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spk04: 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.
spk07: 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.
spk11: 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.
spk09: Thanks, Dave, and good afternoon. We experienced some challenges in our CPaaS and small business segments during the fourth quarter, which impacted service revenue performance. At the same time, we continue to post broad improvements in gross margin delivered solid operating income, turned FEWS accretive to our non-GAAP earnings, and exited the quarter with more cash than expected. We remained financially agile and disciplined. Total revenue for the quarter was $181.4 million, an increase of 25% year-over-year, and inside our $180 to $182 million guidance range. We saw a bit of a bounce back in other revenue driven by the supply chain growth slightly opening but still constrained and milestone completions in professional services. We generated $172.8 million in service revenue, an increase of 29% year-over-year and below our $173.5 to $175.5 million guidance range. As Dave stated, the shortfall was due to CPAS volumes dropping during the second half of the quarter when a few large customers stopped marketing programs in late February and March. The shortfall to expectations in CPaaS was approximately $3 million in lower margin SMS. We are facing some inflationary pressure from international carriers and are favoring margins over revenue growth when they conflict. Looking forward, we are executing plans to leverage our scale in the region to further lower costs and drive incremental customer demand. Fuse accounted for $23.9 million of service revenue and total revenue of $24.1 million. Service revenue from Fuse was higher than expected and driven by higher retention. Integration has been humming along, and I'm super impressed at how quickly we have had some back office operations combined. We did make a cost reduction in mid-February, and on a whole, Fuse did better than expected in revenue, cost, and therefore was accretive to non-GAAP operating income. We have already started moving some additional Fuse customers to the 8x8 platform at their requests. Total ARR was $687 million at quarter's end, up 33% year-over-year. Since we have started merging the customer bases, we will not be breaking out Fuse from 8x8 separately for ARR reporting, but will report revenue. Enterprise ARR now makes up 57% of total ARR and was up 55% year-over-year. Mid-market ARR is 19% of ARR and up 31% year-over-year, and small business is down to 24% of ARR and declined 1% year-over-year. Growing our enterprise business is one of the core tenets of our long-term strategy due to its longer commitments, higher retention rates, and better efficiency ratios. A comment about the small business segment declining 1% year-over-year. Small business is non-strategic for us because of the lower efficiency metric and the absence of contact center needs. we would expect it to continue to shrink as a percentage of total ARR. For expense items mentioned below, they're all non-GAAP unless otherwise noted. The fourth quarter gross margin was 66.7%, driven by CPAS being lower than expected and our COGS improvement programs at FUSE happening faster than expected. Total service gross margin came in at 72.2%. Non-GAAP other margin came in at minus 44.6% for the quarter, reflecting that achieving cost savings from FUSE in this segment will take longer because we need to continue FUSE deployment until complete. As a reminder, other revenue represented less than 5% of total revenue for the quarter, so the decline in other gross margin had minimal impact. Non-GAAP operating profit grew to $4.3 million quarter over quarter as we focused on higher margin portions of our business, such as XCAS, and continue to drive unit improvements and costs. Looking ahead to the first quarter, we expect overall gross margins to be generally flatted sequentially, driven by changing product mix between applications and CPAS. Turning to fourth quarter operating expenses, this is our first combined quarter with FUSE, and that's the reason for this significant step up in several areas. The OPEX guidance per line item I gave was incorrect and would expect some reallocations in future quarters, as I said on the last call. The total was in line with our expectations. We had guided total fourth quarter OPEX in a range of $115 to $118.5 million and came in at $114.6 million. Total spending as measured by COGS plus R&D plus sales and marketing plus G&A was up 23% year over year. below our 25% total revenue growth. In the future, we expect total spending to grow more slowly than total revenue on a rolling four-quarter basis as we drive efficiencies throughout the business. There can be some quarter-to-quarter variability. Turning to the balance sheet, total cash, restricted cash, and investments ended the fourth quarter at approximately $148.2 million. Excluding restricted cash, the balance was $138.7 million. Quarter-on-quarter total cash is down by about $112 million, better than expected, driven by solid collections and lower than anticipated FUSE integration costs. As a reminder, we paid $132 million in cash and 5.6 million shares or approximately $250 million in total consideration to purchase FUSE based on the share price at the time of the announcement when the deal closed in January. Cash flow operations came in at over $16 million for the quarter, and we remained free cash flow positive for the second quarter in a row. The overperformance was driven by conservative cash management and strong collections. Deferred revenue climbed to over $45 million, up 90% year-over-year, and up over 75% quarter-on-quarter. RPO was approximately $715 million for the fourth quarter, up from $565 million in the third quarter. About $125 million of that was from FUSE. and the remainder was from 8x8. Back to FEWS. Revenue came in ahead of expectations, and the acquisition was accretive to non-GAAP operating income. We guide it to remain non-GAAP profitable, and so far, so good. We expect further cost savings in owning FEWS, but it will take some time. Next, a few short comments about fiscal year 2022, which we just closed. We grew revenues above our initial guidance for the year and did a reasonable job managing expenses. The gross margin was better than expected, mainly due to programs we have been running. Operating expense management was solid, but we know we have further work to do. We were cash flow from operations positive for each quarter and returned a free cash flow positive during the year. Business is a team sport, and many 8x8 infused employees got us here. Thank you. Taking the current business performance and market environment into account, including the recent performance of CPASP, We are establishing guidance for fiscal first quarter, fiscal 2023, ending June 30th, 2022, as follows. We anticipate service revenue to be in a range of $177 million to $180 million, representing 28 to 31% year-over-year growth. We expect the FUSES revenue contribution will be between $26 and $28 million. We anticipate total revenue range of $185 to $188 million. We have uncertain visibility on the supply chain for endpoint hardware shipments. The news changes weekly. We are balancing growth with improving profitability and targeting operating margin in a two to two and a half percent range for the quarter. We are starting our guidance for fiscal 2023 ending March 31st, 2023 as follows. We anticipate total revenue to be in a range of $775 to $790 million. representing approximately 21 to 24% year-over-year growth. We anticipate service revenue to be in a range of $740 to $755 million. In January, when we reported, we had suggested revenue would be in the mid-20% growth range, and this guidance confirms that approximate number. We are balancing growth with improving profitability and would like to see operating margins in a 2% to 3% range for the year, and exiting above 3% is a goal. In closing, I remain confident in our strategy and our market opportunity. In FY22, we continue to reinforce our strong financial foundation and remain an agile organization. We look forward to further gains in fiscal 2023. Thank you, and operator will now be open for questions.
spk04: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. We will pause here briefly as questions are registered. The first question is from the line of CP Panegrahi with Mizzou Hope. You may proceed.
spk08: Hi, thanks for taking my question. This is Abhinav on for Citi Panagrahi. And again, congrats on the quarter. How would you characterize the competitive environment you're seeing with Microsoft Teams? Obviously, as you mentioned, your feature-rich direct routing is doing a great job with new logos. But as you called out last quarter, how are you dealing with competitors in the space and how is that matching up against their offerings?
spk11: Yeah, this is Dave Sipes. One of the biggest trends we see is customers are looking to integrate Teams users with their enterprise communication platforms. And they're doing it fundamentally through direct routing and operator connect solutions. We compete in the direct routing solution, and we have a very popular direct routing solution, as you see by a lot of our wins that I mentioned throughout the call today. It's obviously having a significant impact, a positive impact for us. Additionally, we've been recognized in the channel as having the best direct routing solution in the market. And we continue to hone that offering as we look at the other solutions in the market, Operator Connect, which tends to be carriers or national service providers who tend to be less global, less feature-rich and siloed in that they're only servicing the team's users in the enterprise. Our offering brings functionality to those users as well as powering every employee in the organization, not just the team's endpoint users, but also frontline workers and contact center users. It's a big trend as the team's messaging application is prevalent in many of our customers. But powering that with the communication platform is really, we've just scratched the surface. And it is a big initiative for a lot of our customers today. And so they've really, you know, attached or, you know, moved towards our direct routing solution.
spk08: That's very helpful. Thank you. And then just one follow-up. You guys guided to about $50 million in a CCAS cross-sell opportunity after FY23 last quarter. Do you expect any upside to that estimate maybe earlier into FY23, or is it about the same?
spk09: Yeah, I'll take that one. This is Sam. No, we think the opportunity size is $50 million. No, I mean, look, the average sales cycle for a contact center is 12 months, especially with these larger enterprise customers. So if anything, I would expect, you know, any of that stuff to sort of show up in more in fiscal 24. I think the market size and the market opportunity we presented last call is correct. You know, further activities that we've seen continue to verify that sort of that's the right ballpark number. But I don't think it's going to show up anytime soon.
spk08: Perfect. Thank you so much.
spk04: Thank you. Thank you. The next question is from the line of Mike Funk with Bank of America. You may proceed.
spk13: Yeah, thank you for the questions, guys. A couple if I could. Just go back to your comments about the large enterprise customer or customers that have lower usage in the quarter. I'm just wondering if there are any lessons to be learned from that. You know, what drove the lower usage, the ability to forecast, you know, lower usage based on customer patterns. What you took away from that event.
spk11: Yeah, so this is Dave. This is... all within our CPaaS offering. And the drop-off was from several large customers who pulled back from some marketing campaigns in the second half of Q4. We're in good standing with those customers, and we're working with them for reintroduction of some of those campaigns when the market conditions are right for them. For longer term, we continue to diversify and broaden the customer base through addition of new customers. And we've been doing it. We have a very robust pipeline, and we continue to do that with the diversification. Additionally, we already have plans in place to leverage our regional scale to drive lower costs, which can then be leveraged with some of these large customers to help support the performance of these large marketing campaigns in the market.
spk13: And then just to un-fuse, if I could, quickly, I know you mentioned it came in line with your expectations, I think about $24 million contribution, if I simply take the revenue number you gave us back in December and then, you know, adjust for the close date, that would have implied, I think, slightly more revenue. So tying that back to your comment about the churn being as expected, is the difference there just the breakage post-deal? And if so, how much breakage were you projecting after the merger closed?
spk09: Breakage, that's a new one on me. That's a retail term. No, no, no. The numbers came actually better than we had thought, right? So we had said, hey, we thought 20 million for the quarter came in at 24 million. I was actually expecting a little bit more churn or a little less retention. It actually came in stronger than expected. The fuse base is in good shape. And I'm really proud of how our GCC organization has really jumped on top of it. Maybe we can take it offline. Maybe it's some miscommunication around the math, et cetera. But as far as we're concerned, it did better than we originally thought for the quarter.
spk13: Okay, thank you, guys.
spk04: Thank you, Mr. Funk. The next question is from the line of Meta Marshall with Morgan Stanley. You may proceed.
spk06: Great, thanks. A couple of questions for me. Understanding kind of on the CPAS side that you have kind of ongoing positive relationships with those customers, but just as we look forward to your guidance both for the quarter and for the fiscal year, What are you embedding as far as are you flatlining those customers? Are you expecting some sort of comeback from those customers? Maybe that's the first one, and then I'll let you guys answer that one and jump into the second one.
spk09: Yeah, this is Sam. I'll take that one. So, you know, per kind of how we do our usage-based components, we look at where they exited the quarter, and since they were both low for the quarter, we ran that through to the next quarter and year. So we always try to take sort of the latest data points and run it through. Obviously, if they come back, it would be a positive, but we've generally assumed that whatever low level they're at will continue.
spk06: Okay. And then, I mean, similar question, just you guys had noted, last quarter that you were basically assuming twice industry turn for FUSE as you looked ahead kind of to the next year, just as that clearly kind of outperformed in your first quarter. Do you think that those are, you know, too aggressive of turn expectations and that you've kind of taken this light, you know, the fact that the FUSE install base is in better shape into account into the guidance or just how should we think of churn on the fuse base as we head throughout fiscal 23?
spk11: So this is our first, you know, real quarter with those customers. They are in a healthy state and they're well contracted. So I would say in the quarter they came closer to industry standard levels. I think forecasting wise, we're probably still conservative looking forward through the next year. As we get more quarters under our belt, we'll have a better feel for the long-term propensity of those customers on retention. Okay, perfect. I'll hand it off.
spk06: Thanks.
spk04: Thanks, Matt. Thank you, Ms. Marshall. The next question is from the line of Peter Levine with Evercore. You may proceed. Great.
spk02: Thank you for taking my questions. Sam, if I think about organic growth, what do anniversary fuses Should we think about the model, call it, you know, high teens, 20%?
spk09: I think I'd be a little bit aggressive right now. I mean, you're asking me out four plus quarters. And so I think right now I'm a little bit more conservative than that. I'm looking at something maybe in the mid teens type of number, 13 to 15% right now is where I would start out. You know, let me, let me get a little bit more further ahead right now, but that's where I would start.
spk02: Okay. And then, yeah, I think 25, 30% of revenues come from international. You know, anything you can share with us in terms of sales cycles or, you know, are you seeing deals taking longer to close, delays, just, you know, any incremental color on the international front given the current environment and kind of what are you factoring into your guide? Thanks.
spk11: Yeah, our international is predominantly UK and APAC with our CPAS business. So we've talked about the CPAS business on UK, it has trended well in the last quarter, consistent with previous. It continues to grow quite robustly for us, and we have a good brand and concentration and focus in public sector in addition to enterprise in that market. So we haven't seen any adverse effects from macroeconomic trends in that market.
spk04: Great. Thank you for taking my questions. Thank you. Thank you, Mr. Levine. The next question is from the line of George Sutton with Craig Hallam. You may proceed.
spk01: Hey, guys. This is James on for George. Thanks for taking my questions. Appreciate the color on XCAS being 35% of your ARR, but I'm just kind of curious if you could provide any detail on the percentage of customer base that's on XCAS and potentially if you could quantify the uplift from a customer going from just UCAS to XCAS.
spk09: All right, I'll take these in reverse order. And we've said this on, I think, a previous call, but generally when we see a UCAS deal, we see it roughly 50-50 in terms of the dollar amount of UCAS relative to the dollar amount of CCAS. Obviously, the number of seats is different, but then the price difference of the seats sort of works itself out. And magically, through empirical data, it just comes out to be roughly 50-50 is a good working trend. And then in terms of the number of customers in our install base, we didn't provide that number. We just gave you the 35% of our ARR. Obviously, it's skewed more towards our enterprise customers. Per our strategy of moving up market, there's more of a propensity to buy. So in terms of the number of customers, you know, just giving you some color, it would be a smaller number of customers than 35%, but a larger in size.
spk01: Makes sense. And then service margins were great in the quarter. Just kind of curious, are those sustainable or as CPAS sort of comes back, will those come in a little bit?
spk09: Well, if CPAS came back really strong, they may come in a little bit. I mean, we've been running a lot of, and this is Dave's, one of Dave's initiatives, a lot of gross margin improvement programs. And so you're seeing those flow through. We also had, and this is a huge shout out to the FUSE team, FUSE gross margins, we were able to sort of start transitioning those faster to our cost structures than we had expected originally. So I think it's a combination of moving pieces there. with the benefits just being our internal programs and getting FEWS closer to our margin structure faster than expected.
spk01: Great. Thanks for taking my questions.
spk04: Thank you. The next question is from the line of James Breen with William Blair. You may proceed.
spk12: Thanks for taking the question. Have you ever seen any change in the sales environment given sort of the fits and start to COVID? how to change sort of how the markets come together.
spk11: Thanks. This is Dave Sipes. You know, we see, we're focused in the enterprise segment and we're seeing normal deal cycles, I would say, relative to what we saw pre-COVID and customers making those decisions to move legacy solutions to cloud and finding the right, you know, integrations that I talked about earlier, especially with Microsoft Teams, messaging apps, and integrating those into their communication platforms. So I would say that deal cycles seem similar to what would have been pre-COVID in that nine, 12-month frame for an enterprise account, and pretty normal progression of those deals.
spk12: And then maybe just, Sam, just from a model perspective, you know, pretty good jump up in G&A on a sequential basis. How do you think about that in terms of synergies you're trying to take from the FUSE deal?
spk09: Thanks. So I tried to highlight this. This is one of the mistakes I made when I gave that per line guidance last quarter. We didn't get some of the classifications right. So two things. I think over time you'll see some reclassifications of that G&A into R&D and sales and marketing. getting more in line with what we thought and the second part is there's just some and I tried to highlight this on the last call in the in the fuse call it's just going to take us some time to get some of the gna. costs back in line, we have to finish, for example 2021 audits on fuse and those kinds of things and there's just some time associated with that, so I think those are it's combination of reclassification and longer term cost savings that i've talked about in the past.
spk12: Thanks.
spk04: Thank you, Mr. Breen. The next question is from the line of Will Power with Baird. You may proceed.
spk00: Hey, guys. This is Charlie Ehrlich on for Will. Thanks for taking the question. Sam, just wanted to ask about the free cash flow. It was a strong number in the quarter. How should we think about that for the rest of the year? Should we think about it growing off of Q4 levels, or how should we think about that?
spk09: We'd like to see it continue to grow. As Dave mentioned, we are very focused And right now we're a little bit more biased to margin, which means we're a little bit more biased to generating free cash flow. There are some non-GAAP reconciling items that'll flow through on cash flow that will influence a little bit. So it won't be a pure, highly correlated thing to non-GAAP operating margins, but it'll be pretty darn close. And since we expect non-GAAP operating margins to exit above three, that's our target, we'd like to see cash flow grow throughout the year.
spk00: Awesome. Thanks. And then on the Microsoft, yeah, just one more, if I could. On Microsoft Teams directly, could you just talk about the economics, the unit economics on a seat that you went through, the direct routing pathway versus just a direct sale of the 8x8 platform? You know, is there a difference in the revenue or the profit? And also, if you can just give us any color on the size of that business for you, like the percentage of new logos that came from Teams in the quarter or something like that would be really helpful.
spk09: Thanks. Okay. Let me talk about the economics. So it's voice for Teams. And so what you generally see is it is a smaller ASP because Microsoft Teams is handling the chat and video portions of it while we're handling the voice, but the margins, we built the skews and we built the product to be margin agnostic with the rest of our business. And since we're selling this to a lot of larger enterprises, it's kind of being made up in just the sheer size of a lot of the deals we're closing. In terms of the number of new logos, et cetera, we didn't report that on this call, and I'll take it as advisement for future call. I will say last call we did suggest that seat count grew 40% quarter-on-quarter, and we continue to see very high quarter-on-quarter growth in seat counts around teams. And so I'll just kind of leave you with that tidbit and promise maybe next call we'll give you a more solid quantifiable answer.
spk00: Great. That's helpful. Thanks, Sam.
spk09: Thank you.
spk04: Thank you. The next question is from the line of Ryan Coots with Needed Men Co. You may proceed.
spk10: I think the question, Sam, any comment you can give us on the other revenue line in terms of margins there, professional services and supply chain, how to think about that going forward? Thanks.
spk09: Okay, two things here. Number one is, so this is when I talked earlier about longer term time period to sort of get all the costs aligned with Fuse. Other revenues is one of those areas where you see that. Obviously when we purchased Fuse and we brought them on board, we needed to continue all their existing ongoing deployments. And so we've got a very large professional services organization that we brought on. And over time, we'll right-size that. If you're in the professional service organization, I'm not saying we're doing anything crazy. I'm simply saying that we'll get it transferred around and moved around and fully utilized, which right now it's finishing up deployments for Fuse customers. And then on the hardware side, boy, that's a tough one right now. We had a little bit of a relax of the supply chain, kind of mid-quarter, beginning of quarter, mid-quarter, and then it kind of tightened up at the end of the quarter again. So on the supply chain side, that's a real difficult one. And when we see the revenues drop there, our costs are relatively fixed. I know that's going to sound weird, but a lot of it's just people. Relatively fixed for that line item. And so the margins just go get worse. And then when the revenues increase, we can get some economies of scale out of it. So the other revenue is a tough one. It's an area we are a little bit focused on, but I think longer term you'll see improvement in margins there.
spk10: Got it. Thanks, Jeff.
spk04: Thank you. Thank you. The next question is from the line of Matt VanVleet with BTIG. You may proceed.
spk03: Hey, good afternoon. Thanks for taking the question. I wanted to look at the CPaaS business a little closer and just kind of see where you're seeing the most traction. And if you're finding some of your existing maybe X-series customers looking at adding some of those capabilities and maybe even kind of net new use cases that are popping up across the system. Thanks.
spk11: Yeah, so CPaaS tends to be Southeast Asia for us and some Europe, so countries like Singapore, Indonesia, Thailand, as well as cells into European countries, mostly API-driven cells with some cross-cell customization onto contact center cells that are looking to do primarily SMS customizations into contact center, like call and text campaigns. That's where we see that integrated or synergy with our XCAS business.
spk03: All right, wonderful. And then as you look at the contact center market as a whole, how are you seeing in terms of pricing trends and the ability to continue to cross-sell at existing customers that maybe are just now getting around to migrating legacy contact center to the cloud?
spk11: Yeah, so obviously we're having a lot of success there with XCAS continuing to grow robustly with 35% growth and now 35% of our ARR. We are putting a lot of innovation into that. You've seen things like our agent workspace, conversation IQ, which takes Traditional contact center features such as speech analytics, quality management across the whole organization, really cool product, allows more informal cues to have the ability for visibility for the supervisor to manage professionalism and unified approach to customers. So those are areas that we're seeing. I see both innovation driving growth. We see the marketplace already migrating in that direction. You hear about it, you know, UC and CC attach across the whole industry and, you know, other players in the market trying to replicate that strategy. So I feel like we have a good lead in that area, and that's why we're working so hard on our innovation roadmap to continue lengthening that lead for us to get that XCAS percentage up even higher.
spk03: All right. Thank you.
spk04: Thank you, Mr. VanVleet. There are no additional questions waiting in queue. This concludes our Q&A session as well as today's conference call. Thank you all for joining today and enjoy the rest of your day.
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