8x8 Inc

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the fourth quarter 2023 8x8 Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone keypad. At this time, I would like to turn the conference over to Ms. Kate Patterson. Ms. Patterson, you may begin.

Thank you, Operator. Good afternoon, everyone. Today's agenda will include a review of our fourth quarter results with Sam Wilson, our Chief Executive Officer, and Kevin Krause, 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 metrics 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 these non-GAAP measures to the closest comparable GAAP measures is provided in our earnings 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 Sam.

Much appreciated, Kate, and thank you for joining us today. Financial results reflect our company's ability to meet expectations and balance priorities. One year ago, we made the decision to turn our focus from near-term revenue growth towards expanded profitability and cash flow while continuing to invest in innovation for the future. Our fourth quarter and fiscal 2023 results are a reflection of these priorities. Let me walk you through the highlights of our performance. Service revenue growth was 2% in the fourth quarter as we anniversaried the FUSE acquisition and saw the expected year-over-year decline in CPaaS revenue. ARR mix continues to shift to enterprise customers with XCAS deployments. Enterprise and XCAS ARR were both up year-over-year, with XCAS increasing in the mid-teens percentage year-over-year. Furthermore, our CPaaS business was up quarter-on-quarter in the fourth quarter, a first step in the right direction. We invested more than $109 million in non-GAAP R&D in fiscal 2023, an increase of 42% from fiscal 2022 and nearly double what we spent in 2021. About 60% of the R&D spending is focused exclusively on innovations to drive revenue growth, including deep integration with AI technology across the platform, advanced analytics, UI UX improvements, broad developer APIs, and other efforts to expand functionality. We invest the remaining 40% of R&D in our best-in-class communications platform to deliver the quality of service, high availability, and security our customers expect. This is much more than maintenance work. We see multiple opportunities to lead the industry forward in areas like platform flexibility, usability, simplified administration, self-service, accessibility, and anything that results in the greatest possible reliability. These advances are often delivered automatically through our modern cloud-based architecture. Despite the lack of fanfare, these micro-innovations at the platform level are crucial to differentiating our solutions and maintaining our technology leadership. We increased efficiency in our operations, primarily in sales and marketing and the cost of service delivery. which more than offset the increase in R&D investment. We exited fiscal 2023 with non-GAAP operating income of 13.5%, well above our 10% guidance. This compares to operating margin of just 2% in the fourth quarter of 2022 and breaks even at the end of fiscal 2021. To put the magnitude of year-over-year improvements in real dollars, our non-GAAP operating income increased nearly 500% year-over-year for the fourth quarter and for the fiscal year. Looking at our performance on an annual basis, we generated more than $62 million in non-GAAP operating profits for FESY 23. In fiscal 2020, just three years ago, we posted a non-GAAP operating loss of $61 million. Cash flows similarly improved. Fiscal 2023 cash from operations increased 41% year-to-year to $49 million. This is despite a $20 million increase in cash-based interest expense from fiscal 2022 to $22 million for fiscal 23. Our strong financial performance allowed us to accelerate debt repayment while maintaining cash and investment balance in excess of $100 million. In the fourth quarter, we again repurchased debt. Kevin will provide the details. Turning to the future, we are planning to level out operating margins in the near term and continue to invest in R&D for the future. We will continue to use excess cash generated by our operations to deliver our balance keys and return value to shareholders. We intend to return at least $250 million to our investors over the next three years through debt retirement and, if possible, share repurchases. We have started down this path with the voluntary early $25 million debt repayment on our 2027 term loans we made earlier this week. This is a sign of management and the Board of Directors' confidence in our future. Speaking of which, I was surprised to hear a US-based wholesale carrier report their voice traffic declined in Q1. which they attributed to softness in demand from leaders in the UCAS Gartner Magic Quadrant. Let me caution you that the most logical read-through is not always accurate. Speaking purely from an 8x8 perspective, our overall UC and CC traffic has been increasing. We have built a global network of carriers and a super-efficient model for allocating traffic between carriers based on price, capacity, and quality. This quarter, we launched our customer-obsessed branding, which I approach in three lanes. First, we enable agile workforces. This means much more than simply extending voice service to a work-from-home user, although even basic voice delivered worldwide is extremely complex. Our solutions allow users the ability to move across devices and locations, toggling from chat to voice to video and back easily. We deliver these seamless capabilities through our 8x8 work app or through a seamless integration with Microsoft Teams. Across collaboration environments, our scalable, highly available communications platform reduces the administrative burden for IT departments, eliminates the need for multiple carrier contracts, and delivers the highest levels of security and data privacy. We have over 20 years' experience, and we own the platform, patents, and know-how. Second, we empower users across an organization to deliver great customer experiences. Surveys show that every interaction counts when it comes to customer loyalty. In a typical B2B or B2C organization, more than half of all customer engagements are with employees outside of the contact center. Our unified platform provides contact center functionality to these crossover users who typically outnumber contact center agents by about five to one. This is a large and underserved market opportunity. We estimate it's at least twice the size of either the UC or CCAS standalone, and we are uniquely capable of addressing it with our unified platform. Third, the hardest power of AI and machine learning. Artificial intelligence and machine learning have catapulted into the public eye with Chad's GPT, but 8x8 has been preparing for this moment building our experience and talents back along this potentially evolutionary technology lead. We are pursuing an ecosystem path and have partnered with a number of players, including most of the companies in the leaders of various quadrants from Gartner. For example, this week, Converse 360, a leading provider of automated customer journey across voice and digital channels, released their integration with our contact center. Please check out the video on their website. We have a dozen more technology partnerships in development and a waiting list. This will continue to expand the capabilities of our platform in numerous directions. Lastly, we have brought some of the AI technologies in-house for common services, enabling our customers to tailor solutions to their specific use cases and offer a higher level of service at a lower cost. At our event at the NASDAQ market site in March, we introduced several important new products, including Intelligent Customer Assistant and Supervisor Workspace, as well as a platform-wide integration of OpenAI's generative AI solutions. Our spring software release, announced at the end of April, included additional enhancements to the platform, including deeper integration with Microsoft Dynamics 365 and Salesforce Sales Engagement. By rapidly growing investment in R&D, we are increasing the pace and the significance of our innovation cycles, particularly in the contact center. In January, we aligned our sales and marketing resources to better serve our target customers, businesses that deliver a tailored Fortune 100-style customer experience without the dedicated IT developers or unlimited funds. With the increase in focus, we are already seeing our retention, cross-sell, and new business win rates improved. We have included several case studies of fourth quarter wins in our earnings slides to illustrate how the unified platform enables our customers to serve their customers. One of our newest wins, Subjector, helps people who are underserved, at risk, or disabled receive the benefits they are medically, legally, and ethically qualified for from both government and private entities. Last October, Trajector began a small proof of concept with 8x8, testing our XCAS platform with intelligent IVR and an integration with their Zoho CRM. They liked what they experienced, 8x8's uptime, our all-in-one XCAS story, and our ability to integrate APIs. By March, they were ready to make a significant expansion with 8x8 substantially within the contact center to enhance customer experience. Personally, I'm excited to see 8x8 Support Interjector because of their work helping veterans pursue VA benefits. As someone who had the privilege of serving in the United States Army, supporting our veterans is near and dear to my heart. We also showcase several other customer-obsessed organizations who are using XCAS platform to build innovative solutions. Jackson Lewis, a U.S.-based law firm with more than 950 attorneys worldwide, focused on labor and employment law. Jackson Lewis wanted to move to a cloud with a single integrated DCaaS and UCaaS solution to provide performance-wide analytics and work out of the box with Microsoft Teams and ServiceNow. Also, they needed open APIs to build an integration with their billing system. 8x8 will simplify administration for their IT organization and add contact center to their platform. Agilis is one of the UK's fastest growing cloud and digital transformation specialists. Agilis has wanted to move to the cloud with an integrated CC and UC platform to support a hybrid workforce while using quality monitoring and the speech and text analytics to gain better customer insights into the overall customer journey. As a participant in our early adopter program, they are adding 8x8 intelligent customer assistance to further enhance the customer experience through the use of conversational AI and self-service technologies. Maidens. a healthcare company based in Bath whose life work is creating digital technology that changes what's possible for medical professionals and patients. They design, build, and support insightful cloud-based systems for healthcare services in the UK and abroad, including IAPTIS, a SaaS patient management system for over 200 mental health providers in the UK and abroad, supporting over 1 million patients per year. One of the things I love about MADEv's IAPTIS solution is that it uses 8x8 CPAS video to allow healthcare clinicians to generate video links for appointments from the patient's IAPTIS record. This is then shared with the patient via tech in an effortless workflow. We include a link in the slide to a video created if you want to see exactly how all this works. As these customers show, this is what we mean by communications for the customer-obsessed. Omni-channel, data-driven, AI-enabled, and only possible with a scalable, global, highly available communications platform that spans the organization. We want SCAS to be the standard toolset for the customer-obsessed communications. Our business starts and ends with great people. We are coalescing behind a nimble, efficient teamwork orientation. The vision and roadmap we developed this year are resonating with our customers and partners. I also want to note that most of our wins have come through our go-to-market partners, which is a strategy we have embraced and are looking forward to strengthening. In summary, we have a lot of work ahead, but we have a plan. Thanks to 8x8's phenomenal employees, partners, and customers, we have a large install base, we own core technologies, And we plan to spend over $100 million a year annually in R&D for future development. All of this in a large and vibrant market. It is up to us to execute, and as our financial performance for the quarter highlights, we know how to do that. With that, I turn the call to Kevin.