This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: Thank you ladies and gentlemen for joining and welcome to the 8x8 fiscal Q3 2022 earnings conference call. My name is Selina and I'll be facilitating your call today. If you wish to ask a question, you'll have the opportunity to do so at the end of the presentation. Please press star followed by one on your telephone keypad if you wish to ask a question. To remove a question, please press star followed by two. I now have the pleasure of handing over to your host today, Kate Patterson, VP of Investor Relations to begin. Kate, please go ahead.
spk01: Thank you, and good afternoon. Today's agenda will include a review of our third quarter results with Dave Sipes, our Chief Executive Officer, and Sam Wilson, 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 the impact of the FUSE acquisition, as well as our business, product, 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. 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 the year-over-year comparisons in some cases, were not prepared in accordance with U.S. generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release and our earnings presentation slides, which are available on 8x8's investor relations website at investors.8x8.com. With that, I'll turn the call over to our CEO, Dave Seitz.
spk06: Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. Let's turn to a review of our third quarter, an update on our acquisition of FUSE, and our progress and plans for the future. In fiscal Q3, we delivered service and total revenue above the high end of our guidance ranges. Additionally, we delivered positive operating cash flow for the fourth consecutive quarter and achieved our year-end operating margin target a quarter ahead of plan. We also announced our acquisition of Fuse, which increases our enterprise customer base and adds resources for innovation. This transaction closed on January 18th. The market opportunity to migrate business communications to the cloud is massive. We are beginning to see the impact of our focused investments in XCAS, go-to-market, and especially channel and the global coverage in our Q3 results. We have built a strong foundation for growth. I believe we are well positioned as the market evolves. I will frame my comments today around three pillars of our competitive advantage, our XCAS platform, our leadership with 8x8 voice for Microsoft Teams, and our global coverage. Turning to a discussion of XCAS first, capitalizing on the demand for integrated UCAS, CCAS, and CPaaS offerings, XCAS provides a single platform for customer and employee engagement. XCAS eliminates silos and speeds information flow across the enterprise, enabling organizations to be more agile and responsive to customer needs while operating at a lower cost of ownership. 8x8 XCAS was recently awarded the 2021 CRN Tech Innovator Award. Additionally, we were named a leader in the IDC MarketScape Worldwide Unified Communication and Collaboration 2021 Vendor Assessment. XCAS ARR is now more than 35% of total ARR and continues to grow at more than 35% year-over-year. On a dollar basis, we delivered our best-ever sequential and year-over-year growth in XCAS ARR. Adoption of XCAS, often with our 8-byte Voice for Teams capability, is gaining momentum across a broad range of industrial verticals and geographic regions, including the public sector. A few recent examples of both new logo and land and expand XCAS deals include Kubota, North America, a leading manufacturer of agricultural construction equipment, implemented their one Kubota initiative to bring multiple business units onto a single communication platform. Following a successful pilot led by 8x8 Center of Excellence, Kubota selected 8x8 XCAS for 1,000 UC and 200 contact center seats to enable streamlined business communications across the organization. A second win was the London Bureau of Newham, which provides service for more than 350,000 residents in East London. They most recently expanded their 8x8 contact center by more than 90%, bringing the total number to over 220 CCAS seats. 8x8xCAS is deployed across more than one-third of London's 32 bureaus now. Hays County in the Austin, Texas metro area is one of the fastest-growing counties in the U.S. with more than 240,000 residents. The local government sought a single cloud communications platform with high availability. Working with a channel partner, they selected 8x8xCAS with voice for Microsoft Teams to support nearly 1,000 users. Looking now at 8x8 Voice for Teams, we are seeing increased adoption as organizations seek to provide their distributed workforces with the ability to interact with colleagues. In September, we announced that we had surpassed 100,000 business users for our Teams integration, and we continue to see strong momentum. In the third quarter, we experienced business user growth of more than 30% quarter over quarter as a growing number of new and existing customers adopt 8x8 Voice for Teams. Customers choosing 8x8 Voice for Teams in Q3 included the financial ombudsman service in the UK, which investigates and settles complaints between consumers and businesses that provide financial services. Working with our partner, Virgin Media O2 Financial Ombudsman Service selected 8x8 XCAS with over 1,000 UCAS seats and several hundred CCAS seats. Our ability to help them advance their digital strategy combined with our tight integration with Microsoft Teams and direct agent routing were integral in their decision to select 8x8. InPro. which is a global manufacturer of high-performance architectural products for commercial buildings. They selected 8x8 XCAS and Voice for Microsoft Teams to support more than 600 employees around the world. They chose XCAS for composed experiences such as front desk, which will empower receptionists with advanced call handling capabilities and for tight integration with Salesforce. Turning to our global coverage, which further differentiates our solutions and creates a strong competitive advantage with multinational organizations, in the third quarter, we expanded our coverage to include the Philippines, another industry first, and also to Panama. The Philippines expansion follows our announcements earlier this year of delivering an industry first integrated cloud phone and contact center solution in China and Russia. Our regulatory-compliant cloud-based global UCaaS solution is now available in 48 countries and territories, up from 41 a year ago. Our global reach service now covers more than 80% of the world's GDP. Examples of new and expanding global customer wins include Beam Suntory, a great example of a customer that is standardized on XCaaS with 8x8 voice for Teams on a global basis. Beam Suntory is one of the world's largest producers of distilled beverages, including the world's best-selling bourbon, Jim Beam. An 8x8 customer since 2020, Beam Suntory most recently added more UC and Teams licenses in Scotland and Germany to now support over 2,600 employees in 35 sites across 17 countries. Headquartered in Brisbane, Australia, ALS Limited provides testing, inspection, certification, and verification services for over 370 sites across 65 countries. They continue to increase their global 8x8 investment, most recently adding another 800 users with Microsoft Teams integration to support employees in Australia, Canada, New Zealand, and the U.S. Integral to our global strategy is growing our CPaaS share in the Asia-Pacific region. CPaaS revenue continued strong year-over-year growth as we added new customers across the region. For example, SellHere, a leading e-commerce platform with more than 6 million users in Thailand, uses 8x8 SMS APIs for its marketing campaigns, as well as updates and notifications to boost customer experience. Ula, Indonesia's leading e-commerce marketplace for more than 70,000 traditional small and micro retailers, uses 8x8 SMS APIs to enhance its customer experience with marketing promotions, notifications, as well as one-time passwords. Welsh Water, the only not-for-profit water company in England and Wales, uses 8x8 video interaction APIs to provide. With our XCAS strategy, Teams integration, and global coverage, our shift-up market is well underway. Enterprise ARR now accounts for 54% of total ARR and increased 30% year-over-year. The shift to enterprise is also evident in our third quarter retention metrics, which were the best we've seen in the last several years. This performance reflects our customer-first culture and changes we've implemented in our customer success organization. Our focus on enterprise customers and global approach to the market are among the reasons the FUSE acquisition makes so much sense. With the acquisition now closed, we increased our installed base of enterprise customers by about 30%. and created a large cross-sell opportunity for our contact center solution. In the two weeks since the acquisition closed, we're already talking with a number of customers who are excited about the additional solutions 8x8 can provide. In particular, we see the potential for many customers to add 8x8's contact center solution even before they upgrade to an overall XGAS platform. Many customers have also inquired about 8x8's solution for Microsoft Teams. Finally, few partners, many of whom were already 8x8 partners, are excited about the prospect of delivering more complete solutions for our mutual customers. Although it's still early in the integration process, we are excited by the response we're seeing from customers and partners. I am also pleased to report that our R&D and customer success teams are working together and mapping out strategies to accelerate our product roadmap that will increase XCAS adoption worldwide. We have already integrated the FUSE development teams and redeployed FUSE engineers to fuel our innovation. Watch for some of the exciting XCAS and contact center announcements later this quarter. In summary, in the third quarter, we delivered strong revenue performance, demonstrated continued operational discipline and excellence, and expanded our base of enterprise customers. As the customer wins show, it is often the combination of all three competitive advantages, XCAS, 8x8 voice routines, and our unparalleled global coverage,
spk11: that makes our solutions compelling for customers as they migrate to the cloud. Our channel contribution continues to increase globally, but we recognize that there's further opportunity.
spk06: We recently hired Lisa Daly-Rial as our global channel chief to lead and scale our channel organization. Lisa was most recently vice president of strategic partnerships at RingCentral, and I'm confident she will take our channel programs to a higher level. We also announced that Stephanie Garcia joined 8x8 as our chief human resource officer. Stephanie is a recognized HR executive in cloud and theft industries with experience at Salesforce and PayPal, leading and scaling high-performing global HR operations at dynamic, fast-growth companies. She will be responsible for leading the HR organization and expanding the company's Team First culture as we enter the next phase of growth. I welcome them both to 8x8 team and our customer-first, product-first, team-first culture. I will now turn over the call to Sam Wilson, our CFO.
spk07: Thanks, Dave, and good afternoon. We are pleased to deliver results for the third quarter that exceeded guidance, showed improved operating leverage, and generated positive free cash flow. Better-than-expected performance from our product categories were the key drivers, with both XCAS and CPAS both strong performers. Total revenue for the quarter was $156.8 million, an increase of 15% year-over-year, and above our guidance of $152.7 to $154.2 million range. CPAS and contact center revenue was more substantial than expected during the quarter, contributing to the overperformance in service revenue. This offset weaker endpoint shipments and other revenue due to ongoing supply chain shortages. Looking at service revenue, we generated $149.4 million, an increase of 18% year-over-year and above our $144 to $145 million guidance range. Adjusted for exiting the wholesale business last year, service revenue growth would have been about 21% year-over-year or 3% higher. Total ARR growth was $572 million at quarter's end, up 16% year-over-year. Enterprise ARR accounted for 54% of the total and increased 30% year-over-year. The shifts we have made in our demand generation efforts towards enterprise resulted in strong sequential growth in enterprise ARR up approximately $25 million, or 9% quarter on quarter. Growing our enterprise business is one of the core tenets of our long-term strategy due to its longer commitments, higher retention, and better efficiency ratios. The third quarter non-GAAP gross margin was 64.7%, and higher sequentially as service revenue accounted for a more significant percentage of total revenue. Non-GAAP were 350 basis points versus the third quarter of 2021, driven by our focus on improved spending efficiency. Non-GAAP other revenue margin came in at minus 32.2% for the quarter, reflecting the decline in endpoint shipments and some increased investment in our professional services organization as we prepared to welcome the FUSE customers to 8x8. As a reminder, other revenue represented only 5% of our total revenue for the quarter, so the decline in other gross margin had minimal impact. In total, gross profit dollars grew 25% 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 fourth quarter, we expect overall gross margins to be generally flattish sequentially. Turning to third quarter operating expenses, we continue to make focused investments in R&D, mainly in the contact center capabilities within the XCAS platform and in sales and marketing while keeping G&A costs tight. We have made significant investments in sales and marketing over the last four quarters to increase awareness for XCAS to expand our partner programs and to target enterprise customers. Going forward, we expect year-over-year dollar growth in this category to slow compared with the growth of the past few quarters after adjusting for the step-up due to the addition of FUSE. Total spending as measured by non-GAAP 10% year-over-year below our 15% total revenue growth. We had focused non-GAAP operating margins to exit this fiscal year. at approximately 2% and hit that target in Q3 a quarter earlier than expected. Going forward, we expect total spending to grow more slowly than total revenue on a rolling four-quarter basis as we drive efficiencies throughout the business, but there can be some quarter-to-quarter variability. Turning to the balance sheet, total cash, restricted cash, and investments ended the third quarter at approximately $260.4 million. Excluding $8.6 million of restricted cash, the balance was $251.8 million, increasing roughly $94 million quarter on quarter. Cash from operations was a positive $9 million for the quarter, much better than expected on collections and expense management. We were free cash flow positive for the quarter. After we announced the FUSE acquisition, several of our note holders indicated an interest in increasing their positions, so we opportunistically raised capital. During the quarter, we raised $139 million by offering more of our 0.5% notes due in 2024 and simultaneously conducted a buyback of $45 million, or 2.3 million shares. The buyback helped offset any dilution from the offering and reduce our paid discount and resulted in a net increase in cash of approximately $89 million after transaction costs. Excluding the capital raise, quarter-on-quarter total cash increased by about $5 million, better than the small burn forecasted. This was driven by strong collections and higher than expected revenue. For the fourth quarter, we expect total cash balance to decline due to the fused purchase, but cash from operations should be stronger on a combined basis, excluding one-time cash items around restructuring and transaction costs. One item I'd like to mention are liabilities at deferred revenue, which was over $25 million during the quarter and up 23% year-over-year as we move towards billing in advance of service delivery. Our PO was approximately $565 million for the third quarter, up from $550 million in the second quarter. Okay, let's talk about FEWS. We closed the acquisition on January 18th, earlier than we had expected. We sent them about $132 million in cash and 5.8 million shares, or approximately $250 million, in total consideration based on the share price at the time of the announcement. As expected, we will report a stub period of about 10 weeks for FUSE in the fourth quarter and an entire quarter in the first quarter of fiscal 23. The guidance provided in a moment will be for the combined company. We intend to provide commentary for the first few quarters on revenue contribution from FUSE customers as we announce the transaction. At the time of the announcement, FUSE was losing money at a non-GAAP operating line around $16 million on an annualized basis. We believe we can generate over $20 million in annual cost savings, though it will take a few quarters to be fully realized. If we execute the plan, FEWS will be additive to our non-debt operating income over time, but a small headwind in the short term. This week, we took a step in this direction with a restructuring that will appear in the March quarter numbers. As we move into fiscal 24, we believe we could find further cost synergies as we integrate. Taking all this into account, we are establishing guidance for the fourth quarter fiscal 2022 and as follows. We anticipate service revenue to be in a range of $173.5 million to $175.5 million, representing approximately 30% to 31% year-over-year growth. We expect that FUSA's revenue contribution will be about $20 million for the rough 10 weeks of period. We anticipate total revenue to be in a range of $1 million, representing approximately approximately 24 to 26% year-over-year growth. Please note that we expect to have continued supply chain issues with endpoint hardware shipments and expect other revenue to be down about $1 million sequentially from the third quarter because of these. We expect non-GAAP operating margin to remain positive on a non-GAAP basis, but down on a quarter-over-quarter basis as we begin integration and employee-related FICA and benefit expenses increase again at the beginning of the calendar year. We believe integration will take approximately six to nine months and expect to show some financial leverage on the operating line throughout the year. Some modeling notes. These numbers reflect a combination of 8x8 and FEWS as well as ongoing investments we are making. Please note that Q4 FY22 ranges below are based on the stub period I mentioned for FUSE. We are keeping a majority of FUSE's R&D. So on a combined company basis, we expect to step up R&D to approximately $25 to $26 million for fiscal Q4 22. On a non-GAAP sales and marketing, we expect to step up into a range of $73 to $74.5 million for fiscal Q4 22. On a non-GAAP G&A, we expect to step up to a range of $17 to $18 million for fiscal Q4. We are giving line item guidance for this quarter only, so you can adjust your models to include Pew's expenses, but there may be some reallocations as we integrate. Combining our outperformance for the third quarter with the outlook above, we are raising revenue guidance for full year fiscal 2022, ending March 31, 2022, as follows. We are raising total revenue outlook to a range of $636 to $639 million, approximately 20% year-over-year growth. We are raising service revenue range to $603 to $605 million, representing approximately 22% year-over-year growth. We have raised our outlook every quarter this year, and our update for Q4 shows that we continue to execute our plan we outlined last May. we believe the business is trending in the right direction. Looking a little further into fiscal 23, which begins on April 1, 2022, we currently expect year-over-year growth rate for fiscal 23 service revenue, including the revenue contribution from the Fuse customer base, will be in the mid 20% range. We only closed Fuse a few weeks ago, and this is a very preliminary view. We will be able to give you more details when we announce our fourth quarter results in early May. Let me end with some closing thoughts. Since Dave joined 8x8 a little over a year ago, we have concentrated our investments in select areas to reaccelerate growth and deliver improved operating profit and cash flows. The FUSE acquisition is a key component of this strategy. We still have work to do. But the investments we have made and the focus Dave has brought to our business are beginning to take root. With the investments in XCAS, global coverage, voice for teams, and sales efficiency, including key leadership team additions, we are well positioned to execute against these goals in the upcoming fiscal year. We remain focused on reaccelerating our core business, integrating our FUSE acquisition to achieve cost and revenue synergies, including cross-selling and customer retention. We believe the cloud communications market is large, growing, and dynamic, and that we are well positioned with our XCAS platform, our global reach, and our market-leading Microsoft Teams for integration. With that, thank you, and let me turn the call over to the operator for questions.
spk14: Thank you. If you'd like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by 2. Again, to ask a question, press star 1. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause you briefly as questions are registered.
spk15: first question comes from ct panagrahi with mizuho please proceed hey guys this is actually matt diamond on city's behalf congrats on the very solid print that's glad to see that fuse is working out the question i have is around the cross-sell opportunity there was obviously some promising cost synergies here but and i know it's early in the integration to maybe speak about this concretely but Dave, after your first couple weeks of closing the deal, could you give us any sense of your confidence in that $50 million incremental ARR that was talked about when the deal was announced?
spk06: We just closed the deal two weeks ago, and we're having conversations with customers currently, and they're very positive. So encouraged overall, although it's well too early to give updates on the quantifiable number of the cross-sell, and I'll let Sam talk to me.
spk07: Yeah, so as Dave said, look, the feedback so far from the customer base, very positive, I would say. We're going through and validating customer by customer. As Dave said, we only closed it two weeks ago, so we actually literally got the names of the actual customers two weeks ago. And so we're working through all that. I would say incrementally more positive, not ready to change numbers.
spk15: Got it. And around the margin front, it sounds like there's a promising trajectory on the cost phase. I'm curious how you're thinking about inflationary costs this year, if there's anything we need to keep in mind when we're modeling the magnitude of spending growth and margins for fiscal 23.
spk07: No, specifically around inflation. Look, we're dealing with it internally, so we are seeing things like wage inflation, you know, some T&E inflation, those kinds of things. We're dealing with it in the overall guidance we're giving that total spending increases should be less than revenue growth. That's, you know, that's for us to deal with.
spk15: Okay. Thanks so much.
spk14: Thank you. Thank you. The next question comes from Matt VanVleet with PGIG. Please proceed.
spk00: Good afternoon. Thanks for taking the question and nice job on the quarter. Dave, I guess bringing in Lisa to run the channel group here, what incremental sort of improvements or strategy do you think will help get pushed through not only given your experience working with her, but maybe where you're trying to take the channel program from here now that you've built up a nice big stable of partners that are helping out?
spk06: Yeah, and channel is core to our overall strategy. We see the retailer network as the key element that's you know, worked with these customers historically, been with them on legacy solutions, and are helping them through the migration to the cloud. And so as we built up our channel program, and it's been several years as we've done that, we continue to aspire to be the easiest to work with and, you know, build the most trust with the channel itself. That's shown already with the strength of our team as well as the strength of the channel that we've added, but I think there's still a long ways to go. Lisa has a decade-plus of experience with the channel, and she'll bring a lot of operational excellence and ease and trust that we will continue to build with that channel and do that globally. And I see a lot of opportunity still as we – work some of the elements of our differentiated approach to offering both agency and wholesale billing models to Channel that's been very successful for us in Europe to bring that into the U.S., as well as capitalizing on this tremendous Microsoft Teams opportunity that's ahead of us and using the Channel to do that. We still have a ways to go, but I think it's been a positive experience for us to date, and I know Lisa's going to help us move that to the next level.
spk00: All right, great. And then looking at both the mid-market and the S&B groups, you know, a little slower growth, even on S&B, a little bit of contraction here. Can you just help us? kind of break down what some of the puts and takes are around there. Did you see any sort of elevated churn? Are you seeing pricing compression as contracts are renewed? And then what maybe kind of new growth help offset that, any of that downward movement there? Thanks.
spk06: Yeah, churn in small business is inherently higher as you have business mortality and seasonal use of the product. And our core focus, which goes along with our strategy, is really focusing our go-to-market exercise and activities and incremental dollar, both sales and marketing, on the enterprise market. The enterprise is core aligned to our strategy of XCAS. If you think about XCAS, it combines both the employee experience on the UC side and the agent experience on the contact center side. Only the larger customers have that contact center need. So it inherently aligns us with enterprise, as well as if you look at our other advantages of Microsoft Teams and our global capabilities, taking that to 48 countries. Those are really aligned with enterprise. So that's where we've been leaning in and focusing. And we had one of our best enterprise error growths this quarter. So While it takes time to grow that enterprise business as you build pipeline and then mature that pipeline into deals, we are already seeing some of the benefits of that work, which I'm happy about, and continued focus.
spk11: So that's where we'll focus our metrics on what's important to us.
spk00: All right, great. Thank you.
spk10: Thank you, Mr. VanVleet. The next question comes from Brian McWilliams with Barclays.
spk14: Please proceed.
spk06: Hey, guys. Thanks for taking the question.
spk08: Excluding FUSE for a second, it looks like a strong fourth quarter guide in terms of sequential service revenue dollars added compared to your guides in the previous quarters. So anything in your business or anything in your market opportunity that's given you confidence for the fiscal 4Q?
spk07: I'd love to say something insightful at this moment, but it's business as usual. We've got a great product. Teams is doing really, really well. Our global reach message is resonating. And so I have nothing incredibly insightful to say other than I think we're doing really great, and all the investments that we've made are just paying off.
spk06: That works for me. And just as we think about Fuse and its addition to 8x8, how should we think about the year-over-year growth rate for Fuse in 2021? And is there anything since getting your hands on the company? I know it's just been the last few weeks that, you know, maybe you're more excited about from a revenue or synergy standpoint. Thanks, guys.
spk07: All right, so I'll take those in reverse order. Look, as I mentioned on an earlier question, I think the cross-sell opportunity, you know, we had said on the call that we had zero modeled in for cross-sell. That's still the case right now. And so, you know, I think there is some positive stuff there, but too early, nothing in guidance, those kinds of things. And so when you talk about the year-over-year growth from FUSE customers, it gets a little mushy, and I'm sorry to say that, but what we would expect is we expect FUSE revenue to decline from the customer base. Part of that will be natural attrition. Part of that will be we're going to migrate them or upgrade them over to the 8x8 side. And so I think it's purely that's the key drivers right there.
spk06: If I could just follow up on that real quick. I guess how should we think about, like, the timing of that migration, or is that something we can track, or is that just, like, are you going to incentivize that? Like, what's the best way for us to monitor the progress there?
spk07: So, I mean, the big thing is customer choice, number one, right? So we're not going to force anything, any of that sort of stuff. Customer choice, we're analyzing it now. Can I beg that you ask me that again in 90 days, and I'll give you a more coherent answer, but it's still early. We want to make sure that customers get the best of both worlds. That's something we said earlier. We absolutely want to stick with that, so choice is the number one thing, and trying to bring forth that best of both worlds solution.
spk06: And this is something that's going to be a positive for customers as they get to add a greater breadth of products, contact center solution from 8x8, both with their current platform as well as getting the full XCAS experience when they decide to upgrade to the 8x8 XCAS platform. We do expect some of that to happen very quickly and continue to happen for, you know, multiple years. Appreciate the color. Thanks, guys.
spk14: Thank you, Mr. McWilliams. The next question comes from Michael Turrent with Wells Fargo. Please proceed.
spk08: Hey, guys. This is Austin Williams, author of Michael. Thanks for taking my question. I just wanted to follow up on the question on the FUSE guide. The guide is for $20 million for the partial quarter. I think the previous disclosure was $100 or $125 million run rate. Are there any purchase accounting adjustments or other call-outs as to why that might be lower than we were previously modeling?
spk07: Well, yeah. So, I mean, first off, it's service revenue. And second off, it's a stub period, right? So I only get the time I own them. I can't take the full quarter. I'd love to, but I can't. So, I mean, you'll see another step. That's why I try to be really clear in the script. You'll see the first full quarter on that kind of run rate will be – you know, our fiscal first quarter of 23. Got it.
spk08: Thank you.
spk14: Thank you. The next question comes from Peter Levine with Evercore. Please proceed.
spk04: Great. Thanks for taking my questions, guys. I think the first one is, if you think about the service revenue reacceleration at or above that 20% three-year target, first, can you just clarify, that's an organic target? And then second, you know, the go-to-market investments that you guys made internally and towards extending the part of the ecosystem, obviously, that's gaining traction. So, really, what has to work to get to that 20% number? And then the reverse is, you know, where does the risk lie?
spk07: All right, I'll take the first part of that, and maybe I'll let Dave talk about the risks. So, we weren't clear organic or inorganic. We've done both in the history of the company, and I, like – I think you're reading too much into it. It's 20% growth. It's just what we expect the revenue growth side to be. In terms of what has to work, this question was asked a lot when I gave the long-term guidance. The thing I tried to make very clear is that we need to improve our sales and marketing efficiency. That naturally lifts the growth rate. That's one of the areas that we continue to work on. How we invest, where we invest is a key part of that strategy, but that's one of the things that has to continue to work in our favor to drive higher growth rates.
spk06: Where we'll get that acceleration and improve sales and marketing efficiency is as we have success selling XCAS. And we've seen now it's more than 35% of our ARR and growing at over 35% year over year to drive enterprise customers, which I talked about earlier, as well as keeping those customers very happy. And that's where we've made a lot of progress today. It would be always your ongoing risk, but we have driven – the customer error retention improvement every quarter that I've been here and we had a multi-year record on that this quarter. So those are the key elements to drive customer retention of large accounts, to drive the enterprise business, and to drive the XCAS adoption.
spk03: Just one last one, a housekeeping question. I don't know if I missed it on the call, but can you – I said give us the RPO number. I just didn't catch it.
spk07: I said it's 565. Great. Thanks again.
spk14: Thank you, Mr. Levine. The next question comes from Metta Marshall with Morgan Stanley. Please proceed.
spk16: Great. Thanks. I wanted to know if you could just kind of give what the headwind was from just the exiting of the wholesale business, either to this quarter or to the guide. And then just maybe as a question for Dave, clearly you guys have made efficiencies to the services organization and maybe de-emphasized that smaller business. or book of business, you know, should we consider, you know, that as there are any growth opportunity or additional churn we should be mindful of? Just anything to note kind of on the smaller end of the business, you know, as you guys have kind of de-emphasized or changed the services organization around that business.
spk07: Yeah, so the headwind from exiting the wholesale business was about 3% service revenue growth. So I think I said in the script the total service revenue growth would have been about three percentage points higher if, you know, assuming that we hadn't exited and the business was flat.
spk16: And same to the guide, correct?
spk07: Yeah, yeah.
spk06: Okay. And then to your question on our services organization and business, obviously as a fast business, one thing we're striving as we go through, product and of that organization easier more out of the box for customers we've made some progress on that but that creates inherently a little bit of revenue headwind but obviously we're focused on the service revenue component of the business and we believe easier deployment implementation configuration creates strong advantages strong TCO and opportunities for customers for us as a business.
spk16: Got it. Thanks.
spk14: Thank you, Ms. Marshall. The next question comes from Michael Lattimore with Northland Capital Markets. Please proceed. Great.
spk07: Thanks. On the record revenue retention, can you just give a little more data on that? Yeah, I mean, basically our retention rates are the highest we've seen pre-pandemic, even before that. Churns really come down. I mean, it's been a key area of Dave's focus the last year. Churns really come down the last year. And arguably it's across the board. We saw some of the lowest credit card decline rates we've ever seen. We saw great enterprise retention. It's across the board.
spk06: We've made significant investments in our customer success organization over the last year. as well as product usability stability enhancements. And I think those are paying off. Obviously, there's other macro trends possibly affecting, but those, I think, are really critical for what we're doing here and getting greater customer happiness.
spk07: Great. And then in terms of the XCAS verticals,
spk02: Is there any sort of material difference between the verticals that are in the XCAS business versus, say, UCAS, you know, independent of XCAS or independent of Contact Center?
spk07: Or are the verticals pretty much similar? Does it make the verticals similar between the two?
spk06: For us today, the verticals have been similar as we focus on a lot of blend between the UC user and the Contact Center user. We focused on informal queues, and bringing contact center capability into UC users. We talked about our front desk product as one of those. So we are – there is, for us, there's a high crossover in verticals. Our core vertical being SLED out in the EMEA market, and that also is buying XCAS. So we're seeing it across the board.
spk01: Okay.
spk14: Thank you, Mr. Lattimore. The next question comes from George Sudden with Craig Hellam. Please proceed.
spk17: Thank you. I'm glad to hear you're going to continue to focus heavily on R&D. You did mention bringing over a few developers in large part. Can you just talk about how does that influence the product roadmap going forward? In other words, how might the product look different in a couple of years as a result of this move?
spk06: Sure. And we are, you know, I am happy to say we've brought over that team. We've been able to align them into our organization. This is all relatively new, but obviously planned. And it does create a force multiplier on innovation for us as we're able to put incremental resources on key product innovation areas as we have the basics covered, right, from an R&D perspective. And it's nice that we're able to do it while making this profit, you know, being able to contribute to profit over the next 12 months. And what we will focus on, obviously, is those core pillars of XCAS, our team's product, and our global reach, all of those already in the last year or so. There are already additional innovations in the pipe, but what you'll see is increased velocity of innovation over the next nine-plus months. And areas that we'll focus on are things like admin usability for managing very, very large organizations, some of the polish around our omni-channel and AI capabilities, additional deeper integrations that go with that, and additional personas. The front desk was an initial, our first foray into personas, and we have some additional ideas there. So I would say we have a couple interesting announcements planned for late this quarter, and I would say stay tuned for the specifics. I appreciate the detail. Thanks, guys.
spk14: Thank you. Thank you, Mr. Sutton. The next question comes from James Breen with William Blair. Please proceed.
spk05: Thanks for taking the question. You had mentioned a little bit about some of the supply chain issues. Just wondering sort of how maybe you've got to change the business a little bit around some of that and if you're seeing it alleviate at all. And does it impact your sales cycles? Thanks.
spk07: Okay, so here's what happens. Yes, I think it does have some effect. It's hard to quantify. But I think we are seeing – Some enterprise customers place smaller orders up front because they have to have a slightly different deployment schedule, and so there may be some pent-up demand. Certainly, we've got the largest back orders that we've had in a long time backlog, if you will, of hardware, and that is – You know, a statement, is it alleviated? Not really. It's still something we manage every day, every week right now. You know, I'm hoping that at some point in the next four quarters it alleviates, but there's nothing that I can concretely say, you know, that we have the signs on the horizon that it's going to be alleviated.
spk05: So you basically, you've adjusted to the working environment that you're in now, haven't seen necessarily a change, but it just hasn't come to a completion yet.
spk07: Yeah, I mean, there's a change. I think, like I said, I think just some of the enterprise orders, the bigger orders are probably a little smaller than they would have been because they're placing the first order and they'll place a second order here in a couple months when we get more hardware to meet their deployment needs.
spk06: And we're building a greater breadth of hardware option to create more flexibility for customers.
spk05: Okay. And then just qualitatively, you mentioned a little bit about the cross-sell with FUSE. Any real difference in the size of their customer base relative to the size of your customer base, small, large, et cetera?
spk07: Well, on average.
spk05: In terms of the size of the companies.
spk07: Yeah, on average, the size of their customers with their enterprise segment and their enterprise segment, they're very comparable. If that makes any sense. We have a larger small business component than they have. But on the enterprise side, both companies are very similar to each other.
spk04: Okay, great. Thanks.
spk14: Thank you, Mr. Breen. The next question comes from Catherine Tripp. Nick, we'll call yours. Please proceed.
spk12: Thanks for taking my question. Congratulations on a good quarter. So you spent some time talking about Microsoft Voice with Teams, and I'm wondering why aren't you pursuing a relationship with Slack? It seems to me that would be another avenue of good growth. Thank you.
spk06: Thanks, Catherine. So on the Teams opportunity, I do think it is like more partners is always good. So we're open to that relationship. The Teams platform itself is a larger platform, honestly. And they create an opportunity that I think is still just lightly touched. And We are doing a lot in that regard to help penetrate these users that don't have an enterprise communication system attached to their team's usage. And we're doing that through direct routing, and we're adding a lot of value through our contact center, powering all our employees, global coverage. We do have a strong relationship with Salesforce overall. and obviously with integrations across both our UC and CC products, and we see that as a very important relationship overall for us.
spk12: All right, thanks. Appreciate it. Thank you.
spk14: Thank you, Ms. Trepnick. The next question comes from Will Power with Baird. Please proceed.
spk02: Great, thanks. Yeah, I guess a couple of questions. Maybe just starting with the service revenue upside in the quarter. I think, Sam, you indicated it was really driven by strength in CPAS and CCAS. And just wondering if we could get any other color there. Are there any particular products or areas within CPAS and then within CCAS? You know, is that seat? Is it usage? Any other color? And just the sustainability of that upside, I guess, as we move into Q4. Yeah.
spk07: So on the CPaaS side, it was, you know, Southeast Asian usage. And so I think, you know, we've got a great presence there. We've won some new customers. I mean, I think Dave has mentioned some pretty big brand names over the last few earnings calls. You can imagine those flowing through as usage as they ramp up, starts to show up. And then on the contact center side, it was just minute usage. And so do I think it's sustainable? Yes. It feels like the world's opening up and there's a lot more business activity going on, and that just correspondingly shows up as more usage.
spk02: Okay, that's great. And then just a question on ARR growth. You know, it looks like the XCAS ARR growth, you know, accelerated. I know you called that out. I know that's the primary focus. And I think as you touched on, you know, as you look at mid-market and S&B a bit weaker. So I guess one of the big questions or one of the big questions is, is when do we get to an inflection point where that XCAS ARR can more than offset some of the pressure points in mid-market and S&B to help drive an acceleration in ARR growth? What are the key drivers of that and the abrupt timeline to how to think about that?
spk07: dave and i are looking at each other we're wondering if you want us to give you an answer of like three months six days four hours and eight minutes or just the key drivers right so the uh sorry a little bit of humor today um so look what's really driving it is we're pushing in there we're seeing the first signs that the investments we're making in the demand generation in the branding in the channel and all those kinds of things are paying off. Yes, it's continuing to grow faster than overall growth rate, so it's becoming a larger percentage of our business, exactly what Dave wants, and he's been driving towards, you know, in excess of a year now. And, you know, I'm hoping that every call from this point on, we keep saying it's a bigger percentage of the business because it is one of our tenets to drive the overall growth rate of the company up. Okay. Thank you.
spk14: Thank you, Mr. Power. The next question comes from Kim Horan with Oppenheimer. Please proceed.
spk05: Thanks, guys. Can you go into Deems a little bit deeper? Where are you with developing the channel there? I would think it's a very different channel than the legacy channel. And where are you just like the processes to kind of implement the You know, and I guess just lastly, what inning are we in, do you think, in terms of your ability to kind of execute on that and penetrate that market?
spk07: I'm sorry, can I ask you a question? The first part came a little muffled. Did you say Teams channel?
spk05: Yeah, sorry, Microsoft Teams, yeah. Where are you developing the channel that kind of can sell into a legacy kind of Microsoft, you know,
spk06: So, and I'm going to start with the last part. I think it's early in this that there are a lot of Microsoft Teams users when you look at the MAUs, but they're predominantly all using it for messaging, right? And so attaching enterprise communications to that I think is what's and I think just a small fraction have really attached enterprise communications. And when you do do that, there's different ways to do it, whether it's direct routing or operator connect or calling plans. I think what we see as the predominant solution today is direct routing, and that's where we're differentiated. So I think we sensed this, we got into this early, and we think, capitalizing on it. Obviously, we had 30% quarter-over-quarter growth, but I don't think we have yet really capitalized on the full channel opportunity. And so that is something that's the initiative for us. We've been mostly riding our current channel relationships, and there is overlap there, but I think there's a whole additional set of channel partners to exploit, to your point.
spk11: And so that's something that And obviously, we've been doing it.
spk06: When we do it, we do it by, you know, the advantages we bring here is really powering all employees, your contact center employees, giving global coverage to those, and these enhanced capabilities of SMS calls, use fax, things like that. So we've been having a lot of success. I think there is an opportunity for a much bigger opportunity for success here.
spk05: And where are you with the ability to provision and support customers and just quality of the product on Teams?
spk06: Yeah, that's a great question. We, you know, those customers are predominantly provisioned and deployed. And we work on, you know, quality of service, uptime reliability of service is our core tenets. That's where we come from. And so I would say we have an ability to do that. We are still figuring out some of those components, but I think it's better than anyone else and a core special sauce for us to do that in a high-quality and high-reliability environment.
spk10: Thank you.
spk14: Thank you. The next question comes from Michael Funk with Bank of America. Please proceed.
spk02: Yeah, thank you for taking the question. It's good to be here.
spk11: A couple if I could. You know, first on the enterprise deal funnel, any kind of comment you can give on the change in size of that funnel and then early and late stage? We don't.
spk07: Mike, first, thank you for the recent initiation. It was a great read. I appreciate it. Second, look, we don't give those kind of funnel metrics. I think it would be inappropriate. We certainly know our competitors listen to our calls, and so I think it would just be the wrong thing to give out right now. I'll just try one time at least. So on the broader question of enterprise adoption, obviously there have been different rates of inflection over time for UCAS and In CCAS, can you just kind of peel apart kind of the broader acceleration in market adoption versus success?
spk06: You know, the movement to the cloud has been occurring for almost as it's been the latter ones to migrate over time. And so I still think there's a lot of large enterprises on legacy solutions, but we are seeing a greater acceptance, partly because of the work-from-home mandates.
spk11: but partially also because people realize that's where the innovation and investment is going into the cloud solutions over legacy solutions.
spk06: So I think when people are choosing their future platform, it's becoming obvious to move to a cloud platform in this next replacement cycle, that replacement cycle. could still be up to seven to ten years, so I still think it's going to be a long run in that regard, but the propensity to move to cloud has increased.
spk11: The acquisition you mentioned earlier, your breakage, are you modeling in? So by breakage, you mean churn, right? Yeah, sure. So, I mean, you have some rough estimates of what their install base looks like, and I
spk07: So just to be safe, I doubled the industry average churn rate for their portfolio, and that's what I'm running through the model.
spk11: Great. Thank you guys so much.
spk10: Absolutely. Thanks for the question.
spk11: I wanted to double back on teams a little bit more.
spk06: Sounds like an increasingly important part of your new bookings. Can you give us any help there? I hear it's up 30% in terms of ARR. Is that Q over Q? Any more call you can give us on where that stands as a percentage of new enterprise bookings and anything like that? Yeah, I think what we said is a quarter ago we said we had 100,000 users in the first five quarters of launching that.
spk11: and that user number went up 30% quarter over quarter.
spk06: And then it is important both – we are seeing it both on new bookings, but also even the land and expand deals I mentioned today at ALS, being Centauri and London Bureau – Newham all have expansion of Teams also.
spk10: There are no additional questions at this time, and that concludes the Q&A session.
spk11: There's a replay.
spk07: It's one of those days. There's a replay available on the web, and thank you very much for your time today.
spk10: That concludes the 8x8 Fiscal Q3 2022 Earnings Conference Call.
spk14: Thank you for your participation. You may now disconnect your lines.
Disclaimer