Q3 2023 8x8 Inc Earnings Call
Good afternoon. Thank you for attending the <unk> fiscal third quarter earnings call. My name is Matt and I'll be your moderator for today's call all lines will be muted during the presentation portion of the Gulf an opportunity for questions and answers at the end if you would like to ask a question. Please press star one on your telephone keypad.
I have to pass the conference over to Oracles, Kate Patterson, Vice President of Investor Relations.
Please go ahead.
Thank you operator, good afternoon, everyone. Today's agenda will include a review of our third quarter results with Samuel Wilson, Our interim Chief Executive Officer, and Kevin Kraus, Our interim Chief Financial Officer. 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.
It's about our future financial performance, including our increased focus on profitability and cash flow as well as our business product and growth strategy.
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 enel.
As of today, and we have no plans or obligation to update them.
Certain 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 available on <unk> investor.
Investor Relations website at investors <unk> eight by eight dot com with that I'll turn the call over to Samuel Wilson.
Thank you Kate and thank you to everyone joining us on the call today.
I believe our solid third quarter results were a strong indicator of our ability to perform against our objectives. We said, we would forgo some near term revenue growth for profitability as we build a sustainable long term business and that's exactly what our teams did in the quarter.
Despite the lower than expected total revenue, we delivered almost 10% operating income increased deferred revenue in RPM and experienced high customer retention all early indicators of future success for a SaaS business.
The quality of our performance in the third quarter.
Want to thank our employees in every one of the AIA community for their hard work.
Turning to the future I have been working closely with the leadership team and the board of directors on our multi year strategy to grow our business and create value for our stakeholders.
The foundation for our next steps several years ago, when we re architected our core technology, we built a modern micro services based platform that powers, both our current ucas and see cash solutions.
We have fully embraced continuous integration and continuous deployment and are delivering more than a thousand micro service updates every quarter. This enables near perfect uptime for the third quarter and reduced the number of customer identify defects. The single digits, we are innovating faster than we ever have before.
At the same time, we embarked on this journey, we could not have predicted the global COVID-19 pandemic or how it would accelerate adoption of cloud based telephony and internal collaboration tools, especially Microsoft teams.
Ucas migration continues to create revenue and profit opportunities for efficient providers like AIA I believe the opportunities to differentiate based on Standalone ucas are becoming increasingly rare.
Our ex cat platform, which delivers the high availability scalability and security of a unified cloud native solution at a lower Tcl is highly differentiated.
By focusing on <unk> innovation within the platform, we can continue to extend our leadership.
Specifically I believe the contact center market is at an inflection.
According to Pwc's future of customer experience survey one of the three customers would leave a brand. They love after one poor experience no longer can the contact center be viewed slowly through a cost lens. It has become the primary way for companies to interact with their customers and build brand loyalty.
T.
At the same time advances and ml AI technologies as well as customers growing preference for high quality digital and self service interactions set the stage for a new wave of contact center migrations and upgrades.
Technologies like large language models, such as chat GPT has the potential to transform the customer experience. Our modern platform enables these technologies today and I believe we are well positioned as this opportunity evolves.
We have identified six areas I believe are critical to our future success. One further acceleration in <unk> innovation, while maintaining our leadership position in cloud telephony.
We began our shift to an innovation led company with the acquisition of fuse, which doubled the R&D resources dedicated to innovation.
We are successfully accelerated the pace of project completion and are already seeing the results of our increased investment.
We are already in beta on a number of new <unk> features including capabilities based on advanced machine learning and largely which models.
We remain committed to our leadership position in cloud telephony as an important component of the <unk> platform, our ability to deliver both voice and see cash solutions for Microsoft teams users is increasingly a deciding factor in new business wins around the world.
We saw a triple digit growth in voice for teams seats in the third quarter and have now sold more than 300000 licenses, our first and largest teams customer has already deployed the technology to more than 30 countries global coverage matters.
Recent X Cas with teams wins include.
The Australian Computer Society selected April U S catalysts with voice for teams to help drive operational efficiencies productivity gains and enhance their contact center performance. This channel led win demonstrates the competitive differentiation of our ex cast solution within the teams environment.
In the UK Gateshead Metropolitan Borough selected API ex cats with voice for teams to support hybrid work for their nearly 3000 employees and enhance their 200 plus agent contact center.
Two increasing our focus on small and mid size enterprise customers small and midsize enterprise customers need the same automation, an MLA eye contact center capabilities as large enterprises, but don't have the large enterprise budgets or a team of in house developers are mixed and matched pricing model unified communications and <unk>.
<unk> class Apis.
Ex cast the natural choice for these customers just as important our modern platform enables the adoption of advanced contact center capabilities future proofing their investments the strong product market fit improves customer satisfaction, often leading to follow on sales and referenced sales down the line.
A great example of a win directly ties were happy existing customer is Chubb group Security limited, a global fire safety and security solutions provider protecting more than 1 million locations worldwide.
After acquiring a division from an existing <unk> customer Chubb reviews, and selected <unk> for a complete secure cloud contact center solution.
Another example of a customer satisfaction driving new business is Indiana, hemophilia and thrombosis center. The only federally recognized comprehensive hemophilia treatment center in Indiana, and one of the largest centers in the nation with a key decision maker, having previous experience with AIA to nonprofit entities selected <unk> Cas.
For its comprehensive C cash solution that is certified for Microsoft teams are best in class reliability was also a factor in the decision three increasing ex cast win rates in sales and marketing productivity.
As we continue to innovate and expand our ex cat platform. Our win rates should increase we are attracting more go to market and technology partners everyday, especially around our market leading teams integration. This.
This expands our market reach increases our capacity for innovation and creates an ecosystem of applications and features that allow our customers to tailor their customer experience to their business needs.
A customer that fits squarely in our sweet spot is P&I care NHS Foundation trust in the U K a provider of mental health learning disability and autism services to one 3 million people across greater Manchester and beyond they selected a bunny ex cast to upgrade to modern reliable cloud <unk>.
Indications and deliver enhanced patient engagement capabilities for over 3000 staff.
Another U K, where the Southampton football club in the English Premier League is a good example of how unified <unk> platform delivers contact center features to users across the organization to enhance the customer experience. The same selected ACI ex cast with API front desk to deliver a premier fan and hospitality experience.
And introduced new communications channels, such as E mail and web chat because they are customer obsessed.
Four.
Maintaining an outstanding experience for customers. So they can focus on theirs.
<unk>, we have made in customer success, including more than 8500 hours of training for our tier one support engineers are evident in our statistics and customer success scores.
We've seen a 50% reduction in escalated issues, a 20% improvement in first day resolutions and a 49% reduction in global backlog as a result, our customer satisfaction scores are up double digits versus a year ago. We still have a lot of work to do but a passionate about leveraging our platform.
And the solutions of our technology partners to drive continuous improvement in customer experience and customer satisfaction.
We use our own products and intend to document our progress as an early adopter of each new innovation and an ongoing case study in this way we remain accountable to our commitment for improving the experiences of our customers and we provide a roadmap for our customers to do the same in their organizations.
Five.
Establish see past leadership in the Asia Pacific region.
See Pos was down year over year and sequentially again this quarter. It was the single largest factor in our third quarter revenue Miss in downward revision to our revenue guidance for the fiscal year that said the <unk> technology is important to the <unk> platform and we continue to add new customers on a regular basis.
We are going through a transition in the business and there are some signs of stability there.
MS gives me confidence that <unk> will make a positive contribution to our operating performance in the future several third quarter wins illustrate this point.
<unk>, an Indonesian D to C e-commerce platform with a vision to democratize E. Commerce uses a combination of AIA SMS Apis.
And whatsapp through API chat apps API too.
To send secure one time passwords and notifications as well as for customer care Privy Indonesia's first and leading legally binding digital signature with more than 37 million users in 2800 enterprise customers uses API SMS API to keep our users secure with onetime passwords.
Plus the housing.
K housing association that owns and manages over 13000 homes across northwest of England base lifted a bit ex cast with H C pass voice for teams and workforce management to support the over 500 employees and drive customer satisfaction with greater Omnichannel capabilities.
We love our Triple play customers.
Six increase our profitability and cash flow to Delever, our balance sheet and fund investments in innovation that will drive our future growth.
We have already shown tremendous progress in fiscal 2023, and we have come very close to our second half 'twenty four target of double digit non-GAAP operating margin this quarter, a full year ahead of schedule.
As Kevin will discuss we believe we can drive our margins higher again in fiscal 'twenty four as we align our investments and cost structure and improve our sales productivity.
Yeah.
We intend to leverage improvements in our operating margin to pay down debt, which will reduce our interest payments and allow more enterprise value to accrue to our equity holders. We began this process in Q2, when we repurchased $6 million in aggregate principal value of our 24 notes and we continued in the third quarter with the repurchase of approximately 22.
In principle.
What ive outlined here is a long term strategy based on an efficient focused innovation engine and a modern cloud based platform at the heart of this strategy is delivering superior customer experiences the experiences of our customers and partners as they engage with us and the experiences they can't deliver to their customers and <unk>.
Their employees with Rx cast platform.
This is our north star every customer interaction is an opportunity to delight and our goal is to make every touch matter whether digital or in person.
This commitment to our customers experience is already built into our DNA are financially back commitment to <unk> availability is just one example.
We are already well on our way on our multi year plan to lead with innovation and be the customer success platform of choice for our customers.
The best measure of our continued progress is the willingness of our customers to recommend our solutions to their peers. Our goal is to achieve 100% reference ability within our targeted customer segment.
It is a lofty goal, but one I believe will allow us to deliver sustained growth and profitability for many years to come I will turn the call over to CFO , Kevin Kraus for a more detailed review of our financial performance.
Thanks, Anne and good afternoon to everyone. We remained financially disciplined and delivered solid profit and cash results for the third fiscal quarter.
In the third quarter, Despite service and total revenue being slightly below our guidance ranges, we delivered non-GAAP gross margin non-GAAP operating profit and cash from operations above our expectations.
Total revenue for the quarter was $184 $4 million and we generated $175 $8 million in service revenue, both an increase of 18% year over year.
Our revenue performance reflected strong customer retention and renewals, partially offset by a continued decline in our <unk> business in the Asia Pacific region.
Other revenue for the quarter was $8 6 million roughly flat with the prior quarter and inline with expectations.
Fuse accounted for $26 $5 million of service revenue and total revenue and was impacted by a $1 million.
Third quarter reserve adjustment, we made as part of our integration of back office processes.
<unk> customer retention remains strong and the business continues to outperform our initial expectations.
Strong retention across the customer base was reflected in our RTL and they are all metrics.
Remaining performance obligation was approximately $750 million for the quarter up from $715 million in the second quarter on solid bookings performance.
Customer renewals were notably strong and our customer retention was the highest it has been in many quarters.
Total <unk> was $698 million at quarter end up 22% year over year.
Enterprise customers accounted for 57% of total <unk> and enterprise was up 30% year over year, but down approximately $1 million sequentially due to the continued decline in <unk>.
We had hoped as part of the business has stabilized last quarter.
Due to continued challenges we are taking a conservative view of the potential revenue contribution going forward.
Turning to gross margin operating expenses and operating profit. Please remember that all items discussed are non-GAAP unless otherwise noted.
Service revenue gross margin came in at 75, 7% an increase of approximately 600 basis points from Q3, 22, and 160 basis points sequentially driven by continued cost improvement programs, which drove down unit costs and to a lesser.
Extent lower CPAP revenue.
Other revenue gross margin came in at negative one 4% for the quarter.
<unk> was negative 32, 2% in Q3 22.
Other revenue gross margin has shown consistent improvement over the past few quarters due to increased professional services operational efficiencies plus better product margins.
Overall second quarter gross margin was 72, 1% an increase of over 700 basis points year over year and up 200 basis points sequentially.
Turning to operating expenses R&D was 14, 5% of revenue, which was in range of our 15% target.
We improved sales and marketing leverage as we realign costs early in the quarter with sales and marketing expenses down $3 3 million sequentially and sales and marketing as a percentage of revenue declining over 100 basis points sequentially.
We expect further improvements in sales and marketing efficiency as a result of our most recent cost alignment action in January which further reduced our investment in sales and marketing initiatives in non strategic areas of the business.
This will be partially offset by the seasonal increase in employee related costs in the first calendar quarter.
G&A declined $3 million sequentially improved 140 basis points as a percentage of revenue to 11, 4%.
Total non-GAAP spending as measured by cost of goods sold plus R&D, plus sales and marketing plus G&A was up approximately 8% year over year, primarily due to the addition of <unk> operations, but it was well below our 18% total revenue growth.
non-GAAP operating profit was $18 3 million.
Up nearly six times from fiscal Q3, 22 and more than double sequentially.
As Sam mentioned in his opening remarks, we achieved approximately 10% operating margin in Q3.
Nearly a full year ahead of previous expectations.
As you can see we are committed to improve operational efficiency and delivering enhanced operating profit.
Turning to the balance sheet.
Total cash cash equivalents and restricted cash ended the third quarter at approximately $132 million.
Statutory equal to last quarter, despite consuming $20 million in cash for debt repurchases.
John mentioned in his prepared remarks during the quarter. We made notable progress delevering, our balance sheet by repurchasing approximately $22 million in aggregate principal amount of 2020 for our convertible senior notes.
After repurchasing $6 million in Q2 'twenty three.
These debt repurchases and the exchange transaction from August 3rd leave approximately $68 million of aggregate principal value of 2024 convertible senior notes remaining.
Given our current cash balance and expected future positive cash flow, we see no issues with repaying the 2024 debt with cash at maturity in February 2024.
Going forward, we expect cash flow will increase with operating leverage subject to timing differences and collections and other payables, we intend to use the excess cash generated to opportunistically prepay debt, including our term loan.
This will lower our interest payments and will enable continued investment in product innovation, while simultaneously shifting more of our enterprise value to our equity holders.
Cash from operations was over $15 million for the quarter ahead of our expectations and approximately $2 million higher than Q2, despite paying approximately $3 million more in interest expense in the third quarter.
We continue to actively manage cash flow.
Customer collections remains solid in Q3.
Free cash flow was over $12 million for the quarter.
A greater than $1 million sequential increase.
Our capex costs have been declining over time as we are focused on capital efficiency.
As previously stated we took action in January to realign our workforce to accelerate innovation as we continue to shift to enterprise and ex gas and.
And this included the difficult decision to further reduce our total head count.
When completed the actual impact approximately 7% of our employee population.
This action will be factored into our non-GAAP guidance, and we expect some onetime severance and restructuring costs will impact our fourth quarter cash flow and GAAP results.
Before turning to guidance, let me provide some context based on our commitment to building a sustainable growth business with SaaS like operating metrics.
We have been doing a top to bottom strategic review of our business to ensure that all areas are operating efficiently.
The strategic cost realignment activities from last October and in January allow us to reallocate limited resources to the areas of focus for the future while improving our operating metrics in the near term.
We are raising our exit operating margin target for the fiscal year based on improving efficiency and discipline around the business we are pursuing.
For operating expenses, we plan to control sales and marketing spend and we'd like to exit fiscal year 2023 between 33% and 35% of revenue down from 39% four quarters ago.
We plan to focus our R&D efforts on our core product offerings and expect R&D as a percent of revenue to remain about 15% as we continue on the path of investment in our customer focused product strategy with an emphasis on contact center features and functions.
We are focused on extracting more leveraged from our G&A functions as we work to improve operating efficiencies in those areas.
We are establishing guidance for fourth quarter of fiscal 2023, ending March 31, 2023 as follows.
We anticipate service revenue to be in the range of 175 million to $178 million.
Up sequentially from Q3 at the midpoint and representing approximately 1% to 3% year over year growth as we pass the fuse one year anniversary and remain cautious on the <unk> revenue outlook.
We expect that future service revenue contribution will be roughly flat with Q3 at approximately $26 million.
Please note that next quarter will be the last time, we provided us revenue contribution as we will ask that one year anniversary and the businesses are now integrated.
We anticipate total revenue to be in the range of 184 million to $187 million.
Sequentially at the midpoint and representing approximately 1% to 3% year over year growth.
This guidance reflects the one year anniversary, a few and our cautious approach to the C pass revenue outlook.
We expect other revenue to be approximately flat compared to Q3.
We are targeting an operating margin of approximately 10%.
Roughly flat with fiscal Q3, 'twenty three as we experienced our normal expense headwinds related to the restart of employer taxes and other benefits such as the 401K match. These.
These expense headwind impact all cost lines in the consolidated statement of operations.
We expect cash flow from operations to be positive, but down quarter over quarter as we make semiannual interest payments on our 2024 and 2028 convertible debt <unk>.
And absorbed severance costs from our January head count reduction.
We are updating our guidance for fiscal 2023, ending March 31, 2023 as follows.
We anticipate service revenue to be in the range of 708 5 million to $711 $5 million Rep.
Representing approximately 18% year over year growth at the midpoint.
We continue to be cautious regarding our <unk> business and with the fuse one year anniversary past us we expect to exit fiscal 2023 with service revenue growth in the low single digits on a year over year basis.
We anticipate total revenue to be in the range of $743 4 million to $746 $4 million.
Representing approximately 17% year over year growth at the midpoint.
Our total revenue guidance for the fiscal year reflects the combined Q3, and Q4 impact, resulting in a reduction of approximately $5 million at the guidance midpoint.
We continue to focus on improving operating margin over time and anticipate landing at approximately seven 5% for fiscal 2023.
We also would like to provide some directional color on fiscal 2024, which commences April one 2023.
We anticipate total revenue and service revenue growth in the low single digits as the revenue step up from the <unk> acquisition will be reflected in every quarter of fiscal 2023.
Additionally, we remain cautious regarding the revenue trend for the <unk> business.
We anticipate non-GAAP operating margin steadily growing from the expected Q4, 'twenty three base of approximately 10% hitting double digits every quarter in fiscal 2024.
For the full year, we expect operating margin to be four to five percentage points higher than full year fiscal 2023.
We anticipate cash flow from operations to be Directionally aligned with the non-GAAP operating profit trend.
Additionally, I would like to mention that we are reviewing our key metrics to ensure that we're providing the appropriate insight into our revenue growth drivers. We will follow up in subsequent earnings call on this matter.
In closing I believe the continued focus on our operating margin and cash flow is the correct strategy for us at this time.
This strategy enables us to remain an innovation led company as we fund investments in key product areas.
On a personal note I.
I also would like to say that I'm happy to be continuing my business partnership with Sam My new role as interim CFO .
With a by a modern unified <unk> platform, we are well positioned to deploy our strategy to capture more of the contact center market to delight, our customers and to deliver on our commitment to improve profitability and cash flow generation.
Operator, we are ready for questions.
Absolutely.
I'd like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two against you ask a question Press Star one as a reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question. We'll pause here briefly is questions registered.
Yes.
Next question is from the line of Matt <unk> with <unk>. Your line is now open.
Hey, good afternoon, thanks for taking the question.
As you look at sort of the realigned cost structure here.
And then outline kind of focused around.
Servicing smaller customers and also the team's ecosystem I'm just curious.
And sort of where within the sales and go to market organization are we're seeing the most cuts.
And it sort of feels like some of these investments are in areas that were.
Maybe less vocal.
For the previous leadership team. So just curious on how how much of this is a change versus just.
Kind of moving from one pocket to another.
Yeah.
I'm going to give you one of those great answers that Ceos like to give which is a little bit of both I mean.
So we are in line with what we've said in the past we continue to moderate our investment in our smaller customer segments of the small business side of the house.
While we continue to invest in mid market and enterprise, we have made some reduce some investments in our sales and marketing front.
In line with what we have again said in the past.
Where we're willing to forego some revenue growth for increased profitability in the nine 9% operating margins clearly shows that we're taking that seriously.
I think the things that we changed a little bit as we're a little bit more aggressive about making those changes sooner than later.
And we're continuing to focus on investing in contact center <unk> casted innovation those three things.
And I think we're a little bit more aggressive behind those investments also so a bit of both if I can.
Give you that answer.
Okay Fair enough and then I guess as you look at the fuse business that you acquired in.
We're understandably lapping that and create some headwinds on growth, but I'm curious as you look at that customer base.
Is that.
Should we think about that growing at any different pace than that.
The legacy by aid is their limitations on sort of how much you can grow in that basin as much of the acquisition is around the technology and the development team.
I guess, maybe just help us think about what that fuse base looks like and eventually is there still plans to move them to ex cash.
So in order the first and most important thing that we have not done a great job of this yet is cross selling our contact center and that you see base. So there's a tremendous opportunity and it wouldn't show up necessarily in the fuse numbers. If we continue to report those.
From a production next quarter, but if you can imagine the window of the fees are each up in the EBITDA side of the house and we've already started upgrading some of the customers to the AIA platform and we'll continue to do that that's part of the reason Kevin said in his prepared remarks that as we anniversary. It just gets kind of meaningless to report these.
And remember, we're not adding we're not investing a new logo acquisition on the few side of the house, we're investing on the API side of the house.
So in a notional sense the fewest number we report is the fuze UC base and with natural sort of things, we would expect that to slowly degrade a little bit over time and as the numbers show it's been a very slow over the last year. It was well it's done much better kudos to the GCC team so much.
Better than we expected.
When we originally did the acquisition and so I would expect that to continue the number one areas of focus besides retaining the revenue is cross selling our contact center into it.
Yeah.
Okay. Thanks for taking the questions.
Thanks, Matt.
Thank you for your question.
The next question is from the line of meta Marshall with Morgan Stanley . Your line is now open.
Great. Thanks.
Maybe as you look to.
Fiscal 'twenty, four and just kind of low single digit outlook that you gave you guys mentioned a lot of conservatism around C pass or conservatism.
Just on huge term, but just if you could give kind of an update as far as like what you're seeing as far as deal activity trajectory.
Just given kind of the macro environment and then maybe as a follow up question on <unk>.
Let's see pass business I guess, just like what is the ongoing rationale.
Particularly just given it's in a region that you guys don't do a tremendous amount of business and like what is the business rationale.
<unk> to kind of invest in that business.
<unk>.
You know when they are making kind of cost.
Decisions elsewhere.
Thanks.
Yes.
Thanks, Okay. This is Kevin so in terms of the 2020 for growth of low single digits, we are being conservative with respect to the C pass business as we said.
We do see signs of stabilization in that business, but since it's usage based.
It's a pretty dynamic market, we're just going to continue our conservatism into the into the forward looking forecast on that until we see absolute signs of <unk>.
Change.
In terms of the rationale for the investments in that business that business can really turn revenue up pretty quickly. So we're very interested in that business. It can provide a lot of growth.
In pretty short order more so than our typical recurring revenue business does so.
So thats one of the areas, where we're looking at potentially ramping up our growth. Yes. So a couple of small things I'd add is so can you talk about economic sensitivity, probably someplace like C pass, which isn't contracted revenue we are seeing a little bit more of that economic sensitivity.
I think on the core business, where it's really interesting as our collections were absolutely fantastic. So as Kevin talked about our cash and cash balance was sort of in excess of what we expected for the quarter. Our collections portfolio is the best it's been in a long time and Thats also a clear sign in our retention metrics.
So if you look our retention metrics were highest in many quarters months I forgot exactly what Kevin said, but in one of those or so.
The quality of our portfolio from an economic perspective is absolutely fantastic and you did see <unk> trended up right. So.
The contracted revenue had a pretty good quarter.
Relative to some of the other things so I think from an economic front I'm not super stressed right now about the economic health of our both on the recurring side and the ability to add new logos.
And then lastly, just on the conservative nature of the model look it's my first quarter I'm definitely not going to stick my neck far out with a super aggressive model, we've got a ton of new innovation, that's going into beta, which we basically have zero in the model for we're trying to be really conservative on the <unk> side of the <unk> side of the house.
Also so.
Media can be a bit of slack.
Conservative on the first quarter out.
Alright. Thanks.
Okay.
Thank you for your question.
The next question is from the line of CB Penny He with Mizuho. Your line is now open.
Thanks for taking my question.
Sam it's good to see focus on profitability side.
Just wanted to ask on the on the revenue side.
Your service revenue.
Organic services revenue growth.
Excluding fuse. So you did talk about CCAR, but what did you see in terms of macro trend anything on the enterprise side is definitely decelerated what are you seeing in the market right now.
It's a fair question and yes. Your math is correct. It is.
Just it's a little hard for me to tell we took an action in the beginning of October and we took another action in January so both of those had consequences and as we said earlier, we're walking away from low margin or negative margin revenue for improved profitability. When you think the improved profitability allows us to delever our balance sheet.
Just makes the company better often allows us to reallocate investments in the better rois fee areas.
I think absolutely.
Economics played a relatively small role in the revenue performance. It was really self generated and the other thing I would say is I think that reallocation of investment is working deferred revenue up quarter on quarter deferred commissions up quarter on quarter are up quarter on quarter and retention at the highest levels. We've seen in a long time so.
In terms of the underlying indicators of a healthy SaaS business, they all got better last quarter and so.
I sort of believe that the right play right now is to sacrifice a little bit of revenue growth to make all of those things substantially better.
Okay. Thanks for that color and then in the <unk> business I know you talked about weakness.
<unk> business last few quarters. So wondering what's the current run rate of keep us right now.
We don't disclose that as Kevin mentioned in his script. It's one of the things that we're looking at disclosing potentially in future quarters. So we kind of put the bread crumbs out there that it's under review.
Okay. Thank you.
Thank you for your question.
The next question is from the line of Catharine <unk> with Roth Capital Partners. Your line is now open.
Hi.
Thanks for taking my question, Tim when you talked about your beloved point number five Asia Pac and CPAP revenue has been down one other assets are you looking to build that up where they can really drive that as the GB as the key growth driver.
It's a completely fair question. So I think in the past we missed a bit of a product cycle in C pass in Asia, and you could like I can give you more details and.
At another time, but just we missed the product cycle and we sort of caught up on that we're investing in the platform in the business. Our unit volumes have continued to increase and we're continue to land brand name customers as I mentioned in the prepared remarks, and so I think the business funnel is there et cetera, we just need to close the gap on a few products.
<unk> and Theres. Some other news that is coming in the near future on that front also in the <unk> business and so I think that the.
Stars are starting to align for us to turn that business around it is taking longer than we had expected and I grant that to everyone.
But I think the stars are therefore, it to turn around and do better.
And then Lee you.
Then there on your own.
C cap business and like Yeah, Australia market.
It seems like that would be great market for you.
Yeah.
I don't know I don't want to preclude the Australia market. It just happens to be that Australia is like the 58.
Largest population country in the world and the state of California, as the sixth I'm not sure if I would rather invest in California then.
Australia.
Right now we are investing pretty aggressively in the U S UK, California, I am sorry, Canada, Ireland, because those are just great contact center markets right now for us.
Alright that helps thank you.
Thank you for your question.
The next question is from the line of George Sutton with Craig Hallum. Your line is now open.
Thank you Sam you talked about the importance of your customer recommendations to their peers as being a driver of your business can you talk about that in a little more detail is that something you've actually seen is that or is there something you can quantify there.
Another quantification numbers off the top of our head, but one of the things that we've been very focused on over the last few quarters has been improving our reference ability. So we're really talking about NPS. So theres no sort of reference ability and we saw a pretty substantial increase in our reference ability. This all goes.
Full circle right. So in my prepared remarks, I talked about our investment in customer success, Kevin talked about the very high retention rates, we're having that in turn leads to happy customers happy customers give good references, which then in turn drives RPI improvements.
Deferred revenue improvements and those kinds of things right. So we're trying to get that virtuous cycle, maybe spending a little faster than it has in the past.
Got you just as a follow up you mentioned customer churn.
And you're comfortable with I am curious if you can talk about seat churn and of course as we're starting to see some lay offs around the market is that starting to have an impact.
And the results.
I'll, let Kevin follow up if he wants to add anything that looks at it.
We talk about retention, we talk about.
Logo plus seats right. So if a customer down sells for 100 seats to 90 seats, where a customer goes from <unk> to zero, we count that the same and last quarter, we had the highest retention in many years.
And so I.
I don't think it's that much I think what's interesting is we're launching a lot of really important things conversational IQ some of the things, we havent data et cetera. So even if we're seeing a little bit of our pud decrease.
From the core product just the number of seats, we are seeing an uptick in the number of add ons going into our contact center.
I think so.
On the customer retention, we need to go back over more than three years to get.
I just can't find any numbers for more than three years that are better than the ones that we just put up this quarter.
I will also say that we're making.
The right investments in customer.
Customer care and delighting our customers so.
It's really starting to pay dividends for us.
And we're keeping the right high value customers and looking forward, although we don't give guidance on this.
We do we do look out.
We are very very proactive about what customers are renewing what's coming up and we address any risks that way. We are doing a really good job of that right. Now. So I think that's reflected in our recent trend.
Next question please.
Thank you for your question. The next question is from the line of Willpower.
Your line is now open.
Okay, great. Thanks.
Yes, I guess I had a question on the revenue guidance both for.
Fiscal Q4 and 24, thanks for the initial framework there.
I recognize that.
<unk> is going to be a headwind you've talked about that is there any way to kind of help us parse apart, what youre seeing and kind of ex cast and see cash, which I know is the strategic priority versus ucas. I mean are there demonstrably different growth rates. There any color you can provide on that front.
Yeah, So I'll start and I'll, let Kevin fill in so a couple of things right. So ex gas is now for almost 40% of our IRR and has growth rates well in excess of what we're seeing across the whole business right. So the whole business flat and.
Our growth rate next gas high twenties.
And so definitely.
Situations, where we've got a lot of moving pieces under the table C. Pass you mentioned small business Ucas. It had an okay quarter. This quarter was kind of flattish on a year over year basis right.
Up 4% those kinds of things, but not not blow out numbers and so we are still under the covers I think all of this is starting to show up in a complete soup right ex cash our contact center doing better that's driving higher growth rates in enterprise.
Small business is starting to become a smaller and smaller component of the overall <unk> mix and so as all that flushes out over time, we should naturally see a lift in growth rates.
Okay. Let me ask you to maybe this ties into that.
Noted.
<unk>.
And a nice sequential increase.
What's helping drive that I mean is that is that ex cats.
The option what are the kind of the key pieces of that yes.
No I mean, I'd love to make it well I'd.
I'll, just make it super sophisticated and cool, but its we had a good quarter for <unk> sales right.
The combination of UC Cc and a world class Microsoft teams integration I mean, we mentioned Microsoft teams triple digit growth year over year, that's pulling in our contact center or contact Center, then has higher dollar <unk> attached to it and good margins associated with it. So if we just keep rinsing and repeating that.
The numbers will continue to get better.
We also I mean in addition to the strong.
<unk> new logo bookings, we had a great renewal quarter as well, which is indicative of the investments, we're making and delighting the customers. Thank you for calling that out Kevin.
So that's reflected in RVO, our deferred revenue is also up quarter over quarter as well.
And.
Net dollar retention well in excess of 100 right. So like the more of that as <unk> becomes a bigger part of the business to more of the math starts to work itself out.
Okay, and then maybe just a quick clarification on for.
For fiscal 'twenty four on the operating margin Guy.
Guidance I think you said four to 500 basis points was that above the full year fiscal 'twenty three or is that above the exit rate.
Okay.
For the full year.
Sorry, yes.
75% will have for the full year, and then just add $4 to 500 basis points on top of that for the full year.
But we do expect steady improvement.
Yes on the <unk>.
The balance sheet.
Okay. Thank you.
Thank you for your question.
The next question is from the line of Peter Levine with Evercore ISI. Your line is now open.
Great. Thanks for squeezing me in here when we think about.
Foregoing I think near term growth and profitability managing the business for more cash I think your comments on having eight become mortgage emulation by company, but it does sound like the offsets that would be sales and marketing. So is the idea to rely more on partners for that new or is the strategy to kind of focus more back on the base just just what initiatives are in play.
I think today to deliver I think greater sales and marketing efficiencies. If you could be pulled back a little bit of the sales force.
Yes, so we our partner led company and so we're planning I think the key is and.
There's a timing aspect to this and I know that everybody sort of guessed that but.
If we invest today and innovation it takes a little while for that before that to show up in pipeline and so what we have done is we've really worked on improving the sales and marketing efficiency.
The company, while we incubate.
A solid innovation roadmap, particularly around contact center and so once that innovation roadmap starts to get into the market and whatever we should be more of a customer pull model instead of a sales or partner push model and that's much more efficient over time.
And so there is a timing aspect to this will deal with some quarters at relatively low growth rates as we make this transition to <unk> being a larger part to innovation to new products driving more of the business.
But that's really what we're focusing on to improve that efficiency number instead of some of the things we've done in the past.
I apologize if I missed it but can you quantify I think the C pass headwind this quarter.
Looking at organic growth year over year, I'm, just trying to understand how much of that was attributed to surpass headwind versus kind of macro just impacted customer purchasing decisions.
Sure.
We don't breakout <unk> separately, we one of our sale of the segment reporting rules of the SEC and some of the other rules that are out there I would just tell you that it was a it was the.
The red deer.
Difference between our guidance and what we actually produce the vast majority of that was the C pass business if that helps you quantify it.
Okay.
Thanks for the color. Thank you.
Thank you for your question.
Next question is from the line of Ryan Koontz with Needham. Your line is now open.
Thanks for the question.
Sam I Wonder if you look at the kind of the broader U C space, obviously slowing growth across the board or are you seeing signs yet of consolidation that could improve the health of the industry.
Well, we consolidated fuse in the street didn't like that deal. So I'm not sure anybody is going to be consolidating anything anything too soon.
Fuse for US has been a big success I Wouldnt do it all over again.
But so far no I don't see a whole lot in the <unk>.
Consolidation space.
Got it and in terms of.
<unk> installed base no update there in terms of customer migration or how we should expect any kind of impact on the model going forward. Despite what we.
We are accelerating.
<unk> as I say migration, we're selling upgrades and we've got automated tools and the work we've done on the engineering front to make that just a really easy seamless transition is starting to come into market. So we would expect that those upgrades to start to accelerate over the next couple of quarters.
Got it that's helpful. That's all I have thanks.
If any of these customers are listening, we're not going to force you to migrate we're not going to force you to upgrade we're going to do it when you are ready.
Yeah.
Thank you for your question. The next question is from the line of Ryan Macwilliams with Barclays. Your line is now open.
Thanks for taking the question Sam also nice to see the improvement quarter over quarter in non-GAAP gross profit it seems like Youre certainly targeting the right revenue.
For the 2024 target for low single digit topline growth and cut you. Some slack on this one but on a quarterly basis should we think about any differences in the year over year revenue growth rates for the first half of the year versus the second half like at this point are you thinking stronger year over year growth later in the year.
Yes.
We haven't baked really any of the new products and but because of the comps and some of the other things that growth rates will naturally lift as the year goes on.
Thank you for calling it out last quarter.
31% year over year growth and growth in gross profit and we would expect that next year gross profit growth is in excess of revenue growth.
We continue to get solid gross margin improvement, but yes more back half of the year.
Kevin anything.
<unk> provided.
It happens with C pass here, we're going to be taking a look at that in depth and.
And doing what we can to help ramp that above our conservative estimation.
Yes, good to hear that for sure and we also noticed that your disclosure for Microsoft team licenses went from 200000 last quarter to over 300000 in this quarter.
Do you have a sense of what percentage of <unk>. It's net new business comes with Microsoft teams integration, and then separately strength around renewals, but.
Noticed any additional price headwinds, perhaps from competition around those renewals in the quarter.
Okay. So.
I'll get back to you on the first one because we give away the integration for Microsoft teams for effectively free.
It has no real consequence on Ucas number just for everybody freaked out it's not a giving seats away for free they start to buy an X one or X two X three or four seats to go with it the integration is free so it's easy for me to get the seat number but I have to go do some math to say what percentage of new logo dollars that was.
Microsoft teams is an important aspect and obviously, if we're talking about organic growth.
Zero and Microsoft teams growing at Triple digits, it's becoming a larger share of our new logo wins.
And I think it is pulling through contact center and some of the other things.
Sure and just around the renewals in the quarter did you notice any like additional competition around price pricing renewals or was it pretty soon.
Yeah, if I speak really candidly.
The fiscal fourth quarter December for a number of our competitors and I swear at the end of the year and at the end of their fiscal years, they have absolutely no pricing discipline at all.
Did we see mud thrown in several directions sure.
I suspect that while they're busy they're S. Kols now in posting on Linkedin, they'll forget to do that this quarter.
Yes.
Fair enough, Sir I don't think we know youre talking about but I appreciate the color. Thanks guys.
Thank you for your question.
The next question is from the line of Michael <unk> with Wells Fargo. Your line is now open.
Hey, guys. Thanks for taking the question. This is Austin Williams on for Michael.
I wanted to go back to the margins I'm wondering if there's any way to quantify how much of the margin improvement that you've seen thus far are from taking costs out with us and how that compares to just the core business efficiencies.
So we have.
Really gotten a lot of great margin out of the core business as well as skus. So its really on both sides.
And the fuse Marty on the fuel gross margin comparable with.
Organic gross margins and we've done the same kind of work.
On say Cogs that we did over the past several quarters for eight by eight we also did it with the few space. So it's kind of been done in tandem. So I would say that theres, a fairly equal distribution of margin improvement.
From both entities if you will.
Got it that's helpful.
Just one follow up RPM.
Up nicely on a sequential basis I'm, just wondering if there's anything to call out as it relates to deal duration.
Any longer term deals.
Yes, we saw a slight change, but the vast majority of it was just more contracts. It's roughly the same roughly the same.
Got it thank you.
Sure.
Thank you for your question.
The next question is from the line of Michael pump with Bank of America. Your line is now open.
Yes. Thank you for the question couple of bike.
So earlier, you mentioned, hoping to see a catch rate see cash increase over time. So just wondering more details on what's going to make that happen is that just a.
Sales training and processes.
Better partner training.
Is it technical integration so what's the gating factor there.
I believe so.
I believe as we as the innovation, we're investing in it particularly on the contact center side of the house comes into market.
Our contact center is going to start to pull through more and more.
And given the fact that we have things like conversational IQ, which gives us a distinct advantage to moving your base onto you see from the same vendor on the same platform. So as our contact center gets better it gets us involved in more deals.
That in turn mixed prospects look at the fact that we have five nine SLA a single platform high availability high reliability.
Tremendous feature set and all the other things just makes it a lay up to buy it altogether in one package and I think thats why were seeing ex cash resonate with the market right, 40% of IRR higher retention rates higher net dollar retention numbers all of those things and the more we invest on the contact center side, the more I think that flywheel spin faster.
And faster because contact center is where there's a tremendous amount of white space in terms of innovation room today.
Understood. Thank you for that.
And then also I think the comment was made about addressing rest of upcoming expirations in that being helpful. What's the retention rate.
Is that related to some of the competitive pricing pressure you are seeing in the market.
And then how are you addressing those restaurants out through discounting.
Rental product conditions, how are you addressing that with customers.
Okay, I think that was.
My comment about how we're looking.
Yes, so yes.
Yeah, what we're trying to do is we're trying to first of all we have a pretty.
Pretty good we've operationalized fairly well.
And understanding of the customer renewals and when they are coming up and well in advance of their renewal just make sure that the customer.
Using the product it's working.
As promised.
Making sure that they are delighted in the performance of the product and so forth and that's where the investment came in the investment comment comes in that I mentioned about making sure that the.
The customers are happy so by doing so we don't necessarily have to go discount on renewal it.
It could happen, but basically we just wanted to make sure that we get ahead of it yeah, and I would sort of piggyback on what Kevin said right switching costs are not low in this industry with line number porting and everything else. We're training agents are doing these other things right. So really like once we land a customer as they're ours to lose and the GCC organization here, It's just not an exceptional job of.
Of removing the bottlenecks to renewal number one and then the engineering organization has done an exceptional job with just very high reliability. I mean, we have $5 nine platform SLA and most of our competitors don't because they can't meet those kinds of numbers.
Sam Kevin Thank you for your time.
Thank you.
Thank you for your question.
The next question is from the line of Josh Nichols with B Riley. Your line is now open.
Yes, thanks for the question and good to see the improving operating margin guidance as.
The company continues to make progress on the deleveraging frontier just.
Most of my questions have been answered, but I guess I would say if you could kind of compare and contrast, what you're seeing in the U S versus other markets such as the UK and it would be interesting given the economic weaker.
Weakness that we're seeing in foreign markets have been a lot faster growing from you of late just curious what that looks like today.
Hello, Kevin.
I mean, I think the biggest difference I see as our Rx cast messaging resonates in our Microsoft team's messaging resonates really strongly in the UK market and the foreign market is a little bit better in the U S. There's still a little bit of the Microsoft channel and the telecom channel being two separate channels and so our channel team has done a tremendous.
Yeoman's work building, our Microsoft team's channel and Thats paying dividends and so I think it's just I see economics last its just two different structured markets in particular.
And it's easier for us to gain that that suite traction in our foreign markets.
Thanks, and then last question for me.
It sounds like the surpass business has been a little bit of a headwind I know thats, a low margin offering but likely stabilizing over the next couple of quarters here.
One I guess like where the company's focus on deleveraging like one would you consider that core business or potentially not as you look at opportunities to kind of accelerate this deleveraging process and are there any also like.
Repayment restrictions that you have on your debt aside from.
The remaining notes that are due in 'twenty four.
I'll, let Kevin take the second one to see that business is a great business. It's got beautiful unit economics, when it's running right. We step one is get it running rate and then we can talk about strategic options for it but.
Josh as you know me Im a seller from strength from weakness.
The debt question.
<unk>.
February one two.
2024, and the remainder in 2024 converts are due and he's asking though on the on the on the term notes, we can payback, 10% without a prepay pay that they're prepared.
Starting in August .
That's what we have and then there is a there is a prepayment penalty.
For the succeeding year small prepayment penalty and then after that there's none that's right.
Great. Thank you.
Thank you.
Yes.
Thank you for your question there are no additional questions waiting at this time, so I'll pass the conference back to Samuel Wilson CEO for any closing remarks.
Alright, Thank you Matt Thank you.
Can you support I hope, we have conveyed some of the excitement about our opportunity and our future path tapered by the recognition that success will require commitment and hard work I am confident we can do this we are vibrant and financially strong organization and we are accelerating the pace of innovation with a steady stream of new products coming this calendar year, including MLA AI based features and tailored.
Appearances, we are well positioned for the future. Thank you so much and I look forward to reporting our progress next quarter.
That concludes the conference call. Thank you for your participation.