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

All right. Perfect. Welcome, everybody. I'm going to read some disclosures first. So 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. I'm Meta Marshall. I cover the Communication Software space here at Morgan Stanley. Delighted to have 8x8 and have Kevin Kraus, CFO, here with us today.

Thank you very much.

All right. So, 8x8 has been on a journey over the past couple of years, incorporating Fuze, broadening the platform. Can you just level set on some of the steps that you guys have taken and when it should help you return to growth?

Sure. Thank you. Yes, we've been on a very deliberate transformation journey at 8x8 a couple of years ago. Actually, we just had the third anniversary of Fuze in January when we closed the deal. So 3 years ago, we bought Fuze and it's been a tremendous success for us, gave us a lot of good engineering teams. It gave us a lot of great enterprise customers and it really helped us bolster our cash flow and revenue growth at the time. So, very good opportunity there. And we were able to really generate a lot more financial flexibility in the company as a result of doing this acquisition. So, it's been a wonderful, wonderful time to be here. We -- obviously, it enabled us to pay down the debt. We paid down the debt. 35% of our debt has been paid down over the -- since August of 2022. So, we have a lot more flexibility as a result of doing that deal and a lot more product development has happened during that time.

Okay. And then what's the biggest kind of unknown as you determine kind of when you think you can return to growth just as you kind of work through all these factors?

Sure. I think for us, it's a couple of things probably. The ability for us to really accelerate our multiproduct strategy within the company. We've invested a lot in our products. And in terms of the growth, I just want to kind of give a little bit of context for the people here. We had -- over the course of 2, 3 years, our revenue -- our service revenue has been flattish to slightly down over the course of time. In that same period of time, we've reduced our expenses much greater. So, our profitability in the company and our cash flow generation has gone up quite substantially. So, I just want to frame the concept of growth within that context. So, the returning to revenue growth, in the near term, it would really rely a lot on our closing out the Fuze upgrades to the 8x8 platform, which we've set a date for that as December 31, 2025. So at that point, we find when the Fuze customers are migrated over, they're happy. They stick with us. And the -- there's a little bit of churn that happens in that. So that caused a little bit of a revenue headwind for us. And then on the other side of the coin, it's our reacceleration of revenue driven by the adoption of our multiproduct strategy. So, we've invested a lot of money in new products, including AI technologies that we're able to deploy and offer a complete customer solution. We're one of the only companies out there that I know of that has the UCaaS, CCaaS and CPaaS, all natively owned. And we're able to use our deployment teams to deploy that across customers of many different sizes, even though we tend to focus on the small to medium enterprise sized customers, but our technologies can be used for any sized customer. So, doing those types of things, we expect that to help us reaccelerate our growth. There are pockets of growth acceleration at 8x8. We've mentioned this on our earnings calls, our new products, new AI products growing 60% year-over-year, admittedly from a small base, but there's pockets there. Our platform growth in our -- what we refer to as our CPaaS business, a good grower there as well. So, we have really good pockets of growth, a bit of a Fuze headwind and near-term headwind we had for FX, for example, which we articulated in our call, but we do have good opportunities to exploit what we have to deliver in terms of a multiproduct solution.

Got it. As you've kind of talked about building out this platform company away from kind of more of a product company, just how is this impacting sales cycles, customer acquisition costs, deal sizes, win rates? You gave some examples just now of where you've started to see kind of on the win rate side. But just how is that impacting the rest of the sales cycle, just trying to sell that platform instead?

Yes. I think for us, what we are doing, what we're focusing on is selling customer outcomes. So for us, it's using our full suite of offering to develop a use case, specific use case for our customers. We're showing how an ROI can be achieved either through reducing agent workload or improving sales through, say, Secure Pay or something like that, using that AI technology through our technology partner ecosystem and really proving out like focusing on a customer solution. That is -- and we're also deploying AI tools internally to help with that in terms of like your sales cycle question and deal size. But I think that our deal size is roughly the same. We look at our multiproduct solution sales as customers with 3 or more products have deal sizes that are roughly 3x what a 2-product sale would be. And those are the kinds of things that we do to help deal size. So, I think that really developing use cases around ROI and showing the result there or proving it out is -- will help shrink the sales cycle and maintain or increase deal size.

Okay. Okay. You just mentioned kind of influencing deal size. Just as you move towards more of the CCaaS or kind of platform customer experience-led motion, just has the target customer changed from what your customer was before?

So, we started out historically in our company as a UCaaS-only type company. And as we invested more in new products and technologies, we broadened our portfolio, of course. In terms of the target customer, we have focused on small to medium-sized enterprises and still do. But that doesn't mean that our technologies can't be deployed across any size customer. So for us, we've mentioned that we would target the small and medium-sized enterprises, but we have over 50,000 customers in the company and we love all of our customers of all sizes. So, I think that we also need to -- we do look at customers who -- for example, there could be specialty market -- not specialty markets, but certain markets where maybe security or regulation is of paramount importance. We see that some of our U.K., like you can have banking, or health care-related industries. And our product suite fits really nicely into those categories. We've got really good security. And so we work well in those areas. But I would say that as we've broadened into a more -- a wider range of the product suite we can offer, it's moved upmarket a bit to small to medium-sized enterprises.

Okay. Is it that I guess on complete that platform that tends to be most differentiated? Or just what do you find tends to kind of close the deal versus the competitive set?

I think it's the use case and the selling of the solution. It's also the way we deploy it. The -- we have a really great product delivery team and specialty professional services team. And actually, those -- what they offer, that's on a recurring services basis. We actually have -- many of our top customers have these recurring professional services embedded in them and they're happy customers. So, I think that the way we are able to deploy it, again, our target customers are customers that have a level -- have a need for a level of sophistication, but they're not necessarily large enough to have their own a group of internal developers like R&D developers. So, we can do that for them. And so I think the way we deploy it and the way we serve the customer, get them trained up, for lack of a better phrase and working is a real differentiator for us. And a lot of times, when customers keep our services team in some degree, engaged, say, do technical account management or something like that, that really helps. And the multiproduct, which we would consider that a multiproduct customer, if they're buying UCaaS, CCaaS, an AI add-on and professional services, the retention rates are really high -- a lot higher for those customers than they are for, say, a one product customer.

Okay. Got it. How has that changed kind of the go-to-market motion? UCaaS maybe more historically used a lot of master agents. Just as you've expanded the platform, as channels have changed, just how do you find the most effective go-to-market?

Well, we've embraced a multichannel strategy. So, we historically -- to set the stage, it historically had been an agency channel like TSDs, formerly known as master agents and you had subagents. But what we found for us to be most successful is to embrace all the channels. So, we're looking at -- we have direct business. We always had direct business. We had channel business, but they were -- it was mostly agents. We have a very successful value-added reseller business in the U.K. and we're branching that or we're expanding that in the U.S. But we have and continue to invest in a multichannel strategy. So direct, agency and VAR. So, I think that, that obviously broadens the reach for us. And so we're making significant investments internally in the company to work with the channels that we have and the channels that we're trying to grow to make it easier for us to sell for those channel partners to sell our product and just make it generally easier to do business with 8x8.

Okay. Many of your tools have real money-saving attributes of kind of adding efficiencies to employees or just kind of being money saving versus alternatives in the market. Where do deals tend to get hung up and where have you had success moving them forward, particularly just given that there is an ROI to the investment?

Are you specifically talking about the AI component of the sale or just...

Just even in general.

I mean in general. I think that for -- probably in a couple of ways. In terms of deal velocity, I would say that the prioritization within the customer's IT group or the actual champion buyer, that can have a big impact on how the speed of the deal goes through. What we're doing internally now and we're using AI to help us do this is before when we may be just finding a buyer, now we're focused on finding buyers who are ready to buy sooner. And so there's techniques and strategies to do that with tools. So, we're working through that to help accelerate the deal cycle time and closure. But I would say another powerful way to help close deals sooner would be the use case example that I gave earlier. If you can find a way to have -- to prove out an ROI whether you're going to, say, use this and you'll be able to reduce your human agent workload. Use this, you'll be able to get a better -- a lower decline rate on payments, things like that, and you can measure those things. So that's part of the outcome selling that we are trying to promote internally into our go-to-market engine to help with deal velocity.

Okay. Okay. Okay. That's helpful. Particularly when it comes to AI, there's a lot that can be done. Just how are you deciding what products and offerings to invest in versus partner versus resell?

Okay. So the -- for us, the main thing is that any AI, whether it's -- any investment we make, it's AI or otherwise is it has to have a very native feel to it. So, if there is something that naturally fits within our development efforts internally, we built it in, we can build that in. And -- but we were actually first to really embrace, in my view, first to embrace outside best-of-breed solutions. So like we were, I think, among the first, if not the first, to have OpenAI technology embedded in what we were doing. We were first to truly embrace a technology partner ecosystem where we can use best-of-breed third-party technologies, seamlessly integrate them into our offering like an ICA or a Secure Pay or things like that and then make it feel native. So, if there's an opportunity to do that faster for the customer's benefit, then we'll go to our ecosystem, for example. And then if it's something that's more appropriately built in natively, we'll do that, too. So, we do it both ways. But I think for us, it's really a matter of what's the ROI going to be for us. But the most important thing is that what's the customer experience going to be as a result of what we put on to the platform.

Got it. You've laid out a lot of differentiation that you guys have. Maybe shifting to the competitive landscape. You guys have noted the U.S. maybe being a fiercer environment than international. Just kind of what leads to that dynamic? And what can you do to kind of exploit that more internationally?

Sure. Sometimes -- and I guess there are examples where there could be competitive dynamics that are maybe more fiercer, as you say, for certain deals. But I think that there -- it can vary even in North America. I mean, I think that for certain, like, say, low-end UCaaS deals with a lot of seats, there could be fierce competition from a land grab kind of concept. But for us, the way we try to mitigate those is selling -- again, I'm probably being a bit repetitive here, but selling the solution, selling the outcome, focusing on our -- the attributes associated with reliability, scalability, security. So that helps us in certain markets. And it goes beyond price as a competitive lever. And again, I'll call out the fact that we can take UCaaS, CCaaS and CPaaS altogether. And a lot of the AI technologies are leveraged through the use of the quality as well as the quantity of the data. So, if we -- we're selling AI solutions embedded as obviously we've been talking about, having that data reside on the platform enables better AI insights for the customer as well. So I think that, that is another thing that we do that helps us overcome some competitive situations when our competition can't do that.

Okay. Okay. Perfect. Maybe just Teams obviously is a force in the market. Just how do you see Teams as an opportunity for you guys?

Sure. Look, we've -- I think it's a great opportunity and we've always embraced Teams as an opportunity and as a partner. Like we never, as a company, never try to find ways to take out Teams or to compete against Microsoft. That is something that we did because we were focused on our customers' needs. So, we were able to, and very early on, adopt the posture with Microsoft Teams with voice solutions, okay? And then we upped it to contact center features that weren't natively embedded in Microsoft Teams. So, we have a lot of Microsoft Teams seats in our portfolio of business. And the -- I've called this out before publicly, not in this, but when we do Teams deals or deals that involves -- that involve Teams, our attach rate on our contact center solution is much higher. And so for us, focusing on the customer, what the customer wants has been really helpful for our ability to do other -- sell other things.

Okay. Okay. That's helpful. All right. We'll get you back into your CFO sweet spot now. We turn to the model.

You can continue to ask me customer and product questions you want. I'll do my best to answer them.

Okay. So turning to the model, Fuze customers now only represent kind of approximately 5% of the service revenue. You noted end of calendar year kind of being the end date. But just does it gradually wind down? Do we kind of see a cliff? Just how should we expect kind of Fuze to wind down?

Well, we're planning internally for it to wind down and not do the cliff part that you just mentioned, okay? So, just to be clear about that. Look, we've put a lot of effort into this. So, we've got a lot of resources -- outreach, working with the customers to make sure that they're kept in service that they don't have any interruptions. And there's -- and as we've said in our earnings calls and that we do experience churn when that -- when we migrate, it's natural and normal. So end of the year, yes, we expect it to be through. That's going to be helpful into the following year, back half, let's say, 2026 when we don't have that headwind any longer. But the primary motivation for us at this point is to get those customers happy and on the 8x8 platform.

Okay. You noted expectations for operating margins to step down this year in fiscal '26 just due to kind of strategic go-to-market investments. Can you just kind of give a sense of contextualizing what some of those investments are and just how it could impact cash flow trajectory?

Sure, sure. In terms of the -- and let me put this in the context of the cash flow and the net income -- non-GAAP net income. So, what we said we would do is we would make certain investments in our business, particularly in the go-to-market area, continue investments in product. And the operating -- non-GAAP operating profit will go down slightly. We said about 1 point, I think, in the last call. But our net would be roughly flat because we've been paying down our debt and our interest expense is going down very significantly. So on a net basis, we should be fine there. And cash flow can vary for different things that happen in cash flow, but call that roughly in the same ZIP code on cash flow. So the investments themselves, we don't go into too much detail on that, but there's notable investments related to pipeline, power, the conversion rates, focusing on late-stage things to accelerate deal velocity. Also, I mentioned earlier, the investment in our multichannel strategy. So, there's things that are happening there that we believe are going to -- we're going to pilot them first. They cost money first. So, we pilot them and then grow later, but the investment is upfront. So, calling that out now. But we're going to -- we're doing those things, again, to make the channel partners that we have and make it easier for them to sell 8x8 and deploy it, service it if it's in the case of a VAR. So, those are pretty significant things that we're doing to transform the business.

Okay. Okay. You noted that you've made kind of significant strides kind of on the capital structure of the business. Just how are you thinking about capital allocation going forward?

Sure. As I mentioned earlier, we've done a lot of debt paydown. I think it's close to $200 million, so, $190-plus million since August of 2022 that we've paid down, 35% of the debt at its peak. Our -- we're still going to continue paying down the debt into 2026. That enables us a greater amount of financial flexibility to do other things going forward. But I look at 2026 as being another debt paydown year. And then ultimately, that will free up our ability to do other investments and potentially down the road, things like convert buyback or stock buyback type of activities.

You made a number of kind of management hires of late. I think you had 2 that were announced either this week or last week and have a Chief Security Officer and a Head of EMEA Sales. And then you had made a kind of Chief Transition Officer hire, I think, last month or January. Just how are you thinking about kind of in terms of some of these go-to-market investments you're making or just kind of transformation efforts that you're making? What was attractive about kind of these hires? And are there kind of others you think you need?

Yes. I had -- interestingly, I had a one-on-one with the new EMEA leader the other day. I think it was a couple of days ago, great person, really good guy, knows his stuff. And I think that he's going to put the right energy into that market that we maybe didn't have as much of before. The transformation person that we hired, Joel, I believe you're referring to Joel Neeb. He has -- there's a person with a tremendous amount of energy. He is a wonderful addition. He is our internal AI business accelerator champion. And I think he's put a lot of great effort and energy into how we think about transforming our roles internally. So, we have deployed agents or we will make, say, a GPT for how to accelerate sales velocity. And we're using that not only for things like training new people that come in, but you can use this for identifying because customer interactions are transcribed and recorded, put it into the -- we leverage AI to do that. You can use this to gain insights into what the customers' buying behaviors are, what the buying signals are and the resistance signals and use that as a training tool and as a just basic tool to accelerate deal closure. So, there's so many opportunities. I'm using it in finance, for example, to do a few things. And I -- in developing use cases for myself personally all the time. So, I think having that energy in the company and he's also involved in business applications. So that's a really good marriage with the business acceleration combined with AI use inside the company. So, I -- that's a really special thing for us right now.

Okay. Okay. That's helpful. And then maybe just lastly, how are you guys thinking -- you've made progress towards reducing dilution. Just how do you balance kind of stock-based comp with cash?

Sure. Well, so a couple of years ago, we lowered the equity component and increased the cash component of employee compensation. So, we still issue equity, and it's used in a variety of ways of special performance awards. Executives are very invested in the share price as well. So, we get equity grants. So that is something that we've done internally for the employee population. It will help dilution over time. Our stock-based compensation as a percentage of our revenue is down in the single digits now. I mean you can see that a lot of our peer group is following that strategy. But I want to point out that the -- while our stock-based comp as a percentage of revenue has gone down dramatically and we're very proud of that, share count dilution can still occur and that will take time to flush through the system because of the amount of shares we're granting. So, we are -- our per share metrics are very important to us. And so we -- that's top of mind for us in terms of ultimately limiting share price increases in our company.

Okay. All right. Perfect. Well, with that, I think that's a great place to stop. So Kevin, thanks so much for being here today.

I appreciate being here. Thanks.