Q1 2023 8x8 Inc Earnings Call
Good afternoon. Thank you for attending todays eight by eight fiscal first quarter Conference call. My name is Amber and I will be your moderator for today's call.
All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keyboard and anytime.
I now have the pleasure attending the conference over to Kate Patterson head of Investor Relations Kate. Please proceed.
Thank you operator, and good afternoon, everyone. Today's agenda will include a review of our first quarter results with Dave Sipes, Chief Executive Officer, Sam Wilson, Our Chief Financial Officer, and Hunter Middleton, Our Chief product Officer, who will give you an overview of our product strategy.
Following our prepared remarks, there will be a question and answer session. Before we get started let me remind you that our discussion today includes forward looking statements about our future financial performance, including our increased focus on profitability and cash flow as well as our business products and growth strategies. We caution you not to put undue reliance on these.
Forward looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward looking statements as described in our risk factors in our report filed with the SEC any forward looking statements made on this call and in the presentation slides reflect our analysis as of today and we have no plans or.
<unk> to update them.
Financial measures that will be discussed on this call together with year over year comparisons in some cases were not prepared in accordance with U S. Generally accepted accounting principles or GAAP, a reconciliation of those non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release and earnings presentation slides, which are.
Are available on <unk> Investor Relations website at investors Dot eight by eight dot com with that I'll turn the call over to our CEO Dave Sipes.
Thank you Jay good afternoon, everyone and thank you for joining us today on the call today I will review, our first quarter results and give an update on the integration of fuse, which continues to go well I will also discuss our plans for fiscal year 2023, as we place greater emphasis on profitability and cash flow generation in the near term.
Believes that this is the right strategy to deliver value to all our stakeholders customers employees and shareholders.
We delivered another solid quarter with air growth non-GAAP profitability and positive operating cash flow in the first quarter fuse continues to outperform our expectations with strong customer retention. We continue to advance our strategy of empowering every employee companywide through integrated contact center and unified communication capabilities.
And we are strengthening the foundation for sustainable growth in the future.
The quality of our air or continues to improve with the shift to enterprise Nx Cas enterprise grew.
Grew 54% year over year, and now accounts for 59% of total.
Ex cash IRR continues to grow at over 40% year over year and contributed more than 35% of total IRR the sequential.
<unk> growth in excess air was very strong and we see an opportunity to grow this materially over the next several years.
<unk> business declined sequentially and year over year and was an 8 million dollar headwind to total and enterprise growth.
Our continued focus on operational efficiency resulted in higher gross profit with first quarter non-GAAP service revenue gross margins at another multi year high of 73% the.
The improvement in gross margin resulted in sequential and year over year increases in non-GAAP profitability and operating cash flow as a result, non-GAAP operating income and operating cash flow were ahead of our expectations.
As we look to the remainder of fiscal 2023 and beyond we are committed to driving the operational efficiencies that will allow us to continue investing in core ex gas innovation and deliver increased profitability and cash flow over time.
On our last call, we increased our operating margin guidance for fiscal year, 2003% to 2% to 3% and said we have line of sight to doubling operating margin in fiscal year 'twenty for this original range for operating margin reflected increased investment in R&D as well as in the sales capacity and marketing programs needed to drive full year service Rep.
<unk> growth in the mid 20% range.
Over the last quarter, we've continued to evaluate our mix of investing for growth versus increasing profitability. We're prioritizing increased profitability and cash flow are moderating the growth of our investment in sales and marketing to reflect more cautious behavior by SMB and <unk> customers.
Sam will discuss in greater detail, we're making changes now that will allow us to exit fiscal 2023 at or above 5% operating margin. Further I believe we can achieve a leased an additional 200 to 300 basis points and operating leverage in fiscal year 'twenty four.
To achieve our fiscal year 'twenty three target, we're holding operating expenses more or less flat as a percentage of revenue throughout the year and allowing the improved unit economics reflected in our gross margin to flow to operating income.
We are also reducing our annual guidance ranges for service and toddler revenue by $20 million and $30 million, respectively, reflecting lower incremental investment in sales and marketing initiatives as well as foreign exchange headwinds and continued weakness in <unk>.
Let me provide a little more detail on our thinking behind our guidance.
We address a huge market opportunity migrating telephony to the cloud offers organizations enormous benefits in terms of cost and flexibility benefits that are likely to be even more compelling in a recessionary environment.
Our opportunity is greater than just moving on premise communications to the cloud digital transformation and increasingly mobile workforce and the need to offer hybrid work environment is blurring the boundaries between internal communications and contact center functionality.
As the only fully owned unified cloud based UC and contact center platform. We are uniquely positioned to capitalize on this opportunity by delivering advanced contact center features tailored to the needs of each user wherever needed in the organization to fully realize this competitive advantage, we will continue to invest in our core <unk> offering.
With an emphasis on extending the team's experience expanding global connectivity and driving contact center innovation to enhance the end to end customer journey.
As we add new innovations to enable today's modern workforce, we create the opportunity for greater revenue per user through cross sell I believe that our continued investment in innovations like front desk agent workspace and conversation IQ is the best way, we can build the foundation for sustained growth in the future with.
With investment in R&D critical to our future we are making some tradeoffs in the near term to build a better long term future. As a result, we are moderating incremental investments in sales and marketing and to a lesser extent G&A initiatives.
I believe this is the right strategy for us given the current macro environment and our immediate priority of refinancing our convertible debt. It does have an impact on our capacity to drive incremental top line growth as.
As we shift to a greater emphasis on profitability, we continue to make progress on X cat adoption and grow our installed base with our enterprise customers.
Our ex Cat platform continues to be broadly deployed across a range of industry verticals and geographic regions, including the public sector.
A few recent examples of new <unk> customers include.
Science us.
As the leading specialty pharmacy in Europe , providing healthcare solutions to patients with long term conditions rare diseases and cancer.
Selected eight by eight X cats with nearly 300 Ccs seats as part of their digital transformation efforts to enhance the patient experience in the UK and Europe .
Inception fertility as a tech enabled company improving the patient experience through an ecosystem of fertility brands as north America's largest and fastest growing network of fertility clinics inception needed an agile communications partner that would support their growth and selected <unk> to <unk>.
Over 600 employees.
More than 80 sites.
Cross sell is becoming even more important aspect of our ex gas strategy as our enterprise base expands.
Our ability to expand the number of seats and average revenue per user within our installed base has the potential to be an important driver of sales efficiency and revenue growth.
One of our significant land and expand wins in Q1 with T Force logistics, which is leading same day and next day final mile transportation solution provider in North America.
After deploying AI Ucas with voice for Microsoft teams for over 1000 employees and 76 locations across the U S and Canada. They expanded to ex cast by adding contact center this quarter for a single vendor cloud communication platform to help grow their business.
Within the <unk> cash solutions portfolio, our API voice for teams direct routing solution continues to gain momentum we now have more than 200000 users deployed.
Customers choosing a buy a voice for teens in Q1 included Brookfield properties, which develops and operates real estate investments on behalf of Brookfield asset management.
One of the largest alternative asset managers in the world.
They selected API Ucas with voice for Microsoft teams with over 2300 seats due to ease of administration and five nines reliability.
Motive care as a technology enabled health care services company, which provides a suite of integrated supportive care solutions for public and private payers and their patients.
Selected ebay Ucas with voice for Microsoft teams for a seamless experience supporting over 2000 employees across multiple locations or global reach rich feature set and tight integrations across UC and cc continue to be an important competitive differentiator with customers adopting.
Teams as the collaboration platform.
To reach more of these customers. We recently launched the API elevate Microsoft partner program and introduced an X T edition of voice for teams.
The XT addition combines our direct routing technology <unk> based managed SBC as a service domestic tid nationwide, calling HD audio and secure voice all in a single package.
Customers can easily upgrade or add seats with advanced functionality, including global calling conversation IQ or contact center.
We continue to lead the market in global calling capabilities in the first quarter, we expanded global reach to include Israel, Taiwan, Latvia, and Slovenia. Our cloud based global Ucas solution is now available in 54 countries and territories.
Representing nearly 90% of global GDP.
Today about 30% of our users are outside North America, our ability to reduce the cost and complexity of managing PSTN connectivity across multiple regions.
Another competitive advantage that becomes increasingly more important in a cost conscious environment.
Okay.
A great example of a customer implementing ex gas on a global basis as <unk> a global provider of construction products that include high performance specialty construction chemicals and building materials and continues to expand with API ex cash with over 2300 seats.
In 22 countries spanning five continents, including providing full PSTN coverage to employees in China and the Philippines.
Ex gas also continues to gain traction in the public sector, where our ability to support customer engagement across the organization on a single platform creates a competitive advantage examples of public sector wins in Q1 include.
Cambridge, <unk> and Peterborough NHS Foundation Trust, which is the health and social care organization supporting nearly a million people in the community they turned to API Ucas and voice for Microsoft teams to support the employee experience for more than 2000 users.
Norfolk County Municipal government support 63000 residents in southwestern Ontario, Canada.
They selected a bite you cast with voice for Microsoft teams for the simplified administration, a cloud communication system provides.
Finally, a brief comment on our <unk> business, the large customers who reduced their <unk> usage in Q4 have not yet returned to pre Q4 usage.
While we continue to work with them to design new programs, our guidance does not assume any usage revenue from these customers going forward.
Although we expanded our user base with new customers in the quarter. The usage component of the <unk> business continue to weaken in Q1 and impacted both our IRR metrics and service revenue growth. Despite this we continue to add well known names to our customer list setting us up for long term success when usage rebounds.
These names include Dr. Rumour, Indonesia is number one <unk> e-commerce platform for all things from office supplies to maintenance services. They.
They use a by SMS Apis to reliably secure onetime passwords to their users. They also use <unk> chat apps API for customer service over Whatsapp.
Providing their customers a convenient way to contact us.
And Ken belly, one of Indonesia's fastest growing social commerce apps, using <unk> SMS and chat apps Apis recently added <unk> voice, AVR and voice messaging Apis to automate customer self service workflows and user verification.
Notifications.
We continue to enhance the <unk> platform. Most recently with <unk> connect automation builder, a no code multiple channel Communications management solution for C pass.
Automation builder offers a visual effortless way for anyone regardless of coding experience to easily build engaging customer experiences that enhance productivity flexibility and efficiency.
In summary, innovation has always been a core value at eight by eight and I'm proud to say, our new innovations are gaining acceptance.
27% of new mid market and enterprise customers have deployed front desk since its launch just two quarters ago.
And 100% of new users have deployed our new UI and agent workspace since it launched in March.
Our voice for teams offering surpassed 200000 users one of the fastest ramps in our history.
Innovations such as these leads to improved customer satisfaction and retention, which we see in the numbers.
We have already made rapid progress on our ex cast product roadmap. This year Hunter Middleton, our chief product Officer will give you some additional detail on our product strategy.
Before handing the call over to Hunter I do want to thank our teammates here at <unk> for their hard work and commitment I also want to welcome Susie Sandell, as our new Chief Accounting Officer.
I remain confident in our opportunity our competitive advantages and our strategy as we grow our enterprise and <unk> business. We are building the foundation for <unk>.
Sustainable growth in revenue and cash flows and we believe this will deliver value for all our stakeholders.
Thanks, Dave and Hello to the investment community.
Im joining today to give an update on our R&D investments and product strategy as you already know our R&D efforts solid infusion of resources with the recent views acquisition Q1, FY 'twenty three was our first full quarter since the acquisition and while early we have been pleased with the R&D results so far.
Overall output of the combined R&D team is already up 25% compared with Q4 of last fiscal year and the investment in sustaining engineering for the <unk> platform and an upgrade automation to get customers to the combined <unk> platform are looking right on target.
The integration of the development teams is fully complete we have one eight by a roadmap and a single platform that we're investing in I am personally very impressed by the quality of the fewest technical teams and I'm extremely proud of how everyone has come together.
With this increase in innovation capacity by eight has the ability to accelerate our delivery of differentiated services.
A wide range of market segments <unk> value on our services with the core target as a midsized enterprise organization using EMS teams for internal collaboration and with a high value customer base that demands engagement throughout the organization not just in the contact center.
Let me cover each of those points in turn to share how we differentiate.
With the move to cloud midsize enterprise organizations don't want to worry about maintaining their own in house telephony expertise.
Now more than ever they are looking for a vendor that has a longtime cloud telephony and carrier expert not a recent entrant.
<unk> best in class Global Cloud voice solution with a five nines reliable full featured enterprise ready voice and SMS service and the largest global footprint of any cloud vendor continues to be the premium option for midsize enterprise cloud telephony.
This market is especially motivated by <unk> ability to ensure a low risk and low drama move to cloud.
Over the last two years, we have upgraded our entire customer base from our own legacy platform to our new X test platform, while increasing our customer retention rate. We are now preparing to execute that same move with the fewest customer base and in the process extending our import tooling and execution expertise.
Even further.
We know how to move the customer's deployment from one platform to another and this expertise is critical to enabling the significant number of risk averse late adopters to get to cloud.
Some of the top investments we are making in this key area of differentiation include exceeding five nine's availability across the platform expanding our global telephony footprint to add additional countries and delivering even better import tooling to ensure a seamless redeployment from on Prem to cloud.
Almost every mid size enterprise communicates to a contact center to its customers via voice messaging or other omnichannel methods. These organizations tend to be very ROI focused and less experimental they want high reliability, a great user experience to minimize training and operational expense and core.
Our proven technology that is short time to ROI.
AIA is very focused on deepening our value delivered in this large segment.
We recently launched an impressive new agent experience with positive customer reviews.
Typically the customer comments, we've had so far is this from National Express.
Hey, buy eight agent workspace was extremely easy for agents to pick up right from the start and incredibly straightforward self explanatory and easy to use interface that really helped enhance their overall experience for aiding the delivery of better customer outcomes.
We are continuing this coming year with several additional major launches a superior digital conversational AI solution.
A completely revamped team leads experience with user management team reporting and quality management capabilities all in one UI.
Furthermore, we're going to do enhancements to our agent work space to further improve usability for digital use cases, and better integration with the customers CRM.
We have our user research and design teams dialed in on this customer profile and are making sure that everything we deliver scores high on usability and provides a complete end to end use case fine tuned to the needs of this segment.
A significant portion of the midsize enterprise organizations today are opting to use EMS teams for meetings and internal messaging that.
<unk> solution is incredibly EMS team's friendly designed to enable customers to easily mix, our external communication solutions.
With the natives EMS team's internal collaboration service.
Our integration is easily adaptable to the diverse ways that companies choose to operate with MFS teams from having AI voice and SMS fully and book bedded in the EMS teams App.
To enabling mix and match with users adopting the service that makes the most sense for themselves while maintaining effective interoperability with users on each platform.
We are very happy to trade the sale of an increasingly commoditized meeting service for the higher value sale of our native contact center and customer engagement capabilities.
Our recent bird study found that <unk>.
<unk> teams integration is preferred for to one over our UC competitors and we will continue our investment to maintain leadership in this area.
For a while now Dave and Sam has been talking about the success of our X cast product strategy.
Almost all enterprise organizations find value in one platform single vendor solution or X test differentiation goes well beyond simply selling integrated but distinct UC and cc solutions on a single contract.
<unk> is uniquely able to break down the walls between UC and Cc solutions and can deliver traditional contact center engagement capabilities wherever they are needed in New York focusing on three primary avenues for creating value for our customers.
First every new contact center capability gets built at a platform level. So that we can also deliver it to any user team throughout the organization.
Second we're designing dedicated app experiences that bring UC and cc functionality together and purpose built configurable UI for key customer engagement personas.
And third we're investing in the data infrastructure and the analytics that enables visualization and insights on the end to end customer journey. So that companies can really see what's going on.
I know that all sounds a bit silicon valley. So let me discuss two recent launches that make this product approach more tangible.
<unk> recently extended the availability of conversation IQ, our quality management and speech analytics service to any users throughout the organization. This product is typically considered to be a contact center capability.
Speech analytics that looks at individual interaction transcripts to identify coachable moments and topic trends and then feed those into our coaching application for the team late.
You can now apply the capabilities as a premium add on service to any user in the organization.
For instance, we have recruiting agencies that use it to monitor and coach individual recruiters on the effectiveness of their phone screens reception teams that use it to verify adherence to the REIT greeting script on the right inbound number and billing support teams that need to assess customer satisfaction with their agent experience.
Just as if they were sitting in a contact center.
This is how ex cast delivers customer engagement functionality throughout the org.
Another example, the first of our premium experiences was front desk or new attendant console that was released in the middle of last year.
Receptionists need more than just a phone book.
Less than a full omnichannel contact center seat front desk combines core UC call handling and a high highly usable company directory with the extensive multi user voice skus familiar in the contact center space.
And all of this is composed in a single screen UI that ensures the user doesn't have to hop around different components to get their job done.
<unk> gone from the screen, but available click away when needed our company chat in meetings that our research shows are rarely used by this persona during the workday.
Seeds for these app experiences sell at a premium to traditional UC application licenses, while still being more of more affordable to the customer than a full contact center license <unk>.
There are simpler to deploy.
Our data shows that adoption of front desk, among our new enterprise logos is already over 27%.
Looking forward to some of the highlights in the coming year on our ex cast roadmap, our new digital conversation AI capabilities will provide customer self service options across the entire organization, our customer journey analytics are being enhanced to deliver more insight into interactions that span UC and cc nodes.
And the new team leader experience, where we're equally effectively for customer engagement teams outside the contact contact center as it does for those that are in the contact center.
We are also actively working on additional premium app experiences that target key customer engagement roles throughout the company and we will share more about that in future calls.
For your time today and I'll be on the line for Q&A, If you have any questions Sam.
Thanks Hunter and good afternoon, we remained a financial agile and disciplined organization and delivered solid results for the quarter. We continue to experience some challenges in our <unk> business during the first quarter and foreign currency headwinds were strong both of which impacted service revenue performance and will make us adjust fiscal 'twenty three.
Guidance.
In spite of these challenges revenue was near the high end of our guidance range and we continue to post broad improvement in gross margin delivered solid operating income and another quarter of positive cash from operations.
Total revenue for the quarter was $187 6 million, an increase of 26% year over year and inside of our $185 to $188 million guidance range.
Generated $179 $2 million and service revenue increase of 30% year over year and in line with our $177 million to $180 million guidance range.
The <unk> business did not bounce back as hoped with a year over year and sequential decline for the second quarter in a row, the strengthening dollar, especially versus the pound sterling negatively impacted revenue by about $1 $5 million.
Fuse accounted for $29 $3 million of service revenue and $29 $5 million of total revenue.
Service revenue for fuse was better than expected driven by higher retention on our whole used at better than expected in both revenue and costs and therefore was accretive to non-GAAP operating income.
We are committed to remaining non-GAAP profitable post acquisition and so far so good.
We expect further cost savings opportunities as we continue to integrate <unk> operations with our own but these will take time to achieve as we communicated at the time of the acquisition.
Total <unk> was $688 million of quarters and up 28% year over year as we stated in our prior earnings calls, we will not be breaking out fuse from eight by eight separately for our reporting but will continue to give visibility into future contribution to reported revenue.
Enterprise customers now account for 59% of total IRR and enterprise was up 54% year over year.
Mid market with 18% of IRR and grew 22% year over year.
In small business was down to 23% of IRR and declined 7% year over year.
Growing our enterprise business is one of the core tenants of our long term strategy due to these customers longer commitments higher retention and better efficiency ratios.
A comment about the SP segment declined 7% year over year.
Small business is non strategic for us because of the low efficiency metric and the absence of contact center needs.
We expect it will continue to shrink as a percentage of total IRR.
I'd like to call out to investors, we made a change to last quarter's number of enterprise customers lowering the total from 3500 20 to 258.
When we integrated skus into the reporting we inadvertently included both subsidiaries and parent purchasing centers. This has been corrected.
Turning to expenses ill remind you that all expense.
Closed are non-GAAP unless otherwise noted.
Service revenue gross margin came in at 73, 4% an increase of 450 basis points from the first quarter fiscal 'twenty, two and 100 basis points sequentially driven by continued Cogs improvement programs, which drove down unit costs and to a lesser extent lower <unk> revenue.
Other revenue gross margin came in at minus 35, 3% for the quarter compared with negative 19, 6% in the first quarter of 'twenty, two and negative 44, 6% in the fourth quarter of 'twenty two.
Looking forward, we hope to see improvement in other margin overtime as we further integrate fuse overall first quarter gross margin was 68, 5% up nearly 600 basis points year over year, and 180 basis points sequentially the increase.
It was driven by revenue growth a higher mix of service revenue and our gross margin improvement projects.
Turning to first quarter operating expenses. This is our second combined quarter with fuze.
First full quarter of expenses R&D stepped up to 14, 2% of revenue getting closer to where we want it there were several unusual one time items.
That increased operating income by $3 million.
non-GAAP operating profit grew nearly $6 million quarter over quarter to $10 1 million.
On a normalized basis operating income would have been about $7 1 million still up nicely quarter on quarter and year on year.
Without the benefit of the unusual items plus the full impact of employee annual base pay increases we expect a sequential increase in total expenses in the second quarter, resulting in a smaller.
Decrease in the operating margin on a normalized basis.
Instant with our goal of driving financial leverage we expect to see improvements in operating margin in the second half of the fiscal year and want to exit.
The year at 5% or better.
Turning to the balance sheet total cash restricted cash and investments ended the first quarter at approximately $143 million.
Compared to approximately $148 million last quarter and $162 million a year ago, excluding restricted cash balance was $141 6 million compared to $138 $7 million last quarter.
<unk> was approximately $700 million for the quarter down from $715 million in the fourth quarter the quarter on quarter decline was driven mainly by a small shortening of remaining contract duration given the market environment. This was not a surprise.
Cash from operations came in at approximately $5 8 million for the quarter ahead of our expectations. We continued to actively manage cash flow and watch it closely and collections remained solid.
We expect to see a larger than usual difference between operating income and cash from operations over the next few quarters. We have several fuse related items that will use some cash but will not be in non-GAAP income statement.
Recently, we received a number of questions about our $500 million in convertible notes due February 2024, or 18 months out.
We are now in the normal window for refinancing and as a non-GAAP profitable cash flow positive company, we have multiple options to refinance we're going through the process of evaluating the alternatives to arrive on our refinancing strategy that is best for all stakeholders.
Others I remain confident we can refinance our debt this year.
Last quarter, we made the comment that we were shifting to a greater emphasis on improving profitability and cash flow versus driving higher revenue growth. We have continued to evaluate our mix as the selling environment has become incrementally more cautious with CIO and CFO being slower to make decisions, we spent the quarter annualized.
Situations and believe it makes sense to continue to pivot to our profits plus growth strategy.
As such we are taking down our revenue guidance for fiscal 'twenty, three but raising our operating income guidance.
The decline in revenue growth rate was driven by three major factors one.
We are moderating growth in sales and marketing investments to focus on improving efficiency and margins.
The impact of the stronger dollar, particularly the British pound to U S dollar, which is suppressing revenue and three continued weakness in C pass as a reminder, we generate about one third of our revenue internationally.
We remain focused on improving gross margins.
These can be variable quarter to quarter based on product mix for operating expenses, we plan to significantly slow the growth in sales and marketing spend and.
And we'd like to see us exit fiscal 'twenty three between 38%, 39% of revenue down from 41% two quarters ago.
We plan to focus our R&D efforts on our core product offerings and expect R&D as a percentage of revenue to remain in the range of 13% to 15%.
Innovation is key for any software company and for us with a multibillion dollar market opportunity even more so.
We believe continued investment in our customer focused product strategy as described by Hunter with an emphasis on contact center functionality has good ROI.
Lastly, we expect to see continued leverage in G&A as a percentage of revenue as we fully integrate the <unk> operations.
This set of initiatives will drive operating margin higher in the second half of 'twenty, three and we expect to exit 23% operating margin above 5%.
This brings our operating margin for the year to about 4% give or take as Dave mentioned, we think we can add more operating margin in fiscal 'twenty for next year through continued improvement in unit economics incremental savings infuse G&A as the integration progresses and improved sales efficiency.
While we expect the increased emphasis on profitability and cash flow to have an impact on our topline growth near term. It gives us more flexibility to refinance our debt and further options to drive shareholder value in the future with this in mind, we are taking into account. The recent performance of the <unk> business and FX, we are establishing guidance for.
For the second quarter of fiscal 'twenty three ended September 32022 as follows.
We anticipate service revenue to be in the range of $177 million to $180 million essentially flat with the first quarter, representing approximately 24% to 26% year over year growth. We expect used service revenue contribution will be between 27% and $29 million.
We anticipate total revenue to be in a range of $185 million to $188 million approximately 22% to 24% year over year growth, we have uncertain visibility on the supply chain hardware shipments, but for now expect other revenue to be flat to down slightly compared with the first quarter.
We are targeting an operating margin in the 2.5% to 3% range for the quarter.
The sequential decline from approximately three 8% in Q1 on a normalized basis is primarily due to the annual pay increases implemented in June .
We are updating our guidance for fiscal 'twenty. Three ended March 31, 2023 as follows we.
We anticipate service revenue to be in the range of $720 to $730 million, representing approximately 20% to 21% year over year growth, we expect to exit fiscal 'twenty three with service revenue growth.
In the mid to high single digits on a year over year basis.
We anticipate total revenue to be in a range of 747, 5% to $762 $5 million, representing approximately 17% to 19% year over year growth.
We are focused on improving operating margin over time and have a goal of exiting fiscal 'twenty three over 5% for the fourth quarter and at least 4% for the year.
In closing I believe the increased focus on our operating margin and cash flow are exactly the right strategy. At this time I believe we need to continue to fund our investment in R&D, we address a large market opportunity.
And the focused product strategy Hunter outlined leverages, our unique advantages of a unified platform global connectivity and leading teams integration as we extend these advantages and deliver superior ROI to our customers, we reinforce our strong financial foundation and remain agile organization.
And with that I'd like to turn it over to Q&A.
Thank you we will now begin the Q&A session. If you would like to ask a question. Please press star one on your telephone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question Thats Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered.
Okay.
Our first question comes from.
I'm.
<unk> <unk> with Mizuho.
Your line is now open.
Thanks for taking my question.
Just wanted to ask about your plan to reduce your guidance for this fiscal year.
You didn't talk about the demand environment or any kind of slow macro slowdown wondering what are you seeing in them.
Market right now.
I appreciate that also what's triggered this loading sales and marketing.
Ben.
And after Q1.
Yeah on the demand side or enterprise customers, we're not seeing any material impact we have seen some impact on small business and our <unk> customers and we do have in a few cases customers performing additional due diligence.
Slight decline in average contract length may.
It may reflect some caution, but it's not a clear sign but overall not a major.
Signals coming from our enterprise business.
Alright, I'll take the second part of that we're moderating our sales and marketing spending growth and I think that's just driven by the fact that we are continuing to focus on sales efficiency and ROIC.
I just want to be careful that we continue to drive up the ROIC and we're also setting the stage for debt refinancing later in the year. So I think just all those things combined just make as we moderate our sales and marketing growth a little bit this year.
Mhm, Okay, and then a quick follow up to Microsoft teams, where do you see.
Uh huh.
The.
The competition at this far and where do the Microsoft teams telephony offering.
But it isn't what's Microsoft strategy, how do you plan to compete in a next few years.
With that offering, especially in our pricing is so competitive.
Yes, Microsoft teams there is a platform.
Approach to enable telephony into Microsoft teams, both through direct connect and operator can act. In addition to calling plans. So we really see a direct connect operator connect is the big opportunities where a top player in direct connect and we're we've added over a <unk>.
100000 users there.
That is a big opportunity to get make that even significantly larger that's why we launched the elevate program focused on Microsoft partners and our ex tea SKU that will fit nicely into the teams offering and so.
Sure.
I'd like to see US 10 X those users over over the next couple of years.
Great. Thank you.
Thank you.
Our next question comes from.
Ryan Macwilliams with Barclays. Brian Your line is now open.
Perfect. Thanks for taking the question just a follow up on the Microsoft team side. Another 50000 seats added to ebay with your teams are you seeing good success here and Upselling cloud contact center into Microsoft opportunities.
Yes, we are seeing good success with ex cats, which is both contact center and you see and Thats a specialty of our platform.
X T skewed us fit into our X series.
As well as our X X, one and X two X three skus. So those are all UC skus, we sell X at 6768, our contact centers Skus and those do sell nicely, we did see ex cats.
<unk> continued to grow at over 40% year over year in its 35% of our installed base. So it's a creating share within our business and the goal is to push that up into a majority of our business.
Excellent and then Tim just on the guide I guess, how do you think about like.
Where our conservatism is here in the next quarter.
Or more towards the end of this year from a topline perspective, just because.
And like 189 through each quarter that kind of gets you to the midpoint of your guide, but then you would exit the year kind of mid single digits.
Revenue growth so is it more near term or towards end of this year and then.
If you could just double click on what are your thoughts around maybe some of that C pass traffic coming back what the outlook looks like there I appreciate that thanks.
Alright, so in terms of conservatism or or just visibility I guess I'll just use a more generic term I mean like all companies, we have more visibility of the quarter Red and then it progressively over time the visibility gets lesson, we've actually get more conservative we bottoms up forecast and so that's what drives that we did further de risked to see pass model.
It was down quarter on quarter, so incrementally that business got a little worse and as everyone knows we sort of take the exit run rate of that business and run it flattened perpetuity and then thats kind of how we think about it for those customers and then we layer in new customers on top of that and so.
I would say definitely more conservative I think I did say in my script that exit the year kind of mid to high single digit growth once we lap the fuse numbers.
And then just in general your question on C pass.
I would say incrementally environment has gotten a little harder I don't know exactly but the macroeconomic or just specific customer things et cetera. So it's harder for us telling a usage based business, we're not seeing substantially more customers go to zero I don't think the traffic's moving we're just seeing less total aggregate traffic.
Okay.
Thank you next question please.
Our next question comes from.
Meta Marshall with Morgan Stanley .
Your line is now open.
No.
Great. Thanks a.
A couple of questions and then Sam when you mentioned Mitch.
The highest single visit services growth rate exiting fiscal 'twenty three how do you think the bank compared to the overall market growth do you think there'll be kind of a sustainable share growth.
And then on the second question.
You kind of get.
Focus on operational efficiency.
A little bit more conservative on your spend on sales and marketing.
What opportunities do you think you are foregoing does that basically just trying to see does that impact the enterprise or SMB.
Thanks.
Alright, I think I'll take both of these and let Dave chime in so on the mid to high <unk>.
And remember.
We're in a bit of a transition here right. So we've talked about this in the past our small businesses coming down Thats a headwind while our enterprise is growing relatively quickly in the quality. We believe of our over a pool is improving and so we would expect.
That would be exit the year with a higher growth rate in enterprise and then offset by a slow growth rate tick tick it for whatever that means.
Small business relative to the market looked the last industry numbers I saw as the market overall is on the UC side is growing at around 10% plus minus.
I think plus minus we're in that ballpark I think were growing fast we're gaining share on the enterprise side, particularly relative to the on Prem vendors and on the small business side, where it's less strategic and it's got a host of other issues. We may be just treading water in that general area.
In terms of improving efficiency and foregoing some things I think you'll look that's a great question, Matt It's a constant conversation we're having.
I think sometimes you have to forego some opportunities to invest in new opportunities.
You see very clearly in the prime reasons, we wanted hunter on the call. This time was the place we are really pushing the envelope as innovation. So if you think about it we've now increased our R&D spending to 14% to 15%, which is what we talked about in our intermediate and long term model. We wanted to be at so where we are pushing us on the innovation side.
To fund that and meet meet our corporate financial objectives, we're pulling back a little on sales and marketing once we get through that R&D cycle will look to reinvest in sales and marketing, but right now I think the place to invest is definitely in innovation and you see that coming through on the financial model.
Great. Thank you so much.
Thank you.
Our next question comes from.
Matt Van Vliet with E T E.
Your line is now open.
Hey, good afternoon, everyone. Thanks for taking the question.
Yes can you give us an update on where we're at with fuse integration in terms of.
Such as migrating customers to the overall exercise platform, but also what youre seeing in terms of attach rates and upsell on the contact center.
I know you highlighted that as a big opportunity when you close the deal.
Alright, so Matt Van fleet at <unk>, I'll take that part of the equation.
Alright, So look I would say in terms of the back office operations were effectively integrated now with you can't really tell the difference and I would lump R&D I'll say as a separate case in a hunter you want to throw a few words in please do.
In terms of fuse in R&D, we're fully integrated now you can't tell the few teams from the non views teams and where that was going to add any no I think thats exactly right. Sam we've fully integrated the development teams were working on a single roadmap.
The innovation is focused on a single platform going forward. So that integration has gone really smoothly. We're really excited about the team that has come on board and everybody is working great together, alright, specifically on migration and cross sell we've always sort of hinted that this is a fiscal 'twenty four type of initiative and so we still think that I mean remember the average we've only had.
This company six months the average sales cycle is a year generally for that type of stuff and so we're focusing on that and also it takes time to get the the automation of those other things and we're not pushing fuse customers to migrate we will get there over time, but right now we want them to get comfortable with us we want to get comfortable through the transaction.
If you noticed just point blank the fuse revenue numbers have actually been substantially better than we even hoped for and I think our strategy is really showing through in the numbers of really trying the baby. These customers keep them engaged keep in front of them and not push them to aggressively we will get there and get them migrated over really.
Starting next year as we make it super easy for them et cetera. The cross selling activities are occurring we're having things like webinars marketing campaigns.
A lot of interest from the <unk> base, that's just going through now are normal sales cycle.
Alright, very helpful and then.
As you ramp up the channel to help further so into the teams and the broader Microsoft ecosystem, how should we think about the contribution rate or the profitability of.
The elevate program relative to your more traditional.
Partnerships and channel partnerships.
Ex cats.
Are there any meaningful difference there can the volumes of the team's organization often offset.
A little bit lower pricing.
Yes, I think economically the volumes are significant in that market and the elevate program is focused on people that have traditionally been Microsoft resellers and not necessarily cloud.
Cloud telephony resellers, so it's bringing in incremental group into the fold.
And as far as how we go to market.
Youre right its higher volumes in that category with teams add ons and we make it up.
Additional contact center sells into that installed base in our ex cat selling so overall when you look at revenue per account, it's very it's large larger than average.
<unk> creates that opportunity for the partners as well as our sellers.
Alright, great. Thank you.
Thank you.
Our next question comes from.
Peter Levine with Evercore.
Peter Your line is now open.
Great. Thank you for taking my questions also thanks for the color on the convert maybe sand can you kind of talk through what some of the options on the table that you have now and how youre thinking about it and then just to confirm.
Youll, probably convert the convert before it becomes a current liability is that kind of.
Just think about it.
Well I did say this year. So you can take it as calendar fiscal whichever one suits my needs in the moment.
But this year, we'll get it taken care of them and it would become a current liability with it at the end of this fiscal year.
And yes that would be our objective to do that in terms of options. We've got term loan capabilities. We've got exchange capabilities, we've got equity capabilities I mean, it's pretty amazing how much how many different options. There are I mean 20 years ago. When I first was first on the street for a company like us would be equity and equity only.
Literally there is a broad range of options from traditional banks alternative lenders.
Sovereign funds have approached us we've talked to literally a host of different opportunities each.
Certain pluses and minuses and we're trying to weigh through all those options and come together with a complete package that's literally best for all of our stakeholders.
Okay.
And then just final one here how much of the guide down is related to see past. If you can break it out like C pass versus FX versus kind of like the macro environment and then to that is how much of an FX headwind do you think there is for the remainder of the year. Thanks.
So if you take a look at the $20 million to $25 million kind of <unk>.
Service side, and 25% to 30 I would say.
One is is maybe.
A third FX, a third C pass and a third UCC applications kind of when you mix it all together.
And.
Look far be it for me to use the word macro we're a small fish in a big pond, So I'm never sure Im willing to buy all those kinds of things.
But I would say.
That's that's really the way to think about it and then the only thing I would add is on the <unk> side look we're trying to be really conservative with the small business piece, that's where we expected and we continue to expect the enterprise side will grow Thats, where our money is going that's where our strategic initiatives are going et cetera. It's really we're trying to be more cautious given the <unk>.
<unk>. So maybe that's where you would say macro is on the small business side just.
Incrementally tougher on that side of the house.
Yes, thanks for the color.
Thank you.
Our next question comes from.
James Breen with William Blair.
Your line is now open.
Thanks for taking the question can you talk a little bit about the channel and any changes you may have seen there whether it's a slowdown.
Bids et cetera.
Some of the pricing dynamics. Thanks.
Yes.
We brought in new leadership on the channel back at the beginning of the year.
Lisa <unk> and that team is performing very well.
We've also gone into the channel.
With improved how we deal with Escalations customer support elements.
And have improved our reputation in the channel and continue to do that and as you know the channel's been growing quite nicely I think growing at 70% year over year.
We're having success in that market.
And I Love these specialized programs that we're doing now with.
Elevate.
And some other programs that we're doing in the market at least is bringing to bear. So overall I think we're improving our traction and you're seeing it in the numbers.
I think theres a lot more opportunity there for us.
Great. Thanks.
Thank you.
Our next question comes from.
Tim Horan with Oppenheimer.
Tim Your line is now open.
Thanks, guys.
Great.
Can you just describe what your competitors are doing there maybe how far ahead of the competition you are at this point.
The relatively new channel partnership with.
Really probably prefer to use you guys at this point than maybe even Microsoft themselves or.
There's just a little bit more color around that would be great.
Yes, I think the channel itself doesn't really make much money selling Microsoft and so the opportunity for them is really get into the higher level services, such as cloud telephony and contact center.
And the.
The things, we're doing to make our products fit well stuff the hunters team is doing.
Our <unk> SKU.
Create a nice alignment and now going after these incremental sellers that have traditionally not been able to sell those are not focused on those higher value services like cloud telephony and contact center, bringing those into the fold and teaching them how to sell that category and get that incremental.
<unk>.
Economics is a huge win for the channel.
No.
Thanks, and maybe just can you talk a little bit of how much free cash flow. You think you can generate next year, if all goes well.
Any color around that thanks.
Next year, you mean fiscal 'twenty four donahue.
Thank you.
I'd like to see us be generating.
And we've seen 30% and $40 million, but that's an off the cuff guess, it's not guidance put some other SEC words around it.
But that's an off the cuff guess on.
Plus minus and if you give me a couple of hours are probably getting more refined number.
Okay.
Very good thanks, guys.
Yes.
Thank you.
Our next question comes from.
Power with Baird.
Your line is now open.
Hey, Thanks for taking the question. This is Charlie Ehrlich, who will.
Adam.
I had a question on gross margins.
But coming in strong and just wanted to ask what the expectations are for next quarter and the remainder of the year.
Next quarter, I would think flat to down.
Slightly down <unk>, not a big down just.
Just flat to slightly down.
Quarter on quarter, we have some moving pieces in there and then on for the year look we have a lot of programs underway and we'd like to continue to see gross margins trend up looked at the rate of increase will slowdown the wildcard being the <unk> business, obviously with the <unk> business being a little weaker that improves gross margins.
<unk> business bounces back Youll see some.
Gross margin.
Dilution from that.
But over over multiple quarters to want to see a trending higher.
Great Alright, thanks for taking the question.
Thank you.
Our next question comes from.
George Sutton with Craig Hallum.
George Your line is now open.
Thank you you mentioned shortening of pump calculation I just wondered if you could go into a little more detail on where youre seeing that shortening.
It's a great question George I didn't look at it in that detail I look to do over RP O pool, and so the <unk> pool, we saw like a month month, and a half decline quarter on quarter and just to the overall pools pool duration.
I didn't break I could guess, but I'll tell you will probably see it more on the small business side.
Just generally where we see slightly weaker business trends at the enterprise side still remains relatively solid strong whatever word you want to use there.
A quick question for Hunter you mentioned the output was increased by 25% I wasn't sure. What you were referring to being up 25% could you just clarify that.
What we track every.
Every quarters the number of projects that we initiate and complete and our overall project completions were up by 25%.
We do we have a lot of projects across R&D team of our size over relying something on.
At law of averages there, but essentially we're getting getting a significant higher throughput in terms of projects will be completed.
Got you thanks, guys.
Thank you.
Our next question comes from Michael.
Michael Funk with.
Bank of America.
Michael Your line is now open.
Thank you and Dave Sam Hunter. Thank you for the presentation.
Commentary one for <unk> to begin.
There's always a balance between messaging to equity versus debt holder. So how much of the guidance and then the decisions around sales and marketing and profitability.
Is geared towards.
The debt market and the expected refi versus your view on near term market opportunity.
Look I don't view them radically differently I would say what we do see is that.
That.
More and more our equity holders are pushing us to become more profitable.
And potentially trim back low ROIC projects, given the change in the overall market environment that we're in.
And in a little more certainty in the growth profile of the company and so I don't think that there is a different message or a different push between the two of them.
And a discounted cash flow model works, both the same ways I would say that we want to make sure that if we do do depending on how we do the equity I'm sorry, the debt refinancing we want to make sure that we maintain cash flow profitability post any refinancing and so there is some.
And making sure that we're prepared for that also.
I understand and thank you for that and then one more if I cut in sales and marketing efficiency comment just to clarify a number different ways to think about that dollar our sales and marketing.
Obviously return and profitability of those sales and marketing dollars. So we're talking more about return and profitability. So shifting away from product, maybe becoming less profitable lower return more towards innovation or is it just simply.
Revenue dollars per sales and marketing or sales per.
Sales person.
Okay, So I would say.
Great question and definitely what I'd love to talk to you about at length and I'll try to give you a shorter answer knowing that there is a deep long answer that sits behind this.
We look at it bank ways, we certainly look at the core changing IRR or change in service revenue divided by sales and marketing spending those types of metrics. We also look at change in bookings and those kinds of things relative to sales and marketing.
But also if you take a step back there is a bigger picture here.
Right now, we see more and more enterprises wanting to make the move to cloud we see a benefiting our numbers, we see that industry trend that logjam, starting to breakthrough and to meet those enterprise customers. We it makes sense to spend more on R&D and continue to innovate our product to meet.
That market need and so when you get those enterprise customers, obviously, they have lower business mortality risk better LTV to CAC ratios and all those kinds of things also so the more we can innovate the more we create product differentiation. The more we can land enterprise customers the better our sales efficiency numbers will be naturally.
And then on top of that we are continuing to focus on making sure that we put incremental sales and marketing spending in the areas of higher efficiency.
Great. Thank you Sam for questions. Thank you Dave that counter.
Thank you.
Our final question comes from Ryan.
Ryan Koontz with Needham <unk> company.
Brian Your line is now open.
Great. Thanks for the question.
I Wonder if you could give us some more color on the C pass decline just driven by cost cost in your respective price increases with your customer set driving lower volumes or are these like lost deals to alternate communication channels and then secondly.
For transparency any way you can give us the organic AOR growth without views. Thank you.
I'll take the second part even through the first part yes.
We talked about there were some large accounts that reduced the marketing programs that were going over our API.
Communication Apis and those customers have not come back what were working on is getting better ROIC for them and those marketing campaigns.
Through lower costs. Additionally, we continue to add customers, but we see overall usage.
Down a bit it's a usage based business. So we don't have the level of predictability that we do in our standard <unk> CCC business.
And I believe on the <unk>.
I'll take that one so we don't break out <unk> by.
By fused antibody, we give you the revenue numbers, which you can extrapolate how you see fit the big reason, we don't is because we now have customers migrating and so you get into this conversation of should you kept them on the <unk> side of the few side or what are the case may be and so we just try to give you the revenue numbers because thats clean easy to to go through and we don't have to add anything I would say.
When we think about segments. The big thing for US is that our enterprise IRR continues to grow very.
Very healthy as we mentioned ex cash, which you can sort of take it as a euphemism for enterprises with things over 40% year on year enterprise, probably growing over 30% year on year those types of numbers. So there is where the stronger parts of the <unk>.
Helpful. Thanks, guys.
Thank you.
Thank you.
That concludes the Q&A session as well as todays eight by eight fiscal first quarter earnings conference call.
Thank you for your participation you may now disconnect your lines.
Thank you Amber.
Okay.