All right, perfect. Welcome, everybody. I'm going to read some disclosures first. 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. I appreciate it.
All right. You know, 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. Yeah, we've been on a very deliberate transformation journey at 8x8. You know, a couple of years ago, actually, we just had the third anniversary of Fuze in January when we closed the deal. Three years ago, we bought Fuze, and it's been a tremendous success for us. It 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. Very good opportunity there. We were able to really generate a lot more financial flexibility in the company as a result of doing this acquisition. You know, it's been a wonderful, wonderful time to, you know, 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 since August of 2022. 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. What is 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 multi-product strategy within the company. We've invested a lot in our products. 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 two, three years, 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. Our profitability in the company and our cash flow generation has gone up quite substantially. I just want to frame the concept of growth within that context.
You know, returning to revenue growth, in the near term, it would really rely a lot on our, you know, closing out the Fuze upgrades to the 8x8 platform, which we've set a date for that as December 31, 2025. At that point, you know, we find when the Fuze customers are migrated over, they're happy, they stick with us, and there's a little bit of churn that happens in that. That causes a little bit of a revenue headwind for us. On the other side of the coin, it's our re-acceleration of revenue driven by the adoption of our multi-product strategy. 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. We're able to use our deployment teams to deploy that across customers of many different sizes, even though we, you know, tend to focus on the small to medium enterprise-sized customers. You know, our technologies can be used for any size customer. Doing those types of things, we, you know, expect that to help us re-accelerate our growth. There are pockets of growth acceleration at 8x8. You know, 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.
We have really good pockets of growth, a bit of a Fuze headwind, and near-term headwind we had, you know, for FX, for example, which we articulated in our call. We do have good opportunities to exploit what we have to deliver in terms of a multi-product solution.
Got it. You know, 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 know, you gave some examples just now of where you've started to see kind of on the win rate side. Just how is that impacting the rest of the sales cycle, just trying to sell that platform instead?
Yeah, I think for us, what we are doing, what we're focusing on, is selling customer outcomes. For us, it's using our full suite of offering to develop a, you know, 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, you know, through, say, SecurePay or something like that, using that AI technology, you know, through our technology partner ecosystem. Really proving out, like, focusing on a customer solution. That is, you know, we're also deploying AI tools internally to help with that in terms of, like, your sales cycle question and deal size. I think that, you know, our deal size is roughly the same.
We look at our multi-product solution sales as, you know, customers with three or more products have deal sizes that are roughly 3x what a two-product sale would be. Those are the kinds of things that we do to help deal size. I think that really developing use cases around ROI and showing the result there or proving it out 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, has the target customer changed from what your customer was before?
We started out historically in our company as, you know, a UCaaS-only type company. 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. That does not mean that our technologies cannot be deployed across any size customer. For us, you know, we have mentioned that we would target the small to medium-sized enterprises, but we have over 50,000 customers in the company, and we love all of our customers of all sizes. I think that, you know, we also need to, we do look at customers who, for example, there could be specialty markets, not specialty markets, but certain markets where maybe security or regulation is of paramount importance.
You see that in some of our U.K., like, you can have banking or healthcare-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. I would say that as we've broadened into a more, you know, a wider range of the product suite we can offer, it's moved up market a bit to small to medium-sized enterprises.
Okay. Is it that focus 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. We have a really great product delivery team and specialty professional services team. Actually, 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. 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 group of internal developers, like R&D developers. We can do that for them.
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. A lot of times when customers keep our services team in some degree engaged, say, through technical account management or something like that, that really helps. The multi-product, which we would consider that a multi-product customer, if they're buying, you know, 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? You know, UCaaS maybe more historically used a lot of master agents. Just as you've expanded the platform, you know, as channels have changed, just how do you find the most effective go-to-market?
We have, you know, we've embraced a multi-channel strategy. Historically, to set the stage, historically had been, you know, an agency channel, like TSDs, formerly known as master agents, and yet sub-agents. What we've found for us to be most successful is to embrace all the channels. We're looking at, you know, we had direct business. We always had direct business. We had channel business, but 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. We have and continue to invest in a multi-channel strategy. Direct, agency, and VAR. I think that that obviously broadens the reach for us.
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. You know, 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.
Just even 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, you know, 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. There are techniques and strategies to do that with tools. We're working through that to help, you know, accelerate the deal cycle time and closure. 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 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, you know, a lower decline rate on payments, things like that. You can measure those things. 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, you know, 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, for us, the main thing is that any AI, whether it's any investment we make, it's an AI or otherwise, it has to have a very native feel to it. If there's something that naturally fits within our development efforts internally, we built it in, you know, we can build that in. We were actually first to really embrace, in my view, first to embrace outside best-of-breed solutions. 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 SecurePay or things like that, and then make it feel native.
If there's an opportunity to do that faster for the customer's benefit, then we'll go to our ecosystem, for example. If it's something that's more appropriately built in natively, we'll do that too. We do it both ways. I think for us, it's really a matter of what's the ROI going to be for us. The most important thing is that what's the customer experience going to be as a result of what we put onto the platform.
Got it. You know, 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, you know, what can you do to kind of exploit that more internationally?
Sure. You know, sometimes, and I guess there are examples where there could be competitive dynamics that are maybe more fierce, as you say, you know, for certain deals. I think that, you know, it can vary, you know, 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. 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 the attributes associated with reliability, scalability, security. That helps us in certain markets. It goes beyond price as a competitive lever. Again, I'll call out the fact that we can take UCaaS, CCaaS, and CPaaS altogether.
A lot of the AI technologies are leveraged through the use of the quality as well as the quantity of the data. If we, you know, 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. 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, perfect. Maybe just, you know, Teams obviously is a force in the market. Just how do you see Teams as an opportunity for you guys?
Sure. I think it's a great opportunity. We've always embraced Teams as an opportunity and as a partner. Like, we've never, as a company, never tried to find ways to take out Teams or to, you know, compete against Microsoft. You know, that is something that we did because we were focused on our customer's needs. We were able to, and very early on, adopt a posture with Microsoft Teams with, you know, voice solutions, okay? We update to contact center features that weren't natively embedded in Microsoft Teams. We have a lot of Microsoft Teams seats in our portfolio of business. I've called this out before publicly, not in this, but when we do Teams deals or deals that involve Teams, our attach rate on our contact center solution is much higher.
For us, focusing on the customer and what the customer wants has been really helpful for our ability to do other, you know, sell other things.
Okay, okay. That's helpful. All right, we'll get you back into your CFO sweet spot now in terms of the model.
You can continue to ask me customer and product questions if you want. I'll do my best to answer them.
Okay. So, turning to the model, you know, Fuze customers now only represent kind of approximately 5% of the service revenue. You know, you've 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 from here?
We're planning internally for it to wind down and not do the cliff part that you just mentioned, okay? Let me just be clear about that. Look, we've put a lot of effort into this. We've got a lot of resources, you know, outreach, working with the customers to make sure that they're, you know, kept in service, that they don't have any interruptions. And there, you know, there's, as we've said in our earnings calls, and you know, we do experience churn when that, you know, when we migrate. It's natural and normal. End of year, yes, we expect it to be through. That's going to be helpful into the following year, the back half of, say, 2026 when we don't have that headwind any longer. 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 2026 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. What we've said we would do is we would make certain investments in our business, particularly in the go-to-market area, continue investments in product. The operating non-GAAP operating profit will go down slightly. We said about a point, I think, in the last call. Our net would be roughly flat because we've been paying down our debt and our interest expense is going down very significantly. On a net basis, we, you know, should be fine there. Cash flow can vary for different things that happen in cash flow, but call that roughly in the same zip code on cash flow.
The investments themselves, you know, we do not go into too much detail on that, but there are notable investments, you know, related to pipeline, power, the conversion rates, focusing on late stage things to accelerate deal velocity. Also, I mentioned earlier, the investment in our multi-channel strategy. There are things that are happening there that we believe are going to, we are going to pilot them first. They cost money first, then we pilot them and then, you know, grow later, but the investment is upfront. Calling that out now. We are 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, you know, if it is in the case of a VAR, you know. Those are pretty significant things that we are doing to transform the business.
Okay, okay. You know, 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. You know, as I mentioned earlier, we've done a lot of debt paydown. I think it's close to $200 million, I think $190 plus million since August of 2022 that we've paid down, 35% of the debt at its peak. 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. You know, I look at 2026 as being another debt paydown year. Ultimately, you know, that will free up our ability to do other investments and, you know, potentially down the road, things like convert buyback or stock buyback type of activities.
You've made a number of kind of management hires of late. I think you had two that were announced either this week or last week and of a Chief Security Officer and a head of EMEA sales. Then you had made a kind of Chief Transition Officer hire, I think, last month or January. Just, you know, 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? You know, what was attractive about kind of these hires and are there kind of others you think you need?
Yeah, 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. 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. I think he's put a lot of great effort and energy into how we think about transforming our roles internally. We have deployed, you know, agents or say we'll make, say, a GPT for how to accelerate sales velocity.
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, you know, we leverage AI to do that. You can use this to gain insights into what the customer's buying behaviors are, what the buying signals are, any resistance signals, and use that as a training tool and as a just basic tool to accelerate a deal closure. There are so many opportunities. I'm using it, you know, in finance, for example, to do a few things. I am developing use cases for myself personally all the time. I think having that energy in the company and, you know, he's also involved in business applications. That's a really good marriage with the, you know, business acceleration combined with AI use inside the company.
That's a really special thing for us right now.
Okay, okay. That's helpful. You know, 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, yeah. A couple of years ago, we lowered the equity component and increased the cash component of employee compensation. We still issue equity. It's used in a variety of ways. Special performance awards. Executives are very invested in those share prices as well. We get equity grants. That is something that we've done internally for the employee population. It'll 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. I want to point out that 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.
Our per share metrics are very important to us. That is top of mind for us in terms of, you know, ultimately limiting share price increases in our company.
Okay. All right. Perfect. With that, I think that's a great place to stop. Kevin, thanks so much for being here today.
I appreciate being here. Thanks.