8x8 Inc

Hello and welcome to today's eight by eight incorporated fiscal second quarter 2023 earnings call. My name is Bailey and I'll 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 followed by one on your telephone keypad. I would now like to pass the conference over to Kate Patterson. So please go ahead when you're ready.

Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our second quarter 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, 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 obligation 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 the 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 Sipes.

Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. On the call today, I will review our second quarter results and provide an update on our plan for fiscal year 2023 as we place greater emphasis on profitability and cash flow generation. We believe that this is the right strategy to deliver value to our stakeholders, customers, employees, and shareholders, and it is reflected in our increased operating margin guidance range for the year. We delivered another solid quarter, delivering revenue in line with our guidance and non-GAAP profits and operating cash flow above expectations. Our continued emphasis on operational efficiency as well as a favorable mix of higher margin ex-cast revenue resulted in higher gross profit. Second quarter non-GAAP gross margin was above 70% and service gross margin was above 74%. Both were up nearly five points in the last year. We have demonstrated sequential improvements in our gross margin performance for both service and total revenue in every quarter since Q3 2021. And non-GAAP gross profit on a dollar basis increased 35% year over year. The FUSE acquisition continues to outperform our expectations and was accretive to operating margin this quarter. We also strengthened our already solid financial foundation by refinancing over 80 percent of our convertible notes due in 2024 in a transaction that increases our flexibility to deliver the company as our cash flows increase. We remain committed to our strategy of empowering every employee through integrated contact center and unified communications in the cloud, delivering outstanding customer experiences at a lower overall total cost of ownership. We reinforce this commitment by increasing our investments in innovation, and repurchasing 10.7 million shares of our common stock. The quality of our ARR remains high, with enterprise ARR growing more than 40% year-over-year and accounting for 58% of total ARR. XCAS ARR continues to grow at approximately 40% year-over-year and increased as a percentage of total ARR as customers add contact center functionality to their 8x8 deployment. XCAS accounts for more than 35% of our ARR, and we see an opportunity to grow this percentage materially as we continue to innovate on the XCAS platform with features designed for our targeted enterprise customer base. Progress in our strategic enterprise XCAS business was partially offset by continued challenges in our CPaaS business. We believe this business has been impacted by a combination of currency fluctuations, and macroeconomic headwinds. We are focused on stabilizing this business and continue to add new customers with innovative use cases like SES Home Services. SES provides professional and reliable home emergency support using 8x8's video interaction solution to enable agents to provide remote support, reducing operational time and costs. On the plus side, small business ARR grew modestly on a sequential basis. The stabilization and small business error this quarter reflected good retention and upsell in our commercial sectors in both the U.S. and U.K., driven by our efforts to improve efficiency and focus on customer satisfaction. On our last call, we increased our operating margin guidance for the current fiscal year to 2 to 3 percent and said we had line of sight to doubling operating margin in fiscal year 24. We are once again increasing our operating margin guidance for the current year. We now expect to deliver non-GAAP operating margins above 5% this year. We believe we can achieve these targets through increased efficiency in our cost structure, particularly sales and marketing, and have taken steps to rationalize some of our spend across the company. As Sam will discuss in greater detail, we expect these steps combined with an increased mix of higher margin XCAS business will allow us to exit this year at or above 6.5% operating margin. Further, we have demonstrated our ability to expand margins and now believe we have a line of sight to achieve double-digit operating margin in fiscal year 24. Our unified XCAS platform remains a competitive advantage for us, and this advantage is only amplified in a more cautious spending environment. Recent research from Metragy showed that organizations deploying a unified solution achieve a 56% lower total cost of ownership versus a multi-vendor strategy. Casey's, the third largest convenience store chain in the United States, with more than 2,400 locations in 16 states, is an example of a customer migrating to the cloud to reduce total cost of ownership. The company is moving all stores to the cloud with 5,000 8x8 UCAS seats to replace costly traditional phone lines. We continue to deliver advanced features that allow our customers to improve their employees' and customers' experiences. We recently released an update to the 8x8 XCAS platform that extended our global coverage to 56 countries and enhanced our omni-channel customer experience analytics. featuring new visual interaction flow diagrams, enhanced reporting into digital interactions, and new advanced search and filter capabilities. Our XCAST platform continues to be broadly deployed across a range of industry verticals and geographic regions. Recent customer wins included Medline, a leading healthcare manufacturer, distributor, and solutions provider, with over 30,000 employees worldwide with businesses in more than 125 countries and territories. Medline is moving to the cloud with 8x8 initially to support over 2,500 employees on an easy to administer global unified platform. Spectrum Vision Partners is a leading management services organization serving ophthalmology practices and ambulatory surgery centers throughout the Mid-Atlantic and New England regions. Spectrum selected 8x8xCAS to support employee and customer engagement for its contact center and clinics. PrePay Power, Ireland's first dedicated prepaid energy supplier of pay-as-you-go energy with over 250,000 customers working with partner WorkAir, they chose 8x8xCAS to support employees and a 300-agent contact center that will enable them to scale, gain business insights, and serve their fast-growing customer base. The availability of contact center-like functionality, such as ConversationIQ, is driving expanded deployments with UCAS customers. An example is LSH Auto UK. They have eight Mercedes-Benz AMG EQ and smart dealerships across the Midlands and Northwest. LSH UK turned to 8x8 XCAS for a single UCAS and CCAS solution to support the employee and customer experience across their dealerships. This past quarter, LSH added 8x8 Conversational IQ to 20% of their UC users to drive improvements in the sales team's interactions with customers. Our global reach and rich feature set continue to be important competitive differentiators with customers adopting Teams as their collaboration platform. In Q2, we added a new 8x8 phone app for Microsoft Teams, providing customers with additional options for enabling cost-effective PSTN calling within Teams. We continue to build momentum in our 8x8 Voice for Teams solution. Customers choosing 8x8 Voice for Teams in Q2 included a worldwide holiday tour operator recently acquired an existing 8x8 customer in the U.S. The company evaluated 8x8 XCAS and decided to transition its entire global organization to XCAS with Voice for Microsoft Teams to manage communications and customer engagement from a single platform. Delic, a downstream energy company with assets in petroleum, refining, logistics, asphalt, renewable fuels, and convenience store retailing. They turned to 8x8 UCaaS with voice from Microsoft Teams to strengthen security, compliance, and support global communications for more than 2,500 users. Miller's Ale House is a sports-themed casual dining restaurant with almost 100 locations in 10 states. Following a proof-of-concept trial, the fast-growing chain chose 8x8 UCaaS with voice from Microsoft Teams to deploy at their Florida headquarters and all restaurants to enhance the overall customer and employee experience. We continue to expand our relationship with Microsoft Modern Work Solutions partners through our 8x8 Elevate Partner Program. This quarter, we added three new partners, including Cloud Revolution, a Microsoft 2022 Partner of the Year finalist, Cyclotron, a 2020 US Top Microsoft 365 Teams Partner Award winner, and Apex Digital Solutions, also an advanced Microsoft partner specialized in Microsoft Teams calling to our program. We continue to invest in channel with our co-marketing, training, and lead sharing initiatives. Cross-sell of CCaaS to existing UCaaS customers is an important aspect of our growth strategy as we expand our enterprise customer base, including Teams users. As one of the first partners to achieve Microsoft certification for integrated contact center, we are in the early days of land and expand cross-sell into our enterprise customer base. In a recent example, University of Bristol in the UK expanded its 8x8 XCAS with voice from Microsoft Teams deployment by adding 25% more CCAS seats following the successful delivery of phase one of the project. We believe the next wave of cloud migration is contact center. This was reinforced at last week's Gartner Symposium where our booth was crowded with prospects asking about our contact center solution. We are investing more than two-thirds of our R&D and contact center. XCAS innovations like front desk, agent workspace, and conversation IQ differentiate our solution and increase our ability to win with enterprise customers. It is clear that product innovation is a core value for us, and we are maintaining our investments to deliver a greater customer experience even as we focus on higher margins. I remain confident in the path 8x8 is on, and I look forward to giving you an update on our next call. Before handing the call over to Sam, I want to thank our teammates at 8x8 for their hard work and commitment. I also want to welcome Janet Winters, our new Chief Human Resource Officer.