8x8, Inc. (EGHT) Earnings Call Transcript & Summary

Welcome, everybody, to our last session today of the Life After COVID Conference. Appreciate you joining us. We have 8X8 here with us. We have Vik Verma and Sam Wilson, CEO and CFO. I'm going to read a brief disclosure, and then we will jump into our discussion. So please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are remember of the press, please disconnect and reach us separately. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So Vik, Sam, thank you so much for being with us today.

Maybe we can start with the high-level approach as we kind of close out the Life After Covid Conference today. And just -- you guys have taken a compliant platform approach of having voice, video, contact center, CPaaS, all together. How is there opportunities that -- of having that platform impacted by COVID? And how did you think that your differentiated approach versus peers benefited you as COVID kind of changed the needs of customers?

Thank you, Meta, and also a shot out to all our veterans on Veterans Day. We thank them for their service. Look at a macro level, this is the golden age of communication for all the wrong reasons. Increasingly, what companies are finding is that the core communication platform with voice, video, chat, contact center, and the ability to seamlessly move between any of them is increasingly critical. And frankly, it's much more critical than offices. And so the way I view COVID is, it has accelerated adoption. The world was already starting to move in the direction of essentially work from anywhere. All COVID has really done is accelerate that. And I think once COVID finishes up, and we hope to God that it is kind of winding down. But once it does, I think you're still going to see the trend of work from anywhere to be critical. And you'll see these multimedia and multimode communication, where I mean just think about how we all communicate in a large work group. It typically starts with a text or a chat room, and we don't quite understand what's going on. You typically graduate to a voice call and say, hey, wait a minute, I want to chat about this in a little more detail. And then you want to start sharing documents, you want to see the spaces and all the other stuff and then you go into video. And what CPaaS then does is allows you to essentially customize the experience. You can send alerts. You can send SMS text, you can -- and then add contact center with the ability to basically ensure you can integrate with all of your customers with your agents working from anywhere. I think it's the future. And frankly, all COVID has done is accelerate the future.

Got it. That's helpful. Just in terms of what your customers are looking for in an initial sale, how has been having that single sale or a single point where they can come to you for anything and they are changed during COVID? How is it combined with maybe what you were seeing before historically from customer requests?

So at a macro level, I think what started to happen is we've had this platform approach for a very long time. And as you know, platforms take a while to build and they take out of investments, and we've had over 9 acquisitions in the last few years to kind of stitch it all together into a common platform. What it does is it gives maximum flexibility to the customer. What we -- I think as you're well aware, we have always been world-class in global voice. We are increasingly getting better and better on contact center to the extent that we have been on the Gartner Magic Quadrant as a challenge, and we're getting very close to our competitors like Five9, where we're getting very close to best-of-class in contact center also. Similarly, on video conferencing, as you know, we acquired Jitsi, and we've got millions of users now on our video conferencing platform. What starts to happen with our customers is increasingly customers lead with contact center, and then they'll buy the telephony or the video conferencing. Some customers will lead with voice and then add the contact center. So you've got that mix and match, and for us, in the last quarter as we reported, 70% of our bookings greater than 12,000 in ARR represented people buying essentially our voice and our contact center together -- our global voice and our global contact center. And we're seeing that grow at twice the rate of the market, and that now represents over 1/3 of our total ARR.

Do you mind if I add just one thing. I think 1 thing that's also super important is, to Vik's point about pulling forward the future, one size does not fit all inside of an enterprise today. And so that ability to mix and match is really fundamental to growing the business. The needs of your frontline workers may be different than the needs of your back-office workers, which are different from the needs of your executives, which are different from the needs of your sales reps. And so there was a little bit more, I would say, pre-COVID of kind of a one-size-fits-all mentality. And in COVID and post-COVID, I think we're seeing much more of a, hey, each of these job functions and each of these levels needs a given set of solutions that are pretty customized for that environment to maintain that high level of productivity.

And as Sam says, what you're seeing is customers can now literally go buy a contact center seat and buy a virtual office seat and they can mix and match them at any time. And then they can add and subtract as time goes on. And so because we own the entire platform, we're very flexible. We're not sitting there reselling somebody's product for a particular feature. So we can't say, no, no, no, you have to buy a global voice in order for us to basically provide the contact center. We can provide anything because we own every element of the technology.

Got it. And maybe over the past couple of days, there have been kind of some pullback in a lot of the names that were maybe work-from-home names. And you kind of addressed this earlier, but just how do you view what would pull forward versus what was just kind of an acceleration of a trend?

So I didn't view it as major pull forward for COVID. I mean we saw obviously greater adoption, but the biggest change I saw in the way is people's desire to now increasingly move to the cloud. And the main reason to move to the cloud is this whole concept of work from anywhere. And so we have always been selling cloud communication systems. All that's happened is you now are not selling customers on the need to move to cloud. They're literally going I need to move to cloud because I don't want to be wedded to a particular office. That's one. The second thing you've seen is you've seen this accelerating trend where Microsoft Teams has become massive. People are using it increasingly as a collaboration engine. Well, it's a great opportunity for 8x8 because we do direct routing with Microsoft Teams. So in essence, where you need global voice and you need essentially a telephony solution for the line worker or the retailer or anybody other than the knowledge worker, 8x8 Voice essentially goes in and slots in, working very closely with Microsoft Teams. You also need contact center. And so an example of that is Mediterranean shipping lines, which is, I think, about 2,000 contact center seats plus about 17,000 unified communication seats. We've literally seen hundreds of Microsoft Teams customers from small sizes to really large sizes as well as we've seen a significant -- I mean, literally tens of thousands of Microsoft Teams seats where they're using 8x8 Voice essentially in a direct routing way to do global telephony.

Got it. That's helpful. And we'll dive a little bit into Microsoft later. But just in terms of -- you noted a couple of questions ago that your enterprise traction has been growing a lot and it's perhaps been stronger than your SMB traction over the past couple of quarters. Is that a factor of more resilient demand or just some of the strategic investments that you've made kind of in addressing those 2 markets over this upsell, cross-sell?

Yes, Sam, why don't you take this one?

I'll take this one. Okay. So we've been focused on optimizing our small business. I mean, historically, we've been a small business. But as classic Jeffrey Moore, as those mid-market and enterprise customers have started to come and begin to move to cloud, we focused a lot more on growing the GTM, the go-to market focused on those mid-market and enterprise customers. That's a very channel-centric model. Channel generally doesn't deal with that small micro business type environment. And then on the small business side, what we've been very focused on is optimizing it. So optimizing the customer acquisition cost, but also optimizing the amount of resources necessary to go after that business. So I think, Vik has talked about this a lot is, we brought in e-commerce at the low end to handle our micro business, and that's very elegant because it requires no human touch on our part. It's -- customer goes to the website, buys it from the website, self-deploys it and runs. And then on the enterprise side, on the mid-market enterprise side, we've really seen that pay off as we've been taking the cash flow from the small business, pouring it into that mid-market enterprise, seeing 48 new deals greater than $100,000, 22 upsell, cross-sell deals, all those kinds of things. And just point blank, and this is something that we sometimes struggles with is, we've got from like 130 active channel partners a little over 2 years ago to 1,169 active channel partners last quarter. That's what that investment in that mid-market enterprise has been buying us. And that, as we monetize that, now starts to drive that through ARR up 20% year-over-year and 670 customers with greater than $100,000 of ARR last quarter, right? So that's -- it's been about continuing to grow our small business, but really focused on growing it super efficiently and really putting our flag into that mid-market and enterprise.

And then, Meta, building on that, this is where the whole concept of a platform comes in. We use the exact same platform for 1 or 2-seat customers all the way to literally hundreds of thousands of seats on one platform. You use the same platform to provide voice, video chat, contact center and then APIs and CPaaS. So the leverage that this model has is absolutely phenomenal. And what makes, Sam, actually very unique in this role. As you know, in the past, Sam ran our small business and put our e-commerce in place. We're now seeing thousands of logos in e-commerce added every quarter for the 1 to 9. So you're able to get that from our indirect sales team -- or sorry, our inside sales team selling it. And then you can spend more and more of that time and energy moving upmarket into mid-market. And then the other way the CAT comes down is once you sell one, you can now sell the same thing as an upsell and cross-sell. So upsell, cross-sell was 55% of our new bookings this quarter, which again shows the leverage of the model and the value of the platform.

Got it. Another approach that you guys have taken is kind of allowing VARs to be borrowers and not trying to make them master agents, making them more inclined to sell the product. Just what traction have you seen here? And how do you think that this approach will pan out differently than the approach taken by some of your competitors?

So I'll take the first part. And Sam, you can add to it. So we've seen quite a bit of traction because of the same concept of a platform. So think about what a VAR does. Because we have one common platform because this ownership of technology, a VAR can go to their installed base of customers, buy stuff from us in wholesale and sell essentially retail to their customers. And you've seen -- we've got obviously this CloudFuel where ScanSource is part of it, Virgin Media is part of it. And we have seen quite a bit of increase in pipeline. We started to see our first few deals, Virgin Media, in particular, starting to have a lot of success in closing large public sector deals. And literally, they can lead with unified communication. They can add contact center. And because it's all part of one platform, they're able to go in and get their entire sales team where they can go and sell a communications platform and then have the ability to upsell, cross-sell over the years. Sam, anything you'd add to that?

I think the only thing I would add is just a small note, like the VAR model isn't new to us. We entered the U.K. market in 2013 via the acquisition of Voicenet Solutions, right? So we've been in the VAR business now for 7 years. The wholesale model, as it's called in the U.K. is the VAR business, as we call it, CloudFuel globally across the world. And so this isn't a new business to us, and it's one that's endured for decades. And I think the idea of fundamentally rechanging how an industry does its business model is much more difficult than enabling existing VARs to move further faster, et cetera, in this cloud world. And so we're very pleasantly surprised with our success both in the VAR business model and secondly, with the traction so far. The last thing I want to add is a little bit -- and I've been asked this question recently, a little bit of what drove us also to go into the U.S. VAR business. When we first started looking at this business, we contacted several VARs, and we picked a few to begin to work with. And what was super interesting to us is the deals we were seeing were not the deals we were seeing through the referral subagent model. This was a completely different set. The Venn diagram overlap, to get technical for a second, was incredibly small between the 2 GTMs. And so we did think that it was not a competitive route to market. We weren't replacing the subagent model with the VAR model. Instead, basically, end customers that go to VARs, fit a certain profile and end customers that go to the subagent model, fit a certain profile. And by having a foot in each space and having each space do what it does well in enabling them, we thought was the best strategic move for us.

And I think you can see it in the fact that AVANT, Intelisys, Telarus, all the rest are recognizing us essentially as the Vendor of the year or Vendor of the Year International. And then at the same time, we're starting to see so much traction from VAR. The key part also goes to why we acquired CPaaS. Because think about what CPaaS allows you to do. Because it's part of our platform, you can now enable VARs to go in and customize an end-user experience. For example, a dentist office. Every time an appointment comes up, they can use CPaaS to send out little text alerts to all of their customers, And it's all integrated as part of their cloud phone system. So when you think about it, with CPaaS, you enable VARs to do what they have been doing literally for decades, where they provide value added to their customers and what they bring to the party is a complete and intimate knowledge of their customers. And what we enable them to do is then basically have a complete platform that they can provide that level of customization and value-add to their respective customers.

Got it. And Sam, just maybe if you could take a second just to like explain for investors, how that will reflect differently on your income statement by selling in a VAR model? And is there any -- how they should think about where they see is the difference in profitability if there is any?

Yes. So great question, Meta. So you have to look like any wholesale model, the revenue that we get on a per line basis is less from the VAR model. But on the operating margin side, we're agnostic. It's basically the way we built this model is there's no relative economic difference between the master subagent model and the VAR model from a margin economic perspective. And the reason for that is the VAR is obviously providing growing demand generation, their own sales capacity, their own Tier 1 support. And generally, for the most part, their own deployment or some version of reselling our deployment. And so we don't bear those costs. And so it's lower revenue, lower cost, same margin, or through the subagent model, it's sort of higher revenue, higher costs, same margin.