8x8 Inc

Good afternoon. Thank you for attending today's eight by eight fiscal first quarter conference call. My name is Amber and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keyboard at any time. I now have the pleasure of handing the conference over to Kate Patterson, head of investor relations. Kate, please proceed.

Thank you, Operator, and good afternoon, everyone. Today's agenda will include a review of our first quarter results with Dave Seitz, Chief Executive Officer, Sam Wilson, our Chief Financial Officer, and Hunter Middleton, our Chief Product Officer, who will give you an overview of our product strategy. Following our prepared remarks, there will be a question and answer session. Before we get started, let me remind you that our discussion today includes forward-looking statements about our future financial performance including our increased focus on profitability and cash flow, 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 accepting 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'll 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 our first quarter results and give an update on the integration of FUSE, which continues to go well. I will also discuss our plans for fiscal year 2023 as we place greater emphasis on profitability and cash flow generation in the near term. We believe that this is the right strategy to deliver value to all our stakeholders, customers, employees, and shareholders. We delivered another solid quarter with AR growth, non-gap profitability, and positive operating cash flow in the first quarter. Fuse continues to outperform our expectations with strong customer retention. We continue to advance our strategy of empowering every employee company-wide through integrated contact center and unified communication capabilities. and we are strengthening the foundation for sustainable growth in the future. The quality of our ARR continues to improve with the shift to Enterprise and XCAS. Enterprise ARR grew 54% year-over-year and now accounts for 59% of total ARR. XCAS ARR continues to grow at over 40% year-over-year and contributed more than 35% of total ARR. The sequential growth in XS ARR was very strong, and we see an opportunity to grow this materially over the next several years. Our CPaaS business declined sequentially and year-over-year and was an $8 million headwind to total and enterprise ARR growth. Our continued focus on operational efficiency resulted in higher gross profit with first quarter non-GAAP service revenue gross margins at another multi-year high of 73%. The improvement in gross margin resulted in sequential and year-over-year increases in non-GAAP profitability and operating cash flow. As a result, both non-GAAP operating income and operating cash flow were ahead of our expectations. As we look to the remainder of fiscal 2023 and beyond, we are committed to driving the operational efficiencies that will allow us to continue investing in core XCAS innovation and deliver increased profitability and cash flow over time. On our last call, we increased our operating margin guidance for fiscal year 23 to 2 to 3%, and said we had line of sight to doubling operating margin in fiscal year 24. This original range for operating margin reflected increased investment in R&D, as well as in the sales capacity and marketing programs needed to drive full-year service revenue growth in the mid-20% range. Over the last quarter, we've continued to evaluate our mix of investing for growth versus increasing profitability. We are prioritizing increased profitability and cash flow and moderating the growth of our investment in sales and marketing to reflect more cautious behavior by SMB and CPaaS customers. As Sam will discuss in greater detail, we're making changes now that will allow us to exit fiscal 2023 at or above 5% operating margin. Further, I believe we can achieve at least an additional 200 to 300 basis points in operating leverage in fiscal year 24. To achieve our fiscal year 23 target, we're holding operating expenses more or less flat as a percentage of revenue. throughout the year and allowing the improved unit economics reflected in our gross margin to flow to operating income. We are also reducing our annual guidance ranges for service and total revenue by $20 million and $30 million, respectfully, reflecting lower incremental investment in sales and marketing initiatives, as well as foreign exchange headwinds and continued weakness in CPAS. Let me provide a little more detail on our thinking behind our guidance. We address a huge market opportunity. Migrating telephony to the cloud offers organizations enormous benefits in terms of cost and flexibility, benefits that are likely to be even more compelling in a recessionary environment. Our opportunity is greater than just moving on-premise communications to the cloud. Digital transformation, an increasingly mobile workforce, and the need to offer hybrid work environment is blurring the boundaries between internal communications and contact center functionality. As the only fully owned unified cloud-based UC and contact center platform, we are uniquely positioned to capitalize on this opportunity by delivering advanced contact center features tailored to the needs of each user wherever needed in the organization. To fully realize this competitive advantage, we will continue to invest in our core XCAS offering with an emphasis on extending the team's experience, expanding global connectivity, and driving contact center innovation to enhance the end-to-end customer journey. As we add new innovations to enable today's modern workforce, we create the opportunity for greater revenue per user through cross-sell. I believe that our continued investment innovations like front desk, agent workspace, and conversation IQ is the best way we can build the foundation for sustained growth in the future. With investment in R&D critical to our future, we are making some trade-offs in the near term to build a better long-term future. As a result, we are moderating incremental investments in sales and marketing and, to a lesser extent, G&A initiatives. While I believe this is the right strategy for us given the current macro environment and our immediate priority of refinancing our convertible debt, it does have an impact on our capacity to drive incremental top-line growth. As we shift to a greater emphasis on profitability, we continue to make progress on XCAS adoption and grow our installed base with our enterprise customers. Our XCAS platform continues to be broadly deployed across a range of industry verticals and geographic regions, including the public sector. A few recent examples of new XCAS customers include Sciences. It is the leading specialty pharmacy in Europe, providing healthcare solutions to patients with long-term conditions, rare diseases, and cancer. They selected API at XCAS with nearly 300 CCAS seats as part of their digital transformation efforts to enhance the patient experience in the UK and Europe. Inception Fertility is a tech-enabled company improving the patient experience through an ecosystem of fertility brands. As North America's largest and fastest growing network of fertility clinics, Inception needed an agile communications partner that would support their growth and selected 8x8xCas to support over 1,600 employees across more than 80 sites. Cross-sell is becoming an even more important aspect of our XCAS strategy as our enterprise base expands. Our ability to expand the number of seats and average revenue per user within our installed base has the potential to be an important driver of sales efficiency and revenue growth. One of our significant land and expand wins in Q1 was T-force logistics. which is the leading same-day and next-day final-mile transportation solution provider in North America. After deploying 8x8 UCaaS with Voice for Microsoft Teams for over 1,000 employees in 76 locations across the U.S. and Canada, they expanded to XCaaS by adding Contact Center this quarter for a single-vendor cloud communication platform to help grow their business. Within the XCAS Solutions portfolio, our 8x8 Voice for Teams direct routing solution continues to gain momentum. We now have more than 200,000 users deployed. Customers choosing 8x8 Voice for Teams in Q1 included Brookfield Properties, which develops and operates real estate investments on behalf of Brookfield Asset Management, one of the largest alternative asset managers in the world. They selected 8x8 UCAS with voice for Microsoft Teams with over 2,300 seats due to ease of administration and Five Nines reliability. MotiveCare is a technology-enabled healthcare services company which provides a suite of integrated supportive care solutions for public and private payers and their patients. They selected 8x8 UCAS with 8x8 voice for Microsoft Teams for a seamless experience supporting over 2,000 employees across multiple locations. Our global reach, rich feature set, and tight integrations across UC and CC continue to be an important competitive differentiator with customers adopting Teams as their collaboration platform. To reach more of these customers, we recently launched the 8x8 Elevate Microsoft Partner Program and introduced an XT edition of Voice for Teams. The XT edition combines our direct routing technology, Azure-based managed SBC as a service, domestic DIDs, nationwide calling, HD audio, and secure voice all in a single package. Customers can easily upgrade or add seats with advanced functionality, including global calling, conversation IQ, or contact center. We continue to lead the market in global calling capabilities In the first quarter, we expanded global reach to include Israel, Taiwan, Latvia, and Slovenia. Our cloud-based global UCaaS solution is now available in 54 countries and territories, representing nearly 90% of global GDP. Today, about 30% of our users are outside North America. Our ability to reduce the cost and complexity of managing PSTN connectivity across multiple regions is another competitive advantage that becomes increasingly more important in a cost-conscious environment. A great example of a customer implementing XCAS on a global basis is GCP, a global provider of construction products that include high-performance specialty construction chemicals and building materials and continues to expand with 8x8 XCAS with over 2,300 seats in 22 countries spanning five continents, including providing full PSTN coverage to employees in China and the Philippines. XCAS also continues to gain traction in the public sector, where our ability to support customer engagement across the organization on a single platform creates a competitive advantage. Examples of public sector wins in Q1 include Cambridge Sure and Peterborough NHS Foundation Trust, which is a health and social care organization supporting nearly a million people in the community. They turn to 8x8, UCAS, and Voice from Microsoft Teams to support the employee experience for more than 2,000 users. Norfolk County Municipal Government supports 63,000 residents in southwestern Ontario, Canada. They selected 8x8 UCaaS with voice from Microsoft Teams for the simplified administration a cloud communication system provides. Finally, a brief comment on our CPaaS business. The large customers who reduced their CPaaS usage in Q4 have not yet returned to pre-Q4 usage. While we continue to work with them to design new programs, our guidance does not assume any usage revenue from these customers going forward. Although we expanded our user base with new customers in the quarter, the usage component of the CPaaS business continued to weaken in Q1 and impacted both our ARR metrics and service revenue growth. Despite this, we continue to add well-known names to our customer list, setting us up for long-term success when usage rebounds. These names include Daruma, Indonesia's number one B2B e-commerce platform for all things from office supplies to maintenance services, They use 8x8 SMS APIs to reliably send secure one-time passwords to their users. They also use 8x8's Chat Apps API for customer service over WhatsApp, providing their customers a convenient way to contact them. And Ketabeli, one of Indonesia's fastest growing social commerce apps, using 8x8's SMS and Chat Apps APIs recently added 8x8's voice IVR and voice messaging APIs to automate customer self-service workflows and user verification notifications. We continue to enhance the CPaaS platform, most recently with 8x8 Connect Automation Builder, a no-code, multiple-channel communications management solution for CPaaS. Automation Builder offers a visual, effortless, way for anyone, regardless of coding experience, to easily build engaging customer experiences that enhance productivity, flexibility, and efficiency. In summary, innovation has always been a core value at 8x8, and I'm proud to say our new innovations are gaining acceptance. 27% of new mid-market and enterprise customers have deployed Front Desk since its launch just two quarters ago. And 100% of new users have deployed our new UI in Agent Workspace since it launched in March. Our Voice for Teams offering surpassed 200,000 users, one of the fastest RAMs in our history. Innovation such as these leads to improved customer satisfaction and retention, which we see in the numbers. We have already made rapid progress on our XCAST product roadmap this year. Hunter Middleton, our Chief Product Officer, will give you some additional detail on our product strategy. Before handing the call over to Hunter, I do want to thank our teammates here at 8x8 for their hard work and commitment. I also want to welcome Susie Sindel, as our new Chief Accounting Officer. I remain confident in our opportunity, our competitive advantages, and our strategy. As we grow our enterprise and XCAS business, we're building the foundation for sustainable growth in revenue and cash flows, and we believe this will deliver value for all our stakeholders.