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

This is Meta Marshall. I cover the communications, software space here at Morgan Stanley. We're delighted here today to have 8x8. We have Dave Sipes, CEO; Sam Wilson, CFO. I'm going to start with a brief disclosure. 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 rep. Dave, Sam, delighted to see you virtually here today at least. And for a lot of people getting to see getting to see Dave, for kind of the first time as CEO of 8x8.

So Dave, maybe starting with you, you clearly have a lot of experience in the cloud communication space and maybe, being on the opposite side of 8x8 in many transactions. Just what was it about the opportunity that interested you and what did you feel like, you could bring to the table as far as competitive positioning went?

Thanks, Meta, for having us. There are several things. One is a strong technology across the board. Enterprise-grade UCaaS solution that's been a 9x Magic Quadrant leader. So very capable product, complete with phone, video and messaging. In addition to that, though, which is unique, is also in the Magic Quadrant on Contact Center as a Service 6x in that quadrant. And like the only enterprise grade, UCaaS Magic Quadrant leader, also in Contact Center. So it creates a unique combination. And if you combine that with the CPaaS platform that's been added, and great video and over millions of users, MAUs, over 9 million MAUs on video. So it has all the, what I would say, real-time communication elements that are critical for an enterprise. So that was one element. Another is it's still -- clearly, it's a big, big market. It's tens of billions, whether it's UCaaS, CCaaS or CPaaS. Each of those independently. And I still fundamentally believe, and I see it, but it's still early in the transition of moving legacy users to cloud. So there's a huge runway going forward. And then when I looked -- just looking at the organization and reputation of the organization, looking from the outside in, previously, I do see a clear path to success in that there was less focus on consistent execution of strategy and GTM motions that are strong in the marketplace that I have familiarity with and bring over my career at multiple companies and bringing that to 8x8, I believe, like better consistency, better focus, better execution on GTM, more openness to distribution partnerships, all will create a path for success and leadership for 8x8.

Got it. I mean, you just touched on some of what I'm about to ask. But there's a big opportunity. You guys have kind of a platform that includes multiple functionalities and is differentiated in the market. But there's also a lot of competitors in this space. And so is it -- like do you think you have to narrow any focus or that like when you come in, it's really about expanding the go-to-market versus kind of picking any one particular niche or approach to going to market.

No. I think there's -- what's fundamentally important for our core buyer, our IT mid-market enterprise buyer is a high-quality, high reliability across the real-time communication elements of voice and video in those aspects. What -- we bring an opportunity by taking UC and CC. We can cover every employee in an organization and their real-time communication needs. And I think focusing on that segment and being today, having the best IP in that segment and expanding that is a clear opportunity. This is a category of a combo selection of CC and UC that if you look back historically, all legacy solutions have offered that. And that's because that buyer views that as critically important -- critically important capability for the enterprise, and they want that. They don't want to spread that across multiple solutions or vendors and increase chance of failure in quality and finger pointing. And so by bringing that together with CC agents, employees, we bring a unique capability to deliver on that, that's been delivered historically by legacy solutions, but has not yet been delivered in a cloud solution to the extent that buyer wants. So I think it's a latent demand that we can unleash by further executing on our leadership in that area.

Got it. And Sam, clearly, the transition hasn't just started with Dave coming in. You have been working for a couple of years on kind of focus and redirection on 8x8. Can you just lay out some of the steps that have been taken on product and channel? And what proof points you're most excited about for kind of that traction to continue or to accelerate into the future?

Great. Thank you. And thank you also for having me at the conference. Look, I mean, going back, our previous CEO had a vision that in the end, it was this combo product, this bundled product together would be where the marketplace would end up. And I think Dave did a fantastic job of citing how historically, that's how buyers wanted to buy the products together. So if you go back to '15, 16, '17, it was about acquiring pieces of technology to round out that portfolio. And then in 2018, we launched X Series, which is an integrated product, bringing that together. And then after we had that, we progressed to 2 next areas. #1 was rebuilding our go to market, which is still a work in progress. 2 pillars there, rebuilding our marketing technology stack and really starting to emphasize on the channel and drive those forward. You see that with large channel growth, new logo initiative. Channel has been, I think, 64% of bookings last quarter. We've seen in various surveys, we now show up, awards from major channel partners, those sorts of things. So you're starting to get that combination of good product, next-generation combo product, mixed with go-to-market strategy, combined to bring those things together, and accelerate. And I have to say I'm so happy, Dave's here to really help us on that GTM journey to the next level because Dave said on the -- in his answer to your previous question, Meta, I think, was spot on, which is when the on-prem group moved to the cloud, it was a group of UC vendors and a group of contact center vendors. And by default, they had to buy the products generally separately. And we're the only vendor that is in both Gartner Magic Quadrants and can actually provide that combo product the way they want it. So it's really incumbent on us to continue to invest in the go-to-market and the technology to bring them what historically they've always wanted to buy together.

Got it. I mean in terms of how the market has evolved. Clearly, you're talking about people wanting to buy UC, CC together, and you've been able to add that value proposition. But maybe traditionally, like voice has been the center of that. And it's been the center of the decision-making process just as either video vendors get into the voice space or chat vendors try to build out their platforms. Just how do you see who the buyer is evolving? And will your value proposition kind of remain the same because that's still the predominant use case or buyer case?

Yes. I'll take that. One, we offer all those solutions on the UC side from phone, video and chat. And you see collab, what I call, collaborating players coming from chat or video, and offering phone also to okay-ish to somewhat or other times, limited success. And I think from a buyer's perspective, it's like what do you do best and what do you do great? And by providing that real-time communications, that's what they see us as doing great. And I'll give you some example -- we're open to doing integrations, and we have a Microsoft Teams chat. People that want to use Teams chat as their endpoint that can integrate into and use us as voice. We did a study with Hanover Research that 70% of Teams implementations look to integrate a third-party voice lender. And so we're open to doing that and what we had a deal last quarter, and I'll just give you an example, to kind of shed some light on it. It was a 10,000 user retail deal that have 3,500 Teams users, but there's a lot of other users that weren't using Teams in that organization. So they're using the 8x8 endpoint in that example. So we bring an ability to mix and match all the users from an organization, even if they're using a different collab for some of their chat or video as well as -- we have a Salesforce integration. So you have agents using that as a client. You might have people using Teams as client, and you might have people using 8x8 as a client. Bringing all those together with one real-time voice, communication platform that allows the admin IT buyer to see quality, reliability and track it with analytics. They see that as trying to when that is the best opportunity often.

Got it. And a question we got from the audience is just maybe just a little bit more detail on what the competitive advantages of having an integrated CC platform versus kind of partnering on the CCP? Just kind of what more specifically that can -- the customer views as an advantage there?

Yes. I think there's like 3 core pillars. One is one throat to choke. So having high quality, high reliability, high dependability as a vendor. It's an area that's a critical heartbeat application to the extent there's trouble with that. That's a problem for the IT buyer, and they don't want to spread that across multiple vendors. Having a seamless integrated approach to the product, both on a UI from an agent perspective and from an administrative capability and having analytics across is the second core pillar. And then I think the third quarter pillar is lower total cost of ownership of being able to concentrate their spend, get the advantages of that, but also have a product that is such an inherent adjacency that they will have to do the trouble of integrating. Having that pre-integrated out of the box as well as having an integration platform that allows you to maintain integrations with other core workflows in your organization. So I think those are key elements. And then you'll get a lot of spin off, features, capabilities, things beyond that. But if you focus on those three, those are key decision criteria for a buyer.

Got it. In UC, kind of a lot of collaboration software has been slower to take root in international markets. But you guys clearly have a lot of traction in the U.K. Just, are we starting to see an inflection there? Is it -- we should just consider it 2 years behind the U.S. just contextualize the international opportunity and more specifically, the international opportunity for 8x8?

I was very excited about the success we have had and continue to have in the U.K., and that's an area of momentum for the organization that we continue to site. And we're now in like 1/3 of all London borough councils are running on 8x8 as one fun example there, out of like 30 London borough councils. There, I think we got an early start by having -- purchasing some organizations there, but that was years ago. And we've built upon that success. We do see the transition to the cloud happening. Obviously, the last year and the work from anywhere environment has accelerated acceptance across the board. And so we see that as a continued area of opportunity. I think -- I don't even know if they're going to stay -- say 2 years behind, I'm not even sure that's going to be the case going forward, and that will spread throughout the world at this point.

Okay. Got it. Your large competitor has made headlines with a lot of partnerships with legacy vendors. However, there's kind of resellers who may not be as inclined to sell with the master agent model. How do you take best advantage of kind of an ability to work with resellers in whatever mode that they want? And what are some proof points that you're seeing success with this?

Yes. The resellers, I think as you said, the resellers are the key, right? They've been in the category for decades, selling legacy solutions. They've been shown to be effective for cloud vendors and are driving a majority of new pipe generation. And so capturing those, whether you have relationships with legacy OEMs or not, I think, is critical and the core to success. We are a channel-first organization in that we place the needs of the channel at the highest level and supply that to them. One area we've done is that's differentiated is providing a wholesale model for those resellers. And that is a model they are used to historically, that's how they're used to selling. And they're adapting to that. And I think we might be the only global UCaaS vendor that's doing that. We said it drove 40% of our U.K. pipeline -- U.K. channel pipeline last quarter and is growing faster than any other model we have. So it's a unique way, and it's something that just goes back to core philosophy of supporting those channel partners in the way that they want to do business and making it easy to do business with 8x8.

Got it. We kind of touched on the Teams opportunity. How do you balance the -- wanting to sell your whole platform, voice, video, chat, versus kind of the opportunity with clearly, there being a ton of Teams users. And so just where is that calculus as far as how aggressive you want to be in that market versus trying to go after those customers stand-alone?

Yes. And like you said, our product is complete. It has phone, video, chat, but the Microsoft Teams has been clearly successful in the chat space, 115 million DAUs using Microsoft Teams. And the nice thing is that we bring that real-time voice capability. We are now certified with Microsoft Teams as a contact center vendor using their endpoint. So not only do we allow UC but also CC users to use Teams as an endpoint. Additionally, it's a more agnostic approach when we think about all vendors. So I talked about Salesforce and allowing that to be an endpoint also for agents as well as providing users who aren't using any of those endpoints with an 8x8 endpoint. So I think it's a choice for the organization. But even beyond choice, it's the ability to mix and match different use cases that you are naturally going to get any large enterprise. You're going to be using different solutions within different divisions or different organizations, and we can come in and bring the underlying core real-time communications capability at an enterprise-grade level.

Got it. Maybe turning to you, Sam. You clearly kind of tightened belts in 2020, both just because of the overall macro environment, plus just kind of a general push from investors to get to kind of better operating structure. As you've loosened -- as you look to 2021 and being able to kind of takeoff just how tight that belt is, where do you think investment is most needed?

All right. So thank you. So let me first start where we are, right? So 4 quarters ago, we were burning $48 million a quarter. We were using $48 million a quarter in cash. Today, we're burning $7 million. We're nearly to -- back to NGPTI, non-GAAP pretax income, and we continue to be pushing forward on that path. So very happy with we're at. So on a year-over-year basis, operating expense is growing about 3%, while service revenue growing 15%, ARR growing 20%. So I think where we're at is in a good position. Yes, we will start to unlock that spending as you cite. And what we want to do is really focus on areas of the highest efficiency, quota-carrying capacity, channel account capacity, developers, those kinds of things. We have good ROI on those investments. And we really want to focus our investments from a kind of an efficiency ROI model forward to get the company steadily more efficient over time and continuously improve that efficiency. At the same time, though, I'd really like to be clear, we do want to make it profitable growth. So we have every intent to return to profitability and return to cash flow positive. We don't need to sprint as much as we've had in the past towards those numbers, but we absolutely want to be a profitable growth company.

Got it. And maybe to a lot of people surprise. Pricing has held up very well in the UC market over the years. Particularly, you guys -- the space has done a good job of integrating more features and having higher level enterprise implementations. But we're starting to see a lot more competition, and some of that competition is being price disruptive. So how are you best competing against maybe some more price disruptive peers?

Yes. And I've answered the pricing question for many years now. But I think one thing you can look at is history and the ability to innovate and add capabilities, like you mentioned. Create more value for the customer and an ability to capture some of that value and maintain kind of the pricing where we've seen it. I think the other thing, though, is when we look at acquiring customers and servicing customers, we also, by moving upmarket into mid-market and enterprise, getting more users in an organization, obviously, as well as adding contact center, which not all UC or most UC players don't have, creates greater average revenue per account for us. So we still see, even if that historical change were to change, which it hasn't at this point on UC, but even if it does, the ability to sell more into the account and into larger accounts is a path for us to continue improving average revenue per account.

I'm pretty sure I've been asking you about pricing since about 2012. So that's a -- pretty fair. You've mentioned contact center a lot here. How -- at still, the core value proposition is UC and then CC is kind of part of the overall package. Just -- do you consider competing for a larger contact center implementations? Are there different skill sets that you think you would need to add here? Just kind of how do you see the contact center piece of the value proposition evolving?

Yes. Well, one, our contact center product sells very well in a combo cell today. It's now combo is 1/3 of our ARR. It is growing at twice market rates. So it's getting a lot of acceptance, and we've been selling that for over 7 years. The -- but I am a core believer that great product makes easier selling, right? And we continue to put our R&D muscle, which is significant, significantly into that product and into the combo product with the contact center product. I'll give you a couple of examples of things we're doing with better integration of high-volume SMS into a contact center environment where you have a voice and now SMS. Think about like an outbound sales team like making calls and doing SMS. Also ability to bring in video into an agent environment. So those are just like a couple of ideas, but there's many, many out there. We also announced a WFM relationship with Verint for larger enterprise organizations. And so we're going to continue to make these investments in contact center. It's going to primarily drive that combo cell, but we do sell contact center stand-alone today. And that will continue to be an opportunity, probably a longer arc opportunity over time. But primarily focused in combo.

Got it. And maybe for Sam and for Dave, but just Wavecell was an acquisition that helped you gain kind of critical CPaaS functionality. It is not the healthiest business from a gross margin standpoint. And so just how do you evaluate how much you want the technology, but maybe not some of the volume that comes with it? Or just how do you evolve kind of this business as a piece of the overall portfolio?

My take or do you want to start with that one, Dave?

Go ahead, Sam.

All right. So on Wavecell, fair, the gross margins are less because a lot of it is pass-through carrier costs. We need to be on that flywheel of increasing scale and volume, especially in our regional strengths, and that drives down costs over time. I don't think anybody would complain with Twilio's success so far at driving that business model. And that is a sort of a well-known business model in that space. So we are on that path, and we need to continue to grow that. The second thing is, as Dave started to mention in his answer earlier is, look, it gives us tremendous capability. We had CPaaS capabilities before we bought Wavecell. We then scaled that up significantly, and we have things like sales teams, video capabilities, cross-sell opportunities and other things with our contact center customers to round out that sort of true omnichannel perspective. And so I think that's important. And then lastly, it really does help us in Asia. Wavecell has strength in Asia. It's a regionally strong presence. And as Dave mentioned in one of his early answers, the rest of the world will adopt the products that we sell over time. And so that's a beginning of a longer-term strategy with regards to what we do in Asia over time.

Got it. A question that we got from the audience is just maybe with video vendors kind of entering into the market? And just kind of where do you see them ceding the opportunity for you guys are kind of creating more awareness versus being a competitor in the space.

One, it's obviously a big space, but -- and most of those users are on legacy solutions. So whenever you have someone that's tied to a legacy solution that now starts considering moving their voice into the cloud. That creates an RFP opportunity and a valuation process that maybe didn't exist before. So in some ways, there's benefits of catching that as people look to their collab solutions and start knowing that, that's working in the cloud. And now let's bring our entire voice solution in the cloud. So overall, I think you see it, we see it, that there's just an overall tailwind in the movement to cloud. And so I think that's the most important element that we're feeling today.

Got it. And maybe just another question of API integrations, just as you guys scale, and that's clearly been a differentiator for some of your peers. Just how do you see kind of either opening up that ecosystem a little bit more so that there can be more development or just kind of ceding more development in that platform?

Yes. Yes. We offer a number of CPaaS solutions and API integrations. I talked about some of the integrations we have into our core applications. We also have the integrations with our CPAAS. One example is we launched video meetings as a service that allows you to embed that into your core applications. It's called JaaS or Jitsi as a Service. So that's one area. And then I think the other area and that's 2 parts of that question is, how do -- are we expanding our integration platform across our core applications, and that is a core focus for us longer-term as it allows better integration into your other enterprise workflows.

Got it. And maybe just last question for me. You spoke about just kind of needing to expand go to market. You've spoken about just needing to kind of get people to realize that this product has kind of strong competitive positioning. But just what other things do you think are missed by investors and maybe both Dave and Sam, you can give kind of an answer from both perspectives?

Yes. I mean, I'm happy to jump in there. One, we have the best end-to-end real-time communication vendor to cover all enterprise needs. And this is whether you're trying to bring on employees or agents, you're using a classic traditional UC endpoint like 8x8 or you're integrating other endpoints into your organization like Teams for messaging or Salesforce for agents. And we bring that backbone of real-time communications with a high-quality, high reliability with analytics across and are the leader in that. And we're doing that. You'll see that most in like our combo market and our success in combo market, but a better focus and more consistent execution on mid-market enterprise, we'll unleash. This is a key opportunity for us. And we're doing it all with the disciplined approach on gradual but improving profitability for the organization. So I think it gives -- there's a level of confidence you can build by looking at those metrics with the organization and the success that we'll have.

If I was to add one thing. I mean, Dave was spot on. Look, this is a market that's 5% to 15% penetrated depending on whose numbers you look at and what you believe. And as far as I can tell, effectively, none of the legacy vendors, the on-prem vendors have real cloud products. This is really a function of -- it's a whole new crop of vendors in a very large market that's going to go through a, I don't know, decade-long transition over time. And there's still a lot of runway to go and a lot of growth in front of us and our rivals and this industry as a whole. And so I think that sometimes there's this belief that it's a winner-take-all market type of thing. And I just don't think that's the case. There was dozens of vendors on the on-prem world, and there will certainly be a multitude of vendors in the cloud world, and we will grab our fair share of that.

Got it. Dave, Sam, it's a pleasure to talk to you guys as always. Thanks so much for being here, and there's a couple of follow-up questions that I'll forward through Victoria. So great. Thanks so much.

Thanks, Meta.

Thank you.