Q1 2024 8x8 Inc Earnings Call

Good day, and thank you for standing by welcome to the queue.

Q1, 2024, eight by eight incorporated earnings conference call.

At this time, all participants on a listen only mode. After the speaker's presentation there'll be a question and answer session.

The question.

<unk> you will need to press star one one on your telephone.

Here, an automated message advise me your hand is raised to withdraw your question. Please press star one one again.

Please be advised that today's conference is being recorded.

I would like to hand, the call over to your speaker today.

Paterson.

Of Investor Relations.

Thank you operator, good afternoon, everyone. Today's agenda will include a review of our first quarter results with Sam Wilson, or Chief Executive Officer, and Kevin Cross, our Chief Financial Officer. Following our prepared remarks there'll be a question and answer session. Before we get started let me remind you that our discussion today includes four.

We're looking statements about future financial performance, including our increased focus on profitability and Castro as well as our business products and growth strategies.

Caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that may cause actual results to very materially from forward looking statements as described in a risk factors and a report filed with the SEC any forward looking statements made on this call and in the presentation slides reflect or analysis as of today and we.

Have no plans or obligation to update them.

Certain financial measures that will be discussed in this call together with year over year comparisons in some cases were not prepared in accordance with U S. Generally accepted accounting principles forgot a reconciliation of this non-GAAP measures to the closest comparable GAAP measures is provided in our earnings release and on the Investor Relations website and investors Dot eight.

By Amy Dot com.

With that I'll turn the call over to our CEO Samuel Wilson.

Much appreciate it <unk> and thank you to everyone for joining US today. This is my first earnings call is the C. E O of a buy over the past six months I've spoken at length to our customers employees and investors about the future direction of the company.

As you will recall, we made the decision a year ago to balance our innovation led growth strategy with a focus on improving profitability in cash flow through discipline to capital allocation.

And our Q1 results you'll see both progress on this journey as well as areas for further improvement I plan to give you our investors who own the company a transparent view of how the business is doing today and where it's headed tomorrow.

Two they said we will add some commentary about the long term financial path of the company at the end of my remarks, now, let's get into some Q1 highlights.

The increased investment in R&D drove the introduction of new products and enhancements to existing solutions. The reception from customers has been very positive we increased our when rates close significant new customers and expanded our basic X cast contact center users.

We remained the direct riding solution of choice for customers deploying Microsoft teams expanding our eight by eight voice for team seats by over 80% year over year.

We finally launched our contact center ecosystem and expanded the number of partners extending our global industry reached to 59 countries hosted innovation roadshows in the us and UK and strengthened our management team with the hiring of Lisa Martin as Chief revenue Officer, and we delivered record non-GAAP operating profit and cash flow.

Our innovation led strategy seems to be resonating with customers driving new business and awareness in the industry.

As we focus on the right customers lead with contact centers of service and demonstrated the value of our integrated platform. We are building a higher quality pipeline and closing larger deals.

Average <unk> per enterprise customer, excluding see past was at an all time high and we also closed our largest new business when ever with a multimillion dollar total contract value.

Ending <unk> increased year over year in all three customer segments the growth rates for small business in mid market. Both increase sequentially at small business posted its best year over year growth performance in awhile. These.

These metrics all demonstrated the continued progress we're making on our strategic initiatives are results were partially offset by sequential decline and see past usage revenue and higher than expected turn it down sell and the fuse enterprise installed base.

These headwinds resulted in service revenue in total revenue about $3 million below guidance ranges.

Let me give you a brief explanation of what happened with see past and fuse and what we're doing to turn the tide and each first see pass.

We thought the <unk> business has stabilised last quarter, but carrier pricing actions during fiscal Q1 had a negative impact on SMS traffic, we were forced to choose between passing along price increases to customers or accepting negative margins. We made the sound decision to forgo negative margin business and higher prices caused some traffic.

To move to other channels, we didn't lose the customers in fact, the number of <unk> enterprise customers increase sequentially, but usage declined.

With new leadership in place, we are transitioning from an SMS traffic intermediary to a strategic business partner to our customers. We have identified white space opportunities to add value with dynamic routing fraud detection and authentication, while continuing to maintain cost advantages to to our volumes.

As in other areas of our business. We believe the innovation lit approach will result in a more resilient business model and durable growth.

Regarding the increase in turn it down sell within the few space as we sit on calls over the last year. The fuse acquisition has outperformed our expectations. It has been accretive to gross margins operating margins and cash flow. However, we did see a sequential increase in customer churn and down cell in Q1. This resulted in.

Lower than expected revenue from the fuse platform in Q1 as well as a decrease in the more forward looking at our our metric I believe some of this is due to smaller customers actually moving off the platform, but a significant portion of lost AAR was due to right sizing the customer subscriptions as they came up for renewal for upgrades.

To be clear the retention of used customers is still above our original forecasts.

While it may take a few quarters to right size all the customers. The acquisition has been a major success for US we doubled the resources focused on innovation expanded our enterprise customer base and increase our operating margins in cash flow.

In combination the headwinds from <unk> infused caused us to fall below our service revenue in total revenue guidance ranges.

<unk> won by less than 2% the roll forward of the Q1 run rate and lowering beginning AOR cause us to reduce full year guidance for total in service revenue by 3% at the midpoint.

Hedging the exact revenue performance of a three quarters of a billion dollars revenue company is complex at the best of times.

It is infinitely more difficult during tougher economic times integrating the operations of another company and shifting spending priorities.

While we aim to achieve our forecast and guidance moving forward I believe the most important takeaways from our quarterly results are what our core AIA, you see and Cc business was solid and growing and is seeing the green shoots of early successes in our innovation led strategy the challenges that resulted in the revenue.

Paul versus the guidance are fixable, and we have heightened management attention on them.

Two we still expect to achieve 12% to 13% non-GAAP operating margin for the year, representing operating income growth of at least 40% compared to fiscal 2023 three.

Three we expect to generate significantly higher cash from operations in fiscal 2024 compared to last year more on that in a second.

That's a quick review of our Q1 results, let's talk about the three lanes, we presented last quarter. One we enable agile workplaces too we empower users across an organization to deliver great customer experiences and three we harnessed the power of artificial intelligence and machine learning for one I'll quickly say are <unk>.

Microsoft teams integration continues to be a stellar product for us we grew C count, 80% year over year and more than 10% of total seats are connected to Microsoft teams.

Further we continue to evolve the product last quarter, we added new user onboarding capabilities to speed up time to value. We believe we are the leading ucas vendor that offers true cloud to cloud teams integration and let's not forget we were the first Microsoft teams certified contact center simply put I believe we are still the best.

By far.

Turning to lanes, two and three empowering users and harnessing AI.

As we discussed in prior quarter's our strategies to increase R&D vestments in high <unk> innovation to drive durable growth reduce investment and low oroide promotional activity and focus the sales organization for greater efficiency, it is simple and creation, but difficult to execute.

While the decline improve motion all activity shows up in revenue immediately it takes time for investments in R&D to show up in new products and even more time to drive growth on our income statement take supervisor work space are dynamic new you ask for contact Center first this product was built by the engineering teams, we acquired via a fuse.

Again, showing the value this transaction added to our organization.

We started work on it a year ago, we released early adopters in March and we released enhancements based on customer feedback last week.

The early customer response has been fantastic with adoption on track to rival agent work space is our fastest new product adoption ever. It should now began to have a meaningful influence on our sales process ultimately, resulting in higher retention cross cell and more customers.

The time from.

From the first dollar invested to the time showing up in revenue could be as long as 18 to 24 months.

As we continued to invest in innovation, we are building a competitive moat that can last for years I believe this will drive revenue growth and deliver value to our customers and our shareholders for an extended period.

Let me walk through a couple of examples how <unk> solutions are transforming customer processes to deliver better customer experiences.

The first example highlights how customers with field services can transform their processes to reduce costs and improve their customer experiences through the full X cast capabilities of U C plus C C plus he passed.

Platform housing groups before and after case studies shown any earning slides is a visual representation of this triple play use case.

For those that don't know platform housing group is one of the largest housing associations in the UK Midlands with over 48000 homes and more than 120000 customers and.

And has ambitious plans to build around 1300, new homes every year.

Platform housing group elevate employee and customer engagement using eight by eight.

When a customer calls the platform Housing's contact center, which runs on our X cast a video consultation is offered via SMS link so the customer can show their problem to a representative if a visit is needed HQ consent SMS messages to field service personnel, including pictures videos and notes related.

To the issue reminders are sent to the customers. So they are home and a follow up sees that survey via SMS concludes the interaction deep.

Details are automatically saved in the AIA contact center as well as platform Housing's, Microsoft dynamics 365 system.

Following implementation platform housing group has been able to close almost 40% of the repair calls remotely without requiring a visit from field service personnel further over a quarter of calls no longer needed diagnostic visit reducing the total number of visits and speeding up time to resolution.

Platform housing is saving nearly 600 home repair visits per month and.

In an industry average cost of 200 pounds per visit.

This can mean realized savings over 100000 pounds per month.

And achieving faster resolution times.

This type of integrated solution can be replicated across all kinds of service industries think insurance health care maintenance and repair businesses. The cross-sell opportunities for AI is large adding seep asked to just have our contact center customers could at tens of millions in annual usage revenue.

Another recently introduced product digital intelligent customer assistant or ICA has the potential to drive revenue directly through increased subscriptions and usage fees ICA is our generative AI enabled digital chatbot.

Early customers are finding it easy to deploy an incredibly effective at reducing resolution times for simple inquiries.

We are quickly gone over 100000 interactions since April and are growing double digits month to month and we are still in the early adopter phase.

And one use case, a UK based shuttle and taxi service deployed ICA initially to schedule pickups within weeks of deployment more than 50% of the cases that previously went to the call center were being handled without live agent interaction.

In another case, a major P. C manufacturer deployed ICA for the single use case around warranty authentication via SMS. It was so successful that within weeks, they were adding more channels and adding more use cases.

Our advantage with ICA extends beyond the chatbot technology itself to the tight integration of the chatbot into the contact centre workflow.

Thoughts are good at resolving simple issues, even the most advanced best trained AI bots cannot resolve every issue and sometimes the customer just wants to deal with a live agent. When this happens we can seamlessly transfer the customer to the live agent with all the metadata attached meaning no I'll re authentication no <unk>.

Doing the same steps over again and no more customer frustration.

Further we can feed any information given to the chatbot into the agent assist product even if it's from a different vendor. So the live agent is better prepared and can successfully resolve the issue in the last time the.

The bot becomes part of a fully orchestrated customer journey, rather than an island off to the side, resulting in higher C sat and retention.

Our voice version of ICA is moving into early adoption beta phase now with the same amazing integration into our contact center.

Are open platform approach is based on delivering superior customer outcomes. In these examples both the customer and the live agent and have a better experience further the business is able to effectively leverage existing agent productivity tools, which can increase RLI on prior investments.

We can't possibly build great tools for every possible use case.

But we can enable them through our integration capabilities with you ius widgets, Api's, where webhooks with our platform, providing core services like intelligent routing orchestration analytics and reporting customers can build solutions tailored to their needs. They.

They can use our Boston apps build their own or choose to deploy third party solutions purpose built for the specific use case.

Or multiple ways to integrate with partners bring to life, a whole new way of making integrations feel native versus loosely fits together as is often the case with other contact center software.

There appears to be no trade off between functionality and ease of use for the customer and the technology partners love It because we don't compete with them.

We started our partnership journey in January and formally announced it in early July .

We have been overwhelmed with a positive response and have more than 40 partners today and even more onboarding. These are recognizable highly funded companies doing some amazing things. We are fully functional integrations released today and a lot more coming.

Our ecosystem will naturally expand as it use cases for AI and the contact center mature for now customers want reliability security ease of use <unk>.

<unk> a roadmap to protect their investment they may recognize the potential of artificial intelligence and the contact center, but.

But they want the flexibility to adopt new solutions and technologies at their own pace.

Customers like health first <unk> bees horizon hobby, United Neuro skeletal partners and sovereign housing are embracing our approach and committing to the AIA platform. These wins some with T. C. DS of seven figures are detailed in our earnings deck.

Although they vary by industry geography in size. These customers chose AIA to improve their customer outcomes today and well into the future.

Don't take our word for it on July 31, <unk> released its inaugural contact centers of service <unk> Bay.

Based on market share financials market share momentum product mix customer sentiment in the customer business success AI ranked fifth higher than I believe most listeners would have guessed and ahead of Amazon dial pad talked desk vantage avaya content.

<unk>, you jet and zoom.

Additionally, we ranked highest in customer sentiment, we live customer obsession or contact center rocks and it's constantly getting better.

Let's turn to what all this means for us as a company and you the investors.

Creating value for our customers and our shareholders over an extended period of time is fundamental to everything we do I believe we will achieve this by continuing to invest in innovation, while managing within a financial framework revenue growth exceeds expense growth and excess cash flow is returned to investors.

I want to lay out our financial path for fiscal years 24 through fiscal year 2006 time period.

This is not guidance rather the path, we want to be on.

We expect to increase our cash flow from operations by an average of more than 20% per year. This will be driven by a combination of margin expansion debt pay down and revenue growth.

We remain committed to returning $250 million to investors over the period, mainly through that retirement, we have already returned $25 million in at $225 million to go.

Since value cruise on a per share basis, we have taken the pioneering step to reduce the dilution from our employee stock programs overtime, while the full benefit is expected to take three years to be realized as we work through the vesting a previous grants.

We expect the annual increases in diluted shares outstanding to be roughly 6% per year through fiscal 2006.

This will depend on the actual stock price and excludes any acquisitions.

This does include employee stock purchase or ESP, we remain believers that having employees stockholders aligns well with shareholders interest over the long term, we want to reduce annual growth to 4% or less.

These three items combined will drive what I considered to be the most important metric for shareholder value cash flow from operations per share.

Increasing cash from operations, while reducing share dilution is our financial Northstar.

As a proof point over the last four quarters, we have generated cash flow from operations of $69 million, while I reported fully diluted share count is down by over 3 million shares over that time period.

This is not to say we are not concerned about service revenue growth. We are we expect to exit fiscal 24 with low single digit growth and then show acceleration in fiscal 25 in fiscal year 2006, with a goal of getting to 8% to 12% year over year revenue growth as soon as possible.

While doing all of the above we continue to invest in the future of the company growth will come by building innovative products, expanding our channel and developing our employees.

This road may not always be smooth or linear, but we believe that is very doable for us my confidence is built on the accelerated pace of new product introductions.

Truly customer response to these new products are recent financial performance and the improvements in the sales process and go to market, we will achieve under the leadership of our new Chief revenue Officer, Lisa Martin.

So while the quarter was not perfect and we know we have more work to do it was a step in the right direction and we have a plan lastly, I want to thank our customers our partners our employees and you are investors for going on this journey with us and with that I will turn the call over to Kevin.

Thank you Sam and good afternoon, everyone.

We remained financially disciplined and delivered strong operating income and cash flow in the fiscal 2024 first quarter exceeding our guidance range for non-GAAP gross margin and non-GAAP operating margin and exceeding our expert expectations for cash flow from operations.

We have delivered positive non-GAAP operating income and cash flow from operations for 10 consecutive quarters, and we have prepaid $58 million of debt more than 10% of the total outstanding balance since August 2022.

Total revenue for the quarter was $183.3 million and service revenue was $175 $2 million, both decreasing 2% year over year and slightly below our guidance range.

Ah revenue performance was impacted by continued challenges in our past business in the Asia Pacific region, and higher than expected churn in our fused customer base.

Other revenue for the quarter was $8 million slightly above the prior quarter and in line with expectations.

Totally are are with $703 million at quarter end up 2% year over year, reflecting CPAP headwinds and churn and downhill in our inorganic customer base.

Excluding see past usage are total <unk>, approximately 4% year over year.

Most see past R. As in the enterprise segment and consequently, the CPAP headwinds did disproportionately affect the enterprise.

Enterprise customers accounted for 58% of total a R. R and enterprise a R. R was flat sequentially and flat versus the prior year given the aforementioned headwinds.

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 76.2% up 90 basis points sequentially, and 280 basis points higher than Q1 23.

We are continuously managing our cost of goods sold and expect service revenue gross margins to remain healthy.

Part of the year over year increase in service gross margin has been that we have reduced investments and low margin portions of our business.

As we have said we are currently focused on improving profitability over revenue growth in this quarter again shows that.

Other revenue gross margin came in at positive 4% for the quarter compared to negative 35.3% in Q1 hundred 23, and 8.6% in queue for twenty-three again, a sign of improve profitability versus pure growth.

Other revenue gross margin has improved in recent quarters and will vary due to the timing of professional services deployment as well as product mix.

Overall fourth quarter gross margin was 73% an increase of 450 basis points, a year over year and up 50 basis points sequentially.

For the first quarter of 2024 gross profit dollars grew approximately 4% year over year significantly higher than overall revenue growth as we focused on improving profitability of our highest value products and services.

Turning to operating expenses research and development was 14.9% of revenue in line with our 15% target and indicative of the continued investment we are making and product innovation.

Just a quick comment about R&D some of the investments we are making will not show in RLI for multiple quarters as it takes time to build world class software generate awareness and closed deals.

We believe that making these product innovation investments will lead to sustainable long term growth.

Sales and marketing expense was 32.8% of revenue down from 38, 2% of revenue in Q1 23.

Sales and marketing expenses were down $11.7 million from Q1 hundred 23, as we realized synergies from the integration of fuse and eight by sales and marketing organizations and realigned our resources to focus on target markets and improve efficiency.

General in an administration as a percentage of revenue was down 50 basis points and $1.1 million sequentially, as we incurred lower compensation employer taxes and benefits cough.

Total non-GAAP spending as measured by cause plus R&D, plus sales and marketing plus G&A was down more than $20 million or approximately 12% year over year and reflected our strategic cost Street alignment actions in the second half of the prior fiscal year.

At this point, we believe our overall cost structure is where it should be to drive our strategy.

Our guidance will include the step up of expenses for pay increases.

The combination of improved gross margin and lower operating expense resulted in non-GAAP operating profit of $26.4 million up approximately 160% year over year and up over 6% sequentially.

We achieved $14, 4% operating margin and fiscal Q1 versus our guidance of 12.5% to 13%.

Starting this quarter, we are adding a commonly used operating metric adjusted EBITDA.

Which is reconciled to GAAP results in our queue 124 press release.

Q1, 24, adjusted EBITDA was $33.8 million, 18.5% of revenue and up 79% year over year.

Additionally, we have generated well over $100 million of adjusted EBITDA over the past four quarters.

Cash flow from operations was $26.5 million for the quarter, a multiyear record driven by strong profitability strong cash collections and lower than expected cash interest paid due to the timing of interest payment date.

Cash flow from operating activities has been positive for 10 consecutive quarters and increase more than 90% quarter over quarter.

As stated in earlier earnings calls, we plan to maintain the cash and investments balance at or above $100 million and use excess cash to reduce the principal amount of our debt.

In fiscal 2024. This means we will repay the remaining $63 million of the 2024 convertible notes using cash generated from operations.

As we move into fiscal 2025, we will begin repaying the adjustable rate term loan as quickly as possible, which will have a significant an immediate impact on our operating cash flow by reducing cash interest payments.

Turning to the balance sheet total cash cash equivalents in restricted cash ended the fourth quarter at approximately $139 million flat with the prior quarter, Despite prepaying $25 million in principle value of our terminal.

Is 25 million dollar debt repayment was the first installment on our commitment to return $250 million in value to shareholders from fiscal 2024 through fiscal 2026.

Given our current cash balance unexpected future cash flows, but you're not currently anticipate any issues with repaying. The remaining 2024 convertible notes with cash when they mature in February 2024.

Remaining performance obligation or arpeggio was approximately $790 million for the quarter, increasing $15 million quarter over quarter and $90 million a year over year unhealthy multiyear customer commitments.

Additionally, deferred revenue increased $5.5 million or 12% in the prior quarter.

While we experienced retention challenges in our inorganic customer base.

Organic customer retention continues to be the highest it has been in four plus years.

As we noted earlier, we changed our equity cash compensation mix for employees to significantly reduce future equity grants.

Our vesting schedule is typically three years. So this change will take time to appear in the income statement, but as we proceed on this path, we expect to significantly reduce dilution due to employee stock programs.

Associated in this commentary increasing cash flow from operations, while reducing sure shareholder dilution is our financial Northstar and we're very focused on driving improvement in these metrics is the best way to build shareholder value over time.

Before turning to guidance I want to reiterate some of what we said today.

As a company we are very focused on creating value for our shareholders by making smart decisions, even if those decisions take time to pay off.

For example, we are investing in innovation with a goal to drive long term durable growth, we are reducing the mix of equity based compensation, which will moderate the pace of new share issuances due to employee stock programs. We are shifting sales and marketing investment from small business to enterprise, which has a longer cell cycle and we are leading with C.

Calf, which has a much higher potential long term value for the customer.

All of these changes aim to build a sustainable and profitable growth business.

We are making these changes we plan to maintain strong profit in cash flows throughout fiscal 2024, which is reflected in our guidance for the year.

As I mentioned earlier investors will notices step up inexpensive starting in the second quarter.

As we implemented our annual cash compensation raises in early July .

The aim is to significantly reduce future equity dilution born by shareholders in exchange for higher cash compensation to employees.

By trading cash for equity for many of our employees, we can minimize compensation volatility due to market swings, which will help us attract and retain talent in a competitive market.

All employees still have the opportunity for equity ownership through our employee stock purchase plan, but this compensation changes intended to reduce stock based compensation and shareholder dilution overtime.

This new compensation structure is factored into the guidance I'll be giving in to the primary reason for the step down and non-GAAP operating margin guidance for Q2.

For operating expenses, we plan to continue making the appropriate level of investment in sales and marketing and expect sales and marketing to be in the range of 33% to 34% of revenue throughout fiscal 2024 down from 36% of revenue in fiscal 2023.

We plan to focus our R&D efforts on continued product innovation 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, which emphasizes contact center.

We are focused on extracting more leverage from our G&A functions over time as we work to improve operating efficiencies in those areas.

We are establishing guidance for the second quarter of fiscal 2024, ending September 30th 2023 as follows.

We anticipate service revenue to be in the range of $173 million to $178 million approximately flat from Q1 at the midpoint and representing approximately minus 2% year over year growth at the mid point as we still have a challenging comparison foresee path and we remain in transition in other areas.

We anticipate total revenue to be in the range of $180 million to $186 million flat with the prior quarter at the midpoint and representing approximately minus 2% year over year growth at the midpoint.

Our mid point of guidance implies a slight sequential decline in other revenue as other revenue can vary based on customer specific deployment schedules.

We anticipate gross margin to be between 72% and 73%.

We are targeting an operating margin between 10.5% and 11.5% as we increase employee cash compensation as noted earlier.

We expect cash flow from operations to be positive, but down sequentially as we pay greater compensation expenses and cash interest and we are modeling a more normalised amount of cash collections.

We anticipate interest expense of approximately $9 million in cash interest payments of approximately $13 million <unk>.

Note that the Q2 2004 cash interest payment includes $2 million that was paid in early July but related to Q1 hundred 24 accrued interest expense.

Also note that interest expenses can change as our term loan is subject to monthly interest rate adjustment.

We estimate I fully diluted share count of approximately 123 million shares the increase reflects a full quarter waiting of Rs use that vested in June as well as the purchase of shares.

Through our ESP program.

We are updating guidance for fiscal 2024, ending March 31st 2024.

Followed.

We anticipate service revenue to be in the range of $701 million to $711 million, representing less than 1% negative year over year growth at the midpoint as we expect the first half headwinds followed by low single digit growth in the second half of the year.

We anticipate total revenue to be in the range of $732.5 million to $742.5 million, representing approximately negative 1% year over year growth at the midpoint.

Similar to service revenue growth rates, we expect total revenue growth rates on a year over year basis to the higher in the second half of fiscal 2024.

We anticipate gross margin to be between 72% and 73%.

We continued to focus on delivering a solid operating margin and anticipate achieving between 12% and 13% for the year versus the $8, 4% achieved in fiscal 2023.

This operating margin guidance is consistent with the guidance we provided in our prior earnings call. As we are committed to delivering a healthy operating margin to our shareholders. Despite our current revenue headwinds.

We expect cash flow from operations to be Directionally aligned with non-GAAP operating profit trend subject to timing differences in collections that interest and other payables.

We anticipate that interest expense and cash paid for that interest of $35 million to $36 million again, noting that our term loan is subject to monthly interest rate adjustments.

We estimate fully diluted share count growth, averaging approximately 2 million shares per quarter from the 123 million shares guided for Q2 24.

In closing I believe that our continued focus on operating margin and cash flow from operations is the correct financial strategy for us at this time.

At the same time, we are very focused on building a sustainable growth engine for the future.

Fiscal year 2024 is a period of transition and in fiscal 2025, we expect to show some revenue reacceleration, while continuing to focus on profitability cash flow from operations and per share metrics.

This strategy enables us to remain in innovation led company as we fund investments in key product areas.

I would like to thank the entire team for working in concert to deliver this quarter's robust profit and cash flow growth and I look forward to the continued execution of our strategy to capture more of the contact center market to delight, our customers and to deliver on our commitment to solid profitability in cash flow gender.

<unk>.

Operator, we are ready for questions.

Thank you.

As a reminder, if you would like to ask a question. Please press star one one of your telephone.

Please wait for your name to be announced before you proceed with your question one moment wildly composite you in a roster.

And our first question for today will be coming from Kathleen <unk>.

<unk> Rosenblatt your line is open.

Hi, Thanks for taking my question.

Sam.

This job on the Microsoft I'll throw but really what are are you seen yesterday, we had reset code <unk> today you've reported.

And you are in this <unk> <unk> what are you really seen in terms of buying patterns from your target market. The SME. That's the first question I guess I have and the second one is.

Wow, congratulations on <unk> and being in the top five springs Central now it looks like they are following your lead in terms of the ring C. Accent. You know what's your take on how far you are with your product.

Hitting the same target market. Thanks.

Alright, So you ask what are the buying patterns in our target market look I think there's some cautiousness has crept into the market.

We see it in a smaller order sizes, a little bit longer deal times.

CFO , we've seen increasing signature authority on first deals maybe a longer POC those kinds of things I think we mentioned this last quarter also so we've seen a little bit further elongation of the sales cycle.

In there at the same time it's.

Absolutely seeing a lot of interest in the new things that we're announcing right and those are relatively early but we have supervisor work space. That's now generally available a lot of interest in that.

Intelligent customer assistant digital is exiting beta here shortly in the next month or two probably probably not nothing promise and we're I mean, we've seen just a massive increase the amount of usage of that coming out of the beta site customers and we expect that to continue as we go to generally ability. So we're we're in a bin that transition where the new products aren't yet of material amount of money Jen.

Rating revenue, but there's a lot of interest in them.

On a go forward basis, and we continue to generate a lot of cash flow. So while there is some economic headwinds I think and just some cautiousness in our target markets I think we're doing all the right things as a company in terms of Ringcentral following us.

I'll, let them speak for themselves I guess, all I would say is we've been in the market. Since 2011, it's nice that they are showing up in 2023, I think by 2034 there'll be right about where we are today.

Thank you.

Thank you for a request you one moment to the next question.

And our next question will be coming from Jamie rental Morgan Stanley . Your line is open.

Hey, guys, you've got Jamie on for me. Thanks for taking the question I guess, just firstly could you contextualize the uptick in jail activity that you are seeing tied to X cast and then secondly, when customers are talking about having an AI functionality do they know what they're looking for it yet or are they still looking for guidance I guess another way to think about that is is prolonged.

Sales cycle.

Okay. So what are they looking for an AI and what was the first part Kate It was the App taken.

<unk> Oh, okay. So the two are related to each other right. So we announced our ecosystem in early July we've been out on the road talking about the fact, we've got an open ecosystem. We've got a number of partners nearly 20, we've got integrations out there on the MLA I space we've got.

For example, cotton G are intelligent customer assistant out there and so there's a lot of activity that's driving a lot of the uptick.

We were at CCW context underworld in Las Vegas, and I would say the tone on the show floor was very much I.

Want to deploy this in the next year or to help me. So to answer your first party and second part kind of combined.

They are looking for help and I think they're looking for help to not make AI and island onto itself I think it's very easy to buy a product today that does something very specific.

A chatbot and Emily Chatbot, it's often its own world et cetera, but what happens if the user of the chatbot has a problem then it becomes a very complicated that's why we've entered the market with our.

Framework at our integration framework, so that if you're on a chatbot or you're using.

Voice spots are using these kinds of things and you need a live agent you need to complete that circle you can't transfer with all the metadata. So no re authentication no repeating yourself over and over again I was recently on a chatbot with our 401k provider I had to authenticate on the Chatbot, then I had to authenticate.

It again to the agent irritating customer experience, we eliminate all of that and so I think they're trying to figure out what technologies to deploy when I would say the biggest ones right now are chatbots.

Voice spots are pretty popular in the U S. And then agent assists and then you know I would say those are the big three and and health, scoring and some of the other stuff is coming up rapidly behind it but they want it to be part of the overall picture not an island unto itself.

Alright, thanks, so much thanks.

Jamie.

Thank you one moment to the next question.

And our next question is coming from Matthew <unk>, Oh Bank of America Your line.

Hi, Yeah. Thanks for the question one for Michael Funk, I'd I'd really appreciate some additional commentary on see past trends, specifically some incremental color on the carrier price actions taken during the quarter.

Any quantification would be appreciated and how you expect those trends too.

To manifest going forward.

Thanks Matthew.

So look I would say we are not the only one seeing this we've seen some of our competitors and see past business also sort of stay the same commentary I think the carriers are raising prices very aggressively and it's kind of a mistake because I think they've raised prices. So quickly and so aggressively people are actually moving traffic away now that benefits us over.

The long term because we offer a whole range of channels on our <unk> business. So what am I talking about moving authentication and some of US may deal with this today, but moving authentication for example from SMS traffic to what's App is a simple example, very common in Asia were preferred vendor of meta on what's app et cetera. So we've got those capabilities.

We can guide customers to that Jersey journey, but in the meantime, it's causing some disruption in traffic volumes going through that and.

And that's kind of a color I think the other thing that we're doing is we're trying to move up the stack and this goes in in line with my innovation mantra. So we're making the hard decisions in the short term to be a better business. What does that mean, we walked away from low margin or negative margin SMS direct business.

Because it just didn't make financial sense and we've been investing in.

<unk> capability. So one product that's in data today is a product called fraud shield, it's where we actually protect the customer from SMS fraud as part of the contract. We've got I think 15 beta sites between 10 to 15 parasites don't call me.

Exactly on that number and received tremendous uptick in traffic and that makes the product itself stickier. So I think all of US I think <unk>.

Super helpful. Thank you.

I'll just.

Reiterate what sounds that we're not going to go after bad business.

And in terms of the qualifications are queueing. This is roughly half an organic has passed and the big portion of that <unk> is is generated because he didn't go after the bad business.

We're focusing on generating cash flow today, yet that margin.

Absolutely. Thank you.

Thanks Matthew.

Thank you one moment so the next question.

The next question will be coming from city Pedograph App <unk> security.

Hi, This is <unk> I guess the question kind of is what kind of assumptions on the inorganic refuse renewals do you have baked into the fulfill your guide and at what point are we gonna start seeing kind of a lapping effects. After we get through them and I guess related to that kind of a second piece here is what are the expectations are when he took the right for <unk>.

Reaccelerated in FY 25 is that link to kind of the <unk> been discussing and your products are where can we kind of your 0.2 there. Thank you.

Yeah I'll answer the first part and then the second part can take this is Kevin US we don't disclose necessarily have a detailed renewal rates for our for the portions of our business what basically we.

The the downsides upon our upgrades megabyte platform was more than we expected I think the important thing is that we've actually.

Pivoted very very quickly and put.

The whole customer success team on 100% of the few space to contain the.

The down cell and other losses, we see so the next few quarters. We do expect the next couple of quarters or so we do expect to be able to contain that overtime and then we'll we'll start the add on business and other things that were going to do the cross sell into that base alright.

Alright, and I'll take the second part, which is basically I'm gonna paraphrase what gives me confidence that we can accelerate revenue in 2025, so here's kind of a laundry list of things I think about everyday <unk> growth improved in all segments X C pass so our core business is doing fine <unk>.

Double digits year over year and was 41 per cent of total revenue I think that's a big positive and we're seeing more contacts at our customers. So our move towards contact center led sales, we're starting to see the green shoots behind that clearly <unk> saw top five ranking as I said on my script I think most call listeners on this call would have thought of that and that's ahead of Amazon dialed Pat Tau.

Task vantage Avaya zoom and a host of others right. We've got a darn good contact center product and that wasn't the day I was going to use we.

We have proved to the gardener magic quadrant for contact center in the critical capabilities, we've improved year over year and 12 out of 13 categories are contact center is getting better. We've got 12 user awards. This summer from G. Two both on you.

<unk>, we've been investing customer support we saw with Stevie Awards for our contacts for our customer service team and the leader Lisa Martin joined She's a fantastic higher to be our Chief revenue Officer Trust me. She did a lot of due diligence before joining and then I think our new products and what we're seeing on our new products is.

<unk> I mean, it brings like when I get down in a moment or two I just look at the usage trends on our new products and a big Smile gets up my face very rapidly. So I think those things just need to build to a size where they shop in the income statement and start to nudge that number higher.

Wonderful. Thank you appreciate it.

Thank you one moment to the next question.

And our next question is coming from Austin Ruiz of Wells Fargo. Your line is open.

Hey, guys. This is Austin Williams on for my concern.

Just wanted to go back to the higher Lisa Martin May I have a sales just anything that you can add on what changes we might be able to go to market as a result of that and what's the biggest priorities will be to start. Thank you.

Well, maybe we'll bring lease on in a future call I mean, she's been on the job since mid June So I don't want to speak for yet let her get her feet underneath her but if you look at her linked in profile she's an incredibly experienced sales leader.

Both technically and sort of you know her her trajectory she knows contact centre sales inside and out.

And so obviously if she's joining us I think it's just a good validation that she did or due diligence on what we're doing and where we're going and decided to tag along.

Operator.

<unk>. Thank you one moment for our next question.

Mmm.

And our next question will be coming from George Seddon of Craig Helm your line or something.

Hey, guys. This is James uncle, George Thanks for taking my questions.

Taking a interesting approach with the open CX are open.

Platform.

<unk> 40 partners Onboarding.

Talk about what you're hearing from those partners and how do you envision the open platform approach pulling out over the next 345 years relative to some of the closed off competitors, what seems to be that sort of the longer turns out here.

So let me let me take it in reverse order so how do I see this over the next three to four years I see it honestly, how most technology evolves. If you look at <unk> Dot Com R marcato or any of the platforms over the last 20 years anybody that tries to go with themselves failed in the end and so I just believe that contact center is a replay of traditional checked.

<unk> development and if you look at a lot of the market research what contact centre buyers want is seamless native feeling integrations and that's really what we're trying to do so what we hear from our our ecosystem base is thank goodness, you're not trying to compete with us like those other guys. Thank goodness that you're building multi tiered integration point.

So we can integrate at the UI UX level, we can either create at the API level, we can integrate the webhooks level, which allows monitor the event bus which has some really unique stuff.

And honestly, thank goodness that there is a place where the next generation technologies. What are the key things I think this is one of the reasons why others have gone to a closed back versus us as we've rebuilt the foundation of our contact center over the last five years, it's a full CIC D stack continuous innovation continuous deployment, so we're making about five <unk>.

<unk> is a day Monday through Friday, the working week right. So we're doing 20 plus releases a week and what that allows us to do is work at these next generation startup speeds I think one of the problems and I'm guessing as to be fair that our competitors have as they are not that full ici's CD stack, so an ecosystem partner needs an API or.

Need something adjusted and they're like Great. We will get a relief to you in 60 or 90 days well first startup that's a lifetime away and I think the key that investors need to realize is that there is a thousand plus startups and our best guess is in excess of $100 billion a venture capital allocated around the contact.

Center space in R&D and that money is going to lead to tremendous innovation and the companies that can put that into production fast is just beneficial so.

I've used a lot of words now let me give you a real life example, right. We were we knew Chad CPT are open dot AI. The first week. They came out of stealth mode. There were already on our radar screen and we've incorporated their whisper technology transcript transcription technology in house to provide a shared common service for very high quality transcriptions now.

What allowed us to do this different from others as we have the technology in house. So we're not taking the voice recording and shipping it to their cloud, thereby breaking GDP, our rules Federation rules and getting into all kinds of other issues.

All staying on our cloud inside of our ecosystem and so that's an example of US working at startup speeds I think if you were a native stack you couldn't do it as quickly and so we see people announcing things, but if you read the fine print it as frequently to take a piece of technology and push it to their cloud, which then changes the.

Privacy rules and all kinds of other things everything stays within our cloud and yet we have the capabilities of deploying those next generation technologies very rapidly and we offer that as a service to our ecosystem partners and our customers and ourselves obviously today with the corporation of open that AIG technology and so it's just a kind of a real life example of how that.

Speed of innovation matters, when you're trying to build this next generation and I think what you are going to find over the next three to five years is that every contact center in the world will be semi customized for each individual use case big customers are gonna want in a certain way small customers, who want it their way everyone's going to want it their way and we're going to <unk>.

For the most compelling platform for building that for each individual customer.

Thank you.

And this concludes the Q&A essentially for today as well conclude the conference for today. Thank you all for joining you may I'll disconnect and have a good evening.

Thanks, Lisa Thank you you're welcome.

Mmm.

Mmm Mmm Mmm Mmm Mmm.

[music].