8x8 Inc

Good evening. Thank you for attending today's 8x8 Q4 2022 earnings call. My name is Joel, and I will be your moderator for today's call. The presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star 1 on your telephone keypad. I'd now like to pass the conference over to our host, Kate Patterson, head of investor relations at 8x8. Please go ahead.

Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our fourth quarter and full fiscal year results with Dave Sipes, 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, just a reminder 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 products and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our risk factors in our report filed with the SEC. 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 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 in our earnings press release and earnings presentation slides, which are available on 8x8's investor relations website at investors.8x8.com. With that, I will turn the call over to our CEO, Dave Seitz.

Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. On the call today, I will review the quarter and fiscal year using the strategic priorities we outlined on our fourth quarter 2021 call as a framework. I will also give an update on the integration of FUSE and our progress and plans for the fiscal year 2023. We delivered another solid quarter of ARR growth, non-GAAP profitability, and positive cash flow as we continue to advance our strategy of empowering personas company-wide through integrated contact center and unified communication capabilities. We've made tremendous progress over the past year, and our focused XCAS strategy and the investments we have been making in innovation are showing up with several recent contact center focused product launches. For example, our reimagined agent workspace was a winner in customer experience innovation at Enterprise Connect during the quarter. Enterprise adoption of our integrated XCAS platform continues to expand, with XCAS ARR growth accelerating to more than 35% year over year, not including FUSE. XCAS now accounts for approximately 35% of combined eight by eight FUSE ARR, and given the FUSE enterprise base, we see an opportunity to grow this materially over the next several years. Our continued focus on operational excellence resulted in higher gross profit with fourth quarter non-GAAP service revenue gross margins at a multi-year high of 72%. The improvement in gross margins resulted in sequential and year-over-year increases in non-GAAP profitability and operating cash flow. As a result, we delivered positive non-GAAP operating income on an annual basis and generated positive operating cash flow for the full year. Total revenue was within our guidance range as sequential growth in professional services and product revenue resulted in other revenue above the high end of our guidance range. FUSE also outperformed our expectations with strong customer retention and partner engagement. Service revenue was 172.8 million, approximately 0.7 million below our guidance range due to a combination of lower than expected CPaaS usage revenue and flat small business ARR as we continue to focus on higher margin and longer-lived business. As we look to fiscal 2023 and beyond, our commitment to operational discipline will allow us to continue investing in XCAS innovation and deliver operating leverage and increased cash flows. As Sam will discuss in greater detail, Our fiscal year 23 guidance ranges for revenues and operating margin implies non-GAAP operating margin of roughly 2.5%, an increase from fiscal 2022. Given the current market environment, we remain more committed than ever to delivering robust increases in operating income and cash flow while continuing to grow. And I believe we have line of sight to potentially more than double operating margin in fiscal year 24. Digital transformation, agile workplaces, and an increasing mobile workforce are creating a massive opportunity to transform employee and customer experiences through integrated cloud-based communications. As the only fully-owned unified cloud-based UC and contact center platform, 8x8xCAS is uniquely positioned to capitalize on this opportunity and advance our industry. We are leading the innovation and offering customers new persona-based experiences, advanced AI-driven analytics, and a modern intuitive interface. I believe our balanced approach to investing in that innovation that will drive future growth while increasing operating margin and cash flows was the right approach to build shareholder value in today's environment. Turning to Q4, I want to spend a little time discussing the evolution in our CPaaS business today and our strategy for this area of our business. CPaaS represents a relatively small portion of our total revenue, but it remains an area of strategic focus for us in the Asia Pacific region. As the volume leader and low cost provider in that region, we're in a strong position to extend our lead and drive improved unit economics over time. Our strategy has been to diversify the customer base to reduce volatility and usage and focus on higher margin enterprise customers. Until Q4, this strategy was working well, and CPaaS had been a solid contributor to enterprise ARR growth and gross profit dollars. Usage by a few large customers dropped significantly in the last half of the quarter, resulting in an unexpected sequential decline in CPaaS revenue of several million dollars. The decline is reflected in our service revenue and enterprise ARR. While this was a tough CPaaS quarter, we were working with existing customers to grow their business and continue to add new customers to further diversify the business. We hit a speed bump and we're working to actively fix it. Turning to the UCC portion of our business, growth was robust in enterprise with the addition of 120 new customers in 8x8. The Fuse acquisition further expands our enterprise customer base and the XCAS upgrade and cross-sell opportunity with nearly 300 additional customers for an increase of more than 400, bringing our enterprise total to 1,320 customers. Adoption of XCAS has been broadly based across a range of industry verticals and geographic regions, including the public sector. A few recent examples of new XCAS customers include Radian, which provides industry-leading mortgage and real estate products and services as part of their digital transformation initiatives, They turned to 8x8 XCAS and 8x8 Voice for Microsoft Teams to support over 1,700 employees. The University of Salford is a public university in Greater Manchester, UK, serving the higher education needs of more than 23,000 students. The university turned to 8x8 XCAS and 8x8 Voice for Microsoft Teams to empower over 1,600 staff with their robust communications, and customer engagement platform for hybrid work. 8x8 CCAS powerful analytics will help reduce call handling response times with flexible burst licenses, providing extra support during busy admissions clearing periods. Think Research provides knowledge-based digital health software solutions to more than 300,000 clinicians in over 11,000 facilities in eight countries. By implementing the full power of 8x8 XCAS with voice for Microsoft Teams and CPaaS SMS API, ThinkResearch will enhance overall customer experience as they improve agent efficiency and productivity using new channels to confirm appointments and recruit beta testers for drug trials and new therapies. Cross-sell is an important aspect of our XCAS strategy. Some significant landing span wins in Q4 include Habesit America. Habesit delivers premium quality conveyor and power transmission belts, supporting businesses and achieving optimal processing efficiency. Starting as an 8x8 UCAS customer, they recognize the business benefits of the integrated 8x8 XCAS platform and added 8x8 CCAS to gain analytics and reporting insights to better serve their clients. A global sporting goods manufacturer with some golf's most renowned brands expanded their 8x8 investment by increasing their UC licenses and adding contact center seats to support nearly 2,000 employees around the world. The 8x8 Voice for Teams direct routing solution was also a significant contributor to the growth in enterprise customers and ARR as momentum continued to build in the fourth quarter. Our feature-rich direct routing solution for Teams continues to be an important competitive differentiator for our UC solutions and is becoming a significant driver of new logos. Customers choosing 8x8 Voice for Teams in Q4 included one of the UK's top 10 universities, the University of Bristol, who turned to 8x8 XCAS and 8x8 Voice for Microsoft Teams to provide over 27,000 students access to new channels. They will leverage the Microsoft Certified for Teams 8x8 Contact Center for its analytics capabilities as an integral part of their student welfare initiatives. And the Indianapolis Motor Speedway, the racing capital of the world and home of the Indianapolis 500, selected the 8x8 Contact Center for Microsoft Team Solutions for its ticket office to help drive a premier customer experience. This customer is an excellent example of how our global coverage complements our voice for team solution and creates a strong competitive advantage for us with multinational organizations. In the fourth quarter, we expanded global reach to Indonesia, which is another industry first, and to Thailand. This follows our announcements earlier this fiscal year of delivering an industry first integrated cloud phone and contact center solution in the Philippines and China. Our cloud-based global UCAS solution is now available in 50 countries with full cloud public switch telephone network support and territories, up from 41 a year ago, and covers more than 85% of the world's GDP. Examples of new global customer wins include Trek Bicycle. Trek is the largest U.S. manufacturer and distributor of bicycles. They selected 8x8 XCAS and 8x8 Voice for Microsoft Teams as a key part of their digital transformation, providing a global communications and omni-channel contact center capabilities to support over 1,300 employees in 19 countries. Additionally, a French luxury group with world-renowned fashion brands turned to 8x8 UCAS and 8x8 Voice for Teams to support over 12,000 employees, 270 stores, and 75 office locations around the globe. French speaking support in France from the Fuse acquisition was instrumental in winning the business and will lead the deployment. We've been excited by the response we're seeing from Fuse customers and partners and strengthened European presence is just some examples of the additive impact of the Fuse acquisition across the business. Customer retention among the Fuse space has been strong and revenue of 24 million was above our expectations for the quarter. We moved swiftly after the transaction closed to integrate the two organizations and streamline the combined cost structure. As a result, FUSE was accretive to operating profits this quarter, and we are already seeing an acceleration in innovation roadmap as R&D teams around the world work together. We have made rapid progress of our XCAS product roadmap this year, including recent release of significant contact center capabilities and enhancements, including agent workspace, and 8x8 conversational IQ. 8x8 agent workspace transforms the contact center agent experience with powerful contact queuing and handling features to enhance productivity and personalize both agent and customer engagement. The browser-based design-led user interface delivers a tailored and intuitive experience that uniquely blends contact center and unified communication capabilities in a single application. ConversationIQ extends formal contact center capabilities such as quality management and speech analytics to all eight by eight cloud communications users. Eight by eight ConversationIQ delivers AI infused automated evaluation, reporting, and analytics capabilities across the organization to improve effectiveness and compliance. ConversationIQ also supports voice interactions on Microsoft Teams endpoints through the 8x8 voice for Microsoft Teams integration. An example of a customer implementation of ConversationIQ is Thrive. Thrive is a global software and marketing services company with over 46,000 businesses on their SaaS platform, supporting more than 3,700 employees on 8x8 XCAS since 2019, Thrive recently added 8x8 ConversationIQ to apply conversational AI to uncover insights across the company to enhance team performance and optimize customer experience. With these two product releases, we reimagined the agent experience and highlighted the advantages of a unified platform. Customer and industry response to the releases has been very positive, including the Best Customer Experience Innovation Award that Agent Workspace won. And we have orders for ConversationIQ from our great beta customers even before the product was generally available, which it is today. It was exactly one year ago that we outlined our long-term vision for 8x8 and set our strategic priorities for 2022. A comparison of 8x8 then and now shows just how much progress we've made across multiple fronts. First, we accelerated the shift to the enterprise. Even before adding the fused customer base, with the fused customers added in, enterprise customers now represent more than half of our ARR. The shift in mix to higher quality enterprise ARR has been a driving force behind the improvements in our retention metrics, our channel engagement, and our financial performance. Retention in Q4 increased again from record levels in Q3 and reflects our increased emphasis on platform reliability, including our financially backed Five Nines SLA, as well as investments we've made in customer success. Channel engagement, and contribution is also at an all-time high, with channel accounting for more than half of our ARR. We also focused our strategy on the XCAS platform and increased our investment in R&D, especially contact center capabilities. As a result, we launched a steady stream of product enhancements and new capabilities throughout the year, including the March contact center and analytics launches, We completed our acquisition of Fuse, accelerating our progress on the shift to enterprise and expanding our capacity for innovation. And finally, we delivered continuous improvement in our financial results with gross margin up 550 basis points year over year. We achieved our operating margin target a full quarter ahead of schedule and achieved over 34 million of positive cash flow from operations for the year. I want to thank our teammates here at 8x8 for their hard work and commitment in achieving these milestones. We've made tremendous progress on the product front and improved our financial performance and are on track to achieve our operating margin targets for our intermediate and long-term model. Given the current environment, we feel it prudent to continue to focus on operating margin and tighten our criteria for investment, which will favor profit over near-term growth. but will set the stage for our long-term performance. This balanced approach is reflected in our 2023 guidance ranges for revenue and margin. The trajectory of XCAS adoption and the growth we've seen in enterprise ARR and customers gives me confidence our strategy is the right one to build value for all our stakeholders over the long term. The bold moves we made in fiscal year 2022 to strengthen our leadership, increase our innovation capacity, and expand our base all created the foundation on which we will build long-term value. For fiscal year 23, we will continue to focus on XCAS innovation, as well as driving sales efficiency and operational excellence across the organization. I look forward to reporting our progress in future quarters. We're incredibly excited by the work our development teams are doing, and we plan on sharing our innovation roadmap on our Q1 call. I will now turn the call over to Sam.