We can go and get kicked off. I'm sure people probably still feel a cheering in from the earlier keynote. I want to keep it on track today. You know, really happy to have Sam Wilson from 8x8 here with us today. I was telling Sam earlier, I always really enjoy speaking with him because a lot of executives, it's like buzzword bingo. You know, we do these fireside chats. There's not a lot of substance to it, but, you know, Sam always has great substance and insight to his answers. You know, Sam, thank you again for coming out.
Please, Michael, thank you for having me. Thank you. And thank you to Bank of America, where I worked many, many years ago for having me here. I always appreciate it greatly.
Great. I wanted to start with, you know, you just recently reported earnings and, you know, obviously not a full recap, but maybe hit top of the waves, some of the key points, you know, from the recent earnings and the messaging.
All right. So key things we hit, you know, hit our guidance numbers in general, gave out guidance for fiscal 2025, which is our, or sorry, fiscal 2026, 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, you know, 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 a third plus of my business, did fine and actually even better than expected. It was really driven by the fact that the U.S. market was a little bit rough around the edges.
In Q&A, I was asked more about that and just stated that, you know, we definitely see in the 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, you know, order rates and those kinds of things also.
Okay. Great, great overview. You know, I normally save the kind of more pointed questions for the end, but I think, you know, 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've seen kind of high single digits around 8%, you know, in a couple of years in the top line and, you know, stabilizing the business even this year as Fuze continues to run off and you end of life that platform with where your stock is trading today, right? And anyone can see the free cash flow yield. You know, I think it's 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.
Yep.
Right? So, you know, taking those, you know, two separate points, returning mid-step 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 in the business?
All right. I'm going to break this up into three pieces. First, I'm going to start at the big picture, which is the industry itself, just real quickly, right? Voice communications is actually celebrating its 150th anniversary right now. I'm pretty sure based on all the phone calls your 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. The trends that we're on around omnichannel and more channel social, WhatsApp, SMS, et cetera, that fragmentation continues, is growing. We provide software that allows businesses to manage that, run that, use that along with employee collaboration, all those things. That market isn't going away. Just at a macro perspective, we're not going away. If you look at our business, I want to break it into two pieces.
There's the business without Fuze. A couple of years ago, we bought Fuze. It was a $240 million-$250 million transaction. We've generated more cash flow than that. 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. Just the core 8x8 business, we grew 4.6% on a year-to-year basis last quarter in line with industry peers, et cetera. We saw accelerating quarter on quarter and year-on-year growth. We saw acceleration. That acceleration is driven by new products. Now let me sort of, I give you the bottom line up front. Let me take a step back. When we bought Fuze in 2023, we did a couple of things.
We cut sales and marketing capacity tremendously, driving free cash flow generation that brought the growth rate of the company down. We acquired Fuze. We started melting that ice cube of running it for cash flow. We took all that cash flow and we invested in three things: debt retirement, because the company was over-levered, it was at six and seven times EBITDA, right? Debt retirement. We drove it in innovation and we put it into customer retention. In the three years since then, what have we seen? We have reduced debt by 40%, roughly. I am a CEO, I round a little bit to big debt numbers, like 38 point something percent or something. We have increased innovation, new products. We have gone from two products we sell to 10 product lines we sell. That is what is causing the core business to grow year-to-year and accelerate.
Number three is we've seen a four- or five-point increase in gross retention, which is also after a year or two causes the core business to grow. We melted Fuze to drive the core business where we needed it. I think what you're going to see is at the end of this year, we'll have shut down the Fuze platform, the end of this calendar year, we'll have shut down the Fuze platform. That growth rate, that high, that mid-single digits, high single digits growth rate will start to shine through. 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 Forrester or IDC or Gartner or whoever. It's just a conglomeration of what the industry should be growing at and what we should be growing at as a company is high single digits. I absolutely believe we're on track for that.
Okay. That's great. That's a great way to begin. You know, and you mentioned that you generated more cash from the Fuze deal than you paid for the asset, right?
Yeah.
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?
Okay. 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. 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. We are a software company wrapped in telecom. That's what we are. There is 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.
In a modern cloud world, I can deliver voice services or data services effectively everywhere. I have 220 carrier interconnections at 8x8. I cover a vast majority of the entire world. I have users in 160 countries, et cetera. I think there is still a space in this market for a global telecom company. I think the potential of that global telecom company is exceptionally large. As more and more businesses globalize every day, there is more and more need to go to a single vendor that can supply them business communications globally.
Maybe I'm running the wrong direction with this, but you mentioned kind of regional, and it made me think of the old RLEC model in telecom, which was the, you know, 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, you know, more towards traditional telecom asset-based telecom? Is that running too far with it?
I don't think I want to own physical infrastructure. I think that's a, 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&T and Comcast and those people, they all talk about going to layer seven. I'm going to sort of geek out a little bit to talk about being application providers, but they're not. They're physical infrastructure providers. They're one, two 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. What you're going to see is their business is really going to be that physical infrastructure. Our business is going to be running the applications, the business communications on top of that.
With AI coming or here, depending on which person you're going to hear today, that becomes even more important. 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. There are so many of these regional players that are stuck subscale that we should begin to actively do that. 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. Roll up makes total sense in the industry right now.
Absolutely. That's what, and the funny part is we would have started earlier if we could just get the debt down faster, right? 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.
Do you envision these hypothetical transactions being cash transactions or, you know, is your equity a currency that you think you could use and will be accepted?
My equity is highly undervalued and it's, I'm like Warren Buffett. I would never use it for a transaction unless I absolutely had 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. I asked Vlad from RingCentral's question yesterday.
I know that guy.
Yeah.
Oh, wait a minute. He's the absent CEO of my competitor.
I can't comment. I asked him this question yesterday. I think it's fair game. You know, I pointed out that his stock is also undervalued in my opinion and him being a relatively large shareholder, would, you know, would he consider adding value through, you know, LBO, MBO, because in my view, these businesses could actually handle more leverage than what you're driving towards. You could lever it up, you could drive it more for cash and obviously generate a tremendous amount of value. Is that something that you've evaluated, you know, with your board or yourself?
Yes. Let me be super clear. There is no misunderstanding. My board and I evaluate capital allocation, capital structure, every board meeting. It is something that is discussed. There is actually a strategic investment committee or a capital allocation committee of the board. For any lawyers listening, we have dotted i's and crossed t's and have minutes all over the place. 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 am a little old school, I came to Silicon Valley in 1994 originally, is, you know, 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.
I think our optimal leverage ratio is zero. I do not know if we will get there anytime soon, but a low leverage ratio net cash is where we should be. I know from an MBA business school perspective, that is probably not the right level, but I think from running an innovation-driven technology company, that is 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. 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 Contact Center, which quite frankly, you know, goes against a lot of the results companies are reporting in Contact Center, 8x8 included. You know, so maybe, you know, first touch on that, but then second, where you have most success competing in Contact Center and why you're winning.
Sure. Okay. That's a great question. Let me talk about the existential crisis first. I don't know what you're going to hear from other executives, but I will tell you that I do believe technology replaces labor over time. You know, 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. 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 as 2019, we hired a bunch of people from IBM Watson. Like we're six years, seven 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. 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, is that the model's 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.
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 eight hours or 10 hours or 12 hours in your case. I mean, you can't, like an AI can, like I can just replicate. If I have one agent and it's overloaded, I can put six more and I can throw more compute at it. Those costs are going to go up. 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 as it drives off a cliff. I just want to assure every investor out there that that is completely false and we've been in this game for a while and we'll continue to be at this game.
Taking that one step lower, you were talking about the Contact Center in particular, right? 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. Let's use United Airlines. I think last time I talked to United Airlines, I think they have 30,000 concurrent agents any given day on staff, right? 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. 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 United Airlines minus all the developers and the customization and everything else.
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 do today. It is a platform for the future with AI because we're capturing all the data, all the interaction data. 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. If you've got a book or whatever, you know, they crawl the internet, they crawl your intranet in a RAG model, et cetera. The future is going to be, what about all the voice communications? What about all the chat communications? What about that real-time information?
You know, don't tell me this customer had a problem six 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 to tap into real-time communications. The only way to do that is have a platform that's capturing all the real-time communications. That's what we do. It's actually differentiated from our competitors. We are a Contact Center company. We are a UCaaS company. We are a CPaaS company. We are a business communications company. 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 four years from now, they'll realize that, oh 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. I think we're way in front of that trend. What we figured out in the last three or four 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. What we now have is the perfect balance between we build it in-house or we partner for pieces. It is a very long-winded answer, but you gave me a multi-part question.
No, no. It was a great answer. I think another part of the question was, you know, specifically the market that you're targeting, right? There's obviously a large enterprise.
I want to be there's small business. Like the way I say it, I'll say it is 250 employees to 20,000 employees. That's generally 25 Contact Center agents to 2,000 concurrent Contact Center agents, kind of rough ballpark. I'm generally looking for a company that doesn't have developers. 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 Contact Center in general, I mean, there's been this projection for years whether it's IDC or others that, you know, industry would grow, you know, low double digits, mid-teens maybe. Doesn't seem to be hitting that mark. It seems like still a lot of the industry is still in the old on-prem model as well, right? Which could just be, you know, based on a number of factors. 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 customers?
It's a fantastic question and I'm probably going to give you a terrible answer.
Thank you.
I'm not sure there is a tipping point because the notion of a tipping point is really from Jeffrey Moore's technology adoption curve, right? You know, you go into the chasm, you have the bowling alley, and then you sort of get to the tornado. The notion behind that is it's a new technology, a new application, a new thing. 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 email, you're talking about 50 or 60 years old. 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 cost-effective, et cetera.
We're not going to necessarily see that we've reached a magic point, the light bulbs go off, et cetera, and off to the races we go. 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 10 times more trying to get your on-prem crapola to be AI ready to go than it would just be to rip it all out and replace it with us or one of our competitors, right? I think the magic to me will be, and phase one 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 how to get some agent assist to work on the side and whatever.
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? Let's go back to 1998. I'll give you two, I'll give you the light bulb going off for me. 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. That actually led to Cloudflare and AWS and everything else, et cetera, right? Number two 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. The companies that dragged their feet struggled and struggled and struggled.
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. The ones that stick to their legacy on-prem system forever, it will cause their business to have problems. Then they'll invest.
You know, your comment about technology progression and, you know, telecom being 150 years old, made me think back that, you know, in the late 1990s, traditional telecom was still dominant. There were a lot of competitors. You know, obviously, you know, then you had VoIP in the early 2000s. That was a disruptive technology, created, you know, new disruptive companies, you know, like 8x8 and RingCentral and others, you know, started providing, we call it cloud-based communications today, but it's 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 new solution where, you know, we're, you know, a company that once, you know, that once Contact Center AI agents can just buy from somebody else very easily at a much lower cost, right? It's going to undermine the industry.
Totally could happen. 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 flat at Clayton Christensen's innovator's dilemma and refused 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 ain'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. The answer is we will only not survive as a company if we are stupid. You can read the rest of that sentence. But if we're stupid, we deserve to die.
If we're not stupid, we deserve to continue to move forward. I, we spend a lot of time as a management team and as a company making sure that we are not stupid.
It's Darwinism.
Sure, but isn't that business? I mean, look, I mean, look, rule number one, don't take your company private, lever it to the moon and cut all your R&D spending, Mr. Avaya, right? I mean, that has consequences.
You're upset at my bankers now.
I'm not sure there's any fees left to get from that thing.
We have about five minutes left and I, you know, you're always great with the commentary just kind of on the industry and how you're competing and others. Can you give me your perspective about, you know, maybe who you worry about most competitively, maybe who you worry about least where, you know, you're eating their lunch, you're doing really well. You did mention earlier, and I want to come back to it, just, you know, your combination of assets, right? We have, you have UCaaS, you have CPaaS, you have CCaaS, you know, as well. Maybe that position, I know it's kind of a multi-pronged part question, but broader just kind of who do you worry about, who do you not worry about, and then how those assets are 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. You know, 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, you know, a Salesforce, a 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 package software, but it may be make a phone call, get a voicemail, receive things.
You could break apart our service into a pure consumption-based software. I think for a whole host of people, they will never go that route. There are going to be the Ubers of the world that want to have voice masking, the technology we sell frequently, or those kinds of things. I think what you're going to see is you're going to see a bifurcation. I still think globally, let's not use Silicon Valley, California as a representation of the globe, right? A third of our business is outside the U.S. 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.
Just kind of to summarize as well, you know, what you were talking about is that, you know, you do believe you have direct line of sight to improve revenue and growth. This is not an aspiration. It's actually something you believe you can project.
If Excel is completely lying and I'm completely delusional, then no, but I think both those things are absolutely true. Yes. We have direct line of sight to continued growth.
Okay. You know, competitively, 8x8 is well positioned and continues to do well in terms of market share gains, getting more traction in CCaaS. The CPaaS business, which was probably left for dead four or five years ago, has actually been improving, right? You are expanding, I believe, the geographic footprint where you are competing in that business. The third piece, just to come back to it, is that there is a massive market disconnect with the valuation that they are putting on 8x8 and those first two points.
Yes. 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. AI is a trend that you can sell more of in the future. You enable your mid-market customers to, you know, get AI results and self-service and those kinds of things. You just have a label that does not work. I think the answer is yes. I think we are well positioned for the future. I would like to spend more on R&D at some point in the future. I would like to do some M&A and get some scale in the business over the future. I have no concerns that we will not show growth, continue to generate cash flow over a multi-year time period and provide a good return to investors.
Do you feel constrained in the amount of capital that you can spend on R&D? Is there a fundamental disadvantage for 8x8 that you can't spend more?
Look, I'm a Silicon Valley tech guy. Like all the money in the world is not enough for R&D, right? I mean, I always have another project and I always have a CPO telling me he's 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. Business is all about trade-offs and priorities. Yeah, 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.
I should assume that strategically you'll continue to do, I like to call it R&D through partnership, right? Leveraging others' R&D to create or improve products.
Absolutely. We're spending our money on platform R&D. Platform innovation. Part of that is the ability to plug in point products and get a complete solution. We'll partner for a point product to put in so that we can offer a platform which then gives a complete solution. 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.
Once again, thank you for having us.
Of course. Thank you. That was great, Sam. Thank you.