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

We can all go get kicked off. I'm sure we probably still filtering in from the earlier keynote, I want to keep it on track today. So really happy to have Sam Wilson from 8x8 here with us today. I was telling Sam earlier I was really enjoy speaking with him because a lot of executives like Buzzword Bingo. We do a fireside chat. There's not a lot of substance to it, but Sam always has great substance and inside to his answer. So Sam, thank you again for coming out.

Please. Michael, thank you for having thank you. And thank you to BofA, where I worked many, many years ago. for having me here. I always appreciate it greatly.

Great. So I wanted to start with you just recently reported earnings and obviously not a full rate cap, but maybe hit top of the waves, some of the key points from the recent earnings and the messaging.

All right. So key things. We hit our guidance numbers in general, gave out guidance for fiscal '25 which is our -- or sorry, fiscal '26, our new fiscal year. Revenue came in as expected, CPaaS business doing better. Saw -- and I made this comment, and I think this will be interesting to investors. I made this comment, when we did the earnings call, we talked about the fact that March and April, we definitely saw a bit of disruption around new business generation. I think a lot of that was macroeconomic driven because the international markets, which is about 1/3 plus of my business did fine and actually even better than expected. It was really driven by the fact the U.S. market was a little bit rough around the edges. And then in Q&A, I was asked more about that and just stated that we definitely see in second half of May or even May and into June as I guess it's the Taco trade now is what if I read correctly, has gone to fruition. We definitely see that in order rates and those kinds of things also.

Okay. Great, great overview. I normally save the kind of more pointed questions for the end, but I think very topical, so I'll start with it today. The disconnect between your messaging for your forecast for revenue growth returning to, I think we're seeing kind of high single digits, 8% in a couple of years on the top line, and stabilizing the business even this year as Fuze continues to run off and end of life of that platform with -- where your stock is trading today, right? And anyone can see the free cash flow yield. I think it's in a low to mid-teens right now, free cash flow yield, which, in my mind, is indicative of a company where there's tremendous going concern risk, right?

Yes.

So taking those 2 separate points, we turn into revenue growth and then when the stock is trading. Can you help us bridge that gap or explain to investors why they should not be concerned about going concern risk or deterioration of the business?

All right. So I'm going to break this up into 3 pieces. First, I'm going to start with the big picture, which is the industry itself, just real quickly, right? Voice communications is actually celebrating its 150th anniversary right now. And I'm pretty sure, based on all the phone calls you're trading desk gets and you get and we all do every day, voice communications isn't going away and business communications as a whole isn't going away. And the trends that we're on around omnichannel and more channel, social, WhatsApp, SMS, et cetera, that fragmentation continues is growing. And we provide software that allows businesses to manage that, run that and use that along with employee collaboration, all those things. That market isn't going away. So just in a macro perspective, we're not going away. If you look at our business, I want to break it into 2 pieces. There's the business without Fuze. So a couple of years ago, we bought Fuze It was a [ $243 million ], transaction. We've generated more cash flow than that. and we use that asset to pivot 8x8 the company into an innovation-driven motion. If you look at our business without Fuze, and that is both on our platform and still on the Fuze platform because we're upgrading the customers onto our platform. So just the core 8x8 business, we grew 4.6% on a year-over-year basis last quarter, in line with industry peers, et cetera. And we saw accelerating quarter-on-quarter and year-on-year growth. So we saw acceleration. And that acceleration is driven by new products. So now let me sort of -- I give you the bottom line upfront. Let me take a step back. So when we bought Fuze in '23, we did a couple of things. We cut sales and marketing capacity tremendously, driving free cash flow generation that brought the growth rate to come down. We acquired Fuze, we started melting that ice cube of running it for cash flow. And then we took all that cash flow and we invested in 3 things: debt retirement because the company was over-levered, it was at 6 to 7x EBITDA, right, debt retirement. We drove an innovation, and we put it into customer retention. And in the 3 years since then, what have we seen? We've reduced debt by 40%, roughly. I'm a CEO. I round a little bit to big debt numbers, like 38-point-something percent or something. We've increased innovation, new products. We've gone from 2 products, we sell to 10 product lines we sell. That's what's causing the core business to grow year-over-year and accelerate. And number 3 is we've seen a 4-, 5-point increase in gross retention, which is also after a year or 2 causes the core business to grow. And so we melted Fuze to drive the core business where we needed it. And so I think what you're going to see is at the end of this year, we'll shut down the Fuze platform at the end of this calendar year, we'll shut down the this platform. And that growth rate, that high -- the mid-single digits, high single-digit growth rate will start to shine through. And then as the new products continue to gain hold as the increased retention continues to work, we can drive that high single digits. Why high single digits? It's just if you take a breakdown of my business and you multiply it by the industry growth rates by the various segments, it comes out to be 7%, 8%, 9%, depending on if you use Forest or IDC or Gartner or whoever. So it's just a conglomeration of what the industry should be growing at, what we should be growing at as a company is high single digits, and I absolutely believe we're on track for that.

Okay. That's great. It's a great way to begin. And you mentioned that you generated more cash from the Fuze deals than you paid for the asset right. Makes me think about, is there more alchemy to be had in the industry?

Yes.

Okay. So where do you think that you can generate greater value than the acquisition price?

Every company that I'm talking to about acquiring them, it's not you. Like you're terrible and you should sell to me at a very low valuation. There's -- so the telecom industry is massively fragmented. It's funny I'm talking to you, such a veteran of this industry. See, that was a nice way of saying it. It is, if you look at telecom historically, it's a very regionally based, fragmented industry. It's almost by region, by territory, by geography, by physical infrastructure, et cetera. And we are a software company wrapped in telecom. That's what we are. And so there's tremendous ability for us to pick up these regional assets and truly bring the power of cloud and AI and data to bear in this new era, right? The reason telecom companies are regionally based is because their infrastructure had to be regionally based. But in a modern cloud world I can deliver voice services or data services, if I deliver. I have 220 carrier interconnections at 8x8. I cover a vast majority of the entire world I have users in 160 countries, et cetera. And so I think there is still a space in this market for a global telecom company. And I think the potential of that global telecom company is exceptionally large. And as more and more businesses globalize every day, there's more and more need to go to a single vendor that can supply them business communications globally.

And maybe I'm running the wrong direction with this. But you mentioned kind of regional and maybe you think of the old model in telecom, which was the rural local exchange carrier, and those were all rolled up. In the early 2000s, should I be thinking broader than just software potential targets and more towards traditional telecom asset-based telecom that's running too far with that.

I don't think I want to own physical infrastructure. I think that's -- I think what -- look, in my world, what I think you're going to see is you're going to see the traditional Verizons and AT&Ts and Comcasts and those people, they all talk about going to Layer 7. I'm going to sort of geek out a little bit, so they talk about adding application products, but they're not. They're physical infrastructure providers. They're 1, 2 layer providers, and they're very good at it. They know how to get a permit in San Mateo County to run a piece of fiber down the street, and I have no clue of even who to call. So what you're going to see is their business is really going to be that physical infrastructure. And our business is going to be running the applications, the business communications on top of that. And with AI coming or here, depending on which person, you're going to hear today, that becomes even more important. So I don't want to be in the physical infrastructure, but what I do want to be is a global software provider that's providing business communications. And there's so many of these regional players that are stuck, subscale that we should begin to actively do that. And if you read my cash flow statement, I did a deal last quarter, and I'd like to do more deals in the future.

I completely agree with you, rollout makes total sense in use right now.

Absolutely. And that's what -- and so the funny part is we would have started earlier, if we can just get the debt down faster, right? So the whole point is to get the debt down so that I can use the cash I'm generating, not for debt retirement, but for M&A and other things that drives more scale in the business.

And in these hypothetical transactions, do you envision them being being cash transactions? Or is your equity occur that you think you could use would be...

My equity is highly undervalued and it's -- I'm Warren Buffett. I would never use it for transaction, unless I absolutely have to. Now look, every once in a while, you want to do something around retention and those kinds of things. So you'll use some equity as a retention tool. But as a general rule, we want to do cash transactions.

Okay. And I asked Vlad Bad from RingCentral...

Who? I know this guy -- wait a minute, he's the absent CEO of my competitor.

I can't comment. I asked him this question I think it's a fair game. I pointed out that his stock is also undervalued in my opinion, and then a relatively large shareholder, would he consider adding value through LBO, MBO because, in my view, these businesses could actually handle more leverage than what you're driving towards. And you can lever it up, you can drive it more for cash and obviously generate a tremendous amount of value. Is that something that you've evaluated with your Board or your...

Yes. So let me be super clear, so there's no misunderstanding, my board and I evaluate capital allocation, capital structure, every board meaning it's something gets discussed. There's actually a strategic investment committee or a capital allocation committee of the Board. So I -- for any lawyers listening, we have dotted eyes and crossed Ts and have minutes all over the place. More on a practical level, I view us as a software company wrapped in telecom, not a telecom company wrapped in software. A telecom company runs generally more highly levered. A software company, and I'm a little old school, I came to Silicon Valley in 1994 originally is when I was in the first 10 years in Silicon Valley, tech companies ran with no debt because you never wanted debt payments to get in the way of R&D because R&D is your lifeblood. And so I think our optimal leverage ratio is 0. I don't know if we'll get there anytime soon, but a low leverage ratio, net cash is where we should be. I know from an NDA business school perspective, that's probably not the right level. But I think from a running an innovation-driven technology company, that's the right level. You always want to be able to fund R&D and GTM to the proper levels.

-- Okay. Very clear. I want to shift away from this conversation. But thank you for entertaining all those questions and get back more towards your core business, contact center specifically, I wanted to start there. There is an investor perception that AI is an existential threat for copper contact center, which, quite frankly, goes against a lot of the results. Companies are reporting in contact center 8x8 included. So maybe first touch on that. But then second, where you have more success competing in contact center and why you're winning?

Sure. Okay. That's a great question. So let me talk about the existential crisis, first. So I don't know what you're going to hear from other executives, but I will tell you that I believe technology replaces labor over time. The car replaced buggies, the wheel replaced, whatever hauling stuff manually, et cetera. You're going to have technology. The idea, though, that we won't evolve and provide the technology, I think, is the existential threat that the market misses. We sell AI. We sell tons of AI. And as a matter of fact, this is part of the pivot with Fuze. We saw this coming years ago. We've been investing in AI. As far back in 2019, we hired a bunch of people from IBM Watson. Like we're 6 years, 7 years into this game. We knew the OpenAI folks before they were public. I mean before the LLMs were announced and ChatGPT was announced, we were already working with their technology on transcription and other pieces of it. So the idea that we would have seat count decline, but our revenues actually grow because we are selling more combination of products to that customer is actually what you see happening. We now sell 10-plus products. A number of them are AI-based products. I think what the existential crisis is that the model is going to change. You're going to see a little bit less subscription revenue, more consumption revenue over time because most AI products are based on consumption because there's no concept. I mean if you look at AI, it's based on tokens, but there's no concept of a seat because there's no concept of a human being. And the idea that you're going to charge on a per agent per month or whatever is whatever. I mean because it's unlimited, like a human being can only work 8 hours or 10 hours or 12 hours in your case. But I mean you can't -- like an AI can -- like I can just replicate. If I have one agent, it's overloaded, I can put 6 more, and I can throw more compute at it. And those costs are going to go up. So I think the existential crisis is that somehow AI happens and 8x8 is completely asleep at the wheel and keeps doing what it's doing is it drives off a cliff. And I just want to assure every investor out there that is completely false. And we've been at this game for a while and will continue to be at this game. Taking that one step lower, you're talking about the contact center in particular, right? So what we sell or what we specialize in is the layer below the big Fortune 500 companies or Fortune 100 companies. We want to focus on taking the technology that was exclusive to that realm. So let's use in United Airlines. I think last time I talked to United Airlines, I think have 30,000 concurrent agents any given day on staff, right? But because they have 30,000 agents, they've invested a lot in developing cool technologies and capabilities, et cetera, et cetera. We want to make that available to a company that's got 1,000 concurrent agents, and we have customers with 1,000 concurrent agents. And the same capabilities, the same level of customer service, the same everything that you would get from around minus all the developers and the customization and everything else. So if you look, we invest a huge amount in platform technologies. What the platform technologies allow a mid-market enterprise customer to do is deploy a set of technologies that allow them to achieve self-service contact center, omnichannel, routing, the whole kit and caboodle of things they want to take. And it's a platform for the future with AI because we're capturing all the data all the interaction data. So if you think about where I think one of the big areas that AI is going in the future is the stuff that's written today is available for AI today. So if you've got a book or whatever they crawl the Internet, think all your Internet in a rag model, et cetera. But the future is going to be, what about all the voice communications? What about all the chat communications? What about that real-time information. Don't tell me this customer had a problem 6 months ago that we didn't solve, tell me the customer that has a problem today that I need to get solved because they're a major customer. The only way to do that is that happened to real-time communications. And the only way to do that is have a platform that's capturing all the real-time communications. That's what we do. And it's actually differentiated from our competitors. We are a contact center company. We are a UC company, we are a CPaaS company. We are a business communications company. And that, I think, is going to be ever more important as this AI thing takes off. I think you're going to see my competitors and you already see them trying to get into the contact center game, probably 4 years from now, they realize that, my God CPaaS actually matters and start to get in that well. You see the CPaaS guys trying to get into voice calls and everything else like it's going to continue to blur. And I think we're way in front of that trend. And what we figured out in the last 3 or 4 years is how to optimize our innovation dollars for that world. I would say pre me becoming CEO, we tried to do too much ourselves. And what we now have is the perfect balance between we build it in-house or we partner for PSA. So it's a very long-winded answer, but I gave you a multipart.

No, no. It was a great answer. I think another part of the question was specifically the market that you're targeting, right? The -- enterprise...

I want to be Well, so like the way I say -- I'll say this, 250 employees to 20,000 employees. So that's generally 25 contact center agents to 2,000 concurrent contact center agents, kind of rough ballpark. And I'm generally looking for a company that doesn't have developers. So what I mean by that is they're not trying to build an in-house custom solution, they're a trucking company or a law firm or whatever, whose business is not building technology. Their business is using technology to get an outcome. They come to us.

In this context center in general, I mean, there's been the projection for years, whether it's IDC or others that industry would grow low double digits, mid-teens, maybe doesn't seem to be hitting that mark. And it seems like there's still a lot of the industry is still in the old on-prem model as well, right, which could just be based on a number of factors. But what do you think the tipping point is where we see acceleration of migration to the cloud and to the AI-based solutions that are promised to add productivity and reduce expense and all these magical things for customer?

It's a fantastic question, and I'm probably going to give you a terrible answer. I'm not sure there is a tipping point because the notion of a tipping point is really from Geoffery Moores technology adoption cliff right? You go into the chasm, you have the bowling alley and then you sort of get to the tornado. But the notion behind that is it's a new technology, a new application, a new thing. And if you think about voice, you're talking 150 years old. If you think about chat, you're talking about 40 years old, right? If you talk about e-mail, you're talking about 50 or 60 years old. So I think this is not about a new application. It's about a new delivery system, that new delivery system is the cloud, where we control the infrastructure, we make it easier. We make it more effective, et cetera. And so we're not going to necessarily see that we've reached the magic point, the light bulbs go off, et cetera, and off to the races we go, that. Now where could I be dead wrong, AI? I think you can't do AI on-prem. Like it's not going to work. It's too hard. You would spend 10x more trying to get your on-prem crapola to be AI ready to go, then it would just be to rip it all out, replace it with us or one of our competitors, right? So I think the magic to me will be -- and Phase 1 of AI is evolutionary, which is, hey, we're going to run our on-prem stuff, but we're going to try to figure out to get some agent assist to work on the side, whatever. But if AI is truly revolutionary that people think it is, and I truly believe it is, then what's the tipping point will be, hey, the infrastructure I have will not work, right? So let's go back to the 1998, I'll give you 2 -- I'll give you the light bulb went off. In 1998, what was the correct infrastructure for the Internet. I guarantee you it wasn't a large mainframe computer sitting in your basement, right? It was client server, et cetera, and not act like the Cloudflare and AWS and everything else, et cetera, right? So -- and number 2 is what was the proper amount to invest in the Internet every dollar you had? The companies that invested every dollar they had were wonderfully successful in companies that dragged their feet, struggle and struggled and struggle. And I think what we're going to see is you're going to see the companies that are investing in AI and investing in the cloud and investing in modern communications and those things will gain a competitive advantage. And the ones that stick to their legacy on-prem system forever, it will cause their business to have problems, and then they'll invest.

Your comment about technology progression and telecom few 100 years old, maybe think back that in the late '90s, traditional telecom was still dominant. There were a lot of competitors. Obviously, then you had VoIP in the early 2000s. That was a disruptive technology created new disruptive companies like 8x8, then RingCentral and others started providing, we call it, cloud-based communications today, but just a different model. Why won't the next technology emerge and somehow displace companies like 8x8 and others in the industry with some new solution where we're a company that wants contact center AI agents, can buy from somebody else very easily at a much lower cost, right, to undermine the industry.

Totally could have. Let's -- I mean I think it's a great question, but let's look at Avaya, Mitel and the Crew. Why -- they should have owned this market. They should have owned, like we shouldn't exist. We exist because the incumbent vendors fell Clayton Christensen's, Inventors' Dilemma and refuse to invest in the cloud, right? That is a story as old as time and world. At a basic level, we're human beings. We communicate by text and voice, like that isn't going to change. So the need for business communications isn't going to change, right? What method we use could change, but that's not going to change. So the answer is we will only not survive as a company if we are stupid. You can read the rest of that set. But if we're stupid, we deserve to die. And if we're not stupid, we deserve to continue to move forward. And I -- we spend a lot of time as a management team and as a company, making sure that we are not stupid.

So start with it...

Sure. Isn't that business? I mean, Look, I mean, look, rule #1, don't take your company private levered on the moon and cut all your R&D spending, Mr. Avaya. Right. I mean that has consequences.

You're upsetting my bankers now.

I'm not sure there's any fees left to get from that thing.

We have about 5 minutes left. And I -- you're always great with the commentary, just kind of on the industry and how you're competing in others. And so can you give me a perspective about maybe who do you worry about most competitively, maybe who you worry about at least where you're eating their little lunch and you're doing really well. And you did mention earlier, I want to come back to it, just your combination of assets, right, where you have UCaaS, you have CPaaS, you have CCaaS as well and maybe that positioning. I know it's kind of a multipronged part question, but broader just kind of who do you worry about who do you not worry about? And then how those assets allowing you to compete?

I would say that the companies I worry the most about are going to always be the hyperscalers, right? So -- and I'm going to give you a broader brush, right? So there's obviously Microsoft who's a partner of ours, and we partner with them extensively. Amazon, who has Connect, Google, who, I don't know, some days is in and some days is not, who we also partner with extensively. But I think I would also throw in there a sales force or ServiceNow with the things they're doing around CRM and the changes in CRM and those kinds of things. Because I think if you look at CPaaS, right, there's an argument to be made that in the future, our business may not be packaged software, but it may be make a phone call, get a voice mill, receive things. You can break apart our service into a pure consumption base. And so I think there's -- I think for a whole host of people that will never go that round. But there's going to be the Ubers of the world that want to have voice masking, the technology we sell frequently or those kinds of things. And so I think what you're going to see is you're going to get a bifurcation. But I always -- I still think globally let's not use Silicon Valley, California as a representation of the globe, right? 1/3 of our business is outside the United States. I think for the next 30 years, we have more than enough business and opportunity to go after that mid-market enterprise customer who wants to have great business communications, but doesn't know how to make that journey.

And so just kind of to summarize as well what you're talking about is that you do believe you have a direct line of sight to improve revenue growth. This is not a not an aspiration. It's actually something you believe you can project, right?

If Excel is completely lying and I'm completely delusional then no, but I think both of those things are absolutely true, yes. We have direct line of sight to continued growth. .

Okay. Competitively 8x8 is well positioned and continues to do well in terms of market share gains, getting more traction in CCaaS. The CPaaS business that was probably left for dead 4 or 5 years ago is actually been improving. And you're expanding, I believe, the footprint where you're competing in that business. And then the third piece, just to come back to it, is that there is a massive market disconnect with the valuation that they're quoting on 8x8. And those 2 -- those first 2 points.

Yes. And jokingly, one of my Board members said to me recently, you should just rename the company 8x8.ai and triple the valuation of the company overnight, right? You sell AI, you have AI, you -- AI is a trend that you can sell more of in the future, you enable your mid-market customers to get AI results and self-service and those kinds of things. You just have a label that doesn't work. I think the answer is yes. I think we're well positioned for the future. I would like to spend more on R&D at some point in the future. I'd like to do some M&A and get some scale in the business over the future. But I have no concerns that we won't show growth, continue to generate cash flow over a multiyear time period and provide a good return to investors.

Did you feel constrained in the amount of capital that you can spend the R&D, is it a fundamental disadvantage for 8x8 that you can't spend more?

Look, I'm Silicon Valley tech guy, like all money in the world is not enough for R&D, right? I mean you -- I always have another project, and I always have a CPO telling me is just one scrum team short of whatever new project I'd like to sell and develop or a sales rep I'd like to hire. So this is all about trade-offs and priorities. But yes, I mean, I'm not going to say I wouldn't want to take more R&D money if someone gave me a bag of money. I'm certainly not going to borrow money to spend more on R&D. I'm fiscally conservative and want to stay that way.

And I should assume that strategically, we'll continue to do R&D through partnership, right, leveraging others R&D to create or improved products?

Absolutely. We're spending our money on platform R&D. So platform innovation. Part of that is the ability to plug in point products and get a complete solution. So we'll partner for a point product to put in so that we can offer a platform, which then gives a complete solution. And this is where I think at an 8x8 level, we're misunderstood, I think there's tremendous value in providing a complete solution because what we're doing is the customer will pay us for the integration that either they would have to do themselves or hire an SI or hire somebody else to do, they're just going to get it from us, and they'll happily pay us for doing that.

It's a great place to stop. Sam, thank you so much for coming in.

Michael, thank you.

It's always good to see you.

And once again, thank you for having us.

Of course. Thank you. Have a great day, Sam. Thank you.