the power of artificial intelligence and machine learning. For one, I'll quickly say our Microsoft Teams integration continues to be a stellar product for us. We grew seat count 80% year over year and more than 10% of total seats are connected to Microsoft Teams.

Speaker 2

Further, we continue to evolve the product. Last quarter, we added new user onboarding capabilities to speed up time to value. We believe we are the leading UCaaS vendor that offers true cloud to cloud Teams integration. And let's not forget, we were the 1st Microsoft Teams certified contact center. Simply put, I believe we are still the best by far.

Speaker 2

Turning to lanes 23, empowering users and harnessing AI. As we discussed in prior quarters, our strategy is to increase R and D investments in high ROI innovation to drive durable growth, reduce investments in low ROI promotional activity and focus the sales organization for greater efficiency. It is simple in creation but difficult to execute. While activity shows up in revenue immediately. It takes time for investments in R and D to show up in new products and even more time to drive growth on our income statement.

Speaker 2

Take supervisor workspace, our dynamic new UX for contact center. First, this product was built by the engineering teams we acquired via Fuze, again showing the value this transaction added to our organization. We started work on it a year ago. We released early adopters in March and we released enhancements based on customer feedback last week. The early customer response has been fantastic with adoption on track to rival Agent Workspace as our fastest new product adoption ever.

Speaker 2

It should now begin to have a meaningful influence on our sales process, ultimately resulting in higher retention, cross sell and more customers. The time from the first dollar invested to the time showing up in revenue could be as long as 18 to 24 months. As we continue to invest in innovation, we are building a competitive moat that can last for years. I believe this will drive revenue growth and deliver value to our customers and our shareholders for an extended period. Let me walk through a couple of examples how 8x8 solutions are transforming customer processes to deliver better customer experiences.

Speaker 2

The first example highlights how customers with field services can transform their processes to reduce costs and improve their customer experiences through the full X Cast capabilities of UC plus CC plus CPAS. Platform Housing Group's before and after case study shown in the earning slide is a visual representation of this triple play use case. For those that don't know, Platform Housing Group is one of the largest housing associations in the UK Midlands with over 48,000 homes and more than 120,000 customers and has ambitious plans to build around 1300 new homes every year. Housing Group elevates employee and customer engagement using 8x8. When a customer calls the Platform Housing's contact center, which runs on our X Cast.

Speaker 2

A video consultation is offered via SMS link, so the customer can show their problem to a representative. If a visit is needed, HQ can send SMS messages to field service personnel, including pictures, videos and notes related to the issue. Reminders are sent to the customer so they are home and a follow-up CSAT survey via SMS concludes the interaction. Details are automatically saved in the 8x8 contact center as well as Platform Housing's Microsoft Dynamics 365 system. Following implementation, Platform Housing Group has been able to close almost 40% of the repair calls remotely without requiring a visit from field service personnel.

Speaker 2

Further, over a quarter of calls no longer needed diagnostic visit, reducing the total number of visits and speeding up time to resolution. Platform housing is saving nearly 600 home repair visits per month at an industry average cost of £200 per visit, this can mean realized savings over £100,000 per month and achieving faster resolution times. This type of integrated solution can be replicated across all kinds of service industries. Think insurance, healthcare, maintenance and repair businesses. The cross sell opportunities for 8x8 is large, adding CPaaS to just half our contact center customers could add tens of 1,000,000 in annual usage revenue.

Speaker 2

Another recently introduced product, digital intelligent customer assistant or ICA has the potential to drive revenue directly through increased subscriptions and usage fees. ICA is our generative AI enabled digital chatbot. Early customers are finding it easy to deploy and credibly effective at reducing resolution times for simple inquiries. We have quickly gone over 100,000 interactions since April and are growing double digits month to month and we are still in the early adopter phase. In one use case, a UK based shuttle and taxi service deployed ICA initially to schedule pickups.

Speaker 2

Within weeks of deployment, more than 50% of the cases that previously went to the call center were being handled without live agent interaction. In another case, a major PC manufacturer deployed ICA for the single use case around warranty authentication via SMS. It was so successful that within weeks they were adding more channels and adding more use cases. Our advantage with ICA extends beyond the chatbot technology itself to the tight integration of the chatbot into the contact center workflow. While bots are good at resolving simple issues, Even the most advanced best trained AI bots cannot resolve every issue.

Speaker 2

And sometimes the customer just wants to deal with a live agent. When this happens, we can seamlessly transfer the customer to the live agent with all the metadata attached, meaning no augmentation, no redoing the same steps over again and no more customer frustration. Further, we can feed any information given to the chatbot into the agent assist product even if it's from a different vendor. So the live agent is better prepared and can successfully resolve the issue in less time. The bot becomes part of a fully orchestrated customer journey rather than an island off to the side, resulting in higher CSAT and retention.

Speaker 2

Our voice version of ICA is moving into early adoption beta phase now with the same amazing integration into our contact center. Our open platform approach is based on delivering superior customer outcomes. In these examples, both the customer and the live agent have a better experience. Further, the business is able to effectively leverage existing agent productivity tools, which can increase ROI on prior investments. We can't possibly build great tools for every possible use case, but we can enable them through our integration capabilities with UIUX widgets, APIs or webhooks.

Speaker 2

With our platform providing core services like intelligent routing, orchestration, analytics and reporting. Customers can build solutions tailored to their needs. They can use our bots and apps, build their own or choose to deploy 3rd party solutions purpose built for the specific use case. Our multiple ways to integrate with partners bring to life a whole new way of making integrations feel native versus loosely stitched together as is often the case with other contact center software. There appears to be no trade off between functionality and ease of use for the customer and the technology partners love it because we don't compete with them.

Speaker 2

We started our partnership journey in January and formally announced it in early July. We have been overwhelmed with the positive response and have more than 40 partners today and even more onboarding. These are recognizable, highly funded companies doing some amazing things. We have fully functional integrations released today and a lot more coming. Our ecosystem will naturally expand as the use cases for AI in the contact center mature.

Speaker 2

For now, customers want reliability, security, ease of use and a roadmap that protects their investment. They may recognize the potential of artificial intelligence in the contact center, but they want the flexibility to adopt new solutions and technologies at their own pace. Customers like Health First, Sotheby's, Horizon Hobby, United NeuroSkeletal Partners and Sovereign Housing are embracing our approach and committing to the 8x8 platform. These wins, some with TCVs of 7 figures are detailed in our earnings deck. Although they vary by industry geography and size, these customers chose 8x8 to improve their customer outcomes today and well into the future.

Speaker 2

Don't take our word for it. On July 31, METERGY released its inaugural contact center as a service, METER REC, based on market share, financials, market share momentum, product mix, customer sentiment and the customer business success. 8x8 ranked 5th, higher than I believe most listeners would have guessed and ahead of Amazon, Dialpad, Talkdesk, Vonage, Avaya, Content Guru, UJET and Zoom. Additionally, we ranked highest in customer sentiment. We live customer obsession.

Speaker 2

Our contact center rocks and it's constantly getting better. Let's turn to what all this means for us as a company and you the investors. Creating value for our customers and our shareholders over an extended period of time is fundamental to everything we do. I believe we will achieve this by continuing to invest in innovation while managing within a financial framework where revenue growth exceeds expense growth and excess cash flow is returned to investors. I want to lay out our financial path for fiscal years 2024 through fiscal year 2016 time period.

Speaker 2

This is not guidance, rather the path we want to be on. We expect to increase our cash flow from operations by an average of more than 20% per year. This will be driven by a combination of margin expansion, debt pay down and revenue growth. We remain committed to returning $250,000,000 to investors over the period, mainly through debt retirement. We have already returned $25,000,000 and have $225,000,000 to go.

Speaker 2

Since value accrues on a per share basis, we have taken the pioneering step to reduce the dilution from our employee stock programs over time. While the full benefit is expected to take 3 years to be realized as we work through the vesting of previous grants. We The annual increases in diluted shares outstanding to be roughly 6% per year through fiscal 20 26. This will depend on the actual stock price and excludes any acquisitions. This does include employee stock purchase or ESPP.

Speaker 2

We remain believers that having employees as stockholders aligns well with shareholders' interest. Over the long term we want to reduce annual growth to 4% or less. These three items combined will drive what I considered to be the most important metric for shareholder value, cash flow from operations per share, increasing cash from operations while reducing share dilution is our financial North Star. As a proof point over the last four quarters, we have generated cash flow from operations of $69,000,000 while our reported fully diluted share count is down by over 3,000,000 shares over that time period. This is not to say we are not concerned about service revenue growth, we are.

Speaker 2

We expect to exit fiscal 2024 with low single digit growth and then show acceleration in fiscal 2025 fiscal year 2026 with a goal of getting 8% to 12% year over year revenue growth as soon as possible. While doing all of the above, we continue to invest in the future of the company. Growth will come by building innovative products, expanding our channel and developing our employees. This road may not always be smooth or linear, but we believe that is very doable for us. My confidence is built on the accelerated pace of new product introductions, the early customer response to these new products, our recent financial performance and the improvements in the sales process and go to market we will achieve under the leadership of our new Chief Revenue Officer, Lisa Martin.

Speaker 2

So while the quarter was not perfect and we know we have more work to do, it was a step in the right direction and we have a plan. Lastly, I want to thank our customers, our partners, our employees and you, our investors for going on

Speaker 3

this journey with us. And with that, I will turn the call over to Kevin. Thank you, Sam, and good afternoon, everyone. We remained financially disciplined and delivered strong operating income and cash flow in the fiscal 2024 Q1, exceeding our guidance range for non GAAP gross margin and non GAAP operating margin and exceeding our expectations for cash flow from operations. We have delivered positive non GAAP operating income and cash flow from operations for 10 consecutive quarters and we have prepaid $58,000,000 of debt, more than 10% of the total outstanding balance since August 2022.

Speaker 3

Total revenue for the quarter was $183,300,000 and service revenue was $175,200,000 both decreasing 2% year over year and slightly below our guidance range. Our revenue performance was impacted by continued challenges in our CPaaS business in the Asia Pacific region and higher than expected churn in our Fuze customer base. Other revenue for the quarter was $8,000,000 slightly above the prior quarter and in line with expectations. Total ARR was $703,000,000 atquarterend, up 2% year over year, reflecting CPaaS headwinds and churn and down sell in our inorganic customer base. Excluding CPaaS usage, our total ARR grew approximately 4% year over year.

Speaker 3

Most CPaaS ARR is in the enterprise segment. And consequently the CPaaS headwinds did disproportionately affect the enterprise ARR. Enterprise customers accounted for 58% of total ARR and enterprise ARR was flat sequentially and flat versus the prior year given the aforementioned headwinds. Turning to gross margin, operating expenses and operating profit, Please remember that all items discussed are non GAAP unless otherwise noted. Service revenue gross margin came in at 76.2 percent, up 90 basis points sequentially and 280 basis points higher than Q1 2023.

Speaker 3

We are continuously managing our cost of goods sold and expect service revenue gross margins to remain healthy. Part of the year over year increase in service gross margin has been that we have reduced investment in low margin portions of our business. Other revenue gross margin came in at positive 4% for the quarter compared to negative 35.3% in Q1 2023 and 8.6 percent in Q4 2023, again a sign of improved profitability versus pure growth. Other revenue gross margin has improved in recent quarters and will vary due to the timing of professional services deployments as well as product mix. Overall, 4th quarter gross margin was 73%, an increase of 4 50 basis points year over year and up 50 basis points sequentially.

Speaker 3

For the Q1 of 2024, gross profit dollars grew approximately 4% year over year, significantly higher than overall revenue growth as we focused on improving profitability of our highest value products and services. Turning to operating expenses, research and development was 14.9% of revenue, in line with our 15% target and indicative of the continued investment we are making in product innovation. Just a quick comment about R and D. Some of the investments we are making will not show an ROI for multiple quarters as it takes time to build world class software, generate awareness and close deals. We believe that making these product innovation investments will lead to sustainable long term growth.

Speaker 3

Sales and marketing expense was 32.8 percent of revenue, down from 38.2% of revenue in Q1 2023. Sales and marketing expenses were down $11,700,000 from Q1 2023 as we realized synergies from the integration of views and 8x8 sales and marketing organizations and realigned our resources to focus on target markets and improve efficiency. General and administration as a percentage of revenue was down 50 basis points $1,100,000 sequentially as we incurred lower compensation, employer taxes and benefits costs. Total non GAAP spending as measured by COGS plus R and D plus sales and marketing plus G and A was down more than $20,000,000 or approximately 12% year over year and reflected our strategic cost realignment actions in the second half of the prior fiscal year. At this point, we believe our overall cost structure is where it should be to drive our strategy.

Speaker 3

Our guidance will include the step up of expenses for pay increases. The combination of improved gross margins and lower operating expense resulted in non GAAP operating profit of $26,400,000 up approximately 160% year over year and up over 6% sequentially. We achieved 14.4 percent operating margin in fiscal Q1 versus our guidance of 12.5% to 13%. Starting this quarter, we are adding a commonly used operating metric, adjusted EBITDA, which is reconciled to GAAP results in our Q1 twenty twenty four press release. Q1 twenty twenty four adjusted EBITDA was $33,800,000 18.5 percent of revenue and up 79% year over year.

Speaker 3

Additionally, we have generated well over $100,000,000 of adjusted EBITDA over the past 4 quarters. Cash flow from operations was $26,500,000 for the quarter, a multi year record driven by strong profitability, strong cash collections and lower than expected cash interest paid due to the timing of interest payment dates. Cash flow from operating activities has been positive for 10 consecutive quarters and increased more than 90% quarter over quarter. As stated in earlier earnings calls, we plan to maintain the cash and investments balance at or above $100,000,000 and use excess cash to reduce the principal amount of our debt. In fiscal 2024, this means we will repay the remaining $63,000,000 of the 2024 convertible notes using cash generated from operations.

Speaker 3

As we move into fiscal 2025, we will 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 cash interest payments. Turning to the balance sheet, total cash, cash equivalents and restricted cash ended the 4th quarter at approximately $139,000,000 flat with the prior quarter despite prepaying $25,000,000 in principal value of our term loan. This $25,000,000 debt repayment was the first installment on our commitment to return $250,000,000 in value to shareholders from fiscal 2024 through fiscal 2026. Given our current cash balance and expected future cash flows, we do not currently anticipate any issues with repaying the remaining 2024 convertible notes with cash when they mature in February 2024. Remaining performance obligation or RPO was approximately $790,000,000 for the quarter, increasing $15,000,000 quarter over quarter $90,000,000 year over year on healthy multi year customer commitments.

Speaker 3

Additionally, deferred revenue increased $5,500,000 or 12% from the prior quarter. While we experienced retention challenges in our inorganic customer base, 8x8 organic customer retention continues to be highest it has been in 4 plus years. As we noted earlier, we changed our equity cash compensation mix for employees to significantly reduce future equity grants. Our vesting schedule is typically 3 years, So this change will take time to appear in the income statement, but as we proceed on this path, we expect to significantly reduce dilution due to employee stock programs. As Sam stated in his commentary, increasing cash flow from operations while reducing shareholder dilution is our financial North Star, and we are very focused on driving improvement in these metrics as the best way to build shareholder value over time.

Speaker 3

Before turning to guidance, I want to reiterate some of what we said today. As a company, we are very focused on creating value for our shareholders by making smart decisions, even if those decisions take time to pay off. For example, we are investing in innovation with a goal to drive long term durable growth. We are reducing the mix of equity based compensation, which will moderate the pace of new share issuances due to employee stock programs. We are shifting sales and marketing investment from small business to enterprise, which has a longer sales cycle and we are leading with CCaaS, which has a much higher potential long term value from a customer.

Speaker 3

All of these changes aim to build a sustainable and profitable growth business. While we are making these changes, we plan to maintain strong profit and cash flows throughout fiscal 2024, which is reflected in our guidance for the year. As I mentioned earlier, investors will notice a step up in expenses starting in the second quarter as we implemented our annual cash compensation raises in early July. The aim is to significantly reduce future equity dilution borne by shareholders in exchange for higher cash compensation to employees. By trading cash for equity for many of our employees, we can minimize compensation volatility due to market swings, which will help us attract and retain talent in a competitive market.

Speaker 3

All employees still have the opportunity for equity ownership through our employee stock purchase plan, but this compensation change is intended to reduce stock based compensation and shareholder dilution over time. This new compensation structure is factored into the guidance I'll be giving and is a primary reason for the step down in non GAAP operating margin guidance for Q2. For operating expenses, we plan to continue making the appropriate level of investment in sales and marketing and expect sales and marketing to be in the range of 33% to 34% of revenue throughout fiscal 2024, down from 36% of revenue in fiscal 2023. We plan to focus our R and D efforts on continued product innovation and expect R and D as a percent of revenue to remain about 15% as we continue on the path of investment in our customer focused product strategy, which emphasizes contact center. We are focused on extracting more leverage from our G and A functions over time as we work to improve operating efficiencies in those areas.

Speaker 3

We are establishing guidance for the Q2 of fiscal 2024 ending September 30, 2023 as follows. We anticipate service revenue to be in the range of $173,000,000 to $178,000,000 approximately flat from Q1 at the midpoint and representing approximately minus 2% year over year growth at the midpoint as we still have a challenging comparison for CPaaS and we remain in transition in other areas. We anticipate total revenue to be in the range of $180,000,000 to $186,000,000 flat with the prior quarter at the midpoint and representing approximately minus 2% year over year growth at the midpoint. Our midpoint of guidance implies a slight sequential decline in other revenue as other revenue can vary based on customer specific deployment schedules. We anticipate gross margin to be between 72% 73%.

Speaker 3

We are targeting an operating margin between 10.5% and 11.5 percent as we increase employee cash compensation as noted earlier. We expect cash flow from operations to be positive, but down sequentially as we pay greater compensation expenses and cash interest and we are modeling a more normalized amount of cash collections. We anticipate interest expense of approximately $9,000,000 and cash interest payments of approximately $13,000,000 Note that the Q2 2024 cash interest payment includes $2,000,000 that was paid in early July, but related to Q1 twenty twenty four accrued interest expense. Also 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 123,000,000 shares.

Speaker 3

The increase reflects a full quarter weighting of RSUs that vested in June as well as the purchase of shares through our ESPP program. We are updating guidance for fiscal 2024 ending March 31, 2024 as follows. We anticipate service revenue to be in the range of $701,000,000 to $711,000,000 representing less than 1% negative year over year growth at the midpoint as we expect the first half headwinds followed by low single digit growth in the second half of the year. We anticipate total revenue to be in the range of $732,500,000 to $742,500,000 representing approximately negative 1% year over year growth at the midpoint. Similar to service revenue growth rates, we expect total revenue growth rates on a year over year basis to be higher in the second half of fiscal twenty twenty four.

Speaker 3

We anticipate gross margin to be between 72% 73%. We continue to focus on delivering a solid operating margin and anticipate achieving between 12% and 13% for the year versus the 8.4% achieved in fiscal 2023. This operating margin guidance is consistent with the guidance we provided in our prior earnings call as we are committed to delivering a healthy operating margin to our shareholders despite our current revenue headwinds. We expect cash flow from operations to be directionally aligned with non GAAP operating profit trends, 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.

Speaker 3

We estimate fully diluted share count growth averaging approximately 2,000,000 shares per quarter from the 123,000,000 shares guided for Q2 2024. In closing, I believe that our continued focus on operating margin and cash flow from operations is correct financial strategy for us at this time. At the same time, we are very focused on building a sustainable growth engine for the future. Fiscal year 2024 is a period of transition and in fiscal 2025 we expect to show some revenue reacceleration while continuing to focus on profitability, cash flow from operations and per share metrics. This strategy enables us to remain an innovation led company as we fund investments in key product areas.

Speaker 3

I would like to thank the entire 8x8 team for working in concert to deliver this quarter's robust profit and cash flow growth. And I look forward to the continued execution of our strategy to capture more of the contact center market to delight our customers and to deliver on our commitment to solid profitability and cash flow generation. Operator, we are ready for questions.

Operator

Thank you. Please press star 1 1 on your telephone. Please wait for your name to be announced before you proceed with your question. One moment while we compile the Q and A roster. And our first question for today will be coming from Catharine Tribeneck of Rosenblatt.

Operator

Your line is open.

Speaker 4

Hi. Thanks for taking my question. So Sam, Nice job on the Microsoft pull through, but really what are you seeing yesterday we had RingCentral support and today you reported and you are in this pivot, but what are you really seeing in terms of buying patterns from your target market, the SME? That's the first question, I guess, I have. And the second one is, congratulations on METERGY and being in the top 5.

Speaker 4

RingCentral now looks like they are following your lead in terms of the Ring CX and what's your take on how far you are with your product versus them hitting the same target market? Thanks.

Speaker 2

All right. So you asked what are the buying patterns in our target market. Look, I think there's some cautiousness that's crept into the market. We see it in smaller order sizes, a little bit longer deal times. The CFO, we've seen an increase in signature authority on first deals, maybe a longer POC, those kinds of things.

Speaker 2

I think we mentioned this last quarter also. So we've seen a little bit further elongation of the sales cycle in there. At the same time, it's we're absolutely seeing a lot of interest in the new things that we're announcing, right? And those are relatively early. But we have supervisor workspace that's now generally available, lot of interest in that.

Speaker 2

Intelligent Customer Assistant Digital is exiting beta here shortly in the next month or 2 probably, probably nothing promised. And we're I mean, we've seen just a percent increase in the amount of usage of that coming out of the beta site customers and we expect that to continue as we go to general availability. So we're in that transition where the new products aren't yet a material amount of money generating revenue, but there's a lot of interest in them, on a go forward basis and we continue to generate a lot of cash flow. So While there's some economic headwinds, I think, and just some cautiousness in our target markets, I think we're doing all the right things as a company. In terms of RingCentral following us, I'll let them speak for themselves.

Speaker 2

I guess all I would say is we've been in the market since 2011. It's nice that they're showing up in 2023. I think by 2,034, they'll be right about where we are today. Thank you.

Operator

Thank you for your questions. One moment for the next question. And our next question will be coming from Jamie Reynolds of Morgan Stanley. Your line is open.

Speaker 3

Hey guys, you've got Jamie on for me to. Thanks for taking the question. I guess just firstly, could you contextualize the uptick in deal activity that you're seeing Tied to X Cast. And then secondly, when customers are talking about adding in AI functionality, do they know what they're looking for yet? Are they still looking for guidance?

Speaker 3

Guess another way to think about that is, is it prolongating sales cycles?

Speaker 2

Okay. So What are they looking for in AI and what was the first part, Kate?

Speaker 1

It was the uptick in exCast sales.

Speaker 2

So exCast sales. So the 2 are related to each other, right? So we announced our ecosystem in early July. We've been out on the road talking about the fact we've got an open ecosystem. We've got a number of partners at nearly 20.

Speaker 2

We've got integrations out there on the MLAI space. We've got, for example, Cognigy, our intelligent customer assistant out there. And so there's a lot of activity. That's driving a lot of the uptick. We were at CCW, Contact Center World in Las Vegas.

Speaker 2

And I would say the tone on the show floor was very much, I want to deploy this in the next year or 2, help me. So to answer your first party and second part kind of combined, they are looking for help. And I think they're looking for help to not make AI an island onto itself. I think it's very easy to buy a product today that does something very specific, a chatbot, an MLA chatbot. It's often its own world, etcetera.

Speaker 2

But what happens if the user of the chatbot has a problem? Then it becomes very complicated. That's why we've entered the market with our API framework and our integration framework. So that if you're on a chatbot or you're using voice bots or using these kinds of things and you need a live agent, you need to complete that circle, you can't transfer with all the metadata. So no re authentication, no repeating yourself over and over again.

Speaker 2

I was recently on a chatbot with our 401 provider. I had to authenticate on the chatbot, then I had to authenticate again to the agent, irritating customer experience, we eliminate all that. And so I think they're trying to figure out what technologies to deploy when. I would say the biggest ones right now are chatbots, voice bots are pretty popular in the U. S.

Speaker 2

And then agent assist. And then I would say those are the big three and then health scoring and some of the other stuff is coming up rapidly behind it. But they want it to be part of the overall picture, not an island unto itself.

Speaker 3

Great. Thanks so much.

Speaker 2

Thanks Jamie. Thank you.

Operator

One moment for the next question. Our next question is coming from Matthew Bellhop of Bank of America. Your line is open.

Speaker 3

Hi, yes. Thanks for the question. One for Michael Funk. I'd really appreciate some commentary on CPaaS trends, specifically some incremental color on the carrier price actions taken during the quarter. Any quantification would be appreciated and how you expect those trends to manifest going forward?

Speaker 2

Thanks, Matthew. So look, I would say we're not the only ones seeing this. We've seen some of our competitors in the CPaaS business also sort of say the same commentary. I think the carriers are raising prices very aggressively and it's kind of a mistake because I think they've raised prices so quickly and so aggressively. People are moving traffic away.

Speaker 2

Now that benefits us over the long term because we offer a whole range of channels on our CPaaS business. So what am I talking about? Moving authentication and some of us may deal with this today, but moving authentication, for example, from SMS traffic to WhatsApp is a simple example, very common in Asia. We're a preferred vendor of Meta on WhatsApp, etcetera. So we've got those capabilities.

Speaker 2

We can guide customers to that Jersey journey, but in the meantime, it's causing some disruption in traffic volumes going through that. And that's kind of the color. I think the other thing that we're doing is we're trying to move up the stack and this goes in line with my innovation mantra. So we're making the hard decisions in the short term to be a better business. What does that mean?

Speaker 2

We walked away from low margin or negative margin SMS direct business, because it just didn't make financial sense. And we've been investing in add on capabilities. So one product that's in beta today is a product called FraudShield. It's where we actually protect the customer from SMS fraud as part of the contract. We've got, I think, 15 beta sites, between 10 and 15 beta sites don't hold me exactly on that number and we're seeing tremendous uptick in traffic and that makes the product itself stickier.

Speaker 2

So I think all of us, I think Cinch, Twilio, us Vonage, etcetera, all the players in CPaaS are looking at adding more value added services on top of our CPaaS business to make it a better, more sticky business. We started on that a year ago. We're seeing the benefits now.

Speaker 5

Super helpful. Thank you.

Speaker 6

Yes, I'll just reiterate what Sam said. We're not going to go after bad business. And in terms of the quantification, our Q1 miss is roughly half inorganic, half CPaaS. And the big portion of that CPaaS miss Is generated because you didn't go after the bad business.

Speaker 2

We're focused on generating cash flow to get that margin.

Speaker 5

Absolutely. Thank you.

Speaker 2

Thanks, Matthew.

Operator

Thank you. One moment for the next question. Next question will be coming from Sify Panagrafai of Mizutu Securities.

Speaker 7

Hi, this is Avi Nava on for City Panigrahi. I guess the question kind of is, What kind of assumptions on the inorganic or fuse renewals do you have baked into the full year guide? And at what point are we going to start seeing kind of a lapping effect after we get through them? And I guess related to that kind of the second piece here is, what are the expectations or what is like the right for revenue to reaccelerate in FY 2025? Is that linked to kind The pieces you've been discussing in new products or where can we kind of point to there?

Speaker 7

Thank you.

Speaker 6

Yes. I'll answer the first part and then the second part Sam can take. This is Kevin. We don't disclose necessarily the detailed renewal rates for our for the portion of our business. So basically, We it was the down sells upon our upgrade to the 8x8 platform was more than we expected.

Speaker 6

I think the important thing is that we've actually pivoted very, very quickly and put Our whole customer success team on 100 percent of the Fuse base to contain the down sell and other losses we see. So the next few quarters, we do expect the next couple of quarters or so, we do expect to be able to contain that over time. And then we'll start the add on business and other things that we're going to do to cross sell into that base.

Speaker 2

All right. And I'll take the 2nd part, which is basically, I'm going to paraphrase what gives me confidence that we can accelerate revenue in 2025. So here's kind of a laundry list of things I think about every day, right? So our ARR growth improved in all segments ex CPaaS. So our core business is doing fine.

Speaker 2

ExCast grew double digits year over year and was 41% of total revenue. I think that's a big positive. And we're seeing more contact center customers. So our move towards contact center led sales, we're starting to see the green shoots behind that. Clearly, meturgy saw it, top 5 ranking.

Speaker 2

And as I said on my script, I think most call listeners on this call wouldn't have thought of that. And that's ahead of Amazon, Dial Pad, Talkdesk, Vonage, Avaya, Zoom and a host of others, right? We've got a darn good contact center product and that wasn't the deal I was going to use. We improved the Gartner Magic Quadrant for contact center. In the critical capabilities, we've improved year over year in 12 out of 13 categories.

Speaker 2

Our contact center is getting better. We've got 12 user awards this summer from G2, both on UC and CC. We've been investing in customer support. We saw it with Stevie Awards for our contact for our customer service team and the leader. Lisa Martin joined.

Speaker 2

She's a fantastic hire to be our Chief Revenue Officer. Trust me, she did a lot of due diligence before joining. And then I think our new products and what we're seeing on our new products is absolutely I mean, it brings like when I get down in a moment or 2, I just look at the usage trends on our new products and a big smile gets on my face very rapidly. So I think those things just need to build to a size where they show up in the income statement and start to nudge that number higher.

Speaker 7

Wonderful. Thank you. Appreciate it.

Operator

Thank you. One moment for the next question. And our next question is coming from Austin Williams of Wells Fargo. Your line is open.

Speaker 5

Hey, guys. This is Austin Williams on for Michael Turrin. I just wanted to go back to the hiring of Lisa Martin, new Head of Sales. Just anything that you can add on what changes we might see in the go to market as a result of that and what the biggest priorities will be to start? Thank you.

Speaker 2

Well, maybe we'll bring Lisa on in a future call. I mean, she's been on the job since mid June, so I don't want to speak for it yet. Let her get her feet underneath her. But I mean, if you look at her LinkedIn profile, she's an incredibly experienced sales leader, both technically and sort of her directory. She knows contact center sales inside and out.

Speaker 2

And so obviously, if she's joining us, I think it's just a good validation that She did her due diligence on what we're doing and where we're going and decided to tag along.

Speaker 4

Operator?

Operator

Okay. Thank you. One moment for our next question. And our next question will be coming from George Sutton of Craig Hallum. Your line is open.

Speaker 8

Hey, guys. This is James on for George. Thanks for taking my questions. You're taking an interesting approach with the OpenCX or Open CCaaS platform. You mentioned 40 partners onboarded.

Speaker 6

Can you just sort of talk about

Speaker 8

what you're hearing from those partners? And how do you envision the open platform approach playing out over the next 3, 4, 5 years relative to some of the closed off Competitors, it seems to be

Speaker 3

that sort of the longer term bet here.

Speaker 2

So let me take that in reverse order. So how do I see this over the 3 to 4 years. I see it honestly how most technology evolves. If you look at force.com or Marketo or any of the platforms over the last 20 years, anybody that tries to go with themselves failed in the end. And so I just believe that contact center is a replay of traditional development.

Speaker 2

And if you look at a lot of the market research, what contact center buyers want is seamless native feeling integrations and that's really what we're trying to do. So what we hear from our ecosystem base is, thank goodness you're not trying to compete with us like those other guys. Thank goodness that you're building multi tiered integration points. So we can integrate at the UIUX level, we can integrate at the API level or we can integrate the webhooks level, which allows monitoring the event bus, which is some really unique stuff. And honestly, thank goodness that there's a place where the next generation technologies.

Speaker 2

One of the key things, I think this is one of the reasons why others have gone to a closed stack versus us, is we've rebuilt the foundation of our contact over the last 5 years. It's a full CICD stack, continuous innovation, continuous deployment. So we're making about 5 releases a day Monday through Friday, The working week, right. So we're doing 20 plus releases a week. And what that allows us to do is work at these next generation startup speeds.

Speaker 2

I think one of the problems and I'm guessing to be fair that our competitors have is they're not that full CICD stack. So an ecosystem partner needs an API or need something adjusted. And they're like, great, we'll get a release to you in 60 or 90 days. We'll first start up that's a lifetime away. And I think the key that investors need to realize is that there's 1,000 plus startups and our best guess is in excess of $100,000,000,000 of venture capital allocated around the contact center space in R and D.

Speaker 2

And that money is going to lead to tremendous innovation and the companies that can put that into production fast are just beneficial. So I've used a lot of words. Now let me give you a real life example, right? We were we knew chat GPT or open dotai. The 1st week they came out of stealth mode.

Speaker 2

They were already on our radar screen and we've incorporated their Whisper technology, transcription technology in house to provide a shared common service for very high quality transcriptions. Now what allowed us to do this different from others is we have the technology in house. So we're not taking the voice recording and shipping it to their cloud, thereby breaking GDPR rules and Federation rules and getting into all kinds of other issues. It's all staying on our cloud inside of our ecosystem. And so that's an example of us working at startup speeds.

Speaker 2

I think if you were a native stack, you couldn't do this quickly. And so we see people announcing things, But if you read the fine print, it's frequently to take a piece of technology and push it to their cloud, which then changes the privacy rules and all kinds of other things. Everything stays within our cloud and yet we have the capabilities of deploying those next generation technologies very rapidly and we offer that as a service to our ecosystem partners and our ourselves obviously today with the corporation of Open.ai's technology. And so it's just a kind of a real life example of how that speed of innovation matters when you're trying to build this next generation. And I think what you're going to find over the next 3 to 5 years is that every contact center in the world will be semi customized, tech center in the world will be semi customized for each individual use case.

Speaker 2

Big customers are going to want it a certain way, small customers will want it their way. Everyone's going to want it their way and we're going to offer the most compelling platform for building that for each individual customer.

Operator

Thank you. And this concludes the Q and A session for today as well concludes the conference for today. Thank you all for joining. You may all disconnect and have a good evening.

Speaker 2

Thanks, Lisa. Thanks.

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Earnings Conference Call
8X8 Q1 2024
00:00 / 00:00