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spk03: And thank you for standing by. Welcome to Q1 2025 8x8 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson, Senior Vice President of Investor Relations. Please go ahead. Thank you.
spk06: Good afternoon, everyone. Today's agenda will include a review of our results for the first quarter of fiscal 2025 with Samuel Wilson, our Chief Executive Officer. Following our prepared marks, 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 investments and innovation, and our focus on profitability and cash flow, as well as statements regarding 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 measure 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 Samuel Wilson.
spk11: Good afternoon, everyone. I appreciate you joining us today as we discuss our results for the first quarter of fiscal 2025. I am pleased to report another solid quarter in which we delivered results within our guidance ranges for service revenue, total revenue, and non-GAAP operating margin. Cash flow for the quarter was better than anticipated at $18 million, bringing cash flow from operations for the trailing 12-month period to $71 million. We achieve these results even though the market has become incrementally more competitive, if only from a marketing and messaging standpoint. For example, we saw NICE make a marketing splash for the $5 UCAS offering. These solutions are typically feature light and unintegrated, but the announcements have served to disrupt and extend sales cycles in some cases. However, these competitors' actions have made us think about getting more creative to push our competitive advantage and drive awareness and adoption. Nothing to announce at this point, but with the advances we've made on our platform, there may be opportunities to rock the boat a bit ourselves. In addition to delivering in-line results again this quarter, we also achieved an important milestone in our stated objective to return value to shareholders by reducing debts with the repayment of our $225 million term loan with Francisco Partners earlier this week. We funded the prepayment with a new $200 million credit facility we announced in early July, plus $28 million from our cash balances for principal plus accrued interest and fees. The new bank loan reduces our interest rate by approximately 360 basis points compared to our prior loan and was headlined by Wells Fargo Bank with participation by MUFG, First Citizens Bank, the Silicon Valley Bank successor, Citibank, and Citinational Bank. The quality of the commercial banks involved and the favorable interest rate reflects our financial strength, as well as our lenders' confidence in our ability to achieve our long-term profitability and cash flow objectives. With that as an overview, I want to provide you with an update on our transformation and then pivot to more details on our financial performance and updated outlook. Normally, Kevin would do this, but he has been out of the office for a week or two following a mountain bike accident. He's fine and recovering. Fortunately, he was wearing his helmet. We expect him to make a full recovery and be back on the call next quarter. Against the current marketing-driven competitive environment and an uncertain macroeconomic and geopolitical environment, we believe that innovation remains the key to driving sustainable growth. We remain focused on the six initiatives we believe are critical to our future success. They are, one, accelerating innovation with a focus on our platform, and on contact center as a service while maintaining our leadership in cloud telephony. Two, establishing communications platform as a service or CPaaS leadership in the Asia Pacific region and levering these capabilities globally. Three, focus on small and mid-sized enterprises as our target customer segment. Four, improving platform win rates and sales productivity. Five, Maintaining an outstanding experience for our customers, allowing them to focus on their own core business. And lastly, six, building a fortress balance sheet by remaining vigilant in managing our costs, allowing us to return value to investors. Transformations rarely deliver perfectly linear results, but we continue to advance across our initiatives in the first quarter. Fiscal 2024 was a pivotal year in terms of innovation as we introduced new products such as Engage, voice and digital intelligent customer assistant, a bot, and agent assist as well as major platform enhancements like the customer interaction data platform, composable agent and supervisor user interfaces. We also developed solutions that leverage our CPaaS capabilities extending beyond the Asia Pacific region by integrating these capabilities globally. As we design features and enhancements for our target customers in the mid-market and small to medium-sized enterprises, we are building tightly integrated solutions that prioritize ease of use, out-of-box functionality, and rapid deployment without compromising functionality. Our own research, as well as third-party CIO and customer surveys, suggest that many, if not most, organizations are still evaluating how to best implement AI in their contact centers. By focusing on integrated platform solutions, we are reducing the risk of implementing enterprise-grade contact centers, including sophisticated AI-driven bots and analytics for our customers so they can deliver better customer experiences to their customers. This strategy is resonating with customers and beginning to show up in a meaningful way in the market's embrace of our contact center solutions. We are seeing significant momentum in our enterprise contact center business with larger customers showing the highest growth. In fact, 15 of our top 20 new logo deals in the quarter included contact center and enterprise accounts with more than 250 agencies grew 36% year over year. This is clear indications of product market fit. We are also seeing a dramatic increase in the number of interactions using self-service bots, digital messaging, and video in the contact center. For example, video interactions from within the contact center application are up 150% quarter on quarter. We introduced version 1.0 of this solution in calendar 2023 to allow field repair and service providers to assess a problem by video. We launched version 2.0 this year and are seeing rapid adoption. To quote a customer, It's groundbreaking and a game changer. While still a small percentage of revenue, sales of new products increased more than 40% year on year. At the same time, we are seeing more multi-product deals in our pipeline, and we are landing new logos with multiple products. For example, a leading home furnishings retailer landed with five products, including XCAS, SecurePay, AgentAssist, and Workforce Management. And this was not a one-off. We had other four and five product customers land in the corridor, and there are many more in the pipeline. This case study, along with the case studies of Great Places Housing Group and Atrio Health, show how our solutions approach is adaptable to vastly different use cases across vertical markets and geographies. Our technology partner ecosystem plays a critical role in our strategy to deliver business outcomes based on our platform versus a collection of loosely integrated technologies. Technology partner ecosystem has been extremely successful and is allowing us to deliver best-in-breed, plug-and-play solutions on top of our AI-powered platform. This is one of the ways we are reducing the risk of implementing AI in the contact center and actually achieving a measurable ROI. We continue to expand this carefully curated ecosystem and most recently added RegoIO, a leader in outbound campaign management to the exclusive sell with eight partner tier. Native integration of Regal IO's advanced journey builder and sales dialer with 8x8's robust cloud communications platform promises customers more efficient outbound customer engagements. We have already identified multiple joint opportunities for a Regal 8x8 solution, and that's while the product is still in development. Our investments innovation are starting to move the flywheel. We see this in our pipeline metrics and our partner engagement statistics and in the ramp of new salespeople productivity. Leading indicators we watch will show we're building momentum. For example, the pipeline in new logo business is up 35% from a year ago and contact center as a percentage of new pipeline is increasing. Signs our strategy is on the right track. This doesn't mean it'll all close next quarter, but we are getting more at-bats, and this is making us cautiously optimistic as we head into the back half of the year. It takes time for all the changes we made, particularly in our go-to-market strategies, to flow through the sales cycle and show up in revenue. But our experience with the transformation of CPaaS gives me confidence we are on the right track. Speaking of CPaaS, it had another very strong quarter. with a 25% increase in monthly interactions and more than doubling WhatsApp messaging. We helped customers engage with more than 100 million subscribers over the platform. And sales excluding SMS messaging increased more than 60% year over year, demonstrating our progress in diversifying the CPaaS revenue base to higher margin products. The story of Thailand's King Power published in the IT News Asia is a great case study in how the value-added capabilities of our platform, features like intelligent routing, omnichannel campaign management, are increasing the effectiveness of their campaigns while reducing costs by 30%. Just a point of reference, 8x8 sent over 1.2 billion SMS messages last quarter, mostly in the Asia-Pac region, but also growing outside of Asia-Pac. While not in the major leagues as far as volumes, we are far from the minor leagues when it comes to CPaaS. And as we roll out new solutions for our core contact center and UC-based globally, solutions like proactive outreach and contact center add-ins like Remote Fix, we are seeing increased momentum in adding CPaaS features to existing UC or XCAS customers. We expect CPaaS to continue to deliver consistently strong growth throughout fiscal 2025, some 18 to 24 months after the transformation began. Just as we saw the early signs of success in CPaaS in fiscal 2024, we are seeing the early signs of momentum across our broader UC and CC business today. As we saw in the fourth quarter, relatively small changes in platform usage revenue are amplified in the ARR metric as previously defined. We expect platform usage from CPaaS as well as other usage-based products to increase making the ARR metric, as previously defined, less and less relevant as a key business metric. After evaluating the decline in relevance, coupled with a review of peer metrics, we have decided to discontinue ARR as a key business metric. We will continue to review our metrics to provide you with visibility into our performance, but for now, we are focused on trends in our reported financials, including revenue, gross margin, operating margin, and cash flow. As we've said many times, cash flow from operations continues to be our North Star. This is a great segue into our Q1 financial performance and our updated outlook for the remainder of the year. All metrics besides revenue and cash flow are non-GAAP. With our Q1 results consistent with our guidance ranges, we will just highlight a few things. Service and total revenue were both near the midpoint of our guidance ranges even though other revenue was below the implied performance as we continue to see preference for soft phones following the release of updated versions. The increase in platform usage, which includes CPaaS, combined with lower other revenue resulted in a slight sequential decrease in gross profit to 70.6% versus 70.8% in the prior quarter. We continue to operate within the cost envelope Kevin outlined on last quarter's call, which resulted in non-GAAP operating margin of 11.3%, flat with last quarter and near the midpoint of our guidance range. Our stock-based compensation expense for the quarter was less than 8% of revenue, well below that of our peers as we've increased cash compensation in lieu of equity for a majority of our employees. Our intention is to reduce dilution by issuing fewer shares over time, but it will take a hit to our non-GAAP operating margin in the near term Because cash comp isn't excluded from non-GAAP financials, we still think it's the right thing to do. Cash operations was 18.1 million, a little better than expected, and shareholder equity remained positive. All around a solid quarter. We did what we said we would do, and we made progress across our key initiatives. Looking forward, we continue to build momentum with our platform and new products on our path to growth. while continuing to be profitable on a non-GAAP basis with positive operating cash flow. An important step near term is the acceleration of the upgrade program for the remaining customers on the FUSE platform. And we have notified these customers of our intention to move them to the 8x8 platform. We are now two and a half years past the acquisition, and a significant number of the former FUSE users have already upgraded to the 8x8 platform or have made plans to do so. It no longer makes sense long-term to incur the cost of maintaining this increasingly obsolete platform. The 8x8 platform, which is built on a modern architecture with embedded AI throughout, offers significant advantages. Let me be clear. We consider the FUSE acquisition a home run in terms of profitability, cash flow, and innovation. However, at this point, it makes sense to accelerate the upgrade process. We are giving former FUSE customers ample time to plan their move, and we are doing everything we can to make it easy and compelling, and it is. At the same time, we recognize that some of them may not want to make the journey with us, and we've expanded the ranges of our guidance for service revenue to account for the possible increase in attrition as well as uncertainty as far as timing. Our new range for service revenue for the year is $685 million to $707 million. We still expect to show year-over-year growth in service revenue as we exit fiscal 2025 in the fourth quarter, although this will depend on our success at retaining the long-tail customers of FUSE and the timing of any attrition. This flows through to total revenue, which also embeds a more conservative outlook for other revenue. The range for total revenue for fiscal 2025 is now $710 to $732 million. We are seeing less demand for physical phones than historic norms. This is at least partially driven by our innovation, both in soft phones for the contact center and our continued investment in our mobile app. We are completely fine with this because historically this has been a loss leader. We expect gross margin for the year to be a range of 69 to 71%, reflecting an increase in platform usage revenue in the service revenue mix. We expect operating margin in a range of 10 to 11% based on our current expense envelope. This translates into fully diluted non-GAAP earnings per share in a range of 32 to 35 cents per share. We remain on track to deliver operating cash flow in a range of 59 to $64 million as lower interest expense offsets the decrease in operating income. That said, we expect cash flow for the second quarter to be down from Q1 due to the timing of cash expenses, including cash interest payments. That is the summary for the year. For Q2, we're looking at results similar to Q1 in terms of revenue. We expect operating expenses will be about flat with Q1 and operating margin to be in a range of around 10 to 11%. I will finish my comments reiterating my confidence in the future. Our journey may not be perfectly linear each and every quarter, especially in terms of the financial metrics. but our progress is clear and our solutions are compelling. I am confident the investments we are making in innovation, marketing, channel programs, and sales productivity will yield results. We are seeing the positive results of the transformation in parts of our business now, and I believe the rest are just a few quarters behind. In the meantime, we will continue to focus on generating cash and returning value to investors through debt reduction and efficient management of our business. Last, I want to thank our customers, our partners, our investors, and our employees. This is Team 8x8. With that, we are excited to remind everyone that tomorrow is 8x8 Day, August 8th, where we have special events for customers. With that, I will turn the call over to the operator for questions.
spk03: Thank you. As a reminder, to ask a question, please press star, 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt VanVleet from BTIG.
spk09: Good afternoon. Thanks for taking the question. I guess first, as you talk about seeing a little bit more sort of usage or consumption-based revenue going forward, especially as you've integrated the CPaaS components into the other products, where do you feel like that's going to show up maybe most quickly, and how is that developing in the sales pipeline to get more customers sort of using the product and then from that expanding the revenue-based products?
spk11: It's a great question, Matt. Thank you for asking it. So to start with, we launched two products thus far that are more contact center integrated focused. One is a one-way SMS WhatsApp-based system so you can text or message out, and then a two-way where if you want to use WhatsApp or messaging to go back and forth. Those are the first two products launched, so sort of CC-centric, enterprise-centric, and we're getting good pipeline. I think what's interesting is we launched those products as really packaged products, and we've actually seen an uptick also in customized CPaaS solutions. So it's allowing us to not only win CPaaS business in a packaged manner, but also customers are becoming aware of the products we offer, even in a customized manner, API manner. This quarter, we'll launch a product that focuses on emergency notification, really for employees or constituents, like if you're in a school district or those kinds of things. And that's kind of the big three that we're launching. And what we're seeing is a pretty healthy interest in these products, particularly as we see omni-channel and digital channels really become ever more important inside the contact center. I just want to address the second part of it. It's just usage in general, right? So usage is now like 10% to 12% of our revenue. It's definitely increasing. And I just want to be clear, it's not just messaging usage. It's also we have voice, you know, voice masking usage. We have ICA has, you know, the AI components are very usage centric. So that's kind of across the board.
spk09: Okay, very helpful. And then as you look at the strength of the CPaaS business, especially in APAC, you know, Maybe help us understand that a little bit better. Is that a recovery on the macro side? Is it better productivity and efficiency on the sales force, winning new deals and sort of getting back into growth mode there? Because it feels like that's been a little bit of a drag over the last couple of years, but now it sounds like it's a little more of a tailwind. So just help us understand the trends going on there.
spk11: Yeah. Okay. So first, let me go. I'm going to take these in reverse order. It was a nice tailwind this last quarter. And, you know, I'm really super proud of how that team performed. Okay. Is it a macro recovery? Is it whatever? There's a little bit of macroness to it. I would say, you know, if I had to break these apart, like 20% is macro based. The carriers went through their normal price increase cycles and this year didn't jam us with massive price increases. so that was easier to digest and not disrupt the business overall. But really, it's driven by the fact that we replaced the management team 18 months ago, two years ago. We've installed new leaders. We've completely redone the GTM, sorry, the go-to-market initiatives around adding enterprise business, not just sort of high-volume, next-generation sort of startup business. And so it's a whole host of things. The biggest reason, though, is just basic blocking and tackling business. Good leaders with an aligned organization taking a good product to market.
spk01: Great. Thank you.
spk03: Thank you. One moment for our next question. Our next question comes from the line of Catherine Trebnick from Rosenblatt Securities. Hi. Thanks for taking my question.
spk05: So you seem to have a really good quarter of 15, I think you said, of new logos were contact center. So on that piece of it, were those displacement and legacy systems, Sam? Are they upgrades? Are they land and expand? Can you provide more detail around and give us more context on those? Thanks.
spk11: Yeah. It was 15 of our top 20 deals for the quarter. It all involved contact center. And we are seeing contact center as a greater percentage of mix in the pipeline. I think we say in the script the pipeline is up substantially over the last two quarters. It is. I know for a fact it is. I just don't know the exact number I said in the script. But it's up substantially. And we're seeing this transition that we've made to a contact led CX story starting to resonate and work in the marketplace. Now, look, it's still early. We've got a substantial increase in pipeline. That won't necessarily close this quarter ran or next quarter. It takes us a year, some of the sales cycles on the bigger deals. But it's really working pretty clearly, and the message is really resonating with prospects and customers. Most of it, I would say the 15 to 20, most of it was probably 50-50 add-on new logo of that top 15. It's all new logo. That's all new logo. That's all new logo. So 15 of our top 20 new logo deals were all contact center-based.
spk04: Okay, and were they displacement to legacy systems? Oh, yeah, sorry.
spk11: Yeah, almost all are on-prem to cloud. You know... So if you go back, right, and this is, you know, maybe this will help investors, and I know you're very aware of this, Catherine, but so it's not just for your sake, it's for everybody's listening sake. So, you know, when we were, before the pandemic, there were three main drivers of our business from a macro perspective. Digital transformation, end of life of existing on-prem systems, and moving to new office space, new real estate space. And then we saw the pandemic and we saw a surge of business because of work from home, but Post-pandemic, one of those three legs just doesn't really exist anymore, and that's that move to a new office building. Everybody knows the vacancy rates in the commercial real estate space. That's really not a driver of the business. So it's really this digital transformation. And as businesses want to digitally transform, i.e. messaging, bots, AI, data sets, data and analytics, all these kinds of things, they have to move to a cloud-based system. It just doesn't work with the on-prem systems very well.
spk05: All right. Thanks a lot, Sam.
spk03: Thanks, Catherine. Thank you. One moment for our next question. Our next question comes in the line of Meta Marshall from Morgan Stanley.
spk00: Great. Thanks. Maybe just on the contact center side, just trends on kind of the Engage product or more of that enterprise product versus kind of the XCAS or more traditional CCAS product. And if I missed that, apologies, but just kind of some helpful details around that. And then maybe on the second question, you know, understanding kind of the nice impact to the quarter and just in terms of kind of sales cycles, but Given that that product has kind of meaningfully lower reliability and features, do you just feel like it's a matter of time to kind of inform customers, or just how have you kind of been getting through that process? Thanks.
spk11: Yeah, okay. So let me cover Engage first, and then I'll cover the UC product. sort of messaging strength and those kind of things. So first on UC, we're getting a lot of very positive feedback. The product is still in beta. I suspect it'll be in beta for a while. It is a true new product line for the company. So this isn't a UC version. This isn't a CC version. I mean, you can kind of call it a hybrid between the two, but that'd be really unfair to it. It's a new product. It's a new product line. It's built mobile first. And so we're really in that stage. We've got it in customers hands. They're using it We're really excited on the first feedback. We're getting so far, but it's a long way to go in terms of contact center in general we are definitely seeing more momentum with our contact center based product and I think we say in the script or we've said in the past, you know for contact centers above 250 seats the growth is very substantial for us as a company and And I want to let investors know, I mean, I like throwing out lots of numbers, but I'd like to let them know for a second, just the qualitative. We are going head to head with competitors that three years ago or four years ago, we wouldn't have had a chance with. We're going to head to head with competitors who you guys all know, and we're winning deals that historically we just wouldn't win. And we're winning because of our T-PEZ, our technology partner ecosystem, We're winning because of our investment in the single platform. We're winning because more customers want to buy UC and CC together on that single platform. So all those positives together are definitely leading to a higher win rate. In terms of pricing competition in UCAS, and in a second I'll make this bigger, so what really happens is it just slows down a deal cycle because the customer is going to print out the press release, or email it over to the sales rep and say, well, this is $5. Why don't we buy that? And, of course, you have to read the fine print that says you have to be a CX1 user, and there's a whole bunch of other stuff attached to it, and it's not that great of a product. But that just slows down the sales cycle, and it anchors them on a lower price. I do want to bring this up one level, though, and it's a thing that we saw last quarter more so than we've seen in the past, and that's vendors with subpar products. particularly subpar contact center products that they like to talk about a lot, using price. The way they're getting their customer numbers because they want to report it to you guys on Wall Street is they're using price. And it's the same as the three CX products by Nice, et cetera. These are subpar products. I'd go so far as one customer called them crappy products. But it just slows down the sales cycle because they're going to run a POC or they're going to do whatever. And I get what they're doing. They're just trying to use price to disrupt the market. And it just takes time to work our way through that. And that's what we see. We just see sort of, you know, bad products at low prices and you have to sell through it.
spk03: Great. Thanks. Thank you. Our next question comes from the line of David Unger from Wells Fargo.
spk14: Hey, thanks for taking our questions. So just to take it back at the high level, so a lot has clearly happened from our seats since earnings season kicked off for software, the political side, the economic side. So I'm wondering if you could describe the customer engagement activity level over the last month and any particular near-term catalyst that can support decision-making to accelerate. Thanks.
spk11: That's going to be a tough one. So first, remember, I'm a NAT. I'm a $725 million a year software company, so I'm always very reluctant to speak about this multi-billion dollar industry. I feel like I'm a little over my skis, so just FYI on that. And also, I should say thank you to Wells Fargo. You led our financing round. You did all your wonderful due diligence, and you came back, and you led the round of letting us borrow money. So thank you to you guys for that. Okay, in terms of the last month, what do I see? I do see a little bit more cautiousness around some deals. We're still getting them signed, just a little bit more cautiousness. You know, a double, triple check, those kinds of things. And in terms of acceleration, I mean, the big thing is digital transformation, right? If you're really looking, and I want to take this up a level and really talk about business outcomes. And I'll use an example. You're a hospital. Your most precious asset is your doctor's time. If a patient doesn't show up to a doctor's appointment, you don't get to charge him or her. And so having every doctor fully utilized is a key metric for you running your business. When we deploy things like proactive outreach to notify patients and remind them that their appointment is tomorrow, press one to confirm, you know, press two if you want to talk to an agent to change your appointment, these kinds of things, it moves the needle. And what we need to do a better job of as a company, and I think we are starting to do that at 8x8, is educate customers on the potential for them to reduce the cost to serve, improve customer satisfaction, improve their retention rates or renewal rates, improve their ARPU, those kinds of things, by deploying our products and we're seeing it. We're bringing those integrated products together. And I think that's actually what's going to accelerate the business next month, the next six months, the next year is really going in. And the easiest way for me to demonstrate this to you, the investment community is remote fix, right? We invented remote fix for field service companies and we see, you know, 30, 40% reduction in the number of truck rolls after they deploy Remote Fix. And Remote Fix is our contact center, plus our UC, plus SMS messaging, plus video, you know, one-way video, uplift capabilities in the contact center, all those things combined. And that can save field service companies tens of thousands of dollars per month. They don't mind paying us a little bit to give them that capabilities. So it's definitely... that's what's going to drive the industry. The whole, hey, you have an on-prem solution, it's being EOL'd, or you're moving to a new building, those legs just aren't as strong as they were in the past.
spk14: Thanks, Sam. And just one more, if I can just follow up. So we just talked about ARPU, and sorry if I missed this, but can we just talk through some of the ARPU trends you're seeing in CKS, given the competitive dynamics going on in the landscape? Thank you.
spk11: Yeah, okay, that's a great question. So first off, my average revenue per customer, I'll do it that way, instead of my average revenue per user. And the reason is, I think the average revenue per user in the industry is being, I was going to say manipulated, but I'm sure if anybody's listening, they'd be upset with that word, is being, it doesn't tell the full story. So if you look at 8x8's average revenue per customer, it's up on a year-over-year basis, it's up on a quarter-over-quarter basis. And so that's where we're seeing that multi-product, the higher-valued contact center seats, those kinds of things working. Now, what you can get, though, is per seat items can get a little wonky because, you know, I'll say something that's maybe a little contrary to everybody else, but I don't want you to blow it out of proportion, is we do have some instances where people buy less seats because they're buying the bots. Now, I would say in a lot of cases, they buy the same number of seats and the bots because they want more productivity and other things. But we do have some cases. And when you do that, it actually skews your average revenue per user because you're dividing by a smaller denominator. And so I think average revenue per customer is a way better metric. And that's the one that we are seeing trending up. What I think with the subpar products is really it just elongates the sales cycle. And if I just take a step back and this is, you know, just take this for the two cents that it's worth because I'm not the world's most visionary guy. I do think you're going to see a trend over time over the next five years in our industry where usage and consumption-based pricing will become ever more common. I dare say that five years from now, per seat pricing may actually almost become extinct. because I think more and more software is being sold on that consumption-based model. It was pioneered really by the hyperscalers, GPC, Azure, and Amazon, but it's even floating in our industry. And so I think some of those ARPU metrics are going to be less relevant to the average revenue per customer metrics. So just my two cents on that.
spk13: Appreciate it. Thank you, Sam.
spk03: Thank you. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our next question comes from the line of Taz Kaujalji from Wedbush.
spk02: Hey, guys. Thanks for taking my question. Two questions. Sam, you were very positive on the number of new customers who are signing up with multiple products. Can you remind us what's the average penetration or the average, I guess, number of products customers have and what's the upside? What's the upper limit there? How many products does one customer have if you look at the upper limit?
spk11: Okay. So right now, our average is a great question. I haven't actually calculated it out, but I can tell you it'd be somewhere between one and two. So a vast majority of our customers are UC customers still. XCAS is in the 40% of our total revenue. But in terms of our customer base, it's going to be a very small percentage because of the big delta between contact center seats and UC seats. And so it's going to be at one to two. We have hundreds of customers, probably getting closer to thousands of customers sitting at three, four, and five products. No, actually we have thousands of customers with three, four, five products now. And the upside potential, I'll tell you, I've done a back of the envelope, so please don't quote me on this, but if we were to get sort of some basic benchmark type of numbers in terms of penetration and looking just at five products, not the nine products we sell today, it's an incremental 100 to 150 million plus in revenue per year.
spk02: Got it. Just a follow-up question. Fuse migration, can you remind us how much of the base has already moved? And then when customers move from Fuse to 8x8, is there an uplift in pricing or are they paying the same price?
spk11: Okay, so glad somebody asked because I wanted to put more details out. So Taz, I owe you. Next time I see you, I'll buy you a coffee. So when we bought Fuse, it was about 20%, you know, rough and tough of our revenue base. Today it's about a little less than 8%. of the revenue that comes from Fuse, and that number is steadily declining as we migrate customers over. The decision we've made now that we've got the whole upgrade process down, really want to accelerate that. It doesn't make sense to keep these two platforms running in perpetuity. It was never the intention of ours, and so we're really accelerating those moves. You know, I would say the goal is to hopefully get it done in the next year or two to get everybody's disposition, and then it'll take them a while to completely move them, deploy them, and shut down the old legacy platform. But, you know, a little less than 8% of our overall revenues come from Fuse customers today.
spk02: And then when customers migrate, do they pay more?
spk11: Oh, okay. So typically they do not pay more. We charge them the same price. But it opens up the door to cross-selling. So the problem with the Fuse base is I really can't cross-sell them much. And what I mean by that is I don't have like an integrated Fuse plus 8x8 contact center. I have 8x8 plus UC plus 8x8 contact center as I have the bots and proactive outreach, workforce management, PCI compliance, all those products, right? And so once we move them, it opens the door to cross-selling.
spk15: got it really helpful thanks thanks guys thank you our next question comes from the line of michael funk from bank of america yeah great great cam thank you for the for the question um what one more on fuse if i could sam you know you mentioned that you adjusted the guidance for 25 to account for potential churn from the acceleration of the upgrade program but What is the expense you're still bearing from FUSE? Presumably, you're paying for some data center space and support and other factors. Would I put the normal gross cost or cost of service on that revenue percentage, the 8% you gave us today, to kind of get to the cost of that? Or what is that number?
spk11: No, the cost would be less, right? I mean, so... Fuse has been, and I just, you know, everything we talked about on the call, Fuse has been an absolute home run in my mind. It allowed us to innovate. It gave us the 21 scrum teams when we originally acquired them. We said we were acquiring them for innovation. And so we use that innovation to roll out all these products that we're talking about, the things that are taking off, the things that are growing in the 40%, 50% range, all those kinds of things. At the same time, we stripped a lot of costs out. And so the cost to service that platform is, is not massive. It's not, you know, I could wing a number and I probably shouldn't, but it's not. It's single-digit millions of dollars.
spk12: Okay, so it's not $10 million, $15 million on that.
spk11: No, it's not that. What it is, though, is it's a distraction, right? So it's a distraction and it's a distraction we need to put behind us, right? So I can redeploy assets away from maintaining it. You know, I've got to maintain security compliance on it and all those kinds of things. It's just to the point now it's a distraction and we should get them over on our better, fitter platform. It's kind of a, you know, it's a Toyota Camry with 125,000 miles on it. It's time to buy a new car.
spk15: Makes sense. And then one more on the macro. We've heard, you know, some mixed commentary this quarter from other companies about, you know, having to offer more incentives, more discounting, more, more free months to entice those customers over the finish line, especially SMB. Are you seeing the same thing in the competitive environment where you are for the SMB customers?
spk10: Well, I don't think it's, to be clear, I don't think it's enticed the customers.
spk11: I think this is industry self-inflicted gunshot wounds, right? You've got small startup companies that are, you know, last raised their round of capital in 2020 at valuations at 50%. $2.5, $3 billion that are desperate. You've got bigger companies that are single product that are desperately trying to get traction with new products that they haven't invested in and aren't very good. And so I think all that incentive stuff and free month stuff is whatever is, that's just us fighting each other. It has nothing to do with incenting the customer. The customer is just laughing all the way to the bank.
spk15: And you mentioned nice. Thank you for mentioning that. what is your sense of customer overlap with, with nice? I would, I would have assumed it was relatively, it was relatively low and you wouldn't see them that much. You know, customers have both would think about switching to the nice voice product. Do you have, do you have a sense of the overlap?
spk11: Well, okay. So let's remember that there's a certain company in Belmont, California that starts with an R and ends with central and, that has resold nice for years, right? And so when I say nice, I also sort of take it in the context of inside of their go-to-market partner. And then number two is I think your statement is very accurate circa two years ago, three years ago, but we've invested a lot in our contact center. And as I mentioned earlier, we can hold our own. We can hold our own. Now, that doesn't mean I'm... There are places that nice is better than we are, and I think there's places that we are better than nice. Great company, by the way. I respect them tremendously. They've done wonders for our industry. But the UC stuff, I think, was definitely not aimed at us. The things that they did was very much aimed at that GTM relationship with a certain vendor because that certain vendor suddenly decided they want to go in a different direction. That's why the fine print, and everything else.
spk15: Okay. Thank you, Sam. I hope Kevin's feeling better as well.
spk11: I'm sure he's listening to this call, and then I hope he goes back to sleep.
spk03: Thank you. At this time, I would now like to turn the conference back over to Sam Wilson for closing remarks.
spk11: Thank you, everyone. Thank you for joining us today. Lastly, I just want to thank our partners, our customers, our investors. And our employees, tomorrow's August 8th is 8x8 day. So we've asked our employees to take some time off and go volunteering tomorrow. And we've got a big number of events for our customers tomorrow. So happy 8x8 day, August 8th. And with that, we look forward to seeing everybody back in about 90 days for our next earnings call. Thank you.
spk03: This concludes today's conference call. Thank you for participating. You may now disconnect. you Thank you. Thank you. Thank you. Thank you. Good day, and thank you for standing by. Welcome to Q1 2025 8x8 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson, Senior Vice President of Investor Relations. Please go ahead. Thank you.
spk06: Good afternoon, everyone. Today's agenda will include a review of our results for the first quarter of fiscal 2025 with Samuel Wilson, our Chief Executive Officer. Following our prepared marks, 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 investments and innovation, and our focus on profitability and cash flow, as well as statements regarding 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 measure 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 Samuel Wilson.
spk11: Good afternoon, everyone. I appreciate you joining us today as we discuss our results for the first quarter of fiscal 2025. I am pleased to report another solid quarter in which we delivered results within our guidance ranges for service revenue, total revenue, and non-GAAP operating margin. Cash flow for the quarter was better than anticipated at $18 million, bringing cash flow from operations for the trailing 12-month period to $71 million. We achieve these results even though the market has become incrementally more competitive, if only from a marketing and messaging standpoint. For example, we saw NICE make a marketing splash for the $5 UCAS offering. These solutions are typically feature light and unintegrated, but the announcements have served to disrupt and extend sales cycles in some cases. However, these competitors' actions have made us think about getting more creative to push our competitive advantage and drive awareness and adoption. Nothing to announce at this point, but with the advances we've made on our platform, there may be opportunities to rock the boat a bit ourselves. In addition to delivering in-line results again this quarter, we also achieved an important milestone in our stated objective to return value to shareholders by reducing debts with the repayment of our $225 million term loan with Francisco Partners earlier this week. We funded the prepayment with a new $200 million credit facility we announced in early July, plus $28 million from our cash balances for principal plus accrued interest and fees. The new bank loan reduces our interest rate by approximately 360 basis points compared to our prior loan and was headlined by Wells Fargo Bank with participation by MUFG, First Citizens Bank, the Silicon Valley Bank successor, Citibank, and Citinational Bank. The quality of the commercial banks involved and the favorable interest rate reflects our financial strength, as well as our lenders' confidence in our ability to achieve our long-term profitability and cash flow objectives. With that as an overview, I want to provide you with an update on our transformation and then pivot to more details on our financial performance and updated outlook. Normally, Kevin would do this, but he has been out of the office for a week or two following a mountain bike accident. He's fine and recovering. Fortunately, he was wearing his helmet. We expect him to make a full recovery and be back on the call next quarter. Against the current marketing-driven competitive environment and an uncertain macroeconomic and geopolitical environment, we believe that innovation remains the key to driving sustainable growth. We remain focused on the six initiatives we believe are critical to our future success. They are, one, accelerating innovation with a focus on our platform, and on contact center as a service while maintaining our leadership in cloud telephony. Two, establishing communications platform as a service or CPaaS leadership in the Asia Pacific region and levering these capabilities globally. Three, focus on small and mid-sized enterprises as our target customer segment. Four, improving platform win rates and sales productivity. Five, Maintaining an outstanding experience for our customers, allowing them to focus on their own core business. And lastly, six, building a fortress balance sheet by remaining vigilant in managing our costs, allowing us to return value to investors. Transformations rarely deliver perfectly linear results, but we continue to advance across our initiatives in the first quarter. Fiscal 2024 was a pivotal year in terms of innovation as we introduced new products such as Engage, voice and digital intelligent customer assistant, a bot, and agent assist as well as major platform enhancements like the customer interaction data platform, composable agent and supervisor user interfaces. We also developed solutions that leverage our CPaaS capabilities extending beyond the Asia Pacific region by integrating these capabilities globally. As we design features and enhancements for our target customers in the mid-market and small to medium-sized enterprises, we are building tightly integrated solutions that prioritize ease of use, out-of-box functionality, and rapid deployment without compromising functionality. Our own research, as well as third-party CIO and customer surveys, suggest that many, if not most, organizations are still evaluating how to best implement AI in their contact centers. By focusing on integrated platform solutions, we are reducing the risk of implementing enterprise-grade contact centers, including sophisticated AI-driven bots and analytics for our customers so they can deliver better customer experiences to their customers. This strategy is resonating with customers and beginning to show up in a meaningful way in the market's embrace of our contact center solutions. We are seeing significant momentum in our enterprise contact center business with larger customers showing the highest growth. In fact, 15 of our top 20 new logo deals in the quarter included contact center and enterprise accounts with more than 250 agencies grew 36% year over year. This is clear indications of product market fit. We are also seeing a dramatic increase in the number of interactions using self-service bots, digital messaging, and video in the contact center. For example, video interactions from within the contact center application are up 150% quarter on quarter. We introduced version 1.0 of this solution in calendar 2023 to allow field repair and service providers to assess a problem by video. We launched version 2.0 this year and are seeing rapid adoption. To quote a customer, It's groundbreaking and a game changer. While still a small percentage of revenue, sales of new products increased more than 40% year on year. At the same time, we are seeing more multi-product deals in our pipeline, and we are landing new logos with multiple products. For example, a leading home furnishings retailer landed with five products, including XCAS, SecurePay, AgentAssist, and Workforce Management. And this was not a one-off. We had other four and five product customers land in the corridor, and there are many more in the pipeline. This case study, along with the case studies of Great Places Housing Group and Atrio Health, show how our solutions approach is adaptable to vastly different use cases across vertical markets and geographies. Our technology partner ecosystem plays a critical role in our strategy to deliver business outcomes based on our platform versus a collection of loosely integrated technologies. Technology Partner Ecosystem has been extremely successful and is allowing us to deliver best-in-breed, plug-and-play solutions on top of our AI-powered platform. This is one of the ways we are reducing the risk of implementing AI in the contact center and actually achieving a measurable ROI. We continue to expand this carefully curated ecosystem and most recently added RegoIO, a leader in outbound campaign management to the exclusive sell with eight partner tier. Native integration of Regal IO's advanced journey builder and sales dialer with 8x8's robust cloud communications platform promises customers more efficient outbound customer engagements. We have already identified multiple joint opportunities for a Regal 8x8 solution, and that's while the product is still in development. Our investments innovation are starting to move the flywheel. We see this in our pipeline metrics and our partner engagement statistics and in the ramp of new salespeople productivity. Leading indicators we watch will show we're building momentum. For example, the pipeline in new logo business is up 35% from a year ago and contact center as a percentage of new pipeline is increasing. Signs our strategy is on the right track. This doesn't mean it'll all close next quarter, but we are getting more at-bats, and this is making us cautiously optimistic as we head into the back half of the year. It takes time for all the changes we made, particularly in our go-to-market strategies, to flow through the sales cycle and show up in revenue. But our experience with the transformation of CPaaS gives me confidence we are on the right track. Speaking of CPaaS, it had another very strong quarter. with a 25% increase in monthly interactions and more than doubling WhatsApp messaging. We helped customers engage with more than 100 million subscribers over the platform. And sales excluding SMS messaging increased more than 60% year over year, demonstrating our progress in diversifying the CPaaS revenue base to higher margin products. The story of Thailand's King Power published in the IT News Asia is a great case study in how the value-added capabilities of our platform, features like intelligent routing, omnichannel campaign management, are increasing the effectiveness of their campaigns while reducing costs by 30%. Just a point of reference, 8x8 sent over 1.2 billion SMS messages last quarter, mostly in the Asia-Pac region, but also growing outside of Asia-Pac. While not in the major leagues as far as volumes, We are far from the minor leagues when it comes to CPaaS. And as we roll out new solutions for our core contact center and UC-based globally, solutions like proactive outreach and contact center add-ins like Remote Fix, we are seeing increased momentum in adding CPaaS features to existing UC or XCAS customers. We expect CPaaS to continue to deliver consistently strong growth throughout fiscal 2025, some 18 to 24 months after the transformation began. Just as we saw the early signs of success in CPaaS in fiscal 2024, we are seeing the early signs of momentum across our broader UC and CC business today. As we saw in the fourth quarter, relatively small changes in platform usage revenue are amplified in the ARR metric as previously defined. We expect platform usage from CPaaS as well as other usage-based products to increase making the ARR metric, as previously defined, less and less relevant as a key business metric. After evaluating the decline in relevance, coupled with a review of peer metrics, we have decided to discontinue ARR as a key business metric. We will continue to review our metrics to provide you with visibility into our performance, but for now, we are focused on trends in our reported financials, including revenue, gross margin, operating margin, and cash flow. As we've said many times, cash flow from operations continues to be our North Star. This is a great segue into our Q1 financial performance and our updated outlook for the remainder of the year. All metrics besides revenue and cash flow are non-GAAP. With our Q1 results consistent with our guidance ranges, we will just highlight a few things. Service and total revenue were both near the midpoint of our guidance ranges even though other revenue was below the implied performance as we continue to see preference for soft phones following the release of updated versions. The increase in platform usage, which includes CPaaS, combined with lower other revenue resulted in a slight sequential decrease in gross profit to 70.6% versus 70.8% in the prior quarter. We continue to operate within the cost envelope Kevin outlined on last quarter's call, which resulted in non-GAAP operating margin of 11.3%, flat with last quarter and near the midpoint of our guidance range. Our stock-based compensation expense for the quarter was less than 8% of revenue, well below that of our peers as we've increased cash compensation in lieu of equity for a majority of our employees. Our intention is to reduce dilution by issuing fewer shares over time, but it will take a hit to our non-GAAP operating margin in the near term because cash comp isn't excluded from non-GAAP financials, we still think it's the right thing to do. Cash operations was 18.1 million, a little better than expected, and shareholder equity remained positive. All around a solid quarter. We did what we said we would do, and we made progress across our key initiatives. Looking forward, we continue to build momentum with our platform and new products on our path to growth. while continuing to be profitable on a non-GAAP basis with positive operating cash flow. An important step near term is the acceleration of the upgrade program for the remaining customers on the FUSE platform. And we have notified these customers of our intention to move them to the 8x8 platform. We are now two and a half years past the acquisition and a significant number of the former FUSE users have already upgraded to the 8x8 platform or have made plans to do so. It no longer makes sense long-term to incur the cost of maintaining this increasingly obsolete platform. The 8x8 platform, which is built on a modern architecture with embedded AI throughout, offers significant advantages. Let me be clear. We consider the FUSE acquisition a home run in terms of profitability, cash flow, and innovation. However, at this point, it makes sense to accelerate the upgrade process. We are giving former FUSE customers ample time to plan their move, and we are doing everything we can to make it easy and compelling, and it is. At the same time, we recognize that some of them may not want to make the journey with us, and we've expanded the ranges of our guidance for service revenue to account for the possible increase in attrition as well as uncertainty as far as timing. Our new range for service revenue for the year is $685 million to $707 million. We still expect to show year-over-year growth in service revenue as we exit fiscal 2025 in the fourth quarter, although this will depend on our success at retaining the long-tail customers of FUSE and the timing of any attrition. This flows through to total revenue, which also embeds a more conservative outlook for other revenue. The range for total revenue for fiscal 2025 is now $710 to $732 million. We are seeing less demand for physical phones than historic norms. This is at least partially driven by our innovation both in soft phones for the contact center and our continued investment in our mobile app. We are completely fine with this because historically this has been a loss leader. We expect gross margin for the year to be a range of 69 to 71%, reflecting an increase in platform usage revenue in the service revenue mix. We expect operating margin in a range of 10 to 11% based on our current expense envelope. This translates into fully diluted non-GAAP earnings per share in a range of 32 to 35 cents per share. We remain on track to deliver operating cash flow in a range of 59 to $64 million as lower interest expense offsets the decrease in operating income. That said, we expect cash flow for the second quarter to be down from Q1 due to the timing of cash expenses, including cash interest payments. That is the summary for the year. For Q2, we're looking at results similar to Q1 in terms of revenue. We expect operating expenses will be about flat with Q1 and operating margin to be in a range of around 10 to 11%. I will finish my comments reiterating my confidence in the future. Our journey may not be perfectly linear each and every quarter, especially in terms of the financial metrics. but our progress is clear and our solutions are compelling. I am confident the investments we are making in innovation, marketing, channel programs, and sales productivity will yield results. We are seeing the positive results of the transformation in parts of our business now, and I believe the rest are just a few quarters behind. In the meantime, we will continue to focus on generating cash and returning value to investors through debt reduction and efficient management of our business. Last, I want to thank our customers, our partners, our investors, and our employees. This is Team 8x8. With that, we are excited to remind everyone that tomorrow is 8x8 Day, August 8th, where we have special events for customers. With that, I will turn the call over to the operator for questions.
spk03: Thank you. As a reminder, to ask a question, please press star, 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt VanVleet from BTIG.
spk09: Good afternoon. Thanks for taking the question. I guess first, as you talk about seeing a little bit more sort of usage or consumption-based revenue going forward, especially as you've integrated the CPaaS components into the other products, where do you feel like that's going to show up maybe most quickly, and how is that developing in the sales pipeline to get more customers sort of using the product and then from that expanding the revenue-based products?
spk11: It's a great question, Matt. Thank you for asking it. So to start with, we launched two products thus far that are more contact center integrated focused. One is a one-way SMS WhatsApp-based system so you can text or message out, and then a two-way where if you want to use WhatsApp or messaging to go back and forth. Those are the first two products launched, so sort of CC-centric, enterprise-centric, and we're getting good pipeline. I think what's interesting is we launched those products as really packaged products, and we've actually seen an uptick also in customized CPaaS solutions. So it's allowing us to not only win CPaaS business in a packaged manner, but also customers are becoming aware of the products we offer, even in a customized manner, API manner. This quarter, we'll launch a product that focuses on emergency notification, really for employees or constituents, like if you're in a school district or those kinds of things. And that's kind of the big three that we're launching. And what we're seeing is a pretty healthy interest in these products, particularly as we see omnichannel and digital channels really become ever more important inside the contact center. I just want to address the second part of it. It's just usage in general, right? So usage is now like 10% to 12% of our revenue. It's definitely increasing. And I just want to be clear, it's not just messaging usage. It's also we have voice, you know, voice masking usage. We have ICA has, you know, the AI components are very usage centric. So that's kind of across the board.
spk09: Okay, very helpful. And then as you look at the strength of the CPaaS business, especially in APAC, you know, Maybe help us understand that a little bit better. Is that a recovery on the macro side? Is it better productivity and efficiency on the sales force, winning new deals and sort of getting back into growth mode there? Because it feels like that's been a little bit of a drag over the last couple of years, but now it sounds like it's a little more of a tailwind. So just help us understand the trends going on there.
spk11: Yeah, okay, so... First, I'm going to take these in reverse order. It was a nice tailwind this last quarter, and I'm really super proud of how that team performed. Okay, is it a macro recovery? There's a little bit of macroness to it. I would say if I had to break these apart, like 20% is macro-based. The carriers went through their normal price increase cycles, and this year didn't jam us with massive price increases. so that was easier to digest and not disrupt the business overall. But really, it's driven by the fact that we replaced the management team 18 months ago, two years ago. We've installed new leaders. We've completely redone the GTM, sorry, the go-to-market initiatives around adding enterprise business, not just sort of high-volume, next-generation sort of startup business. And so it's a whole host of things. The biggest reason, though, is just basic blocking and tackling business. Good leaders, you know, with an aligned organization, taking a good product to market.
spk01: Great. Thank you.
spk03: Thank you. One moment for our next question. Our next question comes from the line of Catherine Trebnick from Rosenblatt Securities. Hi. Thanks for taking my question.
spk05: So you seem to have a really good quarter of 15, I think you said, of new logos were contact center. So on that piece of it, were those displacement and legacy systems, Sam? Are they mostly... Are they upgrades? Are they land and expand? Can you provide more detail around and give us more context on those? Thanks.
spk11: Yeah. So... It was, you know, 15 of our top 20 deals for the quarter. It all involved contact center. And, you know, we are seeing contact center as a greater percentage of mix in the pipeline. I think we say in the script the pipeline's up substantially over the last two quarters. It is. I know for a fact it is. I just don't know the exact number I said in the script. But it's up substantially. And we're seeing this transition that we've made to a contact led CX story starting to resonate and work in the marketplace. Now, look, it's still early. The large, you know, we've got a substantial increase in pipeline. That won't necessarily close this quarter, you know, this quarter ran or next quarter. It takes us, you know, a year, some of the sales cycles on the bigger deals. But it's really working pretty clearly, and the message is really resonating with prospects and customers. Most of it, I would say the 15 to 20, most of it was probably, you know, it was probably 50-50 add-on new logo of that top 15, right? It's all new logo. That's all new logo. That's all new logo. So 15 of our top 20 new logo deals were all contact center-based.
spk04: Okay, and were they displacement to legacy systems? Oh, yeah, sorry.
spk11: Yeah, almost all are on-prem to cloud. So if you go back, right, and maybe this will help investors, and I know you're very aware of this, Catherine, so it's not just for your sake, it's for everybody's listening's sake. So before the pandemic, there were three main drivers of our business from a macro perspective. Digital transformation, end of life of existing on-prem systems, and moving to new office space, new real estate space. And then we saw the pandemic and we saw a surge of business because of work from home. But post-pandemic, one of those three legs just doesn't really exist anymore. And that's that move to new office building. Everybody knows the vacancy rates in the commercial real estate space. That's really not a driver of the business. So it's really this digital transformation. And as businesses want to digitally transform, i.e., messaging, you know, bots, AI, data sets, data and analytics, all these kinds of things, they have to move to a cloud-based system. It just doesn't work with the on-prem systems very well.
spk05: All right. Thanks a lot, Sam.
spk03: Thanks, Catherine. Thank you. One moment for our next question. Our next question comes in the line of Meta Marshall from Morgan Stanley.
spk00: Great, thanks. Maybe just on the contact center side, just trends on kind of the Engage product or more of that enterprise product versus kind of the XCAS or more traditional CCAS product. And if I missed that, apologies, but just kind of some helpful details around that. And then maybe on the second question, you know, understanding kind of the nice impact to the quarter and just in terms of kind of sales cycles, but given that that product has kind of meaningfully lower reliability and features that, you know, do you just feel like it's a matter of time to kind of inform customers, or just how have you kind of been getting through that process? Thanks.
spk11: Yeah, okay. So let me cover Engage first, and then I'll cover the UC sort of messaging strength and those kind of things. So first on UC, we're getting a lot of very positive feedback. The product is still in beta. I suspect it'll be in beta for a while. It is a true new product line for the company. So this isn't a UC version. This isn't a CC version. I mean, you can kind of call it a hybrid between the two, but that'd be really unfair to it. It's a new product. It's a new product line. It's built mobile first. And so we're really in that stage. We've got it in customers' hands. They're using it. We're really excited on the first feedback we're getting so far, but it's a long way to go. In terms of contact center in general, we are definitely seeing more momentum with our contact center-based product. And I think we say in the script, or we've said in the past, you know, for contact centers above 250 seats, the growth is very substantial for us as a company. And I want to let investors know, I mean, I like throwing out lots of numbers, but I'd like to let them know for a second, just the qualitative. We are going head to head with competitors that three years ago or four years ago, we wouldn't have had a chance with. We're going to head to head with competitors who you guys all know And we're winning deals that historically we just wouldn't win. And we're winning because of our TPEZ, our technology partner ecosystem. We're winning because of our investment in the single platform. We're winning because more customers want to buy UC and CC together on that single platform. So all those positives together are definitely leading to a higher win rate. In terms of pricing competition in UCAS, And in a second, I'll make this bigger. So what really happens is it just slows down a deal cycle because the customer is going to print out the press release or email it over to the sales rep and say, well, this is $5. Why don't we buy that? And of course, you have to read the fine print that says you have to be a CX1 user and there's a whole bunch of other stuff attached to it. And it's not that great of a product. But that just slows down the sales cycle and it anchors them on a lower price. I do want to bring this up one level, though, and it's a thing that we saw last quarter more so than we've seen in the past, and that's vendors with subpar products, particularly subpar contact center products that they like to talk about a lot, using price. The way they're getting their customer numbers because they want to report it to you guys on Wall Street is they're using price, and it's the same as the three CX products by NICE, et cetera. These are subpar products. I'd go so far as one customer called them crappy products, but it just slows down the sales cycle because they're going to run a POC or they're going to do whatever. And I get what they're doing. They're just trying to use price to disrupt the market. And it just takes time to work our way through that. And that's what we see. We just see sort of bad products at low prices and you have to sell through it.
spk03: Great. Thanks. Thank you. Our next question comes from the line of David Unger from Wells Fargo.
spk14: Hey, thanks for taking our questions. So just to take it back at the high level, so a lot has clearly happened from our seats since earnings season kicked off for software, the political side, the economic side. So I'm wondering if you could describe the customer engagement activity level over the last month. and any particular near-term catalyst that can support decision-making to accelerate? Thanks.
spk11: That's going to be a tough one. So first, remember, I'm a NAT. I'm a $725 million a year software company, so I'm always very reluctant to speak about this multi-billion dollar industry. I feel like I'm a little over my skis, so just FYI on that. And also, I should say thank you to Wells Fargo. You led our financing round. You did all your wonderful due diligence, and you came back, and you led the round of letting us borrow money. So thank you to you guys for that. Okay, in terms of the last month, what do I see? I do see a little bit more cautiousness around some deals. We're still getting them signed, just a little bit more cautiousness. You know, a double, triple check, those kinds of things. And in terms of acceleration, I mean, the big thing is digital transformation, right? If you're really looking, and I want to take this up a level and really talk about business outcomes. And I'll use an example. You're a hospital. Your most precious asset is your doctor's time. If a patient doesn't show up to a doctor's appointment, you don't get to charge him or her. And so having every doctor fully utilized is a key metric for you running your business. When we deploy things like proactive outreach to notify patients and remind them that their appointment is tomorrow, press one to confirm, you know, press two if you want to talk to an agent to change your appointment, these kinds of things, it moves the needle. And what we need to do a better job of as a company, and I think we are starting to do that at 8x8, is educate customers on the potential for them to reduce the cost to serve, improve customer satisfaction, improve their retention rates or renewal rates, improve their ARPU, those kinds of things, by deploying our products and we're seeing it. We're bringing those integrated products together. And I think that's actually what's going to accelerate the business next month, the next six months, the next year is really going in. And the easiest way for me to demonstrate this to you, the investment community is remote fix, right? We invented remote fix for field service companies and we see, you know, 30, 40% reduction in the number of truck rolls after they deploy Remote Fix. And Remote Fix is our contact center, plus our UC, plus SMS messaging, plus video, you know, one-way video, uplift capabilities in the contact center, all those things combined. And that can save field service companies tens of thousands of dollars per month. They don't mind paying us a little bit to give them that capabilities. So it's definitely... that's what's going to drive the industry. The whole, hey, you have an on-prem solution, it's being EOL'd, or you're moving to a new building, those legs just aren't as strong as they were in the past.
spk14: Thanks, Sam. And just one more, if I can just follow up. So we just talked about ARPU, and sorry if I missed this, but can we just talk through some of the ARPU trends you're seeing in CKS, given the competitive dynamics going on in the landscape? Thank you.
spk11: Yeah, okay, that's a great question. So first off, my average revenue per customer, I'll do it that way, instead of my average revenue per user. And the reason is I think the average revenue per user in the industry is being, I was going to say manipulated, but I'm sure if anybody's listening, they'd be upset with that word, is being, it doesn't tell the full story. So if you look at 8x8's average revenue per customer, it's up on a year-over-year basis. It's up on a quarter-over-quarter basis. And so that's where we're seeing that multi-product, the higher-valued contact center seats, those kinds of things working. Now, what you can get, though, is per seat items can get a little wonky because, you know, I'll say something that's maybe a little contrary to everybody else, but I don't want you to blow it out of proportion, is we do have some instances where people buy less seats because they're buying the bots. Now, I would say in a lot of cases, they buy the same number of seats and the bots because they want more productivity and other things. But we do have some cases. And when you do that, it actually skews your average revenue per user because you're dividing by a smaller denominator. And so I think average revenue per customer is a way better metric. And that's the one that we are seeing trending up. What I think with the subpar products is really it just elongates the sales cycle. And if I just take a step back and this is, you know, just take this for the two cents that it's worth because I'm not the world's most visionary guy. I do think you're going to see a trend over time over the next five years in our industry where usage and consumption-based pricing will become ever more common. I dare say that five years from now, per seat pricing may actually almost become extinct. because I think more and more software is being sold on that consumption-based model. It was pioneered really by the hyperscalers, GPC, Azure, and Amazon, but it's even floating into our industry. And so I think some of those ARPU metrics are going to be less relevant to the average revenue per customer metrics. So just my two cents on that.
spk13: Appreciate it. Thank you, Sam.
spk03: Thank you. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our next question comes from the line of Taz Kaujalji from Wedbush.
spk02: Hey guys, thanks for taking my question. Two questions. Sam, you were very positive on the number of new customers who are signing up with multiple products. Can you remind us what's the average penetration or the average, I guess, number of products customers have and what's the upside, like what's the upper limit there? How many products does one customer have if you look at the upper limit?
spk11: Okay, so right now our average is a great question. I haven't actually calculated it out, but I can tell you it'd be somewhere between one and two. So a vast majority of our customers are UC customers still. XCAS is in the 40% of our total revenue. But in terms of our customer base, it's going to be a very small percentage because of the big delta between contact center seats and UC seats. And so it's going to be at one to two. We have hundreds of customers, probably getting closer to thousands of customers sitting at three, four, and five products. No, actually, we have thousands of customers with three, four, five products now. And the upside potential, I'll tell you, I've done a back of the envelope, so please don't quote me on this. But if we were to get sort of some basic benchmark type of numbers in terms of penetration and looking just at five products, not the nine products we sell today, it's an incremental 100 to 150 million plus in revenue per year.
spk02: Got it. Just a follow-up question. Fuse migration, can you remind us how much of the base has already moved? And then when customers move from Fuse to 8x8, is there an uplift in pricing or are they paying the same price?
spk11: Okay, so glad somebody asked because I wanted to put more details out. So Taz, I owe you. Next time I see you, I'll buy you a coffee. So when we bought Fuse, it was about 20%, you know, rough and tough of our revenue base. Today it's about a little less than 8%. of the revenue that comes from Fuse, and that number is steadily declining as we migrate customers over. The decision we've made now that we've got the whole upgrade process down, really want to accelerate that. It doesn't make sense to keep these two platforms running in perpetuity. It was never the intention of ours, and so we're really accelerating those moves. You know, I would say the goal is to hopefully get it done in the next year or two to get everybody's disposition, and then it'll take them a while to completely move them, deploy them, and shut down the old legacy platform. But, you know, a little less than 8% of our overall revenues come from Fuse customers today.
spk02: And then when customers migrate, do they pay more?
spk11: Oh, okay. So typically they do not pay more. We charge them the same price. But it opens up the door to cross-selling. So the problem with the Fuse base is I really can't cross-sell them much. And what I mean by that is I don't have like an integrated Fuse plus 8x8 contact center. I have 8x8 plus UC plus 8x8 contact center as I have the bots and proactive outreach, workforce management, PCI compliance, all those products, right? And so once we move them, it opens the door to cross-selling. Thanks, guys.
spk03: Thank you. Our next question comes from the line of Michael Funk from Bank of America.
spk15: Yeah, great, great, Sam. Thank you for the question. One more on FUSE, if I could, Sam. You mentioned that you adjusted the guidance for 25 to account for potential churn from the acceleration of the upgrade program, but What is the expense you're still bearing from FUSE? Presumably, you're paying for some data center space and support and other factors. Would I put the normal gross cost or cost of service on that revenue percentage, the 8% you gave us today, to kind of get to the cost of that? Or what is that number?
spk11: No, the cost would be less, right? I mean, so Fuse has been, and I just, you know, everything we talked about on the call, Fuse has been an absolute home run in my mind. It allowed us to innovate. It gave us the 21 scrum teams when we originally acquired them. We said we were acquiring them for innovation. And so we use that innovation to roll out all these products that we're talking about, the things that are taking off, the things that are growing in the 40%, 50% range, all those kinds of things. At the same time, we stripped a lot of costs out. And so the cost to service that platform is not massive. It's not, you know, I could wing a number and I probably shouldn't, but it's not, it's single digit millions of dollars.
spk12: Okay, so it's not 10 million, 15 million on that.
spk11: No, it's not that. What it is though is it's a distraction, right? So it's a distraction and it's a distraction we need to put behind us, right? So I can redeploy assets away from maintaining it. You know, I've got a, maintain security compliance on it and all those kinds of things. It's just to the point now it's a distraction and we should get them over on our better, fitter platform. It's kind of a, you know, it's a Toyota Camry with 125,000 miles on it. It's time to buy a new car.
spk15: Makes sense. And then one more on the macro. We've heard, you know, some mixed commentary this quarter from other companies about, you know, having to offer more incentives, more discounting, more, more free months to entice those customers over the finish line, especially SMB. Are you seeing the same thing in the competitive environment where you are for the SMB customers?
spk10: Well, I don't think it's, to be clear, I don't think it's enticed the customers.
spk11: I think this is industry self-inflicted gunshot wounds, right? You've got small startup companies that are, you know, last raised their round of capital in 2020 at valuations at 50%. $2.5, $3 billion that are desperate. You've got bigger companies that are single product that are desperately trying to get traction with new products that they haven't invested in and aren't very good. And so I think all that incentive stuff and free month stuff is whatever is, that's just us fighting each other. It has nothing to do with incenting the customer. The customer is just laughing all the way to the bank.
spk15: And you mentioned nice. Thank you for mentioning that. what is your sense of customer overlap with with nice I would I would have assumed it was relatively it was relatively low and you wouldn't see them that much you know customers have both would think about switching to the nice voice product do you have a sense of the overlap well okay so let's remember that there's a certain company in Belmont California that starts with an R and ends with central and
spk11: that has resold nice for years, right? And so when I say nice, I also sort of take it in the context of inside of their go-to-market partner. And then number two is I think your statement is very accurate circa two years ago, three years ago, but we've invested a lot in our contact center. And as I mentioned earlier, like we can hold our own. We can hold our own. Now that doesn't mean I'm, You know, there are places that NICE is better than we are, and I think there's places that we are better than NICE. Great company, by the way. I respect them tremendously. They've done wonders for our industry. But the UC stuff, I think, was definitely not aimed at us. The things that they did was very much aimed at that GTM relationship with a certain vendor because that certain vendor suddenly decided they want to do something, you know, they want to go in a different direction. That's why the fine print, and everything else.
spk15: Okay. Thank you, Sam. I hope Kevin's feeling better as well.
spk11: I'm sure he's listening to this call, and then I hope he goes back to sleep.
spk03: Thank you. At this time, I would now like to turn the conference back over to Sam Wilson for closing remarks.
spk11: Thank you, everyone. Thank you for joining us today. Lastly, I just want to thank our partners, our customers, our investors. And our employees, tomorrow's August 8th is 8x8 day. So we've asked our employees to take some time off and go volunteering tomorrow. And we've got a big number of events for our customers tomorrow. So happy 8x8 day, August 8th. And with that, we look forward to seeing everybody back in about 90 days for our next earnings call. Thank you. This concludes today's conference call. Thank you for participating.
spk03: You may now disconnect.
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