Hi, and welcome to Needham Virtual Tech Week Conference . I'm Ryan Koontz. I cover the cloud communications and broadband networking sectors here at Needham. I'm joined today by 8x8, provider of communication solutions for UCC, CC, and, and CPaaS in the B2B category, and joined by Kevin Kraus, CFO. Welcome, Kevin. How are you?
Thank you, Ryan. It's great to be here. Thanks for having me.
Of course. So let's just start off with the easy stuff. Let's start off with just kind of a quick summary of the September quarter, you know, what went well for you guys, what your expectations were coming in, and how it just kind of finished up overall.
Yeah, no, we were very pleased with the results for the quarter. We met or exceeded our expectations for service revenue, total revenue, and operating margin. So we're very you know, pleased with that. Eleven quarters in a row of positive operating margin on GAAP, eleven quarters in a row of positive cash flow from operations, so we're really pleased with how we're executing as a company up to this point. It's a lot of good stuff this quarter.
That's great. Any particular verticals you saw strength in, in the quarter or, or new deals flow?
You know, yeah, good question. So, you know, we're not particularly concentrated in any particular market vertical.
Mm-hmm.
We did land a lot of new enterprise-size deals, you know, greater than 100K ARR during the course of the quarter. So that was, you know, all good news. And so the diversification in our customer base really enables us to, you know, not have that type of risk as a company.
Yeah.
So, the other thing that we did really well this past quarter was that our CPaaS business, which is primarily in Southeast Asia, grew sequentially for the first time in several quarters, and so we were very pleased with that business. That's a usage-based business, so the revenue can increase pretty readily, and so we're really pleased with that. We've got a new leader in that business, and he's done a lot of great things for us, and we're very pleased, and you know, with the performance there, and we think that business is really on a good financial footing at this point. So very pleased with the bottom line, of course, again-
Yeah
D efinitely on our trajectory, to you know, generate the cash.
For sure. Yeah, I mean, for those of you not familiar, they've made some great progress on non-GAAP operating margin up 800 BPS year-over-year, and cash flow from operations up 62% over the last 12 months. So can you—what was really behind that? If you, if you kind of reflect back to a year ago, what's, what's driven that really strong performance in the bottom line?
Yeah, no, it's actually. Yeah, it's been, it's been a lot of good, a lot of good stuff has happened. You know, what we did, you know, a year plus ago, you know, with, you know, starting when Sam was the CFO and then into the CFO, CEO role, is, you know, we kind of have this three-pronged approach. We wanted to get the financial structure of the company set up the right way, and we did that through making the strategic cost realignments that we did-
Yeah
O ver the course of the past year-plus. We then absolutely focused on making sure that we were making the right investments in our product innovation. So R&D, as you know, as a percentage of revenue, 15%.
Yeah.
We've been able to maintain that and really developed a great, robust product. And, you know, we're obviously building on that with our technology partner ecosystem. And so those moves that we made, both in the financial structure of the company, R&D innovation, and you can see we've... You know, where multiples have had in terms of absolute dollars in R&D and innovation that we've made as a company. Those, and the third leg of the stool is gonna be the, you know, go-to-market, you know, retooling.
Sure.
So we've hired Lisa Martin and Bruno Bertini, our new CRO and CMO, and so they'll be. They're here, they're new, and we're really excited about the things that they're gonna do for us going forward. But the effort that we put into the innovation and the financial structure of the company really has enabled us to increase the profitability and the cash flow of the company, and, and, and obviously, we've been able to, you know, pay down debt. We did it last year. We did it earlier this year, the term loan, $25 million.
Yeah.
The bottom line results are really giving us a lot of flexibility as a company to address our capital structure and return more value to shareholders and investors.
Yeah, that's, that's a big pivot, and congrats on success today. It's really great.
Thank you. Yeah.
Looking forward here, you guided December, and I think you guided for the year as well, ahead. Can you kind of reflect on, you know, what some of your assumptions are there from a revenue perspective and, you know, what kind of assumptions you're assuming in the macro within that, within that guide?
Sure. So, you know, our guidance is, you know, appropriately cautious, I would call it, for the quarter and the rest of the year. And remember, our about 85% ± of our business is recurring-based business.
Yeah.
So, you know, that gives us good visibility as a SaaS business into our immediate future and even a bit longer term. So, you know, we have that. On the usage side of the business, mostly the CPaaS portion, we've assumed, you know, stable, stable business there, for the next quarter and the rest of the year.
Yeah.
Yeah, so, you know, so for us, we're fortunate, again, that you know, having that level of SaaS, that high concentration of SaaS revenue. So the rest of the business is, you know, a small portion of the business, 5% or so, is product revenue. So-
Yeah
Y ou know, hardware shipments, phones, et cetera-
Right
A nd some professional services, which is mostly deployment based and, you know, varies upon customers' deployment schedule. So from that standpoint, you know, those were the kind of the highlights in terms of how our business is built. On the macro, I would say that, you know, we're not, you know, assuming anything positive or negative really along the way. Again, most of our business is already contracted. There is some headwinds in the macro.
Sure
P otentially with getting some new deals signed, or at least the time it takes to sign new deals.
Yeah.
That's kind of the high-level approach.
Mm-hmm
T hat we took with the guidance.
Yeah. I've heard there's also, like, you know, downselling as some customers, you know, come back to renew deals. They're renewing sometimes at smaller numbers 'cause they've just become a smaller company. You see a little bit of that, too?
Yeah, from time to time, we do, you know, see some of that as well. We do have upsell opportunities, however.
Mm, yeah.
The nice thing about our business is that we have a real broad base of installed customers that are maybe UC customers.
Right.
And so we have tens of thousands of customers, so we're able to cross-sell into that customer base. And I think that, as we. You know, with our new sales and marketing leadership, we're gonna create the market motions in order to do that better. You know, so when we acquired Fuze, for example, we acquired a lot of great customers, a lot of enterprise-level UC customers, and that's right for us to, you know, cross-sell our contact center into that base. So I think that, those are the kind of opportunities we really want to take advantage of moving forward, 'cause we've got a lot of, you know, broad-based, market verticals, broad-based in terms of customer size.
Right.
And so I think we have a lot of opportunity, plus our new products that are coming out, that are in early adoption right now, that layer on top of our contact center, the-
Yeah
T he Intelligent Customer Assist, we have Workforce Management or Secure Payments, and things like that, all contribute to making a really robust product portfolio and a platform that becomes, tightly integrated into our customers. So these are-
Yeah
Are things that we're looking forward to seeing. It'll take time to show up in our P&L, but these are things that, you know, we are targeting in terms of getting growth re-accelerated.
Terrific. Yeah, it sounds like that's a nice fit with Lisa's background. Maybe you can say a few things about Lisa and what she's bringing in-
Yes
W here she came from. Her DNA sounds like a really good fit with the direction of the company.
It's terrific. Yeah, she came in. She was actually on our last earnings call. And I think she's a really great breath of fresh air at 8x8. I really enjoy working with her personally. So she has a lot of great ideas. She's got a background from not only Twilio-
Mm-hmm
Y ou know, usage-based business, but she also has a background in contact center, in Genesys.
Mm.
And interestingly enough, our new CMO, Bruno Bertini, who joined, also worked with Lisa, and he has a background in contact center as well. So I think with the two new personalities that have come into the company, it's really exciting, because they've worked together in the past, and they're tightly aligned, and they work in concert. In fact, they're both here today in the office.
Nice
R unning a joint employee meeting with the sales team and the marketing team together. So it's great to see that collaboration between the sales and marketing leadership, and the teams in person in the office for this particular week. So I'm really excited to be working with both of them, and I think they're gonna bring a lot of great new ideas and new energy into 8x8.
Yeah, I love that, Kevin. That sounds like a great fit. Shifting gears, you know, there's been a lot of scrutiny around balance sheets. I'd be remiss if I didn't bring this up. You know, especially around small caps, a lot—just a ton of magnifying glass on the balance sheet, on debt. Can you kind of walk us through, you know, what you've come from, where you are, where you're headed with regards to, you know, reducing that leverage?
Yeah, great question. You know, years ago, when you know, I was here, with you know, four, whatever, five hundred million dollars of debt, we've been able to structure the debt appropriately for our company. A little over a year ago, we did a debt structure that really works for us. Right now, at this point in time, we have $490 million of debt. We've paid off $25 million earlier this year of the term loan that we have, which is the high-interest rate loan.
Mm-hmm.
We have a $63 million debt payment due in February, which is our the final remaining amount of our 2024 converts. We ended the September quarter with $150 million of cash plus investments. So we have the cash to pay that down, the $63 million, no problem, and we'll continue to generate more cash between now and the time it's due.
Yeah.
And so as we've publicly stated, we have a self-imposed, you know, our own kind of self-imposed target of keeping $100 million on the balance sheet in cash and investments at all times. So with respect to the term loan, which is our most expensive debt, that prepayment penalty ends in August of next year.
Yeah.
At that time, we will be moving to aggressively pay that down, which will then, of course, in turn lower our interest expense, which then-
Yeah
H elps with our cash flow from operations. So, of the $250 million pledge, if you will, that we made publicly to return $250 million of value to investors, primarily through debt repayments, by February, we will have done $88 million of that, or 35% of our pledge.
Yeah.
Then we'll have two more years to go to pay down the rest. So again, profit, rather, the cash flow generation that we've had, 11 quarters in a row positive, you know, feel pretty good about our ability to handle that repayment.
Yeah, that's great progress, Kevin. Maybe shifting gears on the product front, you know, what new capabilities, you know, have you brought to market in the last few quarters and maybe in the next couple quarters that you think that you're excited about in your seat, that could contribute to, you know, to the next twelve months and calendar 2024?
Sure. So we've been putting out a lot of public announcements about new products, as well as, if you look in our investor presentation from the prior quarter, we've showcased some customer profiles that have been using these new products, like ICA, for example, Intelligent Customer Assist.
Okay.
The partner ecosystem that we've got going is creating a buzz, I think, in our customer base, and it's certainly creating a buzz inside 8x8.
Yeah.
We're very excited about it. So we're continuously looking at new, third-party ecosystem partners to add to our platform to enhance the experience of our customers and our customer's customer-
Yeah
P articularly on the contact center side.
Yeah.
So, those new products, like I think I mentioned some before, we have Workforce Management, ICA, Secure Pay, and things like that, and it'll be voice and digital ICA. We'll really be entrenched, if you will, into our customer base as a critical tool within their software tech stack, if you will, for lack of a better phrase. And that'll make our product offering more sticky. But most importantly, it's gonna make the experience for our customers better, and it's gonna make the experience of our customer's customer better.
Yeah.
So it'll take some time to grow that new product revenue in ... before it shows up into our P&L, but we've got a lot of good momentum. Really strong growth rates now, but it's on a small base.
Yeah.
So it's not, you know, visibly showing up to a great degree right now, but I have high expectations for it, and I think that that'll also enhance our stickiness, and it'll, you know, the retention should improve as well. I mean, we have a lot of things that we can sell to our customer base, not just a UCaaS provider, and, you know, we had then CCaaS later on, and now CPaaS. So we can sell a bunch of new things and really develop a very robust platform into our customers. So I'm excited about it, and I think there's gonna be more to come as our innovation engine continues rolling.
Yeah.
We'll be adding to our platform on a regular basis.
Yeah, within that commitment to innovation, are you starting to slide the needle more toward AI collaborations? Are you seeing AI show up as a tool set within your products at this point? And, you know, where are you in that kind of introduction of those features? I imagine still pretty early days.
Yeah, I mean, but we were an early, you know, we were an early adopter, if you will, of AI functionality anyway. We were involved-
Mm-hmm
W ith OpenAI before, while it was still in stealth mode, for example.
Yeah. Yeah.
So I mean, we've been involved in this, you know, we're clearly using third-party. There's been a ton of investment that's been made in the AI community, you know, through venture capital and what have you. And so we're leveraging that expertise that's already been developed with our third-party ecosystem partners, so, you know, we can sell with them. And so we don't need to spend all of our R&D dollars on AI. Yes, we're doing some work there, but I think turbocharging our R&D team through adding ecosystem partners in a seamless way for our product, too, it's gonna be-
Sure
Y ou know, it looks like it's native built, right?
Sure.
From the user standpoint, the experience is very seamless and native looking.
Yeah.
So, that's a great way to leverage someone else's investment in-
With your platform approach.
But we do see-
Yeah.
Yeah.
API bases, yeah, you've got a really-
Yeah
R eally easy way to plug in, technology partners. That's really nice.
Exactly. And we can use our CPaaS APIs to plug in even more,
Mm-hmm
Y ou know, video capabilities onto things. So it's really exciting time. You know, we have a lot of this already at our disposal, and we just have to leverage it into the marketplace.
Yeah. In terms of kind of other ecosystems, I know it's one of the ones important to you is Microsoft Teams. You guys have made some real progress there. You've been working probably closer with Teams than anybody in this space. Can you kind of walk us through how that relationship has developed of late, and how you think about it going forward?
Sure, great question. Now, we're really happy with our partnership with Microsoft. So we don't compete against Microsoft, we partner with Microsoft. We have now over 400,000 Microsoft Teams seat connections.
Mm-hmm.
We are really pleased. I guess we're part of their ecosystem, right?
Right. That's right.
So as we provide voice for Teams. But I think the real great thing about that partnership is when we sell Microsoft Teams seats, meaning we don't resell Microsoft Teams, but when we sell the voice for Teams-
Yeah
I t results in a very, very high attach rate to our contact center product.
Yeah.
So, virtually all contact center customers buy UC, by the way, as well. But when we—
Sure
W hen we attach the Voice for Teams, the contact center attach rate for those deals is almost double the attach rate.
Hmm.
This is in MRR, almost double-
Sure
T he attach rate-
Yeah
As non-Teams deals. So we're really happy about that.
That's excellent. And on the contact center side, sounds like a number of partners on that side as well, you know, workflow management and workforce optimization, these sorts of capabilities. Is that an ongoing initiative to build out that ecosystem there?
It sure is, and they're a big part of our ecosystem now. We, you know, we use third parties there, Verint, as an example.
Yeah.
So, that is y ou know, the nice thing about what we've got going on here at 8x8 is that we've got a dedicated team of technical experts as well as market and industry experts going out, vetting the, you know, high-quality ecosystem partners, and-
Right
Signing up together with them. And so we are building a stable of really great capability attached to our contact center, and we've got the right people in-house to help do that. So it's a dedicated group of people who go out and make sure that we are constantly adding onto our innovative capabilities. I mean, we've got a huge R&D team inside the company developing-
Yeah
T he product and making it more robust in a native way. But we also have, on top of that, these ecosystem partners. And I just would expect that would to continue over time, and ultimately result in an uptick in our revenue growth rate.
Cool. How about on the competitive front? What's been going on there? Obviously, you got some big guys you compete against, and then probably a bunch at the low end. Any general changes happening over the last couple quarters?
You know, I think that the competitive environment, you know, it's still there. You know, it's a... It can be a tough business, you know, to be in. You know, I think that, what's happening is, we can see some deals, some larger deals, take maybe a little bit longer to close.
Mm-hmm.
You know, maybe they're you know, they're getting vetted a little bit more on the customer side.
Yeah.
But in terms of the, like, the pricing pressure, I mean, we don't see any meaningful change to our pricing.
Mm-hmm.
So I mean, we're holding that up. You know, we're, we're still getting good gross margins, so.
Yeah.
So I think there is. You know, we're able to maintain a decent, you know, gross margin there. But on the competitive side, you know, there could be some companies who are, you know, taking a little bit longer to make the decision.
Mm-hmm
And we do see from time to time some, you know, pricing pressures, you know.
Hmm
B ut it's-
Yeah
Y ou know, nothing, nothing meaningful that we see. You know, it's not impacting us in a very significant way right now.
So, you're not seeing the smaller, struggling players get completely desperate yet or start to close up shop?
Some do. Some do. Some larger ones also get desperate-
Ah
B y the way. But look, we've been pretty disciplined in our approach. Look, we wanna grow that y ou know, obviously we wanna grow the business. You know, we don't wanna lose any deals that are profitable for us, but we're not going to be irrational.
Mm-hmm.
Okay? So, and I think we've done a really good job in balancing that out. You know, we're appropriately flexible, I guess I would call it. And so-
Mm
Y ou know, we feel pretty good about our disciplined approach. But we're not gonna do anything crazy that's gonna ultimately hurt shareholders.
Sure. Sure, of course. Yeah, that's great. And maybe circling back to go-to-market, you know, what sort of changes is Lisa bringing into the organization in terms of, you know, focus on channel versus direct, and these sorts of real strategic questions you probably have to revisit every couple of years?
Yeah, great. So look, we're a channel-led company right now, and we-
Mm-hmm
Are gonna continue to work with our TSDs and sub-agents. And, you know, we do a lot of business through that, through that channel. What's been successful for us, particularly in the UK market, is wholesale VARs.
Yeah.
And so we are going to be making some additional investment in time and effort.
Mm
I n that particular channel. We'll work in concert with y ou know, we'll embrace both the VAR model, the wholesale VAR, as well as the TSD and sub-agent model. We embrace them both. So that's one thing on the go-to-market. On the other side of things, I would say that. I know that she's relatively new, so she's been here four and a half months, but I think what she is also gonna be focused on is, you know, just the go-to-market motions and how we sell, particularly a focus on, you know, lead with contact center.
Yeah.
Those, you know, contact center customers also buy UC, so we go in there with a solutions-based approach, a portfolio approach, to selling, and not just sell, you know, another seat of UC, for example. I'm not saying that that's always been the case, but really just a more portfolio-oriented approach.
Yeah.
I think she's gonna do a lot, more, around focusing on sales and marketing efficiency. Again, she worked with Bruno Bertini, our new CMO, in the past. He's been here, maybe a couple months. And so they, together, I think are really focused on generating the right type of pipeline, higher quality pipeline, improving pipeline conversion rates, and just-
Yeah
R e-examining the entire selling motion in the company to make us more efficient. We invest, you know, in a, you know, a realistic amount of money in sales and marketing. We have the flexibility-
Yeah
T o do more if needed, and that's a good place to be in. So I think that, in very quick time, she's gonna be coming back with her a more comprehensive plan on what we need to do. But so far, I think she's making a lot of good internal moves, you know, not public moves-
Mm-hmm
To get more productivity out of the group.
That's great. You know, I know you guys have had some a lot of demonstrated success in the UK, and I said Sam was over there running that business many years ago. And
Yeah
Do you, I mean, do you see the overall Western Europe opportunity as promising to move beyond the UK over there? I mean, it's, to me, it seems like it's been a little bit untapped. I'm sure there's some, you know, tougher regulatory challenges over there, I can imagine, but, you know, Western Europe, to me, seems you know, ripe for the picking.
Well, look, we have. We like the UK business, particularly the public sector business is real attractive there.
Right.
In fact, we wanna bring some of that success over to North America.
Oh, wow. Nice.
So we'd like to replicate that success here in North America. But I will say, look, when we acquired Fuze, we've got physical locations in Portugal and in France. Of course, we have our, you know, R&D center in Romania, in Eastern Europe.
Yeah.
So, yeah, we definitely... and look, there's always, you know, Ireland and places like that too, right? So I think that it, to some extent, it is an untapped market. We can expand there. I think we've got a lot of opportunity to expand, not only in Europe or Western Europe in particular, but also in North America and Canada.
Right.
So I think some of that market motion with the VARs that I mentioned earlier, that if we, you know, we could replicate it there, tap into a different type of customer base, potentially, using that VAR model, you know, that is... I just see a lot of opportunity in countries we're already operating in.
Yeah.
But yeah, expanding beyond that is just more.
Yeah, I can imagine the push into channel can have some real efficiency gains, too, on your op margins there, with not as much, not so much sales and marketing lead kind of investments needed.
Yeah, I mean, I think the VAR- for the VARs, you know, look, it's a wholesale VAR, help revenue top line. The gross margin could, you know, could be a little lower because of the points, the spread, but you don't have the OpEx-
Right
Associated with it. So, you know, if it drops to the bottom line and improves our op margin percentage and cash flow, great, I'll do that all day.
Heck yeah. That's great. Well, great, I think we're just about out of time, Kevin, and really appreciate you joining. Do you have any final words you wanted to say in finishing up?
No, thanks. I appreciate the time, Ryan, and thank you to everybody who's listening. Look, we are again focused on you know, driving the profitability and cash out of our business. We've done it for 11 quarters in a row. We're gonna you know, continue doing that. And we are clearly investing in new products and positioning us and for future revenue growth. So looking forward to seeing that manifest itself in our P&L over time.
Yeah. Excellent. Great, great work today, and keep it up.
Thank you.
All right.
Appreciate it.