Yeah. That's perfect. Right, right there. Yeah.
Okay.
All right. Thanks, everyone, for being here. Ryan MacWilliams , Mid-Cap Software Analyst here at Wells Fargo for Wells Fargo's ninth annual TMT conference. With us today is Kevin Kraus, CFO of 8x8. I just wanna start off by saying this is my first Wells Fargo conference, and this is such an amazing location. Like, we should open these doors up and we could have a view of the ocean during a firefight.
Yeah.
Yeah.
Unbelievable.
Look, it's been an upgrade, both with me and the new team and new coverage here at Wells Fargo. Kevin, I've known 8x8 for a long time, but for maybe those in the room that are newer to the 8x8 story or, you know, just overall wanna catch up on the last couple quarters, like, can you just give a brief overview on 8x8 and kind of what momentum has been like in recent quarters?
Sure. No problem. Happy to be here. Thanks for inviting us. Just going back a little, little farther back than a few quarters.
Sure, sure.
Just to reintroduce people to the story, we, a few years ago, made a conscious decision to continue to invest in innovation. We, you know, committed to spend approximately 15% of non-GAAP revenue on R&D to develop our innovation engine, which we've done consistently over the last few years, because we have a product-led growth mindset in the company. We've developed a lot of great new products, a lot of AI-based products over the course of time, both internally and with technology partners. Throughout the course, we've also acquired a company called Fuze, which was a, you know, over $100 million annual revenue company. We're very close to finishing off the upgrades from that company onto the 8x8 platform by the end of the calendar year. We've been experiencing a little bit of revenue headwinds along the way.
That should come to a stop by the end of the year, meaning the momentum from moving the customers over. We have done that and extracted a lot of value out of that acquisition. We pay particularly close attention to our capital management. Our debt was at something like $558 million in August of 2022, which was a company high. We have reduced that debt load by approximately 41% since that time. We are real proud of that.
Absolutely.
We have been able to generate positive cash flow from operations for 19 quarters in a row now. We are really enthusiastic about the trajectory and the strength and the financial footing of our business. Last couple of quarters, we are really excited. The last two quarters, we have been able to put up year-over-year revenue growth numbers, after probably what, maybe an eight-quarter drought or so because of the Fuze headwinds. Our underlying business is a stable, strong business. We have been able to really grow our usage-based business very, very well, and that has really helped us along the growth revenue trajectory. Very happy about that too.
That's actually where I wanna go next.
Yeah.
On the usage-based component.
Mm-hmm.
That seems like an area that you've seen a lot of growth, you know, now, like almost 20% of your revenue. Just, what's kind of working there? It seems like you have a new CRO who's really involved on the usage side. So how have customers wanted to interact more with 8x8 consumption piece?
Sure. Yeah. Great question. You know, yeah, our new CRO is from that business. He's been with the company a couple, probably over a couple of years now.
Mm-hmm.
He's done a tremendous job of growing that. I think we have had eight or nine quarters of successive growth in that area of the company. He's a natural fit with our business. He actually comes from a contact center background as well. That's really nice for us.
Yep.
He knows the company already. I, I, we all, we all expect good things from him. He's a really good, enthusiastic person. I think that for us, it's just a matter of the go-to-market motions that he's been able to drive in that portion of the business will hopefully translate back to our applications business, our core UCaaS business. As far as the usage is concerned, we have a lot of new products. As you mentioned, our usage revenue is 19%, almost 20% of our service revenue.
Mm-hmm.
It was something like 13% last year. So it is growing quite a bit.
That's a lot of revenue.
Yes. It's growing quite a bit. And we, you know, the usage components of our business, a lot of them are AI-driven. Some, you know, some are basic, you know, traditional, telephony-driven usage. But we do have new products that are consumption-based. And so they're pay-as-you-use kind of.
Mm-hmm.
products, whether it be ICA or Smart Assist or conversational intelligence, things like that. That's really generating a lot of traction in the company right now. The goal for us is to offer these products, get the customers to adopt them, and have a lot of multi-product customers. Over 1/3 of our ARR is customers that have three or more products. Those new products typically are usage-based products, and those customers become stickier customers, and they can grow our net revenue retention more and so forth and obviously lift the revenue, lift our revenue base completely. That usage-based revenue is a real factor for us, not only driving the revenue higher but also making these customers stronger and stickier.
This has always been one of the advantages of the 8x8 platform, right? Like, you can start with UCaaS and add contact center, right? Now you can add consumption pieces. As new products come on, now you can just add, you know, AI upsells across
Sure.
those vectors.
And we do do that. The beauty of it is everything's on one platform. You have all this orchestration across the UCaaS, and the usage-based or CPaaS platform. Products like JourneyIQ , for example, can take all of that information consistently from one step to the next to enhance the customer experience. That makes it a lot easier and smoother for contact center agents to work with those customers to enhance their experience. Other things like AI Orchestrator, right, that can take all that information along and then elevate it to a human agent when and if necessary. Those are the kinds of advantages that our platform has because other companies would have potentially platforms where they're a little bit more siloed. It's a real good [audio distortion].
Innovation line picking up here. Like, as you have moved through the Fuze transition, which, you know, is not easy when you move a customer base over. Like, going past that, now you can divert more resources into new product development, like, you know, new WFM or WEM, sorry, features a quarter. It just seems like there's more and more product velocity coming for.
Yeah. And, in fact, you know, there's, you know, we do offer, make offerings, you know, for, for.
Yeah.
Those kinds of features as you've probably seen recently, WFM. The other thing I would say about Fuze, though, it wasn't just, we got good engineering talent from that acquisition too.
Mm-hmm.
It wasn't just about buying that revenue. Part of the reason we got, you know, there were multiple reasons to do that acquisition, but we also got a really good group of engineers that helped with that innovation cycle for us. That was a big part of why we did that. We got a lot of Scrum teams out of it. I think it helped elevate us to become more productive in developing new products. You know, we've got products like Engage, for example. These are all double-digit growers for us in terms of interactions or revenue. We're looking at this with, you know, very positive momentum experience here. We just wanna grow that and proliferate it.
Again, as many multi-product customers as we can get is what we want 'cause the revenue levels, when you look at the customers that have one, two, then three, four, up to seven or more, the growth in the average ARR per customer with those, it grows like exponentially. The customers are bigger, stronger, stickier. That's what, you know, a real motivation for us.
I think in an AI world, that's what customers are looking for, right?
Yeah.
Like, you don't wanna, you know, if I start with a phone call in my contact center and transfer over to UCaaS, right, or I start with a voice agent and then transfer to the human agent, it's like, who owns the transcript? Who gets the data in one place or had they shipped it over to another? If it's one company delivering that entire platform, that just makes it a lot easier to deliver that experience.
Yes. It's better for the customer. It's better for our customer. It's better for our customer's customer. I don't, I've never worked in a contact center, but I can only imagine how disruptive and annoying it might be to switch from system A to system B to get the backstory and not have all of this compiled, analyzed, you know, AI-ified information given to me. I don't have to do that type of research. I can imagine from a working experience, it's pretty terrific.
Yeah. My associates are gonna laugh, but I worked in a contact center in college, and it was so brutal, I feel like I have to bring it up. But, you know, hopefully, you know, some of these new AI tools will help make the agent's life a lot easier 'cause instead of saying the same phrase over and over again.
Sure. I think it's great. It's about just improving the customer experience, not only for our own customers but our customer's customers.
Just on some of the new products, like, we'd love if you could, you talked about Engage, but also, like, some of the consumption pieces. Like, is there three that come to mind of things that are, you know, growing above the 8x8 [audio distortion] that, you know, investors new to the story might spend some time digging into?
Sure. I'll just mention a little bit about Engage for the people who might not know what that is. Think of Engage as more of an internal outreach in the customer for people who are not necessarily part of the classic contact center, right?
Mm-hmm.
If you have to reach out to somebody in the billings department for information, things like that, it's more expansive than your typical contact center. That's growing very, very dramatically for us in terms of the, um, interactions through that. That's been out for a while in, I would call, limited release, and it's been very successful for us. That's something that, hopefully, we'll see more of. That's a big grower, like you asked. ICA, Intelligent Customer Assist, is also a notable one.
Mm-hmm.
Anything that has to do with the voice interaction, right? Over 80% of all of these interactions are still voice-based, right? These tools that we have that transcribe and generate AI insights from it with the best accuracy, there have been some third-party studies done about 8x8 being the most accurate with transcriptions. We do multi-language and dialects and all these kinds of things. They are all very helpful. Anything that touches voice right now is a very popular product for us because of the way the world works, right, with typical contacts. Smart Assist, Agent Assist, these are the kinds of things that are growing very well for us from a usage, interaction-based point of view.
I mean, and you have customers that have, you know, 10+ years on 8x8 contact center or working on the 8x8 platform. For them, like, they have, you know, so many rules already set and, like, their agents are used to using 8x8. Like, you adding an AI upsell on top would make a lot of sense. It's like, okay, like, we would love transcription here, right? Or we would love, some Agent Assist as part of this. Like, that customer base, you think, would be more willing to, like, buy versus build AI?
I think so. I think so because, look, we were also able to integrate fairly seamlessly the best- of- breed tools that are out there. We pick the best ones that work for our customers. We can also have the opportunity to work with a whole variety of, we call it our TPEs, Technology Partner Ecosystem.
Mm-hmm.
We do have that ability. It makes us, I think, fairly nimble and reactive and proactive when we see something good. Whatever works best for our customers will work best for us.
Since I have the CFO here, you know, gotta touch on the most recent quarter. But maybe just kind of, like, I was surprised at some of the upside in the quarter.
Mm-hmm.
I wanna get into, like, the consumption piece and all that. Before we get there, I'd just love to kinda hear, like, your high-level view of, like, kind of, like, we had a super healthy market in UCaaS and CCaaS in 2021, right? You saw things change as, you know, people kinda rationalize some of their deployments across the industry. In between those two, kind of where are the UCaaS and CCaaS market, where are they today, and then how that influenced, like, kinda the results in the quarter?
Yeah. I think there was a lot of COVID- era buying, right?
Yeah.
You have these three-year contracts, sometimes five-year contracts, right? They come up for renewal. Maybe the price points are a little bit different now for certain.
Sure.
For certain types of customers than they were before. Look, our objective is to obviously, you know, we keep the customers, you know, to the best we can. And, you know, we right-size them. But here's the beauty of the usage piece because you asked about usage.
Yeah.
You can do those kinds of things and then add on.
Mm-hmm.
You get usage-based revenue on top of the customers that maybe, maybe they sacrificed a few seats because they, you know, had a layoff or something like that. What we are trying to do is fill any of those voids with some usage solutions. In terms of the quarter, 'cause you asked specifically about the quarter, yeah, look, we saw a really great result in our usage-based platform.
Mm-hmm.
You know, primarily in South, Southeast Asia, right? It performed very well. That was really great for us. You know, the margin profile's a little bit different for that. You'll see, you know, gross margin percentages, they go down. These are gross profit dollar adders, right?
Yeah. Absolutely.
We're looking at this through that lens, and I just see that growing more over time. The UCaaS business, I think, is an underlying healthy business, just regular market business. You know, it's highly competitive in some particular areas, but we have, you know, like I said, the Fuze headwinds are gonna come off soon.
Yeah.
You know, we'll still have the comps next year. That is waning. We grew almost 6% year- over- year in our service business when you exclude the Fuze piece, whether they're on the 8x8 platform or still on the Fuze platform. That's a healthy sign for us. The profitability is still there for us, right? We're like 9.4% non-GAAP growth operating margin. Our net is holding because the interest expense is coming down because we've paid back so much debt.
Mm-hmm.
These are, this is the formula that we have right now. I look at this as, you know, moving forward, you know, more usage coming in, whether it be conventional usage from, like, normal telephony- type SMS texting, whatever, but more usage from AI-based products.
Yep.
I see, you know, I, I'd like to think that we'll see more stabilization as this whole COVID, you know, hangover sort of wanes and things can become a little bit more stable there.
That's actually what I wanna get to. In some of our channel work recently, almost surprisingly to us, we've heard a better UCaaS momentum from partners as they're just saying, like, if macro improves a little bit, right, that's where people are comfortable starting first of like, "Okay, I know we need to do this. These are deployments we can get our hands around. We're a contact center." You know, it's like a multi-year decision, kind of like a bigger ticket.
Yeah.
We're gonna think about where that's occurring. Like, does that make sense? And also, like, does your relationship with Microsoft also help that sell through as well?
I think the, so on your first point about UCaaS, I do sense that the deal velocity is generally faster there where.
Yeah.
Maybe a contact center decision goes higher up in the organization. It's much more impactful because it's definitely a customer-facing.
Yeah.
Tool. Perhaps that's a bit slower from a deal velocity point of view. So yeah, I think the UCaaS could be, you know, there, it could be a lot, a lot faster mover. To answer your question directly.
Yes, that makes sense. Macro starts picking up.
Yeah. The second part of your sentence, I lost my, what, what was that?
Oh, and just the direct routing piece, like, and, and no, 8x8 has a really good relationship with Microsoft.
Oh, Microsoft Teams. Yeah. Sure. We love Teams. We've got hundreds of thousands of Teams users.
Yeah.
I like Microsoft Teams because the attach rate for our contact center is much higher with customers that have Microsoft Teams connectors. So I, I from that standpoint, you know, we're helping the customer. We operate in all these different countries. At one point, our largest customer had Microsoft Teams operating in something like 35 countries. That is something that we're still obviously pursuing. You know, we're in good partnership with Microsoft. We still continue to do that. I like the attach rates.
Yeah. Absolutely. I mean, having the contact center upsell is like a big ticket.
Sure.
On top. Yeah. It's like you get people in with, you know, the 2 L sodas for $0.99 in the back.
Yeah.
We can sell more of the 8x8 licenses too, like UCaaS licenses.
Yeah.
With that as well. It's, it's not just a contact center attach. Yeah. Like, you just can start with UC going to CCaaS. And then how does your AI strategy, like, evolve from there? Like, do you think it starts with the contact center or,
Yeah. Most of our AI is geared toward, I'll be in quotes, geared toward contact center use. But it goes throughout the whole, you know, whole platform for us, right? I mean, we have AI embedded in our usage and our, you know, in certain aspects of our CPaaS business. We can be embedded in UCaaS. Again, it's that whole train, the JourneyIQ that I mentioned earlier, right? All this information can flow through the system that way as you use the UCaaS capabilities with CCaaS. I look at the AI story for us as going across everything that we sell, not just contact center, although today, you know, much of the action and activity is around the contact center.
No, I appreciate that. I guess, like, how do you envision, you know, 8x8 two years from now, in terms of, like, revenue mix?
Sure.
Like, we're past the Fuze migration, right? I mean.
Yeah.
Say, maybe say macro stable. Like, do you think consumption continues to work higher?
Yes, I do.
Like, how does AI upsell kind of evolve too?
Sure. Yeah. I think more usage-based revenue. I think that's where the industry is going generally. I think that companies are, they want to pay for what they use. A lot of companies want to pay for what they use. You know, we're dealing with subscriptions from our vendors.
Yeah.
'Cause we, I see a lot of the buying that goes on at 8x8. And we even see some shifts there, with how they're starting to sell to us. I think that's just a macro trend that's going to happen. You know, you see tokens being sold.
Yeah.
Like, some of our vendors, you know, we have credits, you know, for some of the things that we buy. I won't go into the names, but that's how it's working. I see more usage happening. I see the mix of our revenue becoming more usage. I see more AI coming in, in that respect. I see that generating gross profit dollars but having an impact on the gross margin percentage. You know, this will go down to the bottom line because usage revenue is typically not OpEx-intensive revenue, right? It's gonna be more the cost of delivery intensive.
Yes.
Per se. You'll see that impact in the gross profit percentage. Gross profit dollars can increase.
Precautional operating margin dollars would be a lot better.
Yeah. Yeah. No, and all that will fall in the bottom line. Over time, I see that happening for us.
Especially as that business scales, right?
Exactly. Yes.
That makes more sense. Okay. And then just on the, I have to ask. You guys have done an impressive job on, you know, the free cash flow generation.
Sure.
Paying down debt. You guys have done early term loan prepayments. You know, nothing is even due on the payment side for another year. Just love to kind of, if you could talk to investors, like, your strategy there on capital allocation broadly, and how you guys have gotten more active.
Sure. We are very interested in and have been for years reducing our leverage ratio. We've done a good job, I think, so far. We continue to do a good job there. We're also looking at, in terms of capital allocation, we took an opportunistic stock buyback the quarter before last.
Mm-hmm.
Relatively small stock buyback. We are focused on that. Shareholder dilution is something that we pay attention to, as all companies should. We took an opportunity to do a little bit of that. Primarily, our capital structure and decisions have been focused more toward debt paydown. Really, the reason for that is it opens up optionality for the company. When you can do that, it opens you up to being able to do larger investments, whether they are internal to the company or whether it is an M&A that, you know, we have done M&A in the past and things like that. You have more freedom to grow inorganically as well when you have a lower debt load.
Of course, you know, the benefits, as I mentioned earlier, to the net profit is better because our interest expense has gone down. I mean, our interest expense is going down, like, in the $10 million a year range because of our, not only the rates but the quickness with which we've been paying it down. We're, you know, highly motivated to be, you know, to lower the debt load for now so we have optionality for the future.
More flexibility from here.
Yes.
and it's interesting, especially with the consumption starting to do better. you know, I always love talking to 8x8 and Sam because he's seen around, like, seen around corners on a couple of things. I would just love to know if there's anything, like, are you seeing more AI internally in your organization that you're, like, utilizing and anything interesting?
Yeah. I'm glad you asked that question because I have, I really love learning new things.
Yeah.
Just as a person. What really keeps my job, a big part of what's keeping my job interesting for me personally is the things we're doing internally with AI, okay?
Sure.
This is a revolution in thinking about how to do your work. I use AI every day now. Of course, we use tools that have AI built into them.
Sure.
I'm actually using AI. We're using AI internally to help accelerate deal velocity, doing automations for, say, quote generation for our customers so we can turn things around real quickly, get answers faster. We're looking at AI for, obviously, coding product.
Yeah.
and we've done some internal coding for, an internal, I'm not gonna get too deep into it, but something that we're using internally now, that's really special for us and our ability to work better. Obviously, customer interactions that get recorded. And we can analyze sell signals and resistance signals or, or rather, buy signals and things like that. So we're using that internally, obviously, in the go-to-market but and engineering. But we're also using it in finance.
Wow.
You know, in a lot of different interesting ways. I'm excited by that, personally because it makes my job more interesting and gives me some level of excitement about what I do each day.
Like, the old days of, you know, a channel partner looking to get a commission rate and having to get an answer in the mail are behind us.
Yeah.
But.
Yeah. We get we answer those pretty quickly.
With that, I think we're close to time. Kevin, I just wanted to say thanks so much for kinda running through the 8x8 story. You know, for those who have any questions, feel free to follow up with us or Kate as well.
Thank you, Ryan. Appreciate it.
Thanks so much.
Enjoy the rest of the conference.
It's amazing being here.
Yeah.
Yeah.
Terrific.
Thank you.