8X8 Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Good day, and welcome to the Q4 2024 8x8 Inc. Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. As a reminder, this call may be recorded.

Operator

I would like to turn the call over to Kate Patterson. Please go ahead.

Speaker 1

Good afternoon, everyone. Today's agenda will include a review of our Q4 fiscal 2024 results with Samuel Wilson, our Chief Executive Officer and Kevin Krause, our Chief Financial Officer. Following our prepared remarks, there will be a question and answer session. Before we get started, let me remind you that our discussion today includes forward looking statements about our future financial performance, including our investments in innovation and our focus on profitability and cash flow, as well as statements regarding our business, products and growth strategies. 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.

Speaker 1

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. A reconciliation of those non GAAP measures to the closest comparable GAAP measure is provided in our earnings release and in our earnings presentation slides, which are available on 8x8's Investor Relations website at investors.

Speaker 1

8x8.com. With that, I will turn the call over to our CEO, Sam Wilson.

Speaker 2

Good afternoon, everyone. I appreciate you joining us today as we discuss our Q4 and our fiscal 2024 results and the strategic initiatives that have defined a year of transformation for 8x8. I'm pleased to report solid Q4 in which we delivered results within our guidance range for service and total revenue and once again exceeded our guidance for operating margin. Cash flow from operations for the quarter was also better than anticipated, which resulted in cash flow for the year up 62% from fiscal 2023. This significantly exceeded our expectations for the year.

Speaker 2

We ended the quarter with about $118,000,000 in cash, restricted cash and investments after repaying the remaining $63,000,000 of 20.24 notes. Since Kevin will review the quarter's financial results in detail, I will focus my comments on the progress we've made on our transformation journey. This year has been nothing short of incredible from both a professional and personal perspective. We've strengthened our leadership team, expanded our product portfolio and continue to build on our strong financial foundation. A year ago, I outlined a strategic framework with 6 key imperatives aligned with the 3 pillars of our transformation strategy, innovation, financial strength and go to market.

Speaker 2

I'm pleased to report that we are executing well against each of these strategic imperatives. They include: 1, accelerating innovation in contact center as a service, CCaaS, while maintaining our leadership in cloud telephony. This includes embedding artificial intelligence across our integrated platform. 2, establishing communications platform as a service, CPaaS, leadership in the Asia Pacific region. 3, increasing our focus on small and midside enterprises as our target customer segment.

Speaker 2

4, improving platform win rates and sales productivity. 5, maintaining an outstanding experience for our customers allowing them to focus on their own core businesses. And lastly, 6, increasing profitability and cash flow to drive a fortress balance sheet and fund further innovation. Although our journey has not always been perfectly linear, we are undoubtedly stronger and better positioned financially as we exit fiscal 2024 compared to the end of fiscal 2023. This year has been pivotal in terms of innovation.

Speaker 2

We've introduced several new products that not only differentiated our offerings, but also positioned us for future growth. These new products as well as platform enhancements like the customer interaction data platform, composable user interfaces and the integrated solutions from our technology partner ecosystem are intentionally engineered to deliver superior business outcomes without the heavy integration burden typically required to build an AI enabled contact center. The introduction of our Engage solution extends our customer experience capabilities beyond the traditional boundaries of the contact center and is one of just many examples of how we're leading innovation in an industry leveraging our history as a combined UC, CC, CPaaS company. We believe this product dramatically increases our cross sell opportunities to existing customers and provides an accessible entry point for new customers looking to improve their customer experience across the organization. Shortly after the end of the quarter, we introduced 8x8 Operator Connect for Microsoft Teams, expanding our portfolio of enterprise voice solutions and further strengthening our leadership position in Microsoft Teams environments.

Speaker 2

With this introduction, 8x8 now offers the industry's broadest portfolio of enterprise voice solutions for Microsoft Teams and is the only operator connect provider with a native contact center solution certified to integrate with Teams. The initial market response has been very positive, generating numerous new opportunities within days of the announcement. We believe this solution could be the key to unlocking millions of UC seats not yet migrated to the cloud. As we all know, there are 100 of millions of on prem telephony seats and the industry craves low cost solutions to unlock this base. I want to highlight the progress we're making in broadening our CPaaS product offerings and expanding this part of our business globally.

Speaker 2

With the renewed focus on CPaaS, we are finding new ways to embed CPaaS capabilities into our integrated UC and CC solutions to provide complete solutions that deliver specific business outcomes for our customers. First was the Video Elevation 2.0. Most recently we launched proactive outreach, enabling highly personalized messaging campaigns at scale for both contact center and unified communications customers. These capabilities were important differentiators in the wins at Upward Health in the U. S, Induction Healthcare in the UK and Palawan Pay in the Philippines.

Speaker 2

In addition to these product launches, we continue to innovate across our platform with solutions like our AI powered intelligent customer assistant available as either digital or voice bots. Usage of ICA in self-service options continues to increase sequentially and we are achieving resolution rates as high as 80%. This is a compelling testament to the advanced AI capabilities of 8x8 and our technology partner ecosystem. Further, 100% of our digital intelligent customer assistant customers are referenceable, demonstrating our focus on delivering superior business outcomes with rapid time to value. Our omni channel engagement solutions and the introduction of new digital channels and automation were key factors in our win at Southern Housing in the UK.

Speaker 2

We strive to make our customers heroes in their organizations and this is driving wins like Sky Chefs, a well known catering and hospitality experts serving airline customers where our agility and speed to deployment won the day. Customer acceptance of our new solutions is the most important indicator of success. I'm pleased to report that sales of new products were up by more than 50% year over year for the 2nd consecutive quarter. Given the timing of launches throughout the year and the enterprise sales cycles, I view this as a positive leading indicator of our future success. From a financial perspective, this year has been about strengthening our foundation and positioning ourselves for sustainable growth in the future.

Speaker 2

We've seen a substantial reduction in our non GAAP cost structure with cost reductions totaling more than $47,000,000

Speaker 3

from fiscal

Speaker 2

2023. This disciplined fiscal management enabled us to invest strategically in innovation while increasing our non GAAP operating margins to double digits. With our cost structure aligned with our current revenue run rate and cash generation objectives, we intend increase focus on revving our go to market engine to drive awareness and sales for our expanded product portfolio. Turning to our go to markets efforts, we've made considerable progress. Our sales, marketing and customer success teams are more aligned than ever, focusing on the cross functional initiatives that drive value across our customer base.

Speaker 2

This alignment has improved the quality of our pipeline and resulted in increased close rates, more multiproduct lands and higher customer satisfaction scores. These are the early indicators that our efforts to build a high performance go to market organization are working. Given the nature of enterprise sales cycles and our ratable revenue growth, there is a lag before our progress is evident in our revenue growth. But I am confident that the changes we've made will drive improved performance and accelerating growth by the end of the current fiscal year. As we look to the future, our strategy is clear.

Speaker 2

We will continue to drive innovation, intentionally engineered solutions that deliver superior business outcomes for our customers. I encourage you to watch a short video case study of the San Diego Zoo's implementation of our integrated solution as an example of our solution approach and rapid time to value. Working in partnership with the internal team at the zoo, we implemented a full service contact center with an AI based self-service option for inbound calls in less than 45 days. We have intentionally engineered our products and solutions for this level of agility and rapid time to value. We can leverage this advantage to develop our own purpose built solutions as well.

Speaker 2

For example, 2024 is a big year for elections in both the U. S. And UK. Using the power of conversational AI and automation, our UK team built a library of out of the box templates important information for upcoming elections. To drive awareness and adoptions of our innovations, we are committed to continued improvement in our go to market activities.

Speaker 2

We intend to remain within our current cost envelope as we make the necessary investments to elevate our partner programs, increase awareness for our solutions and improve our processes. We are taking a balanced approach to growth and profitability and with cash from operations as our financial North Star. We intend to continue returning value to our investors through reducing debt. We have repaid $88,300,000 of principal in fiscal 2024, 35% of our commitment to return $250,000,000 to investors through debt repayments over 3 years. Before I turn the call over to Kevin, I want to thank our employees, partners and investors who are with us on this journey.

Speaker 4

Thanks, Sam, and good afternoon, everyone. We delivered solid financial performance again in fiscal Q4. Both total revenue and service revenue were within our guidance ranges and other revenue came in ahead of the target implied by our service and total revenue guidance. Non GAAP operating margin exceeded guidance by 1.3 percentage points and cash flow was above expectations at $12,700,000 for the quarter $79,000,000 for the year. During the quarter, we also achieved the significant milestone of repaying the remaining $63,300,000 principal on the 20 24 convertible notes.

Speaker 4

With this payment, we have retired 88 $300,000 in debt during fiscal 2024 $115,000,000 over the past 6 quarters. The press release and trended financial results we posted on the Investor Relations website provide a comprehensive view of our financial performance. So I'm going to take a slightly different approach to my comments this quarter. Instead of going line by line through the quarterly results and then turning to guidance, I would like to take a step back and review our results as well as our forward guidance within the context of our strategy shift. Before I go on, let me remind you that I will be using non GAAP metrics except for revenue and cash flow unless otherwise noted.

Speaker 4

We really began our transformation in late fiscal 2022 with the acquisition of Fuze. The acquisition immediately increased our capacity for innovation, expanded our customer base and added more than $100,000,000 to our ARR. This acquisition was immediately accretive to our business performance. Although recent customer attrition has created a near term headwind to growth in recent quarters, it remains a huge win overall. With our CEO transition in fiscal 2023, we made a conscious decision to swap near term revenue growth for profitability and cash flow.

Speaker 4

Cash flow became our financial North Star and we implemented multiple actions during the year to reduce our cost structure and improve sales productivity, while maintaining our investments in innovation. By fiscal Q4 2023, we had reduced quarterly non GAAP operating expenses excluding COGS by nearly $10,000,000 compared to Q1 2023, which was the 1st full quarter of combined 8x8 and FUSE results. Our quarterly sales and marketing spend was down even more, dropping by $12,300,000 Q1 2023 to Q4 2023. This equates to almost $50,000,000 in annualized cost reductions in sales and marketing. The decrease in operating expenses, together with higher gross margins, had an immediate impact on our cash flow from operations, which increased from $34,700,000 in fiscal 2022 to $48,800,000 in fiscal 2023 $78,900,000 in fiscal 2024.

Speaker 4

This allowed us to prepay $25,000,000 in principal on the term loan and repay the remaining principal on our 2024 notes, while maintaining cash and investments above $100,000,000 We exit fiscal 2024 with $118,000,000 in cash, restricted cash and investments an expanded product portfolio tailored to the needs of our target customer and a committed and experienced leadership team. We are a stronger company today than we were a year ago and we are a much stronger company than we were at the end of fiscal 2022. Q4 is our 13th consecutive quarter of positive cash flow and non GAAP operating margin, trends we expect to continue. I believe we have successfully laid the foundation for the future growth that our innovation will drive. Let's look at leading and lagging indicators of our continued progress and how they flow through our financial model.

Speaker 4

Let's first look at the leading indicators, RPO and ARR. We knew when we began this transformation that there could be an impact on our growth. And given our predominantly ratable revenue model, it's not surprising that there would be a lag before our progress manifested as an acceleration in revenue growth. In other words, the turn to growth resulting from increases in sales productivity, partner activity and new products should be evident in RPO and ARR before appearing in revenue. I believe we are near the turn in our business.

Speaker 4

RPO was up sequentially in Q4 and flat year over year. We ended the year with $697,000,000 in ARR, down about 1% sequentially with about half of the decline related to a seasonal decrease in CPaaS usage as the impact is magnified in ARR due to annualization. The remaining portion of the decline is related to a decrease in UCCC ARR primarily due to Fuse customer attrition. We expect our efforts to retain and upgrade Fuse customers will result in increased retention in fiscal 2025. And as a result, I believe that Q4 quarter over quarter decline in non CPaaS ARR is the steepest we will see.

Speaker 4

However, it may be a quarter or 2 before the impact of new products and our retooled go to market result in quarter over quarter ARR growth given enterprise sales cycles. Importantly, our business remains healthy and ex CAS ARR has increased sequentially every quarter since we began tracking it. The nature of our business is evolving as we launch and grow multiple products that have consumption based pricing. Additionally, we are seeing an amplified impact of relatively minor fluctuations in CPaaS revenue on our current ARR metric, which is leading us to reevaluate the metrics we report to investors. We will provide visibility into any new methodology or new metrics on the Q1 call.

Speaker 4

Now let's turn to our primary lagging indicator, revenue. With ARR flat to down slightly quarter over quarter over the past 4 quarters, we expect to see a similar pattern in revenue with a lag of 2 to 3 quarters. This is reflected in our revenue guidance ranges for Q1 fiscal 2025, which I will provide in greater detail later on this call. Consistent with our comments at the product and innovation update in March, we expect service revenue for the full year to be approximately flat with fiscal 2024 at the midpoint or about $700,000,000 with first half revenue decreasing by low single digits year over year compared to the first half of fiscal twenty twenty four. We expect to return to year over year growth by the Q4.

Speaker 4

Now let's discuss a few points about our operating model. Our cost structure in Q4 twenty twenty four on a dollar basis was very similar to our cost structure at the end of Q4 twenty twenty three. Total operating expenses were about $2,000,000 lower versus Q4 2023 as we achieved about $2,000,000 in cost efficiencies in G and A, but R and D and sales and marketing were basically flat with a year ago. We believe that our target cost structure with R and D at about 15% of revenue, sales and marketing between 33% 34% of revenue and G and A between 10% and 11% of revenue continues to be the right level of investment to drive innovation and adoption of our expanded portfolio. Consistent with our philosophy that spending follows growth, we are targeting our 2025 spending to be approximately flat from fiscal 2024 on a dollar basis.

Speaker 4

We also expect CPaaS to gradually increase as a percentage of total revenue compared to fiscal 2024. We still expect service revenue gross margin to remain in the 74% to 75% range, but it may vary slightly due to mix. We expect gross margin on total revenue to be between 71% 72% as we add other revenue into the mix. With this operating model context in mind, we established service revenue, total revenue and operating margin guidance ranges for the fiscal Q1 ending June 30, 2024 as follows. We anticipate service revenue to be in the range of $170,000,000 to $174,000,000 We anticipate total revenue to be in the range of $176,000,000 to $181,000,000 implying other revenue of $6,500,000 at the guidance midpoint.

Speaker 4

Note that other revenue can vary based upon customer specific deployment schedules and hardware shipments, so total revenue can vary based on these dynamics. The combination of modestly lower year over year revenue, a higher mix of CPaaS and flattish sequential explains our operating margin guidance of 11% to 12% for Q1 2025. For the fiscal year 2025 ending on March 31, 2025, we provide the following guidance ranges. We anticipate service revenue to be in the range of $693,000,000 to $707,000,000 with year over year revenue declines in the first half and exiting the year with single digit growth rates. We anticipate total revenue to be in the range of $720,000,000 to $738,000,000 We continue to focus on delivering a solid operating margin anticipate exiting the year between 12% 13% and achieving between 11.5% 13% for the full fiscal year.

Speaker 4

Our operating margin results will depend on revenue performance and opportunities for investment. At the midpoint of our revenue guidance range, this translates into non GAAP operating income of between $89,000,000 $90,000,000

Speaker 3

for the fiscal year.

Speaker 4

We expect interest expense to be about $8,700,000 in each of Q1 and Q2 based upon current interest rates. We expect cash paid for interest to be approximately $6,700,000 in Q1 2025 and $10,400,000 in Q2 2025 as cash interest on the 20 28 convertible debt is due semiannually. We are currently anticipating that the interest rate on the term loan remains approximately 12% or SOFR plus 6.6 percentage points. The prepayment penalty on the term loan expires in August and we expect to begin reducing the principal outstanding immediately thereafter. This will enable us to reduce quarterly interest expense in the second half of the year.

Speaker 4

Since our financial position is considerably stronger today than it was in August 2022, we are actively exploring term loan refinancing options, which could also bring interest expense down further later this year. Cash flow from operations remains our financial North Star. It funds our continued investments in innovation that will drive our future growth. It also enables us to return value to investors as we pay down debt in the near term and increases our flexibility to pursue additional opportunities to drive value in the long term. We generated $79,000,000 in operating cash flow in fiscal 2024, an increase of 62% over 2023.

Speaker 4

We remain committed to our goal of a 20% 3 year CAGR in cash flow off our 2023 base of $49,000,000 This implies operating cash flow of about $80,000,000 to $85,000,000 in fiscal 2026 or about $225,000,000 over the course of fiscal years 2024, 2025 and 2026. We believe we can generate at least that much in operating cash flow over the 3 year period, but we now expect fiscal 2025 cash flow from operations to be between $15,000,000 $20,000,000 less than in fiscal 2024. This is due to a combination of factors, including outperformance in fiscal year 2024 caused by our cash from operations to be higher than we had expected for the year, slightly lower operating income compared to fiscal year 2024, strong year end collections in fiscal Q4 2024, which helped our fiscal year 2024 cash flow, but resulted in a lower accounts receivable balance to collect as we enter fiscal 2025. And one time cash payments related to Fuse indirect taxes. In Q4, we booked a $10,000,000 charge related to Fuse indirect tax liabilities, primarily telecom taxes.

Speaker 4

We already made a portion of this payment in April, which will impact our Q1 and fiscal 2025 cash flow results. We are as committed as ever to reducing our outstanding debt and are on track to meet our commitment of returning $250,000,000 to investors, primarily through debt repayments over the 3 year period from fiscal 2024 to fiscal 2026. With the $25,000,000 prepayment on the term loan in Q1 2024 plus the repayment of the remaining $63,300,000 of our 2024 notes on February 1, we are 35% to completion. The final piece of information to keep in mind is share count. We expect fully diluted shares of about 128,500,000 for Q1 and average approximately 133,000,000 shares for the full year.

Speaker 4

We remain committed to increasing shareholder value by reducing future equity dilution over time. Putting all this together, we expect that non GAAP fully diluted earnings per share to be in the range of $0.37 and $0.45 for fiscal 2025. This EPS range is calculated using the operating margin guidance range and the midpoint of revenue guidance as calculation inputs. I realize this is quite a lot of detail, and I think it's important for investors to understand our 2025 guidance within the context of our longer term strategy and overall business model. We summarize these comments in our investor slides.

Speaker 4

I continue to believe that our focus on profitability and cash flow, while maintaining targeted investments in innovation and improving our go to market efficiency, is the correct strategy for us at this time. I am confident this will enable a return to revenue growth while we also return value to our shareholders initially by reducing our debt. I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results and look forward to reporting our progress throughout fiscal 2025. Operator, we are ready for questions.

Operator

Thank you. Our first question comes from Eman Kaughlan with Barclays. Your line is open.

Speaker 5

Hi, Kevin and Sam. This is Damon Kaughlan on

Speaker 6

for Ryan at Williams. Thanks for

Speaker 5

taking the question. How did Secat fiscal 2024 compare to usage in 3Q? And how does that pipeline look compared to UCAS?

Speaker 2

You need to help me understand. How did CPaaS or CCaaS usage look in the past quarter?

Speaker 5

Yes.

Speaker 2

CPAS was down seasonally in the March quarter. Kevin, I don't think it was particularly more than just kind of seasonal declines that we normally see because of the countries we're in, we deal with Ramadan and Chinese New Year, which have a tendency to slow down marketing campaigns and those sorts of things.

Speaker 4

Yes. Up year over year though 9%. So yes, but it was slightly lower than Q3.

Speaker 5

I guess how does that compare to CCAT as well?

Speaker 2

Well, contact center business, we've been seeing more growth. It's hard, there's a little bit of buzz on that call. Contact center, we've definitely been seeing solid momentum, particularly when we think about the TPAD partnership around it, the add on products, those kinds of things. And then UCaaS, it's a tough market out there.

Speaker 5

And then Kevin, just a question on what you had reiterated in the remarks. How did the CPaaS business fair how did the CPaaS business fair in 4Q? And what are the assumptions that you're factoring into 2025 guide for this business?

Speaker 4

So CPaaS, so we just mentioned that the first part of your question, right? So it was seasonally down in Q4 slightly. And in terms of the go forward view, we see continued improvement in that business throughout each quarter of 2025 and again with some seasonality impacts in the Q4, which is the 1st calendar quarter of the year. So we're talking about some decent level of growth rate with some seasonality baked in.

Speaker 6

Perfect. Thanks guys.

Speaker 4

Thank you.

Operator

Thank you. And our next question comes from Michael Funk with Bank of America. Your line is open.

Speaker 2

Yes, guys. Thank you for

Speaker 5

the question tonight. My first one, investors care most about the path to positive growth. And you outlined some of the efforts you're making on the call. I'm a simple equity analyst. So maybe if you could help me with a waterfall for the Peace part for return to growth by fiscal Q4 of this year, understanding Infuze is part of that, CPaaS getting better, CCaaS getting better, But the piece parts to be really helpful for me and investors, so we can picture that return to growth over time.

Speaker 2

I'm trying to think of it historically when I think about a waterfall model, I don't exactly think about the context you're using it in Michael. And I'm not saying you're wrong, I'm just saying how I think about it. I mean the way I think about it right now is our new products, many of which are we've got some that are now fully GA ed, some that are in beta, are growing 50% plus for 2 quarters in a row. They'll continue to grow. So that'll at some point that's positive to the overall performance.

Speaker 2

Our CPaaS business has turned around. And so as Kevin mentioned, that was above positive growth on a year over year basis. And we're seeing stability in our UC business. And so we'll get 2 of the cylinders growing and the remaining cylinders flattish and then eventually the overall boat will lift. And the other thing we know is that as we sell more products, our retention rates go up.

Speaker 2

And so that builds over time too. And so that kind of all starts to come together towards the second half and the final the Q4 of 2025.

Speaker 5

But if you look to say fiscal 4Q 2024 and you have the revenue mix from the different product sets and then the drag from Fuze, if I took that 4Q fiscal 2024 number and then rolled forward to the 4Q fiscal 2025 number and did the same math on the revenue mix and the contribution or less drag from Fuze held from CCaaS, CPaaS, could you build that for me?

Speaker 2

Okay. Hold on one sec. There's some math involved there.

Speaker 5

Yes. I know I'm putting on the spot here, but I'm just I think it's deep question, right? So it everything flows from the top line down that obviously influences the profitability cash flow and that New York Star focus that you have. So just trying to better understand how we get there and can you get greater confidence in that return to growth? And if it's better left offline or for the follow-up call, see, I don't want to take the entire call here, but

Speaker 2

I mean, so let me try to break it up. You're asking, like, could we just say, we're assuming generally flattish UC growth in CPaaS and contact center related products and around the contact center, it's really around the new products that are around the contact center. And then over time, what leads to sustained growth as we exit 2025 into 20 6 and 20 7 is that as we become more of a multiproduct company, our retention rates go up and our NRR can flip solidly positive to drive that higher retention and selling over time. So the two drivers over the next four quarters are contact center and CPaaS.

Speaker 5

Okay, great. Thank you so much, Sam. And Kevin, thank you again for the all the comments on the call.

Speaker 2

Thanks, Michael.

Operator

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

Speaker 7

Great. Thanks. Maybe a couple of questions. Just on the Fuze churn, I know as we kind of get further through the Fuze kind of book of business, some of those are very large customers. And so I just wanted to get a sense of is some of this volatility just as you work through some of those very large customers?

Speaker 7

And is it just what are you seeing as you make those transitions? And then maybe just the second question, as you have introduced Engage, just is the traction that you're seeing there kind of with the customer type that you were expecting or just kind of any commentary where Engage versus some of the higher ex cast tiers are having more success? Thanks.

Speaker 4

Hey, Meta, this is Kevin. I'll take the first part of that question. So yes, look, we are working through the upgrade of the Fuse customers over to the 8x8 platform. And you heard probably on previous calls, we have 100% customer success management dedicated on that base. As we do migrate some of those customers over, and by the way that's accelerating, we do see some rightsizing of their needs.

Speaker 4

And so that's causing us to see some headwinds in that base as we down sell. But the fact the resulting fact of that though is that we're keeping those customers happy and the NPS scores are going up and all those things. But yes, we do go through this process. We do see some headwinds as we do that.

Speaker 2

Well, and I think part of, Meta, what you're getting to, too, is what Kevin mentioned, right? So we've now touched every single Fuse customer. We have a status report on every single Fuse customer with exactly where they stand. We've migrated a whole slug of the small customers. So there's a significant amount of in terms of customer count that has now been migrated off.

Speaker 2

And so part of what you're seeing is that we are getting to the tail end. I won't say that I'm not going

Speaker 8

to put a date

Speaker 2

and time in place, but we see the light at the end of the tunnel, which is we finished migrating all the Fuze customers to 8x8, but we know where every customer stands today and what needs to be done to do those things. Switching gears for a second on Engage. So Engage is in beta right now. The reception to the product has been, I would say, above what we were expecting. We thought the market might be a little crowded because there's a number of sub tier products that are overhyped by other vendors.

Speaker 2

Many of them are very feature light. And so we thought this would be a little bit more of a noisy market. And it turns out that actually coming at this from a mobile first perspective and really targeting the right use cases is resonating. And you asked specifically, is it resonating with our customers and with our prospects? And the answer is yes and yes.

Speaker 2

We're seeing situations where customers existing customers want to upgrade to Engage to roll out and these are not existing contact center seats. These are maybe existing UC seats where the customer can do a much more much improved business process, I think is what the right word to use. Let me give you an example just so it makes sense. We have healthcare companies that have nurses, nurses are on X2s, sort of basic UC seats and we're now seeing a huge push from prospects who want to upgrade those customers want to upgrade those to engage to enable better business processes around on call, emergency services, those kinds of things. With prospects, we're also seeing it because it really fits that unique use case.

Speaker 2

We're in the middle of a large deal and it's UC, it's regular contact center for their contact center people, but they want to engage for all their IT and HR professionals that help out their line business units, those kinds of things. And so we do view it very much as a separate product. It is not a contact center product. It is not a UC product. It is its own product with its own use cases, but it is very use case specific.

Speaker 2

I think I answered your question.

Speaker 7

Yes. No, that's great contact. Thank you.

Operator

Thank you. And our next question comes from Ryan Kountze with Needham and Company. Your line is open.

Speaker 3

Thanks for the question. I'll try not to ask a complex one, Sam. I know you're a sales guy at heart. So on the contact center, you've talked a lot about go to market changes and some new leadership there. I wonder if you can update us on some of the changes you're seeing on your dashboard, so to speak, on go to market that gets you enthused about contact center inflection?

Speaker 3

Thanks.

Speaker 2

Oh, dude, I love you. That's my kind of question. All right. So what gets me excited? So let me I'm going to change your question just slightly and I'm going to sort of paraphrase it, which is something I hear from investors, right?

Speaker 2

Sam, you have confidence this shift is turning around. What are your green shoots around contact center and those things? What are you seeing that gives us confidence that you think this thing is turning around and we're going to see growth again, etcetera, etcetera. So first off, last quarter when we did the win loss analysis, we had the best performance ever in terms of not losing deals because of product. So our right now we are having a situation where in almost every single RFP we respond yes to every question.

Speaker 2

And that's yes, we do it. Yes, we do it with a partner, etcetera. But yes, it can be done on our platform integrated and working. And we are seeing that. Number 2 is we're seeing a significant growth in pipeline.

Speaker 2

Now remember, it takes 8 to 12 months to close these deals and a lot of these products just are coming out of beta now. That's part of the green shoots in the future, not to mention the stuff we're already selling. But the growth in pipeline and then number 3 is, 3rd party validation, right? MetaG ranking us number 1 for customer sentiment or Gartner Critical Capability saying positive things about us. And these 3rd party analysts are coming in, they're doing their due diligence, they're comparing us to other vendors.

Speaker 2

And there's others, I don't want I'm not trying to show any favoritism. But these are all the part. And then lastly, look, I spend a lot of time on the road traveling and it's sitting down with our customers and our partners and me spending a half an hour or an hour going through where we're going as a company and them just nodding their heads and saying, yes, you are on track, you're going to meet our needs, you're doing the right things, Just deliver what you say you're going to deliver and we'll be customers or we'll buy more or however you want to think about it. And so that's really on the dashboard level, it's the increase in pipeline, the increase in win rates, the better performance on RFPs, the better performance of our new products, those kinds of things. And then just the raw qualitative sentiment you get when you sit down with customers and partners and then they're saying, yes, this is what we need for our customer base, for our ideal customer profile.

Speaker 2

That small to medium sized enterprise, it doesn't have a team of a whole bunch of developers. This is perfect. We think we can sell a bunch of this.

Speaker 3

Great. That's really helpful. And just a quick feedback follow-up on you talked about new metrics, I think is what I heard in Q1 and loud and clear investors would like to hear us about some CCaaS metrics, whether it's revenue, ARR, etcetera, I think that would go a long way. Thanks.

Speaker 2

Perfect. Thanks, Ryan.

Operator

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

Speaker 5

Hi, this is Yannis Samolis on for Will Power. Thanks for taking the question. I was hoping you could provide an update as to what you're seeing in the macro more broadly. Are you seeing stabilization yet in terms of renewal pressures, impacts of the account, things of that nature? Are things still getting worse?

Speaker 5

And then I guess more importantly, what are you factoring into your guide for fiscal 2020

Speaker 2

it? So I'll let Kevin cover

Speaker 8

the second one. So I spent a lot of time

Speaker 2

that I mentioned earlier on the last question from Ryan. I spent a lot of time on the road. I wouldn't say it's pretty out there. Layoffs were pretty high in February March. We do see some of the effects of higher interest rates and those kinds of things on various industries and capabilities and those kinds of things.

Speaker 2

We see the positives and negatives, but I would say that the environment is not pretty, it's not great. There's not a lot of tailwinds. There is some holdover post pandemic, right. There were a lot of orders made during the pandemic and some people are right sizing those orders. Kevin mentioned it around Fuse, some of the areas we see that.

Speaker 2

And so I think it's fair to say every CFO or every IT guy I meet with is looking at the cost structure of their organizations and those kinds of things. I would mention though, we launched Operator Connect and we're I'd like to say, we're number 1 on the panel because of our name. It's already driven a lot of things. We have a Microsoft certified contact center that goes with Operator Connect. But there are still 100 of millions of seats of UC.

Speaker 2

And I think low cost solutions unlocks this base. And so the fact that we have low cost operator connect available, I hope allows us to accelerate the move from on prem to cloud relative to other things. And so I'm not exactly fearful of some decline in pricing because I think I'm becoming more and more convinced that's what's necessary. The idea that the entire world is all going to be on $30 per month seats, I think it's just unrealistic. And so we need to meet the customers where they are and try to capture those tens of 1,000,000 and 100 of 1,000,000 of seats that are available.

Speaker 8

We want to say about modeling.

Speaker 4

Yes. So look, in the deal conversations I've been involved in, and we've said this before on earlier calls, is some caution out there. I think people are willing to still do the deals, of course, and we're doing them. But I think there's some cautiousness out there, maybe taking a little bit longer to sign the larger deals and so forth. So the cycle might be drawn out a little bit more, more signatories on deals and so forth.

Speaker 4

So in terms of our guidance, we're basically factoring in the same. I think it's not the neither pessimistic nor optimistic in the guide. But right now, it's been fairly consistent in terms of the attitude out in the marketplace that we see. So we just moving forward in our guidance under that assumption.

Speaker 8

I wouldn't say we're expecting

Speaker 2

to bounce back our guidance. I mean Kevin and I are both sort of quasi pessimistic when it comes to the macroeconomic environment, at least when it comes to forward modeling. That way we try to be always on

Speaker 5

the safe side. Right. Thanks for the context there. And I appreciate the color on OperatorConnect as well. I was wondering if you could provide an update just on the Teams partnership generally and then trends within that base of users.

Speaker 5

Then I guess more specifically, any update on the competitive dynamics that play there with others that are also trying to lock onto that base of users? I guess just any color around that would be great. Thanks.

Speaker 2

Okay. And when you mean basic users, do you mean Microsoft Teams or do you mean on prem? The Teams users trying to lock on to those. So look, I think we're one of the few or only I mean for sure we're the only vendor that has operator connect, direct routing and a Microsoft native certified contact center. And we see a significantly higher attach rate of contact center with our Teams deals.

Speaker 2

As we Teams is well over 400,000 seats, it continues to grow very rapidly. We love Teams and I think Teams is a much better product than those guys that starts with a Z anyway. So more benefit to Microsoft, the better they do, the happier I am. Having some it's just a better solution for mid and large enterprises that we participate in. So I think Teams is here to stay.

Speaker 2

I think telephony is going to be a key component of Teams and we have the most richer offering around that. And I look forward to doing more Teams deals every day. And by the way, we get solid margin doing it also. So just before anybody second guesses it, yes, we get solid margin for doing it.

Speaker 4

Our attach rate to contact center is much higher with Teams deal, so happy about that too.

Speaker 5

Awesome. Thanks a lot for the perspective.

Operator

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

Speaker 9

Hey guys, James on for George. Excluding the CPaaS headwinds and Fuse down sells, do you have grown in the quarter? And could you maybe quantify the mix from CPaaS with some of the new products that's assumed in the full year guide?

Speaker 4

Did you say the headwinds in CPaaS from Q3 to Q4, is that what you're referring to?

Speaker 1

I thought you said headwinds from Fuze.

Speaker 2

I think you said both.

Speaker 9

From both, yes, from both.

Speaker 4

Yes. So I think the reality is that basically the sequential impact is fundamentally on the fuse and headwinds in the CPaaS seasonality. The rest of the business is basically even quarter on quarter.

Speaker 2

Yes, I would say don't hold me directly to the 3rd decimal place, but the general answer I think is eyeballing it is yes, is the answer to your question.

Speaker 9

Got you. And I think you made a comment about continuing to invest in driving awareness and making some other go to market investments. Can you provide some color on what investments you're making there and maybe how you're investing those dollars differently than you may have in the past?

Speaker 2

Yes. So look, in the past, we invested a little bit more in the middle of the funnel. We're investing more top of the funnel activities now. We've added sales capacity, in particular BDR capacity. And we're being aggressive about going out and telling our story.

Speaker 2

So I call out the fact that a couple of quarters ago we hired Justin Robbins to be our evangelist and that guy has been logging a lot of miles on the road telling just a fantastic story. We have a really, really good product innovation led story. We're still somewhat known as that stodgy UCaaS company. But once we can get that story out, we have the references, we have the capabilities, we have the case studies. I mentioned them on the call, Sovereign Housing Group or Upland or any of those types of things.

Speaker 2

And so it's just a matter of getting people to realize kind of what we've evolved to and we'll see those corresponding business improvements. And we see it already in the pipeline. And so I think it's a lot about that. It's a lot less about spending money on Google AdWords and fighting with the lead ags and these 2 bit UCaaS providers that dive on pricing at every instance, like that's where I want to get us out of.

Speaker 9

Very helpful. Thanks guys.

Speaker 4

Thank you.

Operator

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

Speaker 5

Hey, guys. This is Ronit Shah filling in for Michael Turrin. A quick question on the AI piece. So where are you seeing the best opportunities in AI use cases among customers? And is there an avenue for monetization here?

Speaker 2

Well, let me answer the second part first. The answer is yes, and I would put an F bomb in front of that. Yes, there's I mean our intelligent customer assistant is an AI enabled voice and digital chatbot and you pay to use it. We sell it on a per interaction basis. So yes, and we get we're seeing significant usage increases off of it.

Speaker 2

And as I mentioned in my script, all the customers are referenceable. So it works and it works really darn well. Where do I see AI? Here's what I'll say. Our customer base is not a bunch of PhDs in data science and computer science and they want an LLM, large language model with a RAG component and IDE where they have to put it all together.

Speaker 2

That's not my customer base. They're not rocket scientists. My customer base wants products that solve their problems. And so what we've done is we've taken the AI either through our TPaaS partnerships or through our in house shared services and embedded it into products that they can use to solve their problems. And it works and it works really well.

Speaker 2

I mean, I mentioned, for example, on my script to vote it, right, from the UK team pushed out this product that allows local governments to offer voter information, polling information, all these kinds of things, all that is AI driven. It's all AI driven, it doesn't voice and digital, mainly digital, but it's a phenomenal product. And it's but it's the key for me is nobody wants to buy AI. What they want to buy is a solution to a problem they have and they are more than happy to pay for a solution to a problem they have. They don't want to pay for a bunch of Lego blocks spilled on the floor that they have to put together to do something with.

Speaker 5

Great. Thanks guys.

Speaker 2

Thank

Operator

you. Thank you. Our next question comes from Catherine Trebnick with Rosenblatt. Your line is open.

Speaker 10

Yes. Thank you for taking the question. Sorry for the background noise. Sam, last year you rolled out your whole ecosystem of partners for AI between you wanted to really leverage everybody else's LLM and Cognigy for conversational AI. Can you kind of update us where you are in that process and how you feel that will eventually drive more opportunity for you?

Speaker 10

Thank you.

Speaker 2

Thanks, Catherine. I hope you're at RSA. I hope you're having a good time. And I speak for the Governor of California, please leave a lot of your money behind, spend a lot while you're there. So, okay, TPADs.

Speaker 2

So look, I mean, simply put, it's working, right? So we have if you look at our partnership with Cognigy on ICA, we've got AI enabled voice and chatbots that are killing it. The results are well above expectations. Every single customer is a static. We have customers that have gone from signed deal to full deployment within 20 days and have seen 50%, 60%, 70% deflections on their use cases and a 10 out of 10 CSAT score.

Speaker 2

They're ecstatic. And that's really the power of that ecosystem. We have Awaken which we have double digit number of deals in for assist, agent assist and we're seeing a lot of traction in the agent assist market. We have and even take a step back, I mean, we have relationships with people like Meta and with LAMA4 and Open.ai and their ChatGPT model, those kinds of things, those are all embedded into the platform itself, right? So I'm really happy because I think I think sometimes Wall Street misses that our customer, our core ICP customer will pay us for integration.

Speaker 2

They'll pay us for integration because they don't have the capabilities. They're not a United Airlines, they're a Cape Air. They're not Bank of America, they're Atlantic Union Bank and those kinds of things. And so what they'll do is they'll pay us for taking that partnership risk, figuring it out and delivering them a complete solution and they pay us really darn well for doing that for them.

Speaker 10

All right. And then are you seeing an incremental uptick then on the price of that seat versus traditional CCAP seats? The reason I'm asking is, Gartner just it was last year that a huge report out where it showed on an average 3x to 5x lift on if you did conversational AI on top of a base fee price. And are you actually seeing that?

Speaker 2

I think the answer is yes. But I think it's a little bit so I don't know how I haven't seen Gartner's analysis, but I've seen some of the other ones. It's a little bit misleading. I'm not sure what the right word is, because here's what we see, right? Let's say 3 years ago, we sold 100 seats on the per seat model and those 100 seats netted us $100 We may only sell 92 seats now.

Speaker 2

So that's $90 but we're going to sell 3 bots. And so the total deal may be $200 but it's spread across 92 seats instead of 100 seats. And so on a per seat basis, it's a significantly bigger number. That makes any sense. There's a math here.

Speaker 2

And I'm not trying to blow you away with math. So the 2x to 3x, I think is a little bit of a a you're reducing the denominator and increasing the numerator. We definitely see when we sell those bots and we sell the add on AI products, total revenue per customer increases significantly. And yet and look, we're selling a few less seats, which is what we expect. I don't think anybody is going to freak out about this.

Speaker 2

We've always expected that technology will replace human beings on routine work assignments. That's what technology has done for 1000 of years and will continue to do for the next 1000 of years.

Speaker 10

Yes. That makes perfect sense. Thank you.

Speaker 2

Thanks, Catherine. And remember, spend money, lots of money.

Operator

Thank you. There are no further questions at this time. Please proceed with any closing remarks.

Speaker 2

Thank you so much everyone for joining us today. And in conclusion, fiscal 2024 has set the stage for what we are capable of achieving. We began the year with a clear strategic direction and strong financial position. I'm incredibly proud of what we've accomplished and I'm excited about the opportunities are ahead. I love the questions that were asked today.

Speaker 2

It really shows you how people are diving into us and trying to figure out the next step. Thank you once again to everyone for your trust, your partnership, your questions, etcetera. We're committed to delivering on our promises and driving value for all our stakeholders. I look forward to talking to you on an upcoming call. Thank you.

Operator

Thank you for your participation. This does conclude the program. You may now disconnect. Good day.

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Key Takeaways

  • Reported a solid Q4 with service and total revenue in line with guidance, non-GAAP operating margin exceeding targets by 1.3 percentage points, and operating cash flow up 62% year-over-year to $79 million, exiting the quarter with $118 million in cash after repaying $63 million of debt.
  • Executing a transformation framework across three pillars—innovation, financial strength and go-to-market—by accelerating AI-enabled CCaaS, expanding CPaaS leadership in Asia Pacific, refocusing on small/midsize enterprises, boosting sales productivity, enhancing customer experience and driving profitability.
  • Launched key offerings including the Engage solution for cross-sell opportunities, Operator Connect for Microsoft Teams (industry’s broadest Teams voice and native contact center portfolio), plus CPaaS upgrades like Video Elevation 2.0, proactive outreach and an AI-powered customer assistant achieving up to 80% self-service resolution rates.
  • Guidance for fiscal 2025 anticipates roughly flat service revenue near $700 million (first half down low single-digits, return to year-over-year growth by Q4), total revenue of $720 million–$738 million, and non-GAAP operating margins of 11.5%–13%; Q1 service/total revenue is projected at $170 million–$174 million and $176 million–$181 million, respectively.
  • Maintaining financial discipline with $88.3 million of debt repaid in FY 2024 (35% of a $250 million three-year target), a commitment to a 20% three-year operating cash flow CAGR, and plans to refinance its term loan to reduce future interest expense.
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Earnings Conference Call
8X8 Q4 2024
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