So with that, thanks very much for joining Day One of the Wells Fargo TMT Summit. Michael Turrin, Software Analyst, here with the research team. Pleased to have Sam Wilson, CEO, and Kevin Kraus, CFO of 8x8, with us for the afternoon session. Thank you both for making the trip down the coast to sunny Southern California. Hope you had a good Thanksgiving.
Thank you.
Yeah.
Thank you. Thank you for having us also.
Excellent. We appreciate you joining. And I wanted to start off by giving you a chance to level set the most recent quarter: the points of focus, the highlights, the takeaways, the questions you're fielding from investors afterwards. We can use that as a sort of starting point for the conversation.
Yeah. So key points last quarter, right? Number one is new product growth, 60% year-over-year. So as I think most investors know, we've been on a journey for the last couple of years. So let me just set context real quick before I start throwing numbers around. Two years ago, we made a fundamental pivot to the company. Two, two and a half years ago, we made a pivot to the company, focused on customer engagement, etc. And as part of that, we cut and did a layoff and invested the money in balance sheet improvement, in customer retention, and in new product innovation. So now let's fast forward two and a half years later and say, "Okay, how does that look at?" We've seen a significant increase in customer retention.
We've paid off a third of our debt, and we refinanced a large part of it thanks to the guys at Wells Fargo. So thank you, thank you, thank you. And we now see the last piece of that puzzle, which is the product-market fit of our innovation spending. So we significantly doubled, tripled, quadrupled, depending on how you want to measure it, the amount of money we were spending on R&D innovating software products around business communications. We're now seeing 60% growth in those new products. We're seeing further product adoption of those products. And so that's kind of the last puzzle piece. And so if you think about it, we've now gotten to the region, and I think this is part of the reason the stock rallied post the earnings call, is we are now turning around investing back in go-to-market capacity.
If you think about what are the signals you use to invest, the signal you want is you invest in innovation, you seek product-market fit, and then you invest in sales capacity or go-to-market capacity. And that's really what we started two quarters ago. We've seen those leading indicators. So that's one big piece on the strategic portion of where the company is. The second big piece is we bought a company called Fuze three years ago. When we bought it, it was about $110 million of ARR. We made the conscious decision to basically melt it, for lack of a better word. I was trying to find something a little more politically correct than I can. But we removed all sales and marketing from it, and we've been migrating the customers over to our platform.
If you look at Core 8x8, because of the things that I mentioned earlier, Core 8x8 ex-Fuze is up revenue growth on a quarter-over-quarter year-on-year basis. Core 8x8's growing, and we are about, I want to say, I'm hoping three quarters away. Our plan is to shut down the Fuze platform on December 31st, 2025, so at the end of next calendar year. But somewhere mid-year, we should have dispositioned all the customers. We're down to about 200 customers plus or minus left, and we're busy migrating the customers over it. When we migrate them, the retention rates go up, the NRR goes up, everything sort of works. Sometime next calendar year, we should start to show year-over-year revenue growth again. I'm going to take a step back, and sorry for the long-winded answer, okay.
But one piece I think that everybody needs to understand is in the act of what we've done the last three years, we invest in innovation, we invest in customer retention, we invest in fixing the balance sheet. Our peak-to-trough revenue is only down 3.5. Right? So we've seen a very small decline because our lack of new sales or new bookings because we cut sales and marketing has been offset by a radical improvement in customer satisfaction and customer retention. This becomes incredibly important because my belief was that is a foundational condition to becoming a multi-product company. Right? If you don't have happy customers, you can't sell multiple products. And if you look at our top 20 customers now, they average 3.5 products. So that innovation is two products that we sold a couple of years ago to nine products that we sell today. And that's the journey we're on. And last quarter was really that people, I think, are starting to feel like we've turned. We're not out of the woods yet, but we're past the bottom.
Is there commonality in the three and a half product footprint across the product? Is there either a common land and expand mechanism or a common subset that you see most often within that cohort?
So usually the products they start with are unified communications and contact center. So one or the other combined. Add-on professional services is incredibly popular. So we get a lot of add-on professional services, which is great because I know the street doesn't like the multiple professional services, but the best analogy I can give you is an F1 racing car. It always runs flawlessly if you have a great pit crew. Right? So our retention rate on customers that have add-on professional services is significantly higher than customers who try to go it alone. And so it's a net positive.
My last count was 17 of the top 20 have add-on professional services.
Add-on professional services. And then the other one would be the bots. So voice bot, chat bot. And then some of the new CPaaS products and some of the other stuff, they're still pretty much in beta or emerging out. But the other one would be the bots, voice bot, chat bot, those things.
Okay. I want to give you a chance to just touch on some of the rebranding that's out there as well and how much of that was tied into what you're saying and just kind of the evolution coming off the earnings report. But over the past couple of weeks, we've seen some new marketing message come out from 8x8. So I'd just love for you to also level set the message there.
Yeah. So if you go back to when I joined the company in 2017, right, our tagline back then was voice, video, and chat for employee collaboration. Right? Well, today that's owned by Microsoft and Zoom. So the journey we were on two years ago, three years ago was to pivot away. And there's a big secular trend that I think probably people over at this conference would agree is the case, but we first picked up in 2020, 2021. And if it involves the pandemic, I don't know. I'm not that smart. But we started to pick up that corporations cared as much about customer retention as they did customer acquisition. And this is a fundamental change. Salesforce founded in 1999. I'm a Silicon Valley guy. So 1999 to 2020, to me, was all about customer acquisition: marketing automation systems, global payment systems, e-commerce systems, CRM systems, etc.
This is all about acquiring customers. Meanwhile, everyone was taking their contact centers, moving them to the Philippines, moving them to India, stripping out the costs, reducing customer satisfaction, stripping out the costs, stripping out the costs. PricewaterhouseCoopers did a survey in 2018, 2019, I forget, 18,000 global consumers, and I use this all the time when I speak at industry events. One in three consumers will leave a brand they love after one bad customer support experience, and see, it's funny, everybody when I say that, it's like everybody nods their head. Well, of course, but I mean, we have money managers in the room who run mutual funds, who have contact centers, who have—I mean, you'll lose your investor, the math says, after a third, after one bad customer experience, and I love the question that PricewaterhouseCoopers asked because it was a brand they love.
75%-80% will leave after two bad customer support experiences. So corporate America started to figure out, and corporate world is starting to figure out that acquiring customers but bleeding them out the bottom through bad customer support, bad experiences, bad things doesn't make sense. It doesn't make sense. And so we see it because in 2022 and 2023, actual contact center spending in aggregate, total cloud, not cloud, whatever, so actually increased for the first time in 20 years. So for 20 years, it was strip out cost, strip out cost, strip out cost. Wait a minute, 60% of customer engagement is through the contact center. And I like using the BLS numbers, Bureau of Labor Statistics. The average contact center person in the United States makes $18.31 an hour. The average hourly employee in the United States makes $33 an hour.
So if you lose and so what we have is a long-winded answer. We picked this up. We pivoted the company to ride this next wave. Zoom and Microsoft, we collaborate a lot with Microsoft. They handle video and chat. We have 500,000+ seats of Teams integrated stuff. We work great with that stuff. We're a Microsoft-certified contact center. We do all kinds of stuff with those guys. But we're really focused on building a set of tools and capabilities for customers to engage with their customers. That's where we're going.
So when we think about just the ways that you differentiate in market, there's historically been the portfolio of solutions. The lines are blurring. The market message has gotten noisier. Right? Because Zoom's telling you they can do contact center, and every vendor is sort of moving into different areas than their core expertise might have started from. So when you're in market and you're communicating your differentiation to customers, do you go after certain segments? Do you lead with what you're saying? Are there elements of your contact center solution? How do you convey this to the market?
That's a really good question. It's a really good question. And it's a really fundamental question about how you think about technology and positioning technology in the marketplace. I believe greatly that most tech companies get this wrong. So if you want to say this is arrogance on my part, guilty as charged. But technology companies have a tendency to talk too much about themselves and not enough about their customers. And so the way we are trying to go to market is by marketing business outcomes. So if you look at what technology companies like to do, they like to market storage and AI and DevOps and CRM systems or whatever the case may be. What we're marketing is things like remote fix.
If you buy these set of tools and this package, you can reduce the number of truck rolls in your field service business. Appointment management for healthcare. If you buy this set of tools and capabilities, self-service scheduling, automatic amendments to medical records, SMS messaging reminders, those kinds of things, you will get a higher utilization of your doctors, which will improve your business. I mean, I think I got 10 more off the top of my head.
So just thinking about this from how you prioritize both the go-to-market investments you've had, but also the sort of increase in capacity, does it lead you towards more verticalization?
Yes. But I want to be clear. It's not necessarily verticalization like we traditionally think about verticalization around healthcare, financial services, etc. If you think about the concept of appointment management, that's healthcare, field service, restaurants, retail, all kinds of things. So it's about verticalization, but it's around verticalization in a given use case.
You're saying solutions. I get what you're saying.
Okay. Yeah. Because I have a hard time. By the way, I have a hard time. I'm an engineer by training. I have a hard time getting the words out that make sense, but what's amazing to me is when we walk into a field service company and we say, "Do you want video elevation in your contact center?" They're like, "No," and by the way, what exactly is a contact center? But when we say, if we walk in and say, "Would you like a 35% reduction in the number of truck rolls?" They're like, "Yeah. I don't believe you. Call this customer." That's what they got. Holy moly, that's what we want, and what's interesting is, so you asked me about how we differentiate. What we're trying to differentiate is that because we have it done.
It's a package ready to go. Others will say, "Well, you can do that using my product. You just need to buy my Zoom video conferencing, but then you need to go to Twilio to get SMS messaging, and you need to go to these other guys to get Epic integration and whatever." You put it together. We're going to sell you video conferencing, but not, and I don't think that's the right way to go. I think we can be a smaller, more nimble company, but if we actually target the business outcome a company is trying to achieve, we'll be more successful.
I want to touch on the AI discussion because we should. You gave some metrics on the most recent earnings call around some of the uptake that you're seeing. There are a lot of questions in the market around where AI monetization forms. In some of your markets, there are questions around seats. And so maybe first just start with the product efforts, the stats that you're seeing in terms of uptake, and then I'd be curious your view on is there enough added value that even if contact center agent seats are similar, you capture more value by adding the [indiscernible].
Okay. So let me handle it. So the way we view AI is we view it in two buckets. We view bucket number one is core foundational technologies: transcription, translation, summarization, etc. We own those technologies. We built them. They're available in our product extensively. I can have a contact center agent speak 32 languages, which before I couldn't. Now with the emergence of AI technologies, that's our technology. Now, are we leveraging OpenAI in that case? Yes. Summarization, we use a lot of Llama 4 from Meta. We've got various bits and pieces, but those are all built into our platform. They're ours, etc. We also have some partnerships with some best-in-breed AI providers for some of the voice bots and chat bots and some of the other pieces. They're just better at it than we are. And so what we focus on is integrating with those best-in-breed providers.
So we have AI throughout the product overall. I would say I am not scared of AI at all. And I know that sounds pejorative because we've become a non-product company. And so what I like about AI is when we have a large customer in the Midwest of the United States. They're in seven states. They've got tens of thousands of seats. And they do cement and aggregates and rocks and other cool metal real stuff you can touch. And they're like, "Hey, can we use this in our business? How do we use this in our business? We understand cement and rocks and building skyscrapers and bridges. We don't know anything about bots. Can you help us with this?" That's awesome. That's my place in the universe. Come in, be a strategic partner to that company. And I'm like, "Yeah. Do you schedule deliveries?" Yes.
How do you change schedules?" "Oh, it's a real problem. You got a call, and the person's never there, and it's a call back, and then the cement expires, and we have to dump it." And I'm like, "Why don't you just put a bot and put all this in place and have AI do it all?" And they're like, "Sure. How do we do that?" That's our target customer. So it's interesting. And I don't mean this negatively, but if Wells Fargo walked in the front door of 8x8, I'd be like, "You're in the wrong building." Right? Wells is so big, or Bank of America, United Airlines is so big. You can afford to have a telecom team or a voice bot team of 20 experts who build these things for the various departments inside of Wells Fargo. But if you're an average 10,000-person company or 7,000-person company, you don't have a 10 or 20-person team that's helping do these things. That's where we come in.
So I guess if I think about the communications market in totality, it's very horizontal. Right? In some way, shape, or form, every business has some level of need, whether it's UC .
That's why I joined this industry for mobile security to begin with, was everybody needs it.
Right. Right. And so if I give you more go-to-market investment spend, what do you focus it towards, given that sort of open-ended?
Today? This week?
Yeah.
Sales reps, BDRs, and ABM marketing.
You taking notes, Kevin?
Yeah.
He limits the amount I can spend on all those areas. Right? But it takes us six to nine months to ramp a sales rep. It takes us six months to ramp an SDR BDR. And top of funnel, I mean, the part that's a little bit of where we've transitioned the company in so many different ways, is five years ago a vast majority of our leads came from Google or LinkedIn or whatever the case may be, these mid-funnel pay-per-click type of activities. And the costs of those have increased 4x and 5x over the last four or five years. And I think it's one of the mistakes the company made under previous administrations was not evolving to the changes in the marketplace. So today, you have to do much more top-of-funnel account-based marketing, brand-based marketing to drive efficiencies throughout your business.
Historically, the channel has been a significant portion of what informs decision-making in the communications market. Is that still the case from your perspective? How do you delineate direct versus leveraging the channel?
So we really seek a balanced, I'm going to change the word slightly, distribution model. So I think about distribution as there's referral. So there can be agents or IT specialists or whatever the case may be as a referral model. There's a VAR model, which we've been investing in. And there is a direct model. And direct model is pretty prevalent when we get to larger companies. Larger companies are like, "Yeah, thank you very much. I want to talk to the person that built the software. Can we talk to answer my questions." And so what we have to have is a balanced model. Sometimes we haven't always been balanced in the past. And we're very focused on making sure that we enable all those channels for maximum success. So that's been a lot of where some of our, and I would say we're good, not great at that right now.
That's one of the areas we are trying to get better at, is that true channel enablement. Because in this world of AI, I mean, think about it. When you sell through a channel today in a world of AI that's changing so fast, if the channel partner has the relationship with the end customer and you're trying to talk to the end customer, it's really hard. Tell them this is, oh no, that changed. Tell them, "Oh, that changed two weeks ago." This is where the new products are. This is what's happening. That's kind of one of the areas we have to get better at.
I mean, another just observation across the market, and I think this also is compatible with why selling more products makes sense, is we're seeing more aggressive willingness to discount from certain vendors in certain markets. How do you decide whether to respond to that or not?
That's a really good question. So yes, either because of the overcapitalization of 2019 to 2022 or because people have new products and they're desperate to put some vanity numbers out to Wall Street or whatever the case may be, yes, we see price discounting. I would say if we go into a customer and we see a strategic benefit to being aggressive, we'll be aggressive. What strategic benefit? If I can sell them bots, I can sell them SMS messaging, they want to buy add-on professional services, they've got three other divisions we can go get, something that drives me. If it's just a straight race to the bottom, you can have it. I know there are vendors that do this that have this land-grab mentality, but it's not beneficial.
I will tell you, my experience has been the companies that don't sell their products at a reasonable margin end up paying for it somewhere. That somewhere is either in support or innovation. That's the two places you can cut. What ends up happening is they don't support the products well or they don't add the future feature sets that you need to add. So, I mean, our average deal with any sort of enterprise customer is three years. When I go in and talk to a customer, I'm like, "Look, you're signing up. We're getting married here. We're not dating. We're in the marriage territory." Right? So you want to make sure that when you have a conversation with me, it's not, "What are we delivering on day one?" That's a must-have.
"What are we delivering in six months? What are we delivering in 12 months? What are we delivering in 24 months?" Let's have that conversation, and I'll tell you, that's where the multi-product strategy starts to really expand. We recently won a very large retailer. Awesome. We landed with UC. A quarter later, we're adding contact center. Next quarter, we're adding CPaaS. Right? We won the UC because they saw a year-long roadmap to how they could fundamentally change their business.
Any more nuggets on how that discovery process went? Did you have a sense that they were going to go that route when they initially?
No. No. When the first conversation on UC was like, "Hey, there's a bunch of you guys in the Gartner Magic Quadrant. Could you all line up like you're at the police station? Turn to the right, turn to the left." And we said, "Okay. Yes, we'll do that. We'll have that conversation. We're doing 59 countries, etc ." But can we just—what are you trying to do with your business? Where are you going? What do you want to do? And I don't know. So in this situation, one of the frequent questions they get is, "Where's my package?" Whatever. We can automate all that for you. "What do you mean you can automate all that?" "We can automate. We already have that done.
We have 20 other retailers. We'll just grab you their solution. They can do it in 15 minutes." Right? Or, "Do you have appointments?" Or, "What about reminders for holidays or checkups or any of these kinds of things?" And they're like, "You can do that?" And that's really what differentiated us. We have a large home furnishings retailer that bought five products on day one. And it's because they want to fundamentally transform their customer experience.
I think asking the right questions is what Sam is saying. When you do the selling, there's plenty of deals where you'll find out that it's a one-product deal and you start making money in month 33 of month 36. So we don't race to the bottom on those. So I think the solution to selling for multi-product is.
We have a Fortune 50 insurance company. We meet with them quarterly, and they're giving us where they would like to change the insurance business out five years and saying, "Can you help us go on this journey with us?", and we're like, "Wow. Sure." Some big thoughts in there.
I wanted to use this to also, and maybe Kevin, you can chime in on this part too, but just on the margin and just the focus on free cash flow. And you mentioned just kind of cleaning up the financial profile during this period of transition. Doing that in an environment where there are these kind of competitive factors. Right? I think there are concerns from investors just around margin structures within certain elements of the industry because of kind of the pricing. And what you're saying makes sense as a way to combat that, adding additional products and bringing the broader portfolio to market. But maybe you can talk about the margin focus and how you're able to kind of keep margin progression while investing into capacity and attempting to re-accelerate growth.
Let me start. You can start.
Okay, so let me just warn you. We would expect margins to go down slightly in the short- term as we add sales capacity. It takes six-to-nine months to get sales capacity to ramp to productivity, right? So there should be. We are adding more employees right now, and so we'll see some small, but remember, we've already paid off.
Yeah. I would level set with the focus that you've put in on.
Well, we also overshot last year. Right? So we spiked operating margins to 15%, and we were trying for like 10%-12%. So we overshot on that side. And so we took a little too much capacity out. So we're adding a little bit back in. The idea is we want to drive enough to get growth re-accelerated, which we have a clear line of sight to, and to continue to allocate capital towards debt repayments and potentially M&A or stock buybacks or any of the other things that make logical sense. No more going back to the bad old days of burning money all over the place.
Yeah. Basically, we have a lot more flexibility in what we can do as a company because of the things that we've done over the last two and a half years. The debt paydown has been fantastic. And we've got a good little cash machine going right now. So we have the flexibility to invest some of that back in the business, some of it pay back the debt, etc. So the urgency over that debt is not where it used to be a couple of years ago. So it's nice to have that flexibility.
Is it changing the priority list of capital allocation?
Sure. For two and a half years, debt paydown, debt paydown, debt paydown, and if you have any more money, can you pay down a little more debt? We've gone from whatever net debt of $450 to $250. We've gone from an EBITDA to net debt ratio of 6x- something to 2.5x. Our interest costs have declined by probably 50%-ish. So yeah, it's a little bit more like a traditional capital allocation model. What's the weighted average cost of capital? What makes the most sense? What's the risk-reward? Those kinds of things. And a lot less debt paydown, debt paydown. But look, our primary thing is still I'd like to pay off more debt. I get an instant return. I think it drives value to the equity holder. It just makes us more safe and secure. My perfect leverage ratio is zero. That's probably unrealistic. But clearly, getting net cash positive, I think, is a positive thing for us.
How do you think about M&A in the context of there are added features tied to bot and some of the AI capabilities you've talked about? We're talking about multi-product, and then multiples across the space have come in.
Okay. So I'm going to answer this question in two ways. Number one is, and I was not CEO the whole time, but the playbook, the textbook you get at business school says, "When your industry goes cyclically out of favor, you should use that multiple compression to go buy everything that isn't nailed down." But to do that, you've got to plan for downturns, which clearly this industry never planned for. And so what I would say from an M&A perspective is we are not in a rush to acquire. There's nothing we need. There is ac cretive M&A available to us. And so I think we're trying to think about, now that we're entering a realm of no longer purely balance sheet repair to a realm where there is ac creative M&A, let's be smart and selective if there's things that we find that make sense.
A lot of the AI stuff doesn't make sense. It's easier for my scrum teams build it in-house than it is to try to go buy it. I've known OpenAI since they were in stealth mode. We've known them for years. We know the guys at Facebook or Google or Amazon or we use obviously AWS, or we use a lot of Oracle, as everybody knows. So we have the same toolsets than any start-up would have. So that doesn't make sense to go acquire.
There's a lot out there. There's a lot of companies out there that are looking to get bought. It's just a matter of how realistic are they with their valuations?
Are you surprised you haven't seen more consolidation or Fuze-like? Because UC has always been, t here's been a couple in the Magic Quadrant and then a very long tail of fragmentation.
So the answer is, am I surprised? Yes and no. I'm surprised because the textbook says, "In an industry, go consolidate." I'm not surprised in the sense that we bought Fuze. So we did the largest deal in history and probably shocked our stock so shellacked by 50% in a short amount of time, even as it's turned out to be successful. So I think for some reason in our industry, there is some belief that if you acquire and consolidate, it's not a positive. I don't know.
It's tough to parse because there's so much this COVID phenomenon matter where there's so many.
I'll tell you, cloud-to-cloud migration ain't easy. It's not easy. This is not a. I mean, it's easier if you buy a cloud product that's a completely separate product and you just keep it on their platform. But when you are running, and it doesn't make any sense to run two platforms because then all your R&D and innovation is doubled as everything is doubled, right? Your cost, you get no synergies. So you've got to migrate them. It's not as easy as people think. Look, we've done two major migrations in the last five, six years. I would say we're the leading experts in the entire world at doing cloud-to-cloud UC migrations, and they're hard.
Okay. We have just a few minutes left. I think you did a good job early on in just kind of setting the stage for where the company is and what you're building towards. But you're in a bit of a different fiscal year, so it's not the same planning cycle you're going through that some others are. But if we think about your priorities and measures for success over the next three years, what are the key areas you're focused in on? What would you expect?
I want to get the high single-digit revenue growth, double-digit operating margins, and I want to see a significant increase in cash from operations per share just for investors' benefits. Cash from operations per share, even though I'm not legally allowed to guide that metric by SEC rules, is by far our North Star metric. Right? So if you look at, for example, last quarter, our stock-based comp was 5% of revenue, while most of my peer group is at 15%-20% of revenue, 5% of revenue. Why? Because it's interesting. Most employees, I will tell you this, most employees do not value equity compensation. The reason tech companies grant so much equity is because Wall Street backs it out as a non-GAAP reconciling item and makes their numbers look better. But it's actually not valued.
If you actually take a step back and you say, "Hey, non-GAAP operating margins are not the true measure of a company, but actual cash from operations generation per share is the true measure of a company," you would look at companies significantly differently. I believe that is the true measure of a company. That is number one on my 10 commandments is cash from operations per share. And that's what we really focus on. And so if you look at what we really, more than anything, I want to continue to drive at the company is where I'd like to get to $0.50 EPS probably next year, two or three. We're at $0.40 now, rough and tough. But really, I'd like to continue to drive cash from operations per share.
Just to follow on the path to high single-digit revenue growth, how do you think about kind of the stacking, the algorithm, and the types of?
So what we'll do is we'll get Fuze will eventually peel off. So we'll be in the low to mid-single digits just on a core organic basis. And then as the new products drive more multi-products, we'll see a higher GRR and a higher NRR, which will then in turn lift another couple of percentage points of growth on top of that.
Sounds like you've been thinking about it.
Every day. Every day.
It's a good note to close on.
Thank you.
Sam, Kevin, appreciate you making time.
Thank you. Thanks so much for the great questions.
Oh, happy to.
Thank you.