8x8 Inc

Good day, and thank you for standing by. Welcome to the Q1 2024 8x8 Incorporated Earnings Conference Call. At this time, all participants are on 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. Then you will hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. And I would like to hand the call over to your speaker today, Kay Patterson of Investor Relations.

Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our first quarter results with Sam Wilson, our Chief Executive Officer, and Kevin Krause, our Chief Financial Officer. Following our prepared remarks, there'll be a question and answer session. Before we get started, let me remind you that our discussion today includes forward-looking statements about 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 files of 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 our earnings release and on the Investor Relations website at investors.ac. With that, I'll turn the call over to our CEO, Samuel Wilson.

Much appreciated, Kate, and thank you to everyone for joining us today. This is my first earnings call as the CEO of 8x8. Over the past six months, I've spoken at length to our customers, employees, and investors about the future direction of the company. As you will recall, we made the decision a year ago to balance our innovation-led growth strategy with a focus on improving profitability and cash flow, through disciplined capital allocation. In our Q1 results, you will see both progress on this journey as well as areas for further improvement. I plan to give you, our investors who own the company, a transparent view of how the business is doing today and where it's headed tomorrow. To this end, we will add some commentary about the long-term financial path of the company at the end of my remarks. Now let's get into some Q1 highlights. The increased investment in R&D drove the introduction of new products and enhancements to existing solutions. The reception from customers has been very positive. We increased our win rates, closed significant new customers, and expanded our base of XCAS contact center users. We remained the direct routing solution of choice for customers deploying Microsoft Teams, expanding our 8x8 voice for team seats by over 80% year over year. We formally launched our contact center ecosystem and expanded the number of partners, extended our global industry reach to 59 countries, hosted innovation roadshows in the US and UK, and strengthened our management team with the hiring of Lisa Martin as Chief Revenue Officer. And we delivered record non-GAAP operating profit and cash flow. Our innovation-led strategy seems to be resonating with customers, driving new business and awareness in the industry. As we focus on the right customers, lead with contact center as a service, and demonstrated the value of our integrated platform, we are building a higher quality pipeline and closing larger deals. Average ARR per enterprise customer excluding CPaaS was at an all-time high, and we also closed our largest new business win ever with a multimillion-dollar total contract value. Ending ARR increased year-over-year in all three customer segments, The growth rates for small business and mid-market both increased sequentially, and small business posted its best year-over-year growth performance in a while. These metrics all demonstrated the continued progress we're making on our strategic initiatives. Our results were partially offset by a sequential decline in CPaaS usage revenue and higher-than-expected churn and downsell in the few enterprise install days. These headwinds resulted in service revenue and total revenue about $3 million below guidance ranges. Let me give you a brief explanation of what happened with CPaaS and FUSE and what we are doing to turn the tide in each. First, CPaaS. We thought the CPaaS business had stabilized last quarter, but carrier pricing actions during fiscal Q1 had a negative impact on SMS traffic. We were forced to choose between passing along price increases to customers or accepting negative margins. We made the sound decision to forego negative margin business and higher prices caused some traffic to move to other channels. We didn't lose the customers. In fact, the number of CPaaS enterprise customers increased sequentially, but usage declined. With new leadership in place, we are transitioning from an SMS traffic intermediary to a strategic business partner to our customers. We have identified white space opportunities to add value with dynamic routing, fraud detection, and authentication while continuing to maintain cost advantages due to our volumes. As in other areas of our business, we believe the innovation-led approach will result in a more resilient business model and durable growth. Regarding the increase in churn and downsell within the FUSE base, as we've said on calls over the last year, the FUSE acquisition has outperformed our expectations. It has been accretive to gross margins, operating margins, and cash flow. However, we did see a sequential increase in customer churn and downsell in Q1. This resulted in lower than expected revenue from the Fused platform in Q1, as well as a decrease in the more forward-looking ARR metric. I believe some of this is due to smaller customers actually moving off the platform, but a significant portion of lost ARR was due to right-sizing the customer subscriptions as they came up for renewal or upgrades. To be clear, the retention of FUSE customers is still above our original forecasts. While it may take a few quarters to right-size all the customers, the acquisition has been a major success for us. We doubled the resources focused on innovation, expanded our enterprise customer base, and increased our operating margins and cash flow. In combination, the headwinds from CPaaS and FUSE caused us to fall below our service revenue and total revenue guidance ranges for Q1 by less than 2%. The roll forward of the Q1 run rate and lowering beginning ARR caused us to reduce full year guidance for total and service revenue by 3% at the midpoint. Pegging the exact revenue performance of a three quarters of a billion dollar revenue company is complex at the best of times. It is infinitely more difficult during tougher economic times integrating the operations of another company and shifting spending priorities. While we aim to achieve our forecast and guidance, moving forward, I believe the most important takeaways from our quarterly results are, one, our core 8x8 UC and CC business was solid and growing and is seeing the green shoots of early successes in our innovation-led strategy. The challenges that resulted in the revenue shortfall versus the guidance are fixable, and we have heightened management attention on them. We still expect to achieve 12% to 13% non-GAAP operating margin for the year, representing operating income growth of at least 40% compared to fiscal 2023. Three, we expect to generate significantly higher cash from operations in fiscal 2024 compared to last year. More on that in a second. That's a quick review of our Q1 results. Let's talk about the three lanes we presented last quarter. One, we enable agile workplaces. Two, we empower users across an organization to deliver great customer experiences. And three, we harness the power of artificial intelligence and machine learning. For one, I'll quickly say, our Microsoft Teams integration continues to be a stellar product for us. We grew seat count 80% year-over-year, and more than 10% of total seats are connected to Microsoft Teams. Further, we continue to evolve the product. Last quarter, we added new user onboarding capabilities to speed up time to value. We believe we are the leading UCaaS vendor that offers true cloud-to-cloud Teams integration. And let's not forget, we were the first Microsoft Teams certified contact center. Simply put, I believe we are still the best, by far. Turning to lanes two and three, empowering users and harnessing AI. As we discussed in prior quarters, our strategy is to increase R&D investments in high ROI innovation to drive durable growth, reduce investments in low ROI promotional activity, and focus the sales organization for greater efficiency. It is simple in creation but difficult to execute. While a decline in promotional activity shows up in revenue immediately, it takes time for investments in R&D to show up in new products and even more time to drive growth on our income statement. Take Supervisor Workspace, our dynamic new UX for contact center. First, this product was built by the engineering teams we acquired via Fuse, again showing the value this transaction added to our organization. We started work on it a year ago. We released to early adopters in March, and we released enhancements based on customer feedback last week. The early customer response has been fantastic, with adoption on track to rival agent workspace as our fastest new product adoption ever. it should now begin to have a meaningful influence on our sales process, ultimately resulting in higher retention, cross-sell, and more customers. The time from the first dollar invested to the time showing up in revenue could be as long as 18 to 24 months. As we continue to invest in innovation, we are building a competitive moat that can last for years. I believe this will drive revenue growth and deliver value to our customers and our shareholders for an extended period. Let me walk through a couple examples how 8x8 solutions are transforming customer processes to deliver better customer experiences. The first example highlights how customers with field services can transform their processes to reduce costs and improve their customer experiences through the full XCAS capabilities of UC plus CC plus CPaaS. Platform Housing Group's before and after case study shown in the earnings slides is a visual representation of this triple play use case. For those that don't know, Platform Housing Group is one of the largest housing associations in the UK Midlands with over 48,000 homes and more than 120,000 customers and has ambitious plans to build around 1,300 new homes every year. Platform Housing Group elevates employee and customer engagement using 8x8. When a customer calls the Platform Housing's contact center, which runs on our XCAS, a video consultation is offered via SMS link so the customer can show their problem to a representative. If a visit is needed, HQ can send SMS messages to field service personnel, including pictures, videos, and notes related to the issue. Reminders are sent to the customer so they are home, and a follow-up CSAT survey via SMS concludes the interaction. Details are automatically saved in the 8x8 contact center as well as Platform Housing's Microsoft Dynamics 365 system. Following implementation, Platform Housing Group has been able to close almost 40% of the repair calls remotely without requiring a visit from field service personnel. Further, over a quarter of calls no longer need a diagnostic visit, reducing the total number of visits and speeding up time to resolution. Platform housing is saving nearly 600 home repair visits per month. At an industry average cost of 200 pounds per visit, this can mean realized savings over 100,000 pounds per month and achieving faster resolution times. This type of integrated solution can be replicated across all kinds of service industries. Think insurance, healthcare, maintenance, and repair businesses. The cross-sell opportunities for 8x8 is large. Adding CPaaS to just half our contact center customers could add tens of millions in annual usage revenue. Another recently introduced product, Digital Intelligent Customer Assistant, or ICA, has the potential to drive revenue directly through increased subscriptions and usage fees. ICA is our generative AI-enabled digital chatbot. Early customers are finding it easy to deploy and incredibly effective at reducing resolution times for simple inquiries. We have quickly gone over 100,000 interactions since April and are growing double digits month to month, and we are still in the early adopter phase. In one use case, a UK-based shuttle and taxi service deployed ICA initially to schedule pickups. Within weeks of deployment, more than 50% of the cases that previously went to the call center were being handled without live agent interaction. In another case, a major PC manufacturer deployed ICA for the single use case around warranty authentication via SMS. It was so successful that within weeks, they were adding more channels and adding more use cases. Our advantage with ICA extends beyond the chatbot technology itself to the tight integration of the chatbot into the contact center workflow. While bots are good at resolving simple issues, even the most advanced, best-trained AI bots cannot resolve every issue. And sometimes the customer just wants to deal with a live agent. When this happens, we can seamlessly transfer the customer to the live agent with all the metadata attached, meaning no re-authentication, no redoing the same steps over again, and no more customer frustration. Further, we can feed any information given to the chatbot into the agent assist product, even if it's from a different vendor. So the live agent is better prepared and can successfully resolve the issue in less time. The bot becomes part of a fully orchestrated customer journey rather than an island off to the side, resulting in higher CSAT and retention. Our voice version of ICA is moving into early adoption beta phase now, with the same amazing integration into our contact center. Our open platform approach is based on delivering superior customer outcomes. In these examples, both the customer and the live agent have a better experience. Further, the business is able to effectively leverage existing agent productivity tools, which can increase ROI on prior investments. We can't possibly build great tools for every possible use case. but we can enable them through our integration capabilities with UI UX widgets, APIs, or webhooks. With our platform providing core services like intelligent routing, orchestration, analytics, and reporting, customers can build solutions tailored to their needs. They can use our bots and apps, build their own, or choose to deploy third-party solutions purpose-built for the specific use case. Our multiple ways to integrate with partners bring to life a whole new way of making integrations feel native versus loosely stitched together as is often the case with other contact center software. There appears to be no trade-off between functionality and ease of use for the customer, and the technology partners love it because we don't compete with them. We started our partnership journey in January and formally announced it in early July. We have been overwhelmed with a positive response and have more than 40 partners today and even more onboarding. These are recognizable, highly funded companies doing some amazing things. We have fully functional integrations released today and a lot more coming. Our ecosystem will naturally expand as the use cases for AI in the contact center mature. For now, customers want reliability, security, ease of use, and a roadmap that protects their investment. They may recognize the potential of artificial intelligence in the contact center, but they want the flexibility to adopt new solutions and technologies at their own pace. Customers like Health First, Sotheby's, Horizon Hobby, United Neuroskeletal Partners, and Sovereign Housing are embracing our approach and committing to the 8x8 platform. These wins, some with TCVs of seven figures, are detailed in our earnings deck. Although they vary by industry, geography, and size, these customers chose 8x8 to improve their customer outcomes today and well into the future. Don't take our word for it. On July 31st, MetaG released its inaugural contact center as a service, MetaRank, based on market share, financials, market share momentum, product mix, customer sentiment, and the customer business success. 8x8 ranked fifth. higher than I believe most listeners would have guessed, and ahead of Amazon, Dialpad, Talkdesk, Vonage, Avaya, Content Guru, Ujet, and Zoom. Additionally, we ranked highest in customer sentiment. We live customer obsession. Our contact center rocks, and it's constantly getting better. Let's turn to what all this means for us as a company and you, the investors. Creating value for our customers and our shareholders over an extended period of time is fundamental to everything we do. I believe we will achieve this by continuing to invest in innovation while managing within a financial framework where revenue growth exceeds expense growth and excess cash flow is returned to investors. I want to lay out our financial path for fiscal year 24 through fiscal year 26 time period. This is not guidance, rather the path we want to be on. We expect to increase our cash flow from operations by an average of more than 20% per year. This will be driven by a combination of margin expansion, debt pay down, and revenue growth. We remain committed to returning $250 million to investors over the period, mainly through debt retirement. We have already returned 25 million and have 225 million to go. Since value accrues on a per share basis, we have taken the pioneering step to reduce the dilution from our employee stock programs over time. While the full benefit is expected to take three years to be realized as we work through the vesting of previous grants, we expect the annual increases in diluted shares outstanding to be roughly 6% per year through fiscal 26. This will depend on the actual stock price and excludes any acquisitions. This does include employee stock purchase, or ESPP. We remain believers that having employees as stockholders aligns well with shareholders' interests. Over the long term, we want to reduce annual growth to 4% or less. These three items combined will drive what I consider to be the most important metric for shareholder value, cash flow from operations per share. Increasing cash from operations while reducing share dilution is our financial north star. As a proof point, over the last four quarters, we have generated cash flow from operations of $69 million, while our reported fully diluted share count is down by over 3 million shares over that time period. This is not to say we are not concerned about service revenue growth. We are. We expect to exit fiscal 24 with low single-digit growth and then show acceleration in fiscal 25 and fiscal year 26, with a goal of getting to 8% to 12% year-over-year revenue growth as soon as possible. While doing all of the above, we continue to invest in the future of the companies. Growth will come by building innovative products, expanding our channel, and developing our employees. This road may not always be smooth or linear, but we believe that it's very doable for us. My confidence is built on the accelerated pace of new product introductions, the early customer response to these new products, our recent financial performance, and the improvements in the sales process and go-to-market we will achieve under the leadership of our new chief revenue officer, Lisa Martin. So while the quarter was not perfect, and we know we have more work to do, it was a step in the right direction, and we have a plan. Lastly, I want to thank our customers, our partners, our employees, and you, our investors, for going on this journey with us. And with that, I will turn the call over to Kevin.