8x8 Inc

Q2 2022 Earnings Conference Call

11/2/2021

spk02: Good afternoon. My name is Tania, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8 Fiscal Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. At this time, I will turn the call over to Kate Patterson, Vice President of Investor Relations. You may begin your conference.
spk00: Thank you. Good afternoon. Today's agenda will include a review of our second quarter results with Dave Sipes, Chief Executive Officer, and Samuel Wilson, Chief Financial Officer. Following our prepared remarks, there will be a question and answer session. Before we get started, just a reminder that our discussion today includes forward-looking statements about 8x8's future financial performance, as well as its business product growth strategies. We caution you not to put undue reliance on these forward-looking statements, as they may 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 the presentation slides reflect our analysis as of today, and we have no plans or obligations 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 measures is provided within our earnings release, and our earnings presentation slides, which are available on 8x8's investor relations website at investors.8x8.com. With that, I will turn the call over to our CEO, Dave Sipes.
spk07: Good afternoon, everyone, and thank you for joining us today. Before we begin our review of the quarter, please join me in welcoming Kate Patterson to 8x8. She joins us at an exciting time as our XCAS vision is resonating in the market and as we work toward our goal of one billion in revenue, a milestone few software companies achieve. Let's turn to a review of our second quarter and an update on our progress and plans for the future. We delivered revenue above high end of our guidance range and non-gap profitability again in Q2. We ended the quarter with over 550 million in ARR, up 18% from a year ago. The strength of our revenue performance combined with continued operational discipline across the company resulted in sequential and year-over-year improvement in our non-GAAP gross margins and non-GAAP operating margin. We delivered positive non-GAAP operating margin and positive operating cash flow for the third consecutive quarter. Let me provide some context on the market trends and our competitive advantages. The hybrid workplace is the new normal. I believe we are in the early innings of a massive migration to cloud-based communications. As the market has demonstrated, customers are demanding a single vendor, integrated platform for communication, collaboration, and customer engagement. We are proud to be delivering on this critical requirement today. 8x8xCaTS unifies the employee and customer experiences by eliminating silos and speeding information flow for an enterprise. allowing businesses to be more agile and responsive to customer needs. Our differentiated cloud technology has been widely recognized by the marketplace. We recently announced that 8x8 has again been included as a leader in the Gartner Magic Quadrant for unified communications as a service worldwide. This is the 10th year in a row and makes us the longest running leader in the UCaaS MQ. We have also been recognized as a challenger in the Gartner Magic Quadrant for Contact Center as a Service for the seventh straight year. 8x8 is the only UCAS Magic Quadrant leader also recognized in the Contact Center as a Service Magic Quadrant. This recognition and our growing base of more than 2 million business users is a solid testament to our leading position in XCAS. In May of this year, I outlined our vision and our focus on four strategic pillars. These are one, expanding the platform advantage, two, winning together with partners, three, expanding the base, and four, driving operational excellence. This clarity of purpose allows us to gain alignment and prioritize our investments to achieve our growth and profitability objectives I will use the four pillars to frame our Q2 business highlights. First, we continued to aggressively expand our platform advantage through innovation. We introduced new features to our XCAS platform and extended our XCAS solution to new countries and territories through our patented global reach technology. We also deepened our integration with Microsoft Teams, which I'll discuss shortly. Platform enhancements delivered in Q2 included the introduction of 8x8 Front Desk, a new XCAS composed experience that provides a great first impression for organizations as they adapt to the new hybrid workplace. Front Desk empowers the receptionist with advanced contact center and UC capabilities within a personalized experience for high volume interactions. With its revolutionary product, a receptionist is no longer tied to location or hardware or in-person visitors, effectively freeing the front desk. We also extended our global footprint, adding dedicated cloud PBX and storage in Canada to further enhance quality of service and provide Canadian organizations with superior business resilience and data sovereignty adherence. This will open up new vertical markets such as public sector, healthcare, and financial services. We announced advanced enterprise capabilities for large video meetings, including enhanced moderation, polling, and emoji reactions. This further strengthens our video meeting solution for enterprise customers. Both new and existing customers are embracing our XCAS vision and technology. For example, the NHS National Services Scotland, which handles over 1 million calls per month supporting Scotland's vaccination, health lines, and booking services, expanded their 8x8 XCAS investment. Since their original purchase in fiscal Q1 2021, they have more than tripled their investment in XCAS, expanding every quarter and now total more than 2,500 UCAS seats and over 1,300 CCAS seats. The San Diego Zoo Wildlife Alliance, the nonprofit conservation organization that operates the San Diego Zoo and San Diego Zoo Safari Park, selected 8x8xCAS as its single vendor integrated communications platform, supporting over 1,500 employees and agents. They will use speech analytics and quality management to enhance the customer experience and help train and upskill agents. Our 8x8 voice per team solution is an important component of our XCAS platform strategy, and I believe will provide the most feature-rich enterprise integration in the industry. Since the launch five quarters ago, We continue to drive consistent innovation with an integration that now goes well beyond direct routing and keeps us far ahead of the competition. In Q2, we added shared presence, UC and CC users, call recording, and 8x8 front desk support. We are seeing more organizations provide their distributed workforces with the ability to interact with colleagues and customers from anywhere using Teams. And we recently announced that we had surpassed 100,000 business users. Recent examples of 8x8 voice from Microsoft Teams customer wins included the city of Rochester in Minnesota. They needed to replace an aging on-premise communication system to provide better support for their population of more than 120,000 residents. They selected 8x8 XCAS for business resilience and tight integration with Microsoft Teams to support their more than 800 employees. Another local government win was the London Borough of Humslow, which provides services for more than 270,000 residents. They selected XCAS and 8x8 Voids for Microsoft Teams to consolidate disparate systems on a single cloud platform to support more than 2,800 employees. We continue to see strong demand for the CPaaS portion of our portfolio. Our focus strategy to extend our leadership in Southeast Asia has resulted in new customers and strong growth in that region. Wins this quarter included Top Value, one of Thailand's biggest e-commerce platforms, uses the 8x8 SMS API for marketing campaigns to send promotions efficiently and reliably to customers. Additionally, we added Quala, an omnichannel insurance technology company operating in Indonesia and Thailand, which uses the 8x8 SMS API to keep customers informed and secure on their platform with one-time passwords and notifications. Additionally, Timsy, a US-based provider of electronic health record management software turned to 8x8 Jitsi as a service, or JAZZ, to embed a secure HIPAA-compliant telehealth video solution for its customers. Another way we extend our platform advantage is through global expansion. In Q2, we delivered the industry's first integrated cloud phone and contact center solution for multinational organizations with operations in Russia. We also added Japan and Puerto Rico to our service coverage area. This follows our industry first edition of China in fiscal Q1. Our cloud infrastructure now delivers full PSTN replacement services in a market leading 46 countries and territories. Our ability to deliver high availability and reduce cost and complexity globally makes our platform ideal for multinational organizations. An example, is UK-based Inchescape PLC, which is the leading independent automotive distributor and retailer operating on a global scale in 36 international markets. They selected 8x8 XCAS with over 3,000 seats for our omnichannel, contact center, and unified communication capabilities, including speech analytics and global coverage. International revenue now accounts for 31% of our total revenue compared to 26% one year ago. Winning with partners is our second strategic pillar. Promoting a fully engaged channel community allows us to extend our reach to new market segments and geographies more efficiently. In Q2, we expanded our go-to channels through a strategic distribution agreement with Cinex Corporation, a leading IT distributor and solutions aggregator for the technology industry. Cinex's partner community of VARs, MSPs, and system integrators in North America are now empowered to offer 8x8 XCAS solutions to their customers. Our reseller channel metrics show our success at increasing partner engagement and productivity. The number of active channel partners increased 15% from a year ago, and ARR from channel-led transactions increased 36% year-over-year. Examples of the channel-led XCAS customer wins included Howdin Group Holdings, which is the largest European insurance intermediary group in the world. They selected 8x8 XCAS for integration with Microsoft Teams and Salesforce to support 3,000 employees. Pet Supermarket is a leading pet supply retailer with over 200 stores in the southeastern United States. They selected 8x8 XCAS for its robust contact center capabilities and lower total cost of ownership to support the communications and engagement needs of more than 600 employees. Our third pillar is expanding our installed base of users. Growth in our base was led by another record quarter in enterprise with ARR up 33% and the number of customers with more than $100,000 in ARR increasing to 871. Enterprise represented more than half of our ARR for the first time. We also saw expanded deployments and existing customers, including SRS Distribution, which is one of the largest building products companies in the United States and has grown rapidly over the last two years. 8x8 has been their communication partner through this period, with XCAS now supporting more than 6,000 employees. Another longtime customer who expanded their commitment to 8x8's platform a leading digital solutions firm and a customer since 2009. The company continues to enhance client engagement to support its growing consultancy business, and most recently added 50% more seats to support their 234-agent contact center. The Range, a multi-channel retailer selling products in the home, garden, and leisure categories, With over 180 stores in the United Kingdom and Ireland, they selected 8x8 for full cloud capabilities and flexibility to enhance communication and collaboration to improve customer experience. The fourth strategic pillar is driving operational excellence throughout the organization. Our dedicated focus in this area has contributed to our improvement in non-GAAP gross margins, which increased from 62.6% to 64.2% sequentially, as well as continued operating leverage. We remain committed to achieving profitable growth. We also appointed Allison Gleason to our board of directors. Allison is a globally recognized sales executive who was previously SVP of Cisco Americas overseeing a $25 billion revenue organization. She has led multiple top performing sales organizations by focusing on a customer first mentality. We are excited to welcome Allison to the board. In summary, since I joined 8x8 nearly a year ago, we have strengthened our leadership team, aligned our R&D investment, and leveraged a massive market opportunity. and created a CPT culture built on the core tenants of customer-first, product-first, and team-first. The migration to cloud-based communications is just beginning, and we are well positioned with differentiated technology, market-leading global coverage, and a unified platform to optimize customer and employee communications. Leading industry analysts are embracing our XCAS vision. It has been a team effort, and I want to thank everyone at 8x8 for their contribution. We appreciate your continued support and look forward to keeping you updated. I will now turn the call over to Sam.
spk03: Thanks, Dave, and good afternoon. We are pleased to have delivered results that exceeded guidance and showed improved operating leverage. Key drivers were better than expected performance from our product categories with both XCAS and CPAS ARR up more than 30% year-over-year. Total revenue for the quarter was $151.6 million, an increase of 17% year-over-year and above our $147.5 to $149 million guidance range. CPAS and contact center usage revenue was stronger than expected during the quarter. This offset weaker endpoint shipments in other revenue due to ongoing supply chain issues. Looking at service revenue, we generated $142.4 million, an increase of 18% year-over-year and above our $138.5 to $139.5 million guidance range. Total ARR was $553 million at quarter's end, up 18% year-over-year. At the beginning of the fiscal year, we announced that we were exiting the wholesale portion of our CPAS business. Last fiscal year, 2021, wholesale CPAS services contributed approximately $15 million in service revenue and essentially no operating margin. Exiting this business causes roughly a 3% headwind in FY22 revenue growth. For the second quarter of this year, this part of the business did not contribute revenue down from $1.1 million last quarter and approximately $3 million in Q2 2021. Second quarter non-GAAP gross margin was 64.2% as expected and higher sequentially as service revenue accounted for a more significant percentage of total revenue. And we are now fully exited our low margin wholesale CPaaS business. Non-GAAP service revenue margin increased approximately 50 basis points over the previous quarter to nearly 70% and was up 250 basis points versus Q2 2021. Non-GAAP other revenue margin came in at minus 16.6% for the quarter, an improvement from minus 27.7% a year ago and sequentially better than the minus 19.6%. Reduced endpoint shipments were a factor in the margin improvement. In total, gross profit dollars grew 24% year-over-year as we focused on the higher margin portions of our business, such as XCAS, and continued to drive unit cost improvement in COGS. Looking ahead to the third quarter, we expect overall gross margins to be flat-ish sequentially. Turning to the second quarter operating expenses, we continue to invest in R&D, mainly in the contact center capabilities within the XCAS platform and in sales and marketing while keeping G&A costs tight. Total spending as measured by non-GAAP COGS plus R&D plus sales and marketing plus G&A was up 14% year-over-year below our 17% total revenue growth. We expect total spending to grow slower than total revenue over a multi-quarter trend, allowing us to maintain our profitability on a non-GAAP basis and exit the year at approximately 2% non-GAAP operating margin. Non-GAAP operating margins increased to 1.3% for the quarter. Turning to the balance sheet, total cash, restricted cash, and investments ended the second quarter approximately $166 million. Excluding $8.6 million of restricted cash, the balance was $157.8 million, increasing approximately $4.6 million quarter over quarter. Cash from operations was a positive $5.1 million for the quarter. Cash from operations was better than expected on solid collections. We expect a minor positive cash from operations and overall cash burn in the third quarter before returning to positive cash generation in the fourth quarter. One item I'd like to discuss under liabilities is deferred revenue, which was nearly $25 million during the quarter and up 103% year-over-year as we move towards billing in advance of service delivery. RPO was approximately $550 million for the second quarter, up from $530 million in the first quarter. As a reminder, we made a policy change with fourth quarter earnings to conform to industry norms and now include RPO from contracts with terms one year and greater. Turning to the financial outlook, as we enter the third quarter, we continue to focus on making the changes discussed in our first quarter strategy update, including exiting the low-margin CPAS wholesale business, investing in sales and marketing to increase capacity and brand awareness of XCAS, and making incremental R&D investments focused on accelerating revenue growth in XCAS. Taking all this into account, we are establishing guidance for the third quarter fiscal 2022 and in December 31, 2021 as follows. We anticipate total revenue to be in a range of $107 million to $154.2 million, representing approximately 12 to 13 year-over-year growth. We expect to have continued supply chain issues with endpoint shipments and expect other revenue to be down slightly quarter-over-quarter and year-on-year. We anticipate service revenue to be in a range of $144 to $145 million, representing approximately 13% to 14% year-over-year growth. We expect to be operating margin positive on a non-GAAP basis and roughly flattish quarter-over-quarter. Combining our outperformance for the second quarter with outlook, we are raising our full year guidance for fiscal 2022 ending March 31, 2022 as follows. We are raising our total revenue outlook from $604 to $612 million to a range of $611 and $615 million representing approximately 15 to 16% year-over-year growth. We are raising our service revenue range from $564 million to $572 million to a range of $572.5 to $576.5 million, representing approximately 15% to 16% year-over-year growth. And we are maintaining our guidance of 4Q non-GAAP operating margin of roughly 2%. Our Q2 results and our increased outlook for the year demonstrates our continued progress towards our long-term operating model, which we discussed in our business strategy update in May. We remain confident we are making suitable investments to drive reacceleration in our growth and continued margin expansion over time. With that, thank you, and let me turn the call over to the operator for questions.
spk02: Certainly. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the QA roster. The first question is with Peter Levine with Evercore ISI. Please proceed.
spk05: Hi, this is Chirag Ved calling in for Peter Levine. And thanks so much for taking the question. I'm looking to get a better sense of what demand trends on your end look like heading into calendar year 2022. Right over the past 12 to 18 months, we saw potential secular tailwinds in the industry, but looking ahead, are we starting to be perhaps a more normalized pre-crisis demand environment, or do you expect things to continue? Thank you.
spk03: Look, I think going into calendar 2022, I would say the tailwinds that have been in place over the last two years kind of remain in place. As we shift to XCAS, we're continuing to see improvements in our demand generation pipeline. The branding that Dave has launched around that has been really popular and successful, and industry analysts are giving us a lot of credit for it. And so I would say in general, no change or slightly better.
spk07: You see our enterprise demand remains strong. It's now over half of our business, growing at over 30%. And what you're seeing in the market is still a transformation of legacy to cloud, where we're literally only 10% or 15% cloud penetrated at this point. So when we go into accounts, the way we set up and win is in the market is with our single platform of combining UC and CC and bringing that over from a legacy environment to a cloud environment and giving us a differentiated solution. Additionally, our global footprint is fairly unparalleled, and, you know, you see that through our expansion into 46 countries and territories and literally added the most populous nation in the world and the largest geographic nation in the world and the only UC player to do that. And then thirdly, our Microsoft Teams capability and integration is allowing us to win. So I think we see a number of strong momentum. I think underlying is that legacy to cloud transformation, but additional secular strong points for demand.
spk05: Thank you.
spk02: Your next question is from the line of Michael Turin with Wells Fargo.
spk06: Thanks. Appreciate you taking the questions.
spk07: Just in kind of through just the growth dynamics, what we're seeing here, appreciate that the four-year guide comes up a touch, but the Q3 guide is a point or two lighter than where you guided Q2 for initially. The implied Q4 guide suggests a little bit of a decline in the growth profile there as well. Is that the shape you were expecting when you initially framed out targets to start off the year? And can you just remind us how much of an impact the CPAS business has there and if there's a seasonal profile to be mindful at all just in looking through the growth dynamics that we're seeing play out over the course of the year?
spk03: Hey, Michael, this is Sam. I'll take that one. So, yes, this was the profile that we expected throughout the year. We did expect some deceleration throughout the year, mainly driven by the fact that the wholesale CPAS business was about $15 million last year, but its profile was growing throughout the year. So I've said this publicly in other forums that roughly if you thought about in fiscal 21, the wholesale CPAS business as being $2 million, $3 million, $4 million, $5 million throughout the year, then when you view that on a year-over-year basis, you would see a larger deceleration. throughout the year. And so we have been expecting that. We do expect re-acceleration of revenue as we go into fiscal 23, driven by the roll-off of the CPAS business, also driven by our improvements that we're making in demand generation, sales capacity, new product development, and those kinds of things. We expect that some of the things that Dave's already been doing are starting to land, and some of the things that are coming on the roadmap will arrive before then.
spk07: That's helpful, Sam. Just one more just on the ARR by segment metrics. The enterprise ARR growth still looks healthy, but the mid-market and SMB sequentially are a little lighter. I know mid-market in particular has been more consistent. So when you're talking about CPAS or some of the phone shipment endpoint issues that you're running into, is there any reason those would hit the mid-market segment more directly, or are there certain use cases or other elements within that segment that might be driving the difference between what you're seeing in the two segments, mid-market and enterprise? Well, I think what you see in the shift to enterprise is purposeful in how we're transforming the company and focusing on our core XCAS vision, the combination of UC and CC, focused on enterprise customers. And we've continued to invest our go-to-market resources in into enterprise customers. That's why you see the growth there. And it's important to note that as we target XCAS customers, these larger customers that combine the UC and CC, we have a doubling of our account size when we sell XCAS. They're stickier, longer retention customers. We have higher win rates. So you're seeing a transformation of our go-to-market activities as we focus on the higher end of the market, which will set us up very nicely as we go into fiscal year 23.
spk03: Okay, and then on the topic of endpoints, so the supply chain issues that we're having, and I think this is pretty universal now among a whole bunch of companies, the supply chain issues really doesn't affect ARR. That's really contracted, mainly subscription revenue. Where it does show up, though, is our other revenue was at, you know, $9.2 million was down sequentially pretty notably. noticeably, and as part of our forecast, right? We aren't expecting, based on everything we see right now, that the supply chain is going to rectify itself, you know, at least in the next quarter. That's where we kind of have visibility. And so it is a bit of a headwind on total revenue.
spk06: Got it. Thank you for taking the question.
spk02: Thank you. Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
spk01: Great. Thank you. A couple of questions for me. One, just if you could kind of talk about the environment with direct routing and just what kind of channel that is for you guys or what kind of activity you're seeing there. And then second, Sam, if you could just remind us of how we should kind of consider the wave cell headwinds in the kind of fiscal Q3 and ongoing guide of how much of that $15 million was in the second half of the year versus first half. Thanks.
spk07: Hi, this is Dave. I'll take the first part of that on the Microsoft Teams direct routing integration. The Teams opportunity is obviously very significant. Just in five quarters since launch, we're now 100,000 users and attaching an enterprise communications platform into the productivity suites and Teams being a messaging platform within that is a huge opportunity as the vast majority of those users are not on enterprise communications today. So expanding, I think that's why we've seen the success we've seen today. And we go to market and we win. I would say there's four key elements there. One is a superior end user experience. Second is powerful admin tools. Third is that we go empower all the employees. And fourth is we go and win with the channel in those areas. And I'll just go a little deep on each of those, but on the end user experience, we continue to add functionality for end users directly into the team's desktop and mobile apps. We've recently added recording and our front desk capability that already adds to very robust functionality, which already included things like presence and SMS and fax as well as, you know, group voicemails. So that's a powerful value-added capability for those users. Second is, you know, coming with really powerful admin tools of world-class call quality management, reporting and analytics that you get with the 8x8 platform. And then third is that core prospect of powering all employees, not just knowledge workers, but also frontline workers, contact center agents, receptionists, and doing that globally across all countries that an enterprise competes in. And third, you know, the other is winning with the channel. And we continue to go to market strong with the channel. There's actually a good blog on our website from October with Softcat, who adopted X-Series and our Voice for Teams integration of how they couldn't make those work together previously with a UCMCC solution. So that's something that you can see on the 8x8 website.
spk03: All right, and then on the second part of your question, I think the answer you're looking for, and, you know, follow up if I got it wrong, in the second half of 21, so last year, the wholesale CPAS business produced about $9 million in total revenue, broken down by about $4 million in Q3 and $5 million in Q4 fiscal. We fully exited that business in Q1 of fiscal 22 last quarter, so with zero revenue this quarter, and it's about a 3% headwind on year-over-year growth.
spk01: Great. That is helpful. And then just context in terms of, you know, how much we should consider that headwind to the ARR statistics, or should we consider, just as we look at you over your kind of ARR growth numbers, any headwind that's
spk03: It's a couple percentage points of headwind to ARR growth. Some of those CPAS do meet our criteria. Some of those CPAS customers do meet our criteria, which is six consecutive months of a minimum revenue threshold. So it's a couple percentage points. To be fair, I haven't memorized this. I can't give it to you off the top of my head. But it's a couple points of growth. And then just for everyone, I mean, generally our CPAS business does see a bit of a seasonal uptick over the holidays. full with more sms messaging going on and then a little bit of a fourth quarter around chinese new year a little closer but nothing great thank you your next question comes from the line of brian cons with needham your line is open hi thanks for the question um it looks like great progress on the international front um
spk07: Can you walk us through how you guys are progressing in the different geographies, whether it's Europe, I know you had some real strength in the U.K. historically, and how your channel development's going in the international markets? Appreciate it. Sure. So there's a number of areas where we continue to focus and to win internationally. We've been in the U.K. for many years, since 2013, and we've been increasing investment. We've also seen brand growth. recognition and word-of-mouth referral improve in that market. And we have a great product fit with our XCAS solution. Additionally, through our international capabilities, we also have a strong public sector penetration. And Furthermore, I made the decision to focus our CPAS business in Southeast Asia. That's showing strong benefits as we densify our sales presence in key countries. We talked about wins this quarter in Indonesia and Thailand, and that business continues to thrive in those areas with both expansion of voice masking and SMS solutions. So we're happy with those expansions we see that is all contributing to our international growth and now over 31% of our total business. That's great.
spk06: Thanks a lot.
spk02: Your next question comes from the line of Andrew King with Collier Securities. Your line is open.
spk05: Thanks, Jake, for my question. Congrats on the good order. Dave, as we're approaching your one-year anniversary of joining the company, can you just give us a little color to what initiatives or changes you've been implementing since you've joined and how you're benchmarking your own progress?
spk07: Yeah, absolutely. We've taken the steps to really set 8x8 up to be a great company going forward. So, you know, I'll take it a few steps. One, we've formalized our vision around XCAS, and we've branded that. It's gotten great reception in the marketplace already today from analysts as well as prospects and the channel. And we're doing things today that, you know, can't be done by competitors. And I can go into front desk in a little bit, but how that's just a fantastic example of leveraging our XCAS positioning. We've also, you know, we've changed how we develop products. So in looking at front desk, that was a whole transformation of how we, our whole R&D cycle of having world-class UI, of involving our install base and customers very early in the process and having a near flawless launch of a capability that really combines the UC and CC users. and creates a great ability to win, you know, demo. It's going to be something we're going to demo for years from now and get a lot of attention from our prospects and help win deals. We've also shifted GTM spending to enterprise as evidenced in our continued growth in that segment. I talked about the focus of CPaaS into Southeast Asia. I've really focused the company on a customer-first culture, which is leading now to three-quarters in a row of reduced churn. And one thing, you know, Sam and I both recommitted or committed to key ground rules around profitability and growth and investments in the right areas that generate long-term, long-lived revenue and high-margin revenue. So I think all these transformation steps are creating greater focus. They've moved us away from empty calories onto high protein meals and are setting us up for a long, successful journey.
spk05: Great. And then I saw a nice quarter in the channel. Can you talk about the contribution from ScanSource and how that's ramping and then how you expect the Cinex relationship to ramp given the similar terms?
spk07: We're on channel. I think we talked about being over 30% year-over-year growth. We have strong alignment across both agency model as well as our VAR wholesaler model, which I think you're referencing in that regard. So we've been happy. We don't break those two out separately. We've been happy with the progression of those. It is a differentiated capability that we bring to market and allows us to play in both segments. So overall, you see it as a strong driver of our overall growth, and we're happy with the progress there.
spk05: Thank you.
spk02: Your next question comes from the line of Will Power with Baird. Your line is open.
spk06: Hey, guys. Thanks for the question. This is Charlie Ehrlich on for Will. I just wanted to dig into the sales KPIs if I could. How does the pipeline look relative to last quarter and then maybe churn as well or retention out of those two metrics compared relative to last quarter?
spk07: Yeah, thanks, Charlie. I mentioned that our churn has improved for three quarters in a row and that we've focused our GTM efforts on our core XCAS buyer, which is a mid-market enterprise buyer that's combining UC and CC. We're seeing strong growth in XCAS pipeline as well as the percentage of deals that we close that's ex-cast, and that's why you see that continuing to grow rapidly as we shift the business, and that becomes a majority going into next year of new business that will lead us to acceleration of growth as that revenue is better in a number of ways. One, just larger per account, better retention and higher win rates for us. So those are the key metrics that we're tracking internally.
spk06: Actually, no, that's helpful. And then also just a quick question on pricing. Is there anything to call out in terms of changing and pricing on maybe a per seat basis for UCAS? Is there anything you have to call out? Any changes there?
spk03: No, I would say that, I mean, I get this question from investors. For us, as our enterprise business grows, we do see a small decline in our per seat pricing, driven by the fact that enterprises just have volume pricing arrangements and they're buying larger per customer size. But the margin-wise, anything else-wise is all fine. So on an apples-to-apples basis, we don't see anything abnormal in terms of pricing other than the fact our deals are getting larger, and so our per-seat pricing comes down a little bit.
spk07: And this really, you know, plays into our powering all employees with our XCAS vision of being able to have our X1 through X8 pricing. We had... One customer this quarter that six different SKUs between X1 and X8, so all the way from the simplest SKU to X8, our most complex contact center SKU. And we really look at giving the best value and utility to our customers by being able to fit their personas into those key SKUs. pricing targets. And for us, it's really about the overall revenue per account and the retention of those accounts. So, you know, I think any movement within kind of lower-end voice is minor to our overall growth trajectory and strategy. Understood.
spk06: Thanks, guys.
spk02: Your next question comes from the line of C. Panegra with Mizuho. Please proceed.
spk07: Hi, this is Alex Kim on for City Panagrahi. I just had a question on the competitive environment.
spk06: Microsoft recently announced the first party voice channel for their 365 customer service to build out a full contact center solution. And I was wondering, what are your thoughts on how do you see the competitive environment involving that follow up?
spk07: Yeah, well, I think you're asking about the competitive environment where you combine UC and CC. And there really are very few offerings in that. And most of our competition in that regard comes from people that are partnering between a UC and a CC solution. So having one platform that we can create differentiated solutions have our full X1 through X8 pricing capabilities and ability to mix and match users, as well as unique persona capabilities that were launched, such as front desk, are all proof points of our Xcash strategy that allows us to be a leader in that market and maintain leadership. So I think you will see over time people trying to create more of those capabilities and follow that vision. It is because that's what the customers fundamentally want. But by being first and early in that market, we're able to keep innovating and expand our capabilities and maintain leadership.
spk06: Got it. And also in the past, you mentioned you're displacing legacy providers like Avaya and Mintel for some big deals. Can you give us an idea, like what percent of your wins today are large legacy displacements and also like versus a year ago and also like what percent of your wins are just gaining more market share versus your competitors?
spk07: Yeah, I don't think we've said specific people who we replaced typically, but The fundamental opportunity is still moving legacy to cloud to get customers onto modern architecture that really helps them optimize productivity and really deal with the hybrid workforce that you're seeing today. So I would say the vast majority of the deals are legacy replacement deals that You obviously have some, you know, cloud displacement that occurs, but the bulk of the opportunity is legacy to cloud.
spk03: Yeah, and to answer your other question, I mean, we have over 870 customers that are, you know, enterprise over 100,000 in ARR. That's a function of landing those customers. So big ones come over probably from an on-prem solution into that market, or they land and expand up into that size as they're a growing business. So I think it's like we don't necessarily look at it that way. I think we look at what's doing best for our customers with that customer-first mentality, and then they naturally sort of grow up and become bigger customers.
spk06: Got it. Thank you.
spk02: Your next question comes from George Sutton with Craig Howland. Your line is open.
spk04: Thank you. I give you guys good credit at Enterprise Connect, probably the most helpful – Piece of the entire conference. I thought was you're predicting the future of communications panel And some of the survey work you had done so I just want to address two of the points that came out of that and how you're adapting to that number one 72% of Companies already are starting to use AI in their communication apps I'm just I just wanted to understand how you specifically are differentiating on the AI side and then secondly I 75% of businesses moderately to extremely influenced by external consultants. And I just wanted to make sure I understood the breadth of what was meant by consultants. I think this is getting to your addressing pretty aggressively the Gartners of the world along with the channel partners, but I just want to make sure I understood that correctly.
spk07: Hey, George. Thanks for that. In-depth question. I'm glad you appreciated that. Sorry about that. Sorry you late the call. I'm going to guess the first part. I'm not sure about the second part, the external concerns. But on the first part, how AI and communication, you see a lot of opportunity in AI and communications from translators. capability that, you know, transcription translation is one area that you see. Additionally, quality management and a sentiment analysis is a key area and one that we lead in. And so that's a big aspect that we have in our contact center solutions today. And I think when you envision our XCAPs, vision is how do we take those capabilities that are in one side of the house, UC or CC, and take that across the entire enterprise. So that's the type of work we're doing in taking AI further throughout the product offering that will improve overall ability for enterprises to manage employee productivity, to route customer interactions more effectively throughout the organization and get people to an expert faster to allow the enterprise to be more agile and nimble in how they respond to their customers and more effective.
spk03: Yeah, to the extent of the exact definition, I was just using our product to check internally with our expert on the topic. And she doesn't have the exact data in front of her right this second either, so I'll get you that offline if it was us who presented it. But I would say, I mean, we are proud of the fact that we have 10 times more UCAS leader at Gartner and, what, seven times challenger on the contact center side. And if you look at Forrester and others, look, do I think that's important? Yes. We think that a lot of enterprises use that, and so we do spend time with third-party analysts. We've had analyst events for them on a regular basis, and those, along with our channel partners, are definitely influencers on the buying decision.
spk04: Gotcha. Sorry for the long question. Thanks for the answers.
spk03: Thanks, George.
spk02: The next question is from the line of Tim Horne with Oppenheimer. Please proceed.
spk06: Thanks, guys. Dave, historically, I think voice communications was bought company-wide. It was a pretty monolithic product at the CIO level. Now you have eight different services selling six to one customer. Is the industry waking up to the fact or customers waking up to the fact that they can have, you know, mix and match and have, you know, just so many more price points and features and functionality and, you know, where are we in that whole process, do you think?
spk07: Yeah, absolutely, because you have different needs throughout your organization, whether it's a knowledge worker or a frontline worker or a contact center agent. So being able to right-size your benefits that you're getting with the cost that you're paying is like a natural and tendency for those buyers. And by bringing it to them, like one example is our Teams integration where you can have a different price point with your Teams seat that's integrated that may be utilizing different messaging methods. then you're utilizing the 8x8 endpoint, but then having things like receptionist or having informal queues like accounts receivable and other groups that are within your organization have higher level capabilities. So that's how we envision our pricing. It's really around personas within an enterprise and right-sizing that organization, but at the same time, giving one fundamental enterprise communication platform with some of the core admin capabilities of, you know, quality management and visibility across the organization, powering all countries and having a single integration framework that can go into your workflows or your CRMs across the organization. So I think it's a powerful message. It's wonderful. resonated, like I said, with, you know, not only through our selling ecosystem, but through our channel partners and with industry analysts. And you'll see more and more movement in that direction across all providers ultimately. So, you know, our goal is to keep innovating these unique personas like front desk that are examples of executing at that vision.
spk06: So as you look at it, is anyone close to eight products, or, you know, how many years would it take anyone else to kind of catch up, do you think, or how many a year head start do you have?
spk07: Well, you know, if you look at the contact center magic quadrant of, you know, the five or so key players in there, including 8x8, they've all been in that magic quadrant for almost 10 years, so... there's some key capabilities there, and combining that with the core UC capabilities, that's where we're differentiated being in both magic quadrants and being a leader in the UC quadrant and the only leader in the CC quadrant. So I think that's where you saw some movement or attempt to, you know, consolidation, which hasn't happened at this point. but our ability to be in there for 10 years and the time we spent integrating those products is a significant capability that's allowed us to offer things like our X-Series pricing.
spk00: Thank you.
spk02: The next question is from James Bring with William Blair. Your line is open.
spk06: Thanks for taking the question. Just first on the channel, has there been any real change in terms of the competition channel and how you're dealing with some of your channel partners in the last couple quarters since the world's continually evolving? And then secondly, just on the margin side, I think you might have touched on it a little bit, but I missed it. You had strong growth margins this quarter. How do you think about those going forward? It seems to be a little bit of seasonality in the December quarter, but generally speaking, you think those are tracking in the right direction. What's the target over the next couple of years from a growth margin perspective?
spk07: Thanks. I think the channel environment is competitively pretty consistent. Although I would say in talking with some of our channel partners, they historically carried multiple categories. And UC is now becoming the number one solution they're selling, which is new. And Contact Center is moving into a top three or four. So those weren't necessarily their number one thing they carried in their bag, but it's become key to the channel overall. And that's why you see strong alignment with us, both domestically and internationally with channel. I'll let Sam answer the margin.
spk03: All right. And then on the trend of gross margins, look, I mentioned in my prepared remarks, I would expect them to continue to trend higher. If you think back to our Q1 long-term model, we're saying 70% gross margins over the next, I guess, four and a half years from now. I think we can continue to trend that direction. Any given quarter, it may be down just based on product mix, but the general trend should be up. We continue to focus on improving it. And, you know, I jokingly said last conference call that they needed to be higher, otherwise I was getting fired. And Dave continues to maintain that that's the case.
spk06: Yeah, I guess to that end, you know, next December quarter, you tend to see a little bit more CPAP side, just given the holiday season and everything else. Is that a quarter, for example, where you could see them kick down a little bit before they reaccelerate in the first half of next year?
spk03: Yeah, I mean, I think slattish. I've got positive underlying programs underneath them. I've got an increase in CPAS business. Those two roughly offset. I could see them move a few dozen basis points either direction.
spk06: Great. Thanks.
spk02: Your next question is from Rachel Freeman with BTIG. Your line is open.
spk08: Hi, this is Rachel. I'm from Matt VanVleet. Thanks for taking my questions. Firstly, just on the enterprise strength this quarter, 33% ARR growth, can you provide any more color just on how much of this is being driven by CCAS bundle deals? And then just more broadly, can you speak to how you're differentiating your CCAS offering at the enterprise level?
spk03: Okay, just a clarification. Did you say CPAS bundle deals or CCAS bundle deals?
spk08: CCAS.
spk03: OK, so XCAS. Yeah, look, XCAS is clearly out of date. But XCAS is clearly driving our enterprise strength. Oh, sorry. So it's clearly driving our enterprise strength. We do see it resonating in more and more mid-market enterprise customers. And as Dave mentioned in kind of the question about what he's done since he's been here, as we push our demand generation and our marketing efforts higher and we get the awareness out there, that is definitely helping the situation in terms of continuing to grow our enterprise business. It is the focus of the company.
spk08: Okay, and then can you just talk about any CCAS opportunities you might be seeing just within your team's direct routing customers?
spk03: Well, I would say most of the CCAS that we see and the type of customers we land are interested in our contact center products. So they may do it from day one. So Dave talked last quarter about Halfords, which bought standalone UCaaS, Microsoft Teams integrated UCaaS, and Contact Center all in a bundle. And then we have a number of customers that are buying Teams today with an eye towards adding Contact Center in the future. If they're coming to us, it's because they want that global capability and they want that mix and match capability across. And then lastly, we just add more feature functionality. This quarter, our front desk launch, which as Dave mentioned is a pretty revolutionary product for us, is Microsoft Teams enabled. You can now have a receptionist with an underlying Teams infrastructure do some pretty amazing stuff. That added functionality in Teams environment is also bringing that. I want to be clear, I don't exactly know where to call that because the front desk product truly is a blend of unified communications and contact center communications technologies. So it's like you're going to hear us say this probably more in the future about how that line is blurring between these two product categories.
spk08: Okay, that's very helpful. Thanks.
spk02: Again, if you would like to ask a question, press star, then the number one on your telephone keypad. Your next question is from Sharon. Sharon Kripa with Northland Capital Marketing. Please proceed.
spk09: Hi. So this is Sharon on behalf of my class, the Northland Capital team. So how is the demand for the combined UC and CC offering? Is it stronger or weaker internationally than in the U.S.? ?
spk03: Okay, so in terms of the XCAT product, I would definitely say the strength is stronger in the international markets, and the numbers show that, right? So the international buyer absolutely, I believe, prefers to buy UC and CC together from a single vendor solution. And since we're the leader in that category, it definitely benefits our international business. Now, this is not to say we also don't see strength in the U.S., but it's definitely a stronger fit in the international markets.
spk09: Okay, thank you.
spk00: Operator, I think we have time for one more question.
spk02: There are no further questions at this time. I will now turn the call back over to the presenters.
spk00: Great. Thank you very much. We're around if you have any further questions. Bye-bye.
spk02: This concludes today's conference call. You may now disconnect.
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