All right, perfect, everybody. I'm going to start with a disclosure and then we'll get into introductions and everything else.
Buyer beware .
Yes, exactly. 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 head up communication software here at Morgan Stanley. We're delighted to have 8x8. Sam Wilson, CEO. Kevin Kraus, CFO. Pleasure to have you guys here today.
Thank you as always for having us.
Thank you. We're getting later in the afternoon, so people are more caffeinated, but we're going to get there. So hopefully everybody took their afternoon breaks. So, Sam, your most recent quarter marked the anniversary of the official launch of 8x8's innovation-led strategy.
Yes.
What are some of the largest changes 8x8 has gone through over the last year, and what are you most focused on as we head throughout calendar 2024?
OK, so let me take a step back and just describe it. So I took over as CEO a little over a year ago now, and I led an innovation-led strategy. The strategy had the idea that we wanted to focus on being an innovation-led company, not necessarily a sales and marketing-led company. As part of that, there were sort of three phases to the transformation. Number one, jump-start R&D. So take R&D from 9% of revenue to 15% of revenue and spend on new product development and those kinds of things. Talk about that because that's kind of the signs that things are working. Number two, fix the financial model. So we reduced sales and marketing. We did a layoff. Actually, we did two of them in a three-month time period.
But fix the financial model so that we could delever the balance sheet, et cetera, et cetera. And then number three, and that's kind of the place we're at now, is once one and two were sort of wrapping up, we could get to the point where we could retool GTM around the innovation. So if you think about it, we used to be sort of a UC-led company selling effectively one or two products. Now we're a CC-led company. We can sell six products. So we go from a transactional company to more of a land and expand company. We have to sell multiple products. We have to build composable packaging. We have to do all those things. So as part of that, new CRO, new CMO, new channel chief, all those kinds of things around. And then now we're rebuilding the GTM around this.
OK, so what's working and what's not? So clearly, the new products, they're still $ single-digit millions, but they're growing 60%+ year-over-year. Quarter-on-quarter, the bookings are accelerating. We're getting product-market fit in that traction. And we're starting to get smarter about what the motions are about how to land and expand into a customer. Secondly, and I'll say this, when we modeled all this transition out, we knew our revenue growth rate would drop, but our profitability would improve as we made the cuts and we sort of cut the inefficient parts of the business. We overshot to the downside on revenue growth. So we're like zero service growth. We thought we'd be low single digits. But we way overshot on profitability. So everybody thinks it's easier than it is. We have a 9-12-month sales cycle.
So Kevin and I turn a knob, and about nine months later, we look at the knob and go, you know, we turned it a little too far. Probably shouldn't have quite cut so much. And so now we're putting a little bit more money back in. But I mean, cash flow is growing like 50%-55% year-over-year, et cetera. And then so that's kind of that positive on the financial model that's allowed us to delever. So at our peak, we had $550 million-ish in debt. Now we're at $427 million. And we're generating $130 million of EBITDA. So we'll continue to pay down the debt and get all that stuff behind us. And that means we fund all our own growth now. 12 quarters of profitability, et cetera, the bad old days of $90 million cash burns and all that other stuff is behind us.
The phase right now is just retooling that GTM.
OK. So Sam Wilson, CFO time. Sam Wilson, CEO time. All right, OK, so following up on that point, the strategy, you've been pretty focused around that strategy over the last year. Just where do you feel like when you talk to investors, you've been talking to investors all day, that that strategy is still kind of misunderstood and where you're trying to do further education?
Well, OK, so we trade, so as I mentioned, we have, what, $130 million of EBITDA. And our enterprise value right now is, what, $700 million, $600 million, something like that. We trade at like 3-4 times EBITDA, 5 times EBITDA. It's some really small number. So I think on the Guggenheim spreadsheet, we're the second lowest valued company on the planet for software.
For software.
For software. Not something to be proud of. So what I take from that is that the street believes our cash generation capability is not sustainable. We've spiked cash flows, but because of the lack of revenue growth and what we're doing as we transition to new products, we will never grow again. Our revenues will decline in perpetuity, and we're melting an ice cube in some form or fashion. And that always happens quicker than people think. And what I think what people misunderstand is there's a rhyme or a reason. Some of this is intentionally done. It's harder to get down to the exact thing. And secondly, they're missing the new products and what's happening here. So new products are coming into the financial model. They're not big enough yet to drive the financial model, but there's certainly some indications.
The reason that's important to me as the CEO is it shows product-market fit. It doesn't really matter and I want to be careful how I say this. It does matter, but it doesn't matter to me how much revenue I'm generating right this second. What matters is, do I have products that people want to buy? Do I have the right go-to-market? Then I can scale it once I have those in place. And we've got the green shoots. We've got the products in place. Now we've got to get the routes to market in place, and then we can scale it.
OK, so you mentioned you guys had turned a knob and seen what happened 9-12 months later. How much of that kind of overshooting, maybe to the downside on the revenue growth that you ended up with, is macro? And are there particular areas where you're seeing kind of signs of that turning or signs where kind of that pressure is still more elevated, either verticals or customers?
Well, clearly, doing this transformation in the face of a Fed raising interest rates, headwind type of scenario isn't a good thing. It makes it twice as hard. So what we do see is, and if you guys are familiar with the SaaS business model, we have contracts. And so if a company, let's say a company did a layoff last July, went from 100 employees to 90 employees, but their contract comes due in March, we're going to see a 10-seat downsell in March, even though the economic hit was back in the past if they haven't billed those employees back. So we're still dealing with a little bit of that. We're not seeing elevated credit card default rates, but we are seeing an elevated pressure on downsell and some of those other things. And this is where our sales motion needs to evolve and get better over time.
We need to get better, a la what a Microsoft does or a Salesforce does in saying, hey, no, let's not shrink your contract. Let's add these new products in, or let's do these things in to drive more of that retained value. But that's a new motion for us.
OK, OK, so there's kind of pathways there.
Then just one other thing, because I said on the call, we have been dealing with a little bit of elevated churn around our Fuze acquisition. That's as we upgrade the customers and move them over. As we upgrade and move the customers over, we're seeing their retention rates snap to our retention rates, which is an improvement.
The customer CSAT score is going up, so forth.
That's a little bit of a moving piece that's very specific to us.
OK. Middle of last year, you provided an operational framework calling for top-line growth closer to 8%-12% and improved cash flow from operations between fiscal 2024 and fiscal 2026. You've made some improvements towards improving the leverage. Just what underpins your confidence that you can still get there? So you said you have the portfolio and the go-to-market changes, but.
So if you think about it from a cash flow perspective, we're well on our way. We set a 20% compounding growth rate over 3 years. The first year we're like 55%. Whoops, overshot. We've already made the changes to equity compensation. Our stock-based compensation is 8% of revenue today, when most of our competitors are at 20%. So we've already made those changes. So on a cash flow per share basis, we're sort of well on our way. The part that's missing is that 8%-12% revenue growth, and that's all driven by the new products. And here's the wizardry . When we become a portfolio of products company, what we see is both a higher revenue per customer, because we're selling them more stuff, and a higher retention rate. And in a recurring business model, that's the wizard tree.
So when we sell one product to a customer, let's say a small business customer, we get a mid-80s retention rate. We sell two products, 91%-92%. We sell three products, 94%-95%. And we sell four more products. It's effectively 100%. So if I can get every customer, every major customer, at three, four, five products, and I'm selling eight, nine now, if I can get that done, then after three or four quarters, we'll see that growth rate start to lift up.
OK, I'm going to say you should coin those like 8x8x8x8.
Exactly.
Math puns. I'm here all day. All right, so turning to go-to-market, you recently hired a new CRO, Lisa Martin. What are some of the changes she's already made, and what are her key focus areas over the next year?
So first and foremost, she comes from Genesys and Verizon and Twilio, where she had a demonstrated track record of success. We recruited her out of Twilio. She wasn't looking. We recruited her out. She really brings that ability to sell multiple products and to land and expand. The number one thing we've got to get better at is solution selling, using a defined methodology that gets a product in or products in the door and then expands out from there. That's very different from the UC world and the background of the company. The UC world is one transaction. How many phone lines do you need? I'm out of here to find the next logo. This is totally different. That's skill number one. Skill number two is a lot of experience at Genesys.
And she ran go-to-market for Flex and Twilio, so a lot of context under experience. So how to bring that good. And then number three, a lot of VAR experience. So if you go back to 2017, we were primarily a direct company. Then we sort of over-rotated to the TSD agent model. What we need is a balanced go-to-market. We need to have the right amount of resellers. And the reseller VAR, as you call it in North America, is a very successful channel for us in the U.K., but we've really struggled to get it to work in the U.S. And I now feel like between her and Michelle Paitich , our channel chief who comes from a VAR background, I have a set of architects who know how to build a house correctly.
Okay, and so maybe you can kind of give a sense, because those are a combination of economic models as well. And so sometimes we kind of hear pushback when we do checks about, well, this person has this compensation model. I have this compensation model. How are you managing that conflict? And then just how are you deciding which one is the right one?
Well, so first off, you need a balance. The thing that I find most interesting is some companies like to buy direct. Some want to buy through a selling agent, the TSD selling agent model, which is a derivative of direct, because it's still on our paper, but it's through some sort of local selling agent type of partner. And some want to buy through value-added resellers, the traditional IT channel. And a lot of times, the customer is sort of self-selecting each bucket. So you need a little bit of a, I guess my dream would be we were 50% VAR, 30% direct, 20% agency, or some combination close to that. And we're pretty far from that today. But that would be and have a balanced model.
And then what I've been adjusting and yes, this is the CFO side of me is I've been adjusting the payments we make to a channel partner to be directly proportional to the amount of economic value they provide. So under the old regime, we would pay a VAR and an agent roughly the same amount of dollars over the life of a contract. But wait a minute. A VAR deployed the product, supports the product. That's not really fair. They do more. So what I've now done is I've tilted the playing field of channel compensation, and I say this bluntly, more in line with the amount of economic value that channel partner provides to an 8x8 shareholder. So if they provide more value, they get paid more money. If they provide less value, they get paid less money.
So when people come in and you used to pay us more money, I'm like, you should do more. You make more money if you do more. Those guys are doing a ton. Do what they do. I'll pay you more. So I have no problems paying a channel partner a ton of money. I just want a ton of economic return.
OK, perfect. Shifting gears to the product side, you've announced a lot of new products to the set, and they're all showing kind of demonstrated growth, these kind of six products. Just where do you expect over the next year to kind of see the strongest traction? Are all of them on the same trajectory?
No, no, they'll always be disposal. So if you think about where I expect to see the biggest stuff is around our Intelligent Customer Assistant, digital voice. So those are next-generation AI-driven chatbots and voice bots that are fully integrated into our contact center. Our partner is Cognigy, but we have a set of APIs, so you can use any bot. But that's by far where we're getting the most traction. And we see very demonstrated, very fast ROIs on that. I would say after that, we're seeing the PCI standards have continued to evolve and become tougher. And about 60% of all contact centers accept payments. So we are seeing an increased demand in our PCI compliance solutions. And then number three is we've launched a couple of new products recently around integrating CPaaS into the contact center. And so those are a wild card.
I think they could be wildly popular. They could be duds. I'm not 100% sure which one. But ICA, Intelligent Customer Assistant, those bots, we launched last year, and they should drive the most revenue this year. The most important product launch we're making this year we announced last week is Engage. So Engage is a hybrid UC/CC product. I would think about it like a new product line for the company. And it's for people who need contact center functionality but are not agents: nurses, field service workers, IT help desk, HR help desk, et cetera, et cetera, et cetera. And we are the only provider right now that has UC/CC, informal contact center, and CPaaS all in the cloud, all under one roof, integrated. And that's our value proposition.
OK, I mean, you guys were very early on with XCaaS to kind of have that contact center product integrated into your suite. Just where did you see kind of this need for this kind of lighter weight CPaaS product? And how does that differ from the customer set that you were going after with CPaaS?
So that's a super, super interesting question. So it's a product the industry analysts have talked about, a market segment the industry analysts have talked about for years. But we couldn't figure out the value proposition. And it was actually, we were in conversations with several of our customers who were saying to us, we need you to take these contact center functions, but we need it wrapped in a UC product. Because today, we handle that with a ring group, typically. So what's a ring group? All your nurses, you dial a number, and all their phones ring simultaneously. And one randomly picks up, and that's who gets the phone call. No analytics, no rhyme or reason, no queuing, not all that cool stuff, geo-routing, and all that cool stuff we do in the contact center, none of that's available. Just 15 phones ring simultaneously. Someone should grab it.
If none of them grab it, then it goes to voicemail, and I guess the patient dies or something. I don't know. Something happens.
Maybe less dark than that.
Yeah, OK. So now we've got a whole set of capabilities. But it was really in conversations. And so look, I'm not a product wizard. I will tell you my limitations as CEO. I cannot necessarily tell you the far-reaching future of tech or whatever it is may be. But what we did, what Hunter Middleton and I definitely built to the company, was a very strong research operation. So before we build products, we go out and interview customers. We have people with clipboards who sit in contact centers who say, how are we going to use it. We stick wire diagrams or rough drafts in front of ours, so for example, our Video Elevation product, there's a large bicycle company that's a customer of ours that wanted to use Video Elevation in the contact center. And so we're like, OK, we'll build it. Tell us how you use it.
They worked with us for a number of months saying, OK, we need this. We need the ability to take a screenshot. We need the ability to annotate it, draw an arrow, send it off via this. Oh, OK, we can do all that stuff. And so that's really how we've been driving forth on that innovation front.
OK, and I mean, you mentioned just announcing it kind of last week. You had alluded to it on the earnings call. Just where do you see more tactically, what timeline do you see for this product ramping? And just risk that in the near term, there's kind of this conflict with salespeople on which sales product is the right one?
I think we're OK on the sales product. Right now, look, we're in beta now. So we have 10 Fuze customers that are in beta. We're shortly any day now, we'll start ramping 8x8 customers. We'll go for 10 or 15 of those in beta. Usually, our betas are 2-3 months. This one may be in beta a little bit longer, because this is a new product line. So getting that product-market fit. So I would expect that it comes out of GA July-ish. Then we'll start ramping the sales process. What I think is super interesting, we did an analyst event last week for industry analysts at the San Diego Zoo, which is a great customer of ours. The industry analysts were like, "We don't understand this product." They were asking a bunch of questions about it.
And the three customers stood up: San Diego Zoo, Trajector, which is a health care company, and Cape Air, which is an airline. And they all said and the first question from the audience was, what do you think of this new informal contact center product? We're like, when can we have it? We want it tomorrow. And the analysts were like, whoa, explain why. And the guy from Cape Air was like, hey, my refunds department, if you get a plane ticket and for some reason you need a refund, they're part of finance. I need a bunch of contact center functionality for them, but they're not in the contact center. They're not agents. And the Trajector person was like, oh, we need this for our nurses. And some of our billing people, this would be absolutely fantastic. And so those use cases, we know, exist.
It's just been really tricky figuring out where the line of UC is and where the line of CC is and actually building a capability. The other thing is mobile first. This was really built knowing that Kate has my phone, but knowing that most likely that person that's getting that call or getting that message or getting that bot interaction is on a mobile device.
OK, OK, that's helpful. CPaaS has been a market that you got into with the acquisition of Wavecell. But you were kind of seemingly de-emphasizing before Lisa joined. Just how do you see that market for CPaaS within the 8x8 suite today? And maybe how is it different than when you acquired Wavecell?
Yeah, so Vik acquired Wavecell two CEOs ago with a little bit of this vision. And then Dave Sipes despised the CPaaS business and de-emphasized it. I've always thought it had value. But the value has to be that it's an add-on, that it's a really easy add-on. So last week, we announced our first CPaaS package that's an add-on to the contact center that's like a PLG. It's off the shelf. Push a button. It integrates, et cetera. We've got more packages coming for sales to our installed base. So I don't have any desire to compete with Twilio or Sinch head to head in the CPaaS business. But in our ideal customer, having CPaaS add-ons is a highly sought-after thing. And so what's an example? We do a lot of business in UK public sector.
So we built a set of CPaaS technologies that incorporate video contact center and SMS messaging or WhatsApp messaging. So you call a contact center because you need a repair. They take a video, and they're side by side. So if they're still on the phone with you, there's a video going on because they have access to your camera. You show them the problem. They take a screenshot, circle it, send it to the repair person. The repair person is going to save himself one trip, because he's going to go to the warehouse and get the parts he needs before he leaves to your place. So we've already sent you one text message to start the video conference. 20 minutes before arrival, a second text message goes out saying, "the driver is 20 minutes away. Please make sure you're there to accept him.
I can't tell you that text message how frequently now we've avoided missed appointments. There's like a 50% reduction in missed appointments. I'm sure there are a lot of people scrambling. But there's a 50% reduction with the driver is 20 minutes away, et cetera. And then there's a follow-up survey saying, did we solve your problem? Did we not solve your problem? Et cetera, et cetera. So that is a combination of video technology, the contact center, UC, and CPaaS all sold as a complete integrated bundle.
OK, OK, that's helpful. We've alluded to it a number of times. The integration of Fuze has changed a little bit over the past couple of years. It seems as if now you are moving those customers over to 8x8 systems. When can this kind of become a tailwind versus a headwind that has been?
Yeah, so we did the Fuze acquisition, which has been really terrific for us over the couple of years that we've owned them. Yes, there's been some headwinds in the share and the S&M engine earlier. We think that when we move these customers over, we do see some downsell pressure. Customer sat was up. We think they're really sticky. Probably a couple more quarters-ish of headwinds right now, probably in the second half of the fiscal 2025. We'll see it abate. Yeah, but we're really pleased with that acquisition. It's really driven a lot of growth for us in terms of cash flow growth. So we're very successful that way.
OK, I mean, Sam, you just mentioned that the original beta customers were Fuze customers. Was there any reason why you started with Fuze?
So Fuze built kind of an MVP, for lack of a better word, if you're familiar with Eric Ries's term, around this notion of kind of this contact center-like product. And so as part of upgrading them, we need to match that product gap. And that's part of the idea of where this originally came from.
OK, OK, we were talking a little bit up front about misinterpretations people have about the space. But one of them is just that pricing concerns have obviously become a concern around the space. Do you think customers or investors are right in their concerns, or that they just miss that a lot of this is more downsells versus kind of true pricing pressure?
Well, both. But look, I don't think investors are wrong either. But I think there's a fundamental misconception. There were 600 million seats of on-prem business voice. Did we really think all 600 million seats were $22 a user? Because I didn't. There are a lot of seats in there. And I think this is part of the reason why you still have what, 400 million seats sitting on-prem. Because a lot of those seats should be $6 lines or $7 lines. And so what we've really worked on doing the last few years is building a set of products that can mix and match. So if you want a $4 line with almost no functionality, great, we have it. You want a $6 line, a $12 line, a $14 line, a $20 line, a $30 line, all based on the amount of feature functionality.
Probably a terrible example, I like the airline industry.
You like the airline industry?
Well, because they have basic economy, premium economy, business class, first class. And so they're really good. And each one has a different set of features and functions. They're really good at skimming the incremental dollar. And oh, by the way, you want 2 bags? Add some extra $25. They're really good at building the right set of pricing and packaging to capture each amount of economic return in each one of those segments. I think the UC industry had it wrong. I think the UC industry went down and said to Mr. IT department, hey, that phone that only makes 3 phone calls a month, you should pay $22 a line to fix that, plus taxes and fees, $40 a line. The guy in the IT department was like, no, it'll sit there. I think now, and I think you see it because of Microsoft Operator Connect.
You see Operator Connect. You see it ramping. That is dumb voice. It has no features at all. It is one of the fastest growing segments of the UC market. If they needed features, they would be buying the more features. Microsoft was the first one that really pioneered low-end voice to really capture a lot of those seats.
OK, and so I mean, is there a better way that we should be thinking of the TAM on the UC space? Or we should be just thinking of kind of this more holistic market?
Well, the way we think about it is, so let's say Cisco 53 million seats. I don't know if these numbers are accurate, but this is my best guess. 53 million seats of on-prem UC.
Let's just say approximately.
Approximately 53 million. NEC approximately 78 million. Avaya approximately 89 million. And Mitel approximately 37 million seats of on-prem UC. So that's 200 million seats, rough and tough, between those four vendors. If I went and captured 20% of that at even $5 a month, that's a pretty good market. So I think for all of us that are relatively small, there's a tremendous amount of opportunity to go get that still. Now, where I differ a little bit is I'm trying to offer the milk and the bread at low margin, along with the pizza and the frozen food, contact center, engage, other products, so I can get an entire margin bundle. And if I sell you multiple products, it's relatively sticky over time. And then I drive a net present value of future cash flows that's relatively high.
OK, you alluded to Teams and kind of the way that it changed kind of how people looked at the space and just the opportunity people saw there. Just how do you see it as an opportunity versus a threat kind of in the current market?
I love Teams. I love Teams. We're a partner of Microsoft. I think Teams is an amazing product. I think if you're a video conferencing company that starts with a Z, you're scared to death of Teams, because it's Microsoft. But we've been partnering with Microsoft for what, 5 years now? We're a partner of theirs. And I mean, we have 400,000+ seats of Teams integrated phone. And we hope to have more in the future. I think it's a great, phenomenal product. But what it meant was in 2017, 8x8's value proposition was voice, video, and chat for employee collaboration. And we had to make space by shifting it in more that innovation-led customer engagement, customer contact space, because the collaboration market was fundamentally changing. But if it wasn't Microsoft, it was somebody else. And they're great partners.
I mean, we go to them and say, hey, we need an API to do this. And they're like, there you go.
OK, I mean, but how do you assure that you're not just providing $5 lines within that market and that you're kind of upselling to sell the full portfolio and maximize that opportunity?
Well, I think we need to. So they have what, 290 million MAUs, 390 million MAUs? I've already lost track.
A lot.
A lot. So if I capture 10% of that at $5, yes. But the key for me is I've witnessed in RFPs in particular, the request for proposals the last few years, if you didn't have an answer at that low end, you were excluded from selling the $120 contact center or the $150 contact center seats. You can't come into an enterprise, particularly in international markets, and say, I want just the high-valued seats and go find some other vendor for the low-value seats. Their answer is, we want one vendor to provide a range of products. And that's what we're focused on.
OK, we would be remiss to be at TMT without talking about AI. It continues to be kind of one of the dominant themes within the space, particularly within UC, CC, and CPaaS products. Where do you find the most compelling opportunities to apply AI? And where do you think that there's an opportunity for you guys to do that organically versus partner?
So we organically develop AI toolsets when we find it's a shared common service transcription, translation. So we started working with OpenAI six months before they came out of stealth mode. We started working on. We used Llama 4 for interaction summarization. That's Meta's platform 4 that just came out. We've been using it for months. So we use those when we want to create tools like summarizations across multiple interactions, those kinds of things, as a platform-level service. And then for a lot of AI, the bots, health scoring, those types of things, we partner with best-in-breed providers. So if you look at the Gartner Magic Quadrant for conversational AI, five of the six in the leaders' quadrant, all partners of ours, all integrated into our contact center.
Pick your bot, whatever bot's yours, the leading health scoring vendors, the leading IT service companies, campaign management, all those kinds of things. We want to partner with those. We can partner with those, because we refactored our contact center over the last five years, modern microservice architecture with Kubernetes, with APIs, with webhooks, with security, et cetera, that allows us to then integrate with a next-generation startup. I think one of the mistakes that my competitors are making is trying to compete with $100 billion of Silicon Valley venture capital. I say this as a Silicon Valley veteran. That is Don Quixote in action. You're ramming windmills at full speed. My attitude to the venture capital community is, I'm your friend. Come hug me. But come spend your money integrating with my product, because I bring you a complete solution.
OK, OK, perfect. You've done a fair amount of M&A over the past few years. How do you see the need for kind of further consolidation or fortification of the portfolio or just kind of opportunities for consolidation within the space in general?
Yeah, we did Fuze. I mean, I wouldn't say the streets rewarded us for doing Fuze. I think I did it. It was $21 a share. I think I'm $2 and what, $0.50 now. So I don't know. Look, it's a very hard question to give you a soundbite answer to, because we probably have the most experience at migrating UC bases. It's hard. It's tricky. We're good at it. But we built a lot of intellectual property over five years. If you've never done this, God bless you. Have a good time. But don't call me when you need help, because I'm not going to help you. Migrating contact centers really doesn't work. It's too customized. It's too rip and replace. But I do think there is room for adding products that you can sell through a set distribution channel.
There's analytics products that definitely there's a market demand for. There's security products there's a market demand for. So I think there's room for M&A. I think there's room for customer acquisition. It's just kind of got to be done in very specific use cases. And it's got to be done at the right price. I mean, there are several UC providers out there who have astronomically high valuation expectations. And everybody needs to remember, we bought Fuze for 2x ARR.
Right, OK, before I go on with questions, any questions from the audience? All right, perfect. Kevin, we haven't spent enough time with you. So you've made tremendous strides on operating leverage and deleveraging over the past year. Just how do you think about capital allocation and just kind of the state of the balance sheet?
Sure, yeah, this is an area which I'm particularly proud of. So a little over a year ago, we had $550 million in debt. We're down to $427 million. This year to date, we've paid down $88 million of principal value in debt. So that's greater than one third of the commitment we've made to return $250 million to shareholders over three years of time. So we're past the one third mark there. So we have two tranches of debt left. It's $225 million in our term loan. And then there's about $202 million of our 2028 converts. The term loan's due in 2027. And we have a prepayment penalty that expires in August, which will, after that time, aggressively pay down that debt, which it's a virtuous cycle, obviously. It's a higher interest rate debt. We pay that down. The cash interest we pay goes down.
It helps our cash flow. It's a wonderful virtuous cycle. We're on track with our commitments. The converts, they are convertible at $7.15 a share. By virtue of paying down the debt, we may get the stock up to that range or hopefully above over time. And then after that, we're going to continue to generate cash flow and potentially do other things with the cash. If it's an M&A opportunity that Sam was just talking about, if it's a potential buyback in the future to reduce our dilution, we can do that too.
OK, I'd like to use just so people understand our capital allocation model. I'd like to use Fuze as an example. So we bought Fuze 2x ARR. We bought it at a reasonable price. We issued 6 million shares. We took on $125 million in debt. Since we've acquired Fuze, we bought back 10.5 million shares. We've actually bought more shares than we issued. We've retired $120 million in debt. So Fuze is paid for. I'm still generating ARR perpetuity in the future. To me, that's the model transaction. That's the model use of a balance sheet.
And then kind of I mean, just anything in terms of areas where you're kind of focused on either optimization or investing in kind of over the next year?
We cut 40% out of sales and marketing. I'm going to take this. Then I'll leave it. It's about getting revenue growth back.
Sure, as far as optimization, we are obviously very focused on efficiency metrics internally in the company, whether it's sales and marketing efficiency, et cetera. From a more tactical view, and I think you've heard this and various people have heard this on the call, as we're looking to refinancing opportunities for the term loan, because we're in a completely different credit risk now as a company than we were when we did that over a year ago. So that's an option for us that I think is going to help us out soon.
OK, perfect. All right, well, Sam, Kevin, thanks so much for being here today.
Thank you.