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

Bank of America Securities, cover smid-cap software. One of my subsectors is the XCaaS space and 8x8. Always a pleasure to have Sam here with us today. He always gives us great commentary and some good takeaways in 8x8 as well as the industry. So Sam, thank you again so much for presenting here.

Thank you for having me. I am, of course, a Bank of America Securities alumnus from many years ago, so absolutely, would do anything for you guys.

Perfect. So you know to give me some good answers and some new 8-K information.

Absolutely. Of course, 8-K information, Kate's ready to file it tomorrow morning. And if you don't get that out of me, at least something that makes the conversation interesting.

Perfect. Outstanding. I do have a couple of standard questions we're asking all of the companies during the conference this week so we can kind of compile a high-level view. So if you don't mind, I'll start...

I feel like the warm-ups. I kind of like this.

Exactly. Take a few practice swings at it. So how would you characterize the macro environment and the impact in your business today versus, say, 6 or 12 months ago?

Harder than 6 or 12 months ago. I would say part of it is the increase in interest rates squeezing small- and medium-sized businesses. You can't jack up the cost of borrowing 5x in a relatively fast time period and not eventually have it go through. As much as I don't always understand what the Federal Reserve is doing, a lot of PhDs and economics understand higher interest rates slow down the economy. I would say the second thing though is the pandemic, and I know we don't like to talk about it, but the pandemic was almost exactly 3 years ago. And there was a lot of buying for companies like ours during the pandemic. And we do see some -- I mentioned this on the last earnings call, some downsell pressure. I just want to be clear I used my nomenclature correctly. Downsell pressure is generally where we retain the logo, but they had 100 seats and now they need 98 seats because they did a layoff 3 months ago or they moved some employees around. So we see some of that. I am very obsessed about retaining logos, and my logo retention is quite great. I'm very happy with it. What I am just dealing with is some holdover of the pandemic in number of seats. And so I'm going to try to answer it quickly. Harder than it was 6 and 12 months ago.

And there's actually a lot of like good pieces in there I want to dig in a bit, because it does relate particularly to 8x8, is how do you or how should we then separate or differentiate between, say, a rising rate environment, making CFOs more cautious about spending versus, say, the urban provisioning that happened during COVID and that leading to see contraction. Is there a way you can frame that for us so we can figure out what percentage of it is each?

That's hard for me. The customers don't exactly like to tell us these things. So I mean, generally, what we take a look at is how much of it is we're retaining the logo, and what we're seeing is the number of seats that we're renewing is less than before relative to acquiring newer. So let me give you the 2 references, right? So I would say the bigger piece is downsell among my enterprise customers. Where I see the economic environment show up is we had a deal last quarter that we won and closed, but when we started the deal, it was going to have 4 signatures. The final DocuSign had 18 signatures on it. Everybody was covering their ass inside that company with everyone else. The CFO signed it, the CEO signed it, the IT guys signed it, [indiscernible]. And so my sales guys have to go chase those guys around and saying, "Hey, the DocuSign's in your inbox. Can you sign this thing?" And it ended up being a total of 18 people at the bottom of this thing. It was hilarious because it was kind of like down the margin, there were signatures, at the side, there were signatures, those kinds of things. That's where we see the economic, the CFO putting his, hey, are we sure -- have we bought the right amount? Do we have outs? Et cetera, et cetera. We see a little bit more -- I don't want to call them termination for convenience, but we see a little bit more like, hey, in a year, we want to reserve the right to change 5% of our seats. We'll do those deals. I think it's -- we've got to treat the customer fairly. I would say that's the majority of our retention -- our lack of retention today is downsell, not logo. Our slowness in logo is all-around. Deal sizes shrinking, sales cycles elongating, that's much of it. Offsetting all of that, for us, at the micro level is that we've gone from 2 products to 9 products. And so what we're doing is as our new products grow in size, that should eventually drive that renewal of revenue growth.

Okay. And I do want to come back later to the trajectory for top line growth. I know you have a few priorities that you've laid out, and it's been very clear, but I do want to touch on one kind of sub point here is just the urban provisioning, because it could be 1 of 2 things. It could be that during COVID, companies were scrambling to support work from home. And one way you can do that is through an XCaaS solution which is much more flexible than something from AT&T or Verizon.

Yes. Plug a phone into any [ public peer ] [indiscernible] in the world, it will work.

Exactly. And then the other component you mentioned is headcount reductions, and headcount reductions, that's easy to quantify. We can track headcount reductions, and we can see they peaked in the first quarter of 2023 and they've been coming down even though you sell more first quarter '24. And so you should start to lap that. The other piece, which would be simply urban provisioning, maybe where companies now are just -- they don't need the work-from-home support in a way that could maybe be more permanent. So is that similarly difficult to quantify for you? Or help me frame...

Mike, these are really good questions. So they're hard to quantify. I mean, trust me, I say that we get a sense because the customer doesn't always tell us. So I do think during the pandemic, there was a, hey, we're going to buy this. And as people haven't returned to the office, et cetera, there's been some reduction in the raw number of lines. You may have a lobby phone or a phone in the warehouse and those kinds of things, and they're moving those. You did have some overbuying and some rightsizing of businesses as they slowed. Because a lot of times what happens is the person buying this is buying for 3 years, and they're like, okay, we need 100 lines this year, but we think we'll need 110 lines next year, 115 lines the year after, and we want to say 115 lines to maximize the discount you're going to get from us. But then it turns out it's not 115, it turned out to be 107. And so somewhere along the way or a renewal, you want to rightsize that. And I think what's also very interesting is that decision could have been 9 months ago, but you have to wait through the renewal before you can sort of rightsize it. So there's a lag effect. The layoff may have been 6 or 9 months ago, to your point, Q1 of '23 or Q2 or Q3 of '23 is when we did the lay off, but your contract isn't coming up until '24 or '25, and that's actually where we sort of let you rightsize, unless we sort of play some games, to do that stuff. And so there's a lag effect. The up is instantaneous. As you add employees, you're immediately adding lines. But if you're shrinking employees, then to get that shelfware off the shelf takes some time. There's a lag.

Yes. Understood. That segues well once into my next question, which is the visibility into the kind of revenue growth improvement in the second half of the year, and what gives you confidence in predicting that and maybe what variables that we on the buy side of the sell side can look at to also have greater confidence?

It's a fair question, and it's certainly a question I get a lot. So there's the whole magic of what I see internally to the company versus what the outside person looking in sees. So it's a completely fair question. The confidence comes -- obviously, like any company, we run really detailed Excel models, financial models, analysis, in terms of what our market opportunities are, what our sales pipelines are, where opportunities are in stage 1 or stage 3 or closing, what traction we're seeing with new products, the response rates we're seeing from marketing campaigns. These are all the things that give us confidence that we're on the right track. Now Wall Street loves the specificity. And I have to admit, when I was on Wall Street, man, I thought it was easier than being on the other side of the table. Just to be fair, young Sam -- or current Sam would tell younger Sam, have a little bit more patience on those management teams. It's not as easy as it looks on TV. Getting the plane to land in these 13-week windows is sometimes more difficult. I will tell you what we see. We see the product traction. We see the growth. We're modeling out now -- for example, take Intelligent Customer Assistant, right? We launched that product in the summer of last year, the chat version, digital version of it. We now have effectively a year worth of data where we see, okay, when we land the customer, they're doing 100 interactions. Within 3 months, they're doing 130 interactions. Within 6 months, they're doing 190 interactions. So you can start to model out, okay, the average number of customers, this is what the growth should be over time. This is the new product, these are the growth over time. And you start modeling that out, and then we know what the retention rates are, and as long as we can hold sort of retention rates where they're at, you start to get that magic spreadsheet to come together. Now that being said, we thought we'd be further along by this point. It's been a little slower than expected. The headwinds have been a little stronger than expected, especially around retooling the go-to-market strategies. And so everything still continues to show the second half of '25, we should see that inflection point where a new product growth drives enough on the income statement to show up as year-over-year change in Q3, Q4-ish type timeframes. Now what are the leading indicators? We try to give you new product growth. Kate is doing a tremendous amount of work trying to figure out how to adjust our metrics to do a better job of giving investors that visibility that they deserve. Let me be clear, I have to balance between on one shoulder, I've got my investors and what you want as owners of the company, and I absolutely would love to share more with you, and the SEC on the other shoulder telling me that any number that's not GAAP should never be reported to anyone anywhere at any time, right? So literally, at any given moment, we've -- a whole bunch of companies in Silicon Valley have gotten comment letters or letters about ARR metrics. We all report ARR completely differently. There's no standardization. The SEC hates this. Well, I shouldn't say that. That's presumptive. In my opinion, they appear to hate this. If the SEC is listening to this conversation, based on the tone and tenor of the letters they send us, we get these letters that are like, why do you report this? And like, because that's what our investors want us to report, I would like to answer. And so that's a -- it's a great question. It's completely fair question. I think if you look at things like RPO, which is remaining performance obligations, so that's an audited number, so the SEC blesses it. It's under 606 accounting. You'll see that our RPO is relatively rock-solid, $700 million and what, Kate? $775 million, $735 million, $790 million, whatever. It's been relatively steady. And so we're not seeing the decline in the core business that you would expect to see. And so we have effectively $790 million, whatever the number is, I haven't memorized it, in backlog to close at some future point. And so -- and actually, to recognize at some future point. And so I think if you look at that relative to our market cap and where our metrics on, whatever, those are some of the things you'd see. And then we're looking at other metrics. The thing that's becoming harder, and this is going to get harder for Wall Street, is there is an emerging trend in consumption-based pricing. And consumption-based pricing, especially for the industry we're in, is something that's existed forever. Toll-free minutes, SMS messages, whatever the case, they have always been sold on a consumption base. If you look at AWS or OCI or GPC or Azure, those are all sold on consumption-based models. So the industry is getting pushed to move more to consumption-based models. How do you -- with AI, if you sell a bot, how do you sell a bot in anything other than consumption? I'm only selling one seat of the bot. How do you sell it as a -- it's not a human being that's working on a per seat basis. It doesn't actually work like that. And so I think if you look at a lot of our emerging products, they're consumption-based pricing models. Proactive Outreach, Video Elevation, ICA, digital invoice, these are all consumption-based products. And so there will be less financial statement visibility that you will have than in years past. That's how the industry is changing.

It makes a lot of sense. And all analysts [indiscernible], though, remembers -- communications companies, for example, and I get you're a software company, but the services are...

The core service is voice, provides telecom. I'm not denying my lineage and roots, right?

So let's think about metrics. Historically, we had modeled those based on net adds, churn, ARPU, you could get disconnects, you could look at trends in the business and then use those to forecast maybe that glide path. So why not give us these more granular metrics, aside from the SEC giving you the phone call, to help us better model?

So Kate's working on it. Like I'm totally in. The thing is that you're getting into, once again, sort of this notion of subscribers, minutes for subscribers, hasn't worked with [indiscernible]. I mean should I give you the number of interactions of [indiscernible]? Hey, we did 333,000 interactions last month with the [ 350 ], you're going to say, okay, well, I mean we're looking -- do we give usage-based revenue? All revenue that's on a consumption-based model? Like I'm in. Look, I believe in shareholders tremendously. I work for you guys. I believe in that dearly. It's just a tricky little thing to put it out there and have it make economic sense.

Okay. So I mean, should I take that to mean that you're looking at all of the above for metrics? Or do you not think the metrics are laid out? Or are you...

All the above. Just -- like the trick is putting them out in a way that makes economic sense. For example, we released last year 12% of our revenues, I think, were usage-based, and that number is increasing, right? So you're going to have a situation -- if this works according to the way I want it to work, you're going to have a situation where our revenues are going up and RPO may not be going up. And then you're going to call me and say, WTF, what the hell's going on here? I don't know if you like, that's a usage-based model. That's how this bad boy works. And I get it. Look, in the end, my #1 constituency is the customer. And I don't mean that sardonically. What I mean by that is the customer sends me a check each month, and so I have to build a set of products and services that meet their needs. And the whole shelfware conversation we've had, whatever, I think in the end, what we're going to give up is visibility into future revenues. But also, we're going to give up this notion of cliffs and downgrades and all this other stuff. And there's going to be -- for contact centers, we've always had bursting in seasonal uplift. I just think that's going to be a larger portion of our revenues in any given time. What I think is most interesting is a dear friend of mine works for New Relic, and when New Relic switched to 100% consumption-based model, I think they saw a 15% to 20% decline in first year revenues. And then by year 2, it was up 130%. And in year 3, it was up 150% from baseline. So what happened immediately is all the shelfware came off the table, but then immediately, the barriers to getting solutions adopted dropped and eventually usage goes up. And every CFO will sign off on, if we use it, we pay. Great. I'm in.

Just to be clear so I understand it better, are you saying that you think the usage base will mostly be relegated to or focused on Contact Center. That's where it's going to be most applicable?

No. It's SMS messaging, WhatsApp messaging. I think it's across the entire platform. And by the way, I think this is a trend in software. If you're in Silicon Valley and you go to some of the CEO meetings I go to, everyone's talking about consumption-based models.

Okay. That's really helpful. And then on Contact Center, I think some investors look at XCaaS and think that all products or strategies are carbon copy, but you've taken a very different approach to Contact Center than some of your peers, right?

Yes.

So can you just lay out again kind of what that approach is and then what you're seeing in the competitive environment? Because there's been some mixed signals last quarter or 2 about the competitive environment.

So all right. So our strategy around our product set is we're fundamentally a workflow company. So we're focused on using our R&D dollars to improve the workflow, present a case, move a case, skills-based routing, blah, blah, et cetera, move a message, CPaaS, video, all those kinds of things. And then what we are doing is we built a set of APIs to the integrated platform that allows us to use next-generation AI technologies on our platform, integrated. So let me give you an example. We started working with OpenAI, you noticed ChatGPT, months before they came out of stealth mode. Months before anybody even knew what ChatGPT was, we were already working with them. We had integrated parts of their technologies onto our platform. I am not trying to compete with every AI company on the planet. Most of my competitors, especially on the contact center side, are trying to compete with them. They're building their own bots, they are building their own AI, they're hiring their own data science teams, et cetera. I am not trying to do that. Silicon Valley, the venture capital community, has allocated $100 billion to AI start-ups in and around the contact center space. What they need is they need me to give them the data, to get the case, get the case to the agent, Agent Assist, et cetera. And so what we do is we partner with a lot of those companies. We have a ton. And this allows us to go after a best-of-breed strategy versus a strategy where you're buying media robotics. And I think that will work out in the end. It always has.

And I think you first laid that strategy out, to me, at least, in our offices a year or so ago over lunch. It was very unique to hold the partnering aspect of it versus some others. So how has the reception been to partnering with 8x8 and the solutions that are being created?

At this point, Mike, I would say, effing amazing, [ is if I would ] not say effing. It's been amazing. It's been amazing. My number 1 issue as a company is customer awareness. My number 1 issue is not building the products. It is not showing the referenceability. It is not retention, not any of those things. It's not pricing, it's not competition. My number 1 thing right now is we have transformed the company over 2 years. We're a $750 million company that sells in a bunch of markets. We've got to get the word out. That's my number 1 thing. And it doesn't make sense to try to get the word out until you actually have the products. It doesn't make sense to say, "Hey, we've got these incredible AI-driven bots," and have people go great, let me try a proof of concept. Well, it doesn't actually exist yet. They needed to burn a bridge, right? So what we went through is we went through the -- over the last 2, 3 years, we've doubled R&D spending. We've built the new capabilities. Now we need to go through and retool GTM and get the word out. That is my number 1 issue by far. What -- and you talked about earlier about what gives me confidence about revenue growth, et cetera. Every single customer that we've deployed ICA to is referenceable. Every single one of them will stand up in front of a group of peers and say, "We bought Intelligent Customer Assistant from 8x8, and it's amazing, and it works."

What does retooling the go-to-market mean for you? Is that changing partner incentives to get them focused to a greater degree in 8x8? Is it the messaging? What's that mean?

What it is, is when we were an on-prem to cloud company, we were an on-prem to cloud company, right? That was our core message, still a big piece of our business. We were an on-prem to cloud company. You'd show up and say, "Hey, Michael, how many seats of UC do you need? How many seats of [indiscernible] phone do you need?" Here's a quote. And then you would go, okay, give me either 6 vendors, 8 vendors, 10 vendors, you'd go get 10 quotes. And we're big and we've got scale and we're doing a bunch of countries and you may choose us or you choose something else. That's fine. Whatever. Today, though, we need to go in and see you, but we need to see the guy running the contact center and saying, "Hey, how are you dealing with the new PCI compliance rules? Let us sell you a solution to solve the PCI compliance problems." Or you go see the security guy and say, "Are you dealing with fraud? Great. We've got solutions that deal with fraud." We can do better authentication. We do voice authentication. We're looking at partnering with a company that's developed technology to identify deepfake voices, right? Do you have that technology? Do you need to implement it at your bank, your financial service company, those kinds of things. So it's much more of a land-and-expand model than it is a [ driveby ] moving from on-prem to cloud. 3 years ago, 4 years ago, and I think this is what's caused a lot of changes in the UC market, there were 3 main reasons why people moved to the cloud: end of life of Avaya and Nortel, Siemens, Alcatel, whatever the case may be; digital transformation; and move to new office building. And with the slowdown in the real estate market and, what, office vacancy is at 50%? 1/3 of the reasons why people bought UC ran away. Today, digital transformation, more than anything, is driving our business, which is how do you retain customers? How do you maintain PCI compliance? How do you reduce the number of truck rolls? We have just absolutely amazing case studies around reducing truck rolls for field service. Now in the old 8x8 pre-GTM transformation, we would sell this as Engage plus UC plus something else gives you the capabilities of doing something. So maybe sell those Remote Fix. We come in, we sold Contact Center, Video Elevation, SMS messaging, all together as a package, allowing you to reduce the number of truck rolls for your field service employees, and we have people that are seeing 30%, 40%, 50% reduction in the number of truck rolls. It has an ROI that's almost instantaneous. But we need to go sell Remote Fix. We need to sell a business outcome, not SMS messaging, not UC, not -- if I have my way, 3 years from now, you will never ask me a question about a business segment. Is it UC? Is it CC? It's not. We need to learn, in our industry, to sell a business outcome. The old way we sold was on-prem to cloud. The new way we sell is, do you need to reduce your time to serve? Do you need to reduce your cost to serve? Do you need to increase your customer retention? Do you need to increase your customer satisfaction? Let us help you with those things.

So should I take away you're going to be leading a lot more with Contact Center in the future and less with things like voice?

Yes. But even that is a label. What I want to lead with is a business outcome. What I find works so much better and gets us out of a commoditization, you've got to get rid of the competition. Our competitors fight with features. And that's a never-ending battle. And where I'm trying to retool our sales organization or organization in general is to go find the person who's responsible, whose job changes if we make their lives better. Let me give an example. Agent Assist. You go to the Contact Center, you want to sell Contact Content. We used to go in and sell, "Hey, we do skills-based routing. We do this." We now can sell agent assist and reduce your training time by 2, 3, 4 weeks. That pays for the entire Contact Center. Contact center's 40% attrition. If you can reduce training time by 2 weeks on every agent that contact center is going to add this year, pays for the entire product [indiscernible] over.

In the contact center market, again, Sam, and maybe I didn't hear your answer before, but some competitors point towards softness at the end of last year, beginning of this year in the market. Others said it was relatively strong. Love to get your perspective on the overall strength of Contact Center.

Hard for me to say. Hard for me to give you an answer only because we've started to sell so many more products around it. And so let me tell you, here's what's interesting to me. 2, 3 years ago, we would frequently not be downselected in contact center deals. In the last 6 months, we have been downselected in RFP -- that's like [indiscernible] when you go from 10 vendors to 3 vendors or 2 vendors for the final bake-off. We are almost always downselected in RFPs, and we are not losing deals because of product capabilities at all. At all. Our ability in that space -- and so I see our Contact Center business so much more robust than it used to be, but I don't know if that's because of our innovation or the market or whatever, I can't answer. All I see is like we won head-to-head deals against competitors that we used to never win against. We now regularly win them.

Got it. We have about 2 minutes left. And I always like to ask you the industry structure question because I'm just curious about it. It seems to me natural evolution is going to be consolidation in the XCaaS industry, right? And where -- if you have the scale of subscribers, scale of sales and marketing, you're potentially better positioned to compete. What do you think -- assuming I'm right, what do you think 8x8's role will be in consolidation?

So let me tell you, I think it's harder for a larger company to buy us if they are a competitor of ours than it used to be. Let me tell you why. So if you look at, for example, this new product we launched, Engage. This is an amazing product, but it's a new product line, it's a new product category. And -- but it runs on the same platform. So like what we did with Fuze, where we bought them and we're busy migrating, we've migrated a majority of the customers off of Fuze's platform onto our platform. That's hard for a bigger company to do to us. Now I'm not saying some strategic buyer can't buy us. I'm not saying that at all. I'm saying we wouldn't -- all the fiduciary responsibility verbiage [indiscernible]. I'm just saying it's harder. I think for us to buy a smaller player and migrate them over, it's doable. It's just hard. Migrating cloud to cloud customers is hard. We have more experience at it than I would argue than any other company on the planet. We're migrating UC customers, we've done it 3 times. And it's hard. And so I think consolidation can happen. I don't think it's -- but I just think it's not easy. And so it has to be factored into the mix.

Okay. And then just the -- so you've already dealt with the balance sheet, right, last few years, so that's relatively cleaned up. How should we think about then the cash flow generation of the company and utilization of that cash flow? Because [indiscernible] continues to -- that's one of your north stars last few years.

So absolute north star is all around cash generation. I want to continue to -- look, the next steps are -- we've said publicly, we'd like to -- we're pursuing avenues to refinance our term loans. We are doing '27, and then we'll -- starting in August when the prepayment penalty comes off from our Francisco private credit term loans, we'll start to aggressively pay those off. And then at that point, we'll start to look at also -- I'm dabbling in some M&A. There are some things that potentially we can add into the portfolio, I think, that make a lot of sense. Very small, nothing major, but some things that we're looking at that would -- to benefit our GTM engines. And after that, just -- I don't know. After we pay off the '27s, probably go up to the '28s or buy back stock. I mean, we're committed to returning $250 million to shareholders through fiscal '26. We've already returned $120 million, and we'll keep returning money to shareholders.

Okay. That was great, Sam. Thank you so much. Sorry, we ran out of time.

Any time.

Okay. Thank you again. Thank you all for attending.