Q2 2024 8x8 Inc Earnings Call
Good day, and thank you for standing by walk into the queue to 2024 eight byte egg earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the sexual need to press star one on your telephone people down here, an automated message advising your hand is raised.
She had the cops already a speaker today J Patterson. Please go ahead.
Thank you good afternoon, everyone. Today's agenda. It will include a review of our second quarter results with Samuel Wilson, Our Chief Executive Officer, and Kevin crowds, our Chief Financial Officer, Lisa Martin Our Chief Revenue Officer has also joined our call today. Following our prepared remarks, there will be a question.
Answer session before we get started let me remind you that our discussion today includes forward looking statements about our future financial performance, including investments and innovation and our focus on profitability and cash flow as well as statements regarding our business products and growth strategies.
Day, and we have no plans or obligations to update them.
Certain financial metrics 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 gap measure is provided in our earnings press release and earnings presentation slides, which are available.
Will an eight by eight Investor relations website at investors Dot eight by a dot com.
With that I'll turn the call over to Sam Wilson.
Much appreciated K and thank you to everyone on the call for joining us today.
I am pleased to begin my remarks by saying, we met or exceeded our guidance ranges for service revenue total revenue and non-GAAP operating margin for Q2 when.
When I took over the C E O role I outlined our innovation led strategy to drive growth along with improving profitability in cash flow through disciplined capital allocation.
We believe this balanced approach is the best way to build a durable business and deliver value to all our stakeholders, that's customers employees partners and shareholders.
Our continued progress on this journey was evident in our queue to results as a reminder, we are focused on.
Investing in innovation drive longterm durable growth.
Bleeding with contact center and X cast for new business and cross selling our product portfolio to into the installed base.
Focusing on our target customer small and medium size enterprises with the same technology customer experience needs as large enterprises, but without the same internal development resources, and lastly building, an enabling channel and technology partners ecosystem that allows a platinum customer to deliver best in class customer experiences or.
All of this while growing revenues faster than expenses and returning excess cash to investors. Our goal is to grow cash flow from operations by an average of 20% in fiscal year 24 through 20 physical twenty-six.
We intend to return $250 million to investors over this period.
They have already returned 25 million for early repayment of principal on our 2027 term loans.
Let's take a look at the highlights for a Q2 performance service revenue increase sequentially by $2.5 million and it was roughly flat year over year improvement in our see past business with a significant driver of the quarter on quarter growth as existing customers increase their business with us and we added new customers to see best team.
Has done a great job retooling the business over the past year and I'm excited by the new opportunities. We have identified both in the APAC region and worldwide now.
Now more than ever I believe or see past business will prove to be a competitive advantage for us or U C. C. C. Core business continues to perform as expected and we see new products is a bright spot.
We demonstrated continued disciplined in managing our operating costs, which allowed us to deliver non-GAAP operating profit above our guidance ranch.
Cash from operations for the quarter was $17.5 million in cash and investments increased to approximately 100 $150 million, we have double cash from operations in the first six months of the fiscal year compared to last year.
Customer satisfaction and retention remained high within the eight by a customer base, reflecting the investments we made in our customer success organization as well as continued innovation in our solutions there.
This is reflected in the feedback we receive from the thousands of customers who participate in our first ever AIA day on August 8th.
As well as the recent recognition from numerous industry organizations to celebrate the first eight by eight day, we ask customers what they loved about it by eight and ask you. If you could publish their response.
As a thank you we sent them what's cooking at a party and he broke a employee recipes in case studies from our food and beverage customers. If you Lucky winners also received E bikes from our customer track, who we love.
The volume and enthusiasm their sponsors tell us the investments we are making it innovation and customer success are resonating check out the videos on the website.
Adoption of our recently introduced C cast product portfolio continues to accelerate early adopters of our AI powered intelligent customer assistant both digital and voice versions are seeing high rates of case deflection for specific use cases.
Customers are rapidly finding new use cases, the volume of conversations is up over 50 per cent quarter on quarter and accelerating R. I C. A pipeline is up over triple digits quarter on quarter.
We saw significant growth in our North American reseller channel. We are committed to a channel first strategy had been investing in building out our network of value added resellers.
We have built a strong value added reseller channel in the UK and while it takes time and investment to build it pays long term dividends in sales productivity customer satisfaction and durable growth.
Partially offsetting these in early indications of success with continued downtown and to a lesser extent attrition and the fuse customer base. This created a headwind in our enterprise are our metrics and the customer count as we said before we are 100 per cent committed to retaining fuse customers. The number of last few customers decrease significantly.
Currently measured by logos a.
Quarter on quarter, and we are accelerating the pace of customer upgrades on the eight by platform R.
Our progress this quarter gives me confidence that our strategy is working.
We deliver value to our customers by and.
Enabling agile workplaces empower users across an organization deliver great customer experiences and harnessing the power AI and machine learning.
We have dramatically increased our investment and innovation over the past two years and the products and features resulting from those investments are now coming to market customer interest has been high and we are seeing increasing adoption and use let me share a few examples of our innovation inaction of our customers.
First up Westminster City Council, who has been an eight by voice in contact center customer since 2021.
We recently introduced ICA as part of their user standard operating model. They are regularly achieving 80% resolution rates on inbound and inquiries and and some days as high as 100 per cent I encourage you to watch the video of their experience. There is a link in the slides next.
Next up is Acer a top technology company with customers in 160 countries.
R. A superpower is impairing users and administrators in these organizations with best in Brea capabilities, including AI powered apps intuitive interfaces and ultra high reliability in a wrapper of extreme simplicity. Our goal is to make our user superheroes of their own organizations.
See past innovations further extend our ucas and see cast portfolios. We recently introduced remote fix a pre packaged second generation video escalation solution targeting field service organizations. We also introduced omni shield to or see past customers safeguarding enterprises from fraudulent SMS activity and a host of other and has.
Enhancements outlined in our press release last week.
Our strategy is to be a leading a high powered customer experience platform for small and medium enterprises.
The quotes from all the customers profile that are earning slide demonstrate our progress in this strategy.
They love April solutions for ease of use simple deployment and deep native like integration into the contact center, our customers see tangible business benefits from our products every day.
When I look back I'm amazed at how many innovations we have introduced in a very short time period.
The list of significant product introduction enhancements include conversation IQ for Ucas, bringing C C level speech analytics to Ucas.
Integration of opening our eyes Whisper for transcription and translation, we launched this within weeks of chat Gpt's unveiling and are now transcribing more than 3 million hours, a month with a 20% to 25% improved accuracy versus previous solutions.
Postal user experiences empowered agent and supervisors with the information they need to be more productive powerful user friendly AI enabled self service capabilities in both voice and digital.
Expansion of our omnichannel capabilities, including embedded secure video and enhancements and SMS and chat apps and updated version of Microsoft teams phone App as well as deeper native integration with teams that simplify administration and ease of use and so much more we are pushing out hundreds of micro updates as.
Every week using our automated C I C D process and.
Adding incremental capabilities and improving performance.
Before the end of the fiscal year, we plan to introduce a host of additional products into data just a few big ones are AI powered interactions summarization in conversation categorization.
A next generation version of our air powered agent assist to our ecosystem partnerships and expanded contact center features for employees outside the contact center that will continue to blur the lines between U C. N C C.
R. C cast and you cast solutions have come a long way in the last 18 months and this is reflected in the recent recognition for both industry analysts and customers.
Cause I have traveled around the world talking with customers and partners innovation Roadshows in the U S and Europe I have come to the conclusion that our biggest challenge is awareness.
It is clear that our velocity of our new product introductions has outpaced our customers and partners awareness of our nominal innovation solving.
Solving this issue in overcoming outdated perceptions of our solution is a multifaceted challenge, we must do a better job of keeping our customers informed educating our channel increasing our visibility and creating word of mouth references.
We have barely scratched the surface of the opportunity that exists within our installed base, let alone the tens of thousands of small and medium sized enterprises.
Sled organizations and public sector entities that are just beginning to migrate their contact centers to the cloud Lisa Martin who joined four months ago as our Chief revenue officer is up to the challenge.
She is joined by Bruno Bertini, who recently joined Us as CMO at.
Some Bruno both have extensive experience in the contact center and have a track record of building high performance teams in sales and marketing.
They've worked together in the past are fully aligned and are already having an impact within the organization.
Transitions don't happen overnight, but I am confident we now have the right team in place the right strategy for growth and the financial and technical resources next is necessary to achieve our goals I've asked Lisa to join US on the call today to talk about her vision of priorities as she and Bruno build a world class go to market engine.
Taken away Lisa.
Thank you for that nice introduction, Sam and for inviting me to speak on today's call and thrilled to be at a <unk> in fact, I accepted this role because I see tremendous opportunity for eight by eight at the you cast and <unk> market continue to evolve.
I spent the majority of my career focused on customer engagements solutions. The past two years that twilio and prior to that a number of years at both Genesis and Verizon meeting high performing sales organizations as the customer experience and communications industry have dramatically changed in well over a decade of <unk>.
<unk> I've learned to appreciate how important strong and well defined go to market motions or to successful sales organizations and how critical it is to align those motions with the buyer journey I spent the first few months at eight by eight doing a deep dive into really understanding current sales processes the channel strategy.
<unk> and marketing motions to figure out what was holding us back from better sales performance we.
We are transforming our organization as I go to market motion migrate from U C led to contact center Lad and from a single product focus to a portfolio of products I am focused on optimizing sales operations and enablement building the processes playbooks in packages that make it easier for our customers to do <unk>.
With us and for our business development team salespeople and partners physician and sellers solution.
I go to market partner are new Chief marketing Officer, Juno Bertini will focus on lead generation and overall brand visibility and awareness and to see cats market. We are 100 per cent of lines on our priority.
With the recent innovations introduced and last year, we can effectively compete head to head in the city cast market with or without the incredibly strong foundation of our market leading <unk>.
And the timing is right I believe the market is that an inflection point and the adoption of AI will continue to drive migration to the cloud because of the benefits companies can realize.
The fact is eight bytes portfolio offers the flexibility and innovative technologies for small and medium enterprise companies to optimize customer and employee experiences.
Could not be more excited for our future from my due diligence during the interview process and my first few months here and extremely confident that there is tremendous potential for eight by eight we have great product markets that we have strong leaders in our region.
And we have the cost functional collaboration and support that is crucial to any successful revenue organization.
I will now turn it over to Kevin for his review of our financial performance. Thank you.
Thank you Lisa and good afternoon, everyone.
R Q2 performance exceeded expectations in several key areas as we delivered service revenue in total revenue above our guidance bitcoins.
We continued the trend of delivering solid bottom line profitability as we achieved 12.8% non-GAAP operating margin well above the high end of our guidance range.
Year over year non-GAAP operating profit grew 162% cash flow from operations increased 26% versus the prior year.
We have delivered positive non-GAAP operating income in cash flow from operations for 11 consecutive quarters and.
We plan to continue generating positive cash flow operations in operating margin as we build momentum.
Total revenue for the quarter was $185 million in service revenue was $177.8 million exceeding the mid point of our guidance range by $2.3 million.
Our service revenue performance reflected better than expected usage activity for our C pass business in the Asia Pacific region, as well as contribution from new products.
This quarter, we recorded year over year growth and see past revenue for the first time in many quarters.
Other revenue for the quarter was $7.2 million slightly below the prior quarter and generally in line with expectations.
The total error with $707 million at quarter end up 2% year over year.
Enterprise customers accounted for 58% of total are are consistent with the prior quarter and prior year <unk>.
Enterprise are are was up approximately $3 million sequentially and grew 1% year over year.
We ended the quarter with approximately 1200 50 enterprise customers. The number of enterprise customers was impacted by approximately 50 customers moving from enterprise to mid market as we.
Saw some effects from the current economic environment.
Turning to gross margin operating expenses and operating profit. Please remember that all items discussed our lawn gaffe unless otherwise noted.
Overall second quarter gross margin was 71.5% an increase of 140 basis points a year over year Q.
Q2, 24 gross profit dollars grew approximately 1% year over year higher than overall revenue growth as we continue to focus on profitability.
Service revenue gross margin came in at 74.6% up 50 basis points year over year.
We continuously manage our cause and expect service revenue gross margins to remain healthy.
Other revenue gross margin came in at negative 3.5% for the quarter compared to negative, 11.2% and Q2 23.
The timing of hardware shipments in professional services deployment impacted other revenue, which in turn impacted the gross margin on other revenue in the quarter.
Turning to operating expenses R&D was 15.2% of revenue in line with our 15% target and indicative of the continued investment we are making a product innovation.
As we mentioned on our previous earnings call. We expect our investment in R&D will generate a desire will return on investment, but this will take time as we build world class software generate awareness and closed deal.
Sales and marketing expenses, 33.1% of revenue slightly up from 32.8% in Q1, but well below the 37.4% of revenue in Q2 twenty-three.
G&A as a percentage of revenue was 10.4% in down to 50 basis points sequentially, as we incurred lower compensation employer taxes and benefits call.
Total non-GAAP spending as measured by cost of goods sold plus R&D, plus sales and marketing plus G&A was down approximately $17 million or nearly 10% year over year and reflects our strategic cost realignment actions taken in the prior fiscal year.
Keep in mind that fiscal Q2 also included annual pay increases for our global employee population.
At this point, we believe our overall cost structure is appropriate to drive our strategy.
The combination of improved revenue and carefully managed operating expenses resulted in non-GAAP operating profit of $23.8 million up approximately 160% year over year.
Adjusted EBITDA, which is reconciled to GAAP results in our queue to twenty-four press release was $35 million <unk>.
16.5% of revenue and up 75% you over here.
We have generated over $120 million of adjusted EBITDA over the past four quarters.
Cash flow from operations was $17.5 million for the quarter, driven by strong profitability and solid cast collections, partially offset by cash interest paid of $12.9 million.
Given that cash flow can vary quarter to quarter due to the timing of interest payments collections and changes in other balance sheet items I prefer to look at rolling for quarters cash flow when I evaluate our performance.
Over the last four quarters, we have generated approximately $73 million in cash flow from operations, an increase of 62% compared to the comparable trailing 12 month period ending September 30th 2022.
We are very pleased with our financial performance so far this year.
We ended the quarter with approximately $150 million in cash restricted cash and investments up.
Approximately $11 million from the prior quarter as.
As we have set on prior calls are plan remains to return $250 million to our investors from fiscal 2024 through fiscal 2026.
Our next step in that plan will be to repay the remaining $63 million of the 2024 convertible notes using cash generated entirely from our operations.
As we move into fiscal 2025, we intend to begin repaying the adjustable rate term loan as quickly as possible, which will have a significant an immediate impact are operating cash flow by reducing our cash interest payments.
You can expect us to begin voluntarily early repayment of principal immediately after the expiration of the prepayment penalty in August 2024.
Remaining performance obligation or R. P. O was approximately $780 million for the quarter, increasing $65 million a year over year unhealthy multiyear customer commitments.
Before turning to guidance I want to recap what we're doing is a company to build shareholder value over time.
First we are investing in innovation with a goal to drive longterm durable growth.
Second we are focused on leading with our CCAR solutions to our target small and medium enterprise customers.
Third we are reducing the mix of equity based compensation, which will moderate the pace of new share issuances due to employee stock programs over the long term.
And fourth we are focused on growing revenue faster than expenses, leading to increase profitability in cash flow.
Increasing cash flow from operations, while reducing shareholder dilution is our financial Northstar and we are very focused on driving improvement in those metrics over the long term is the best way to build shareholder value over time.
Property expenses, let me walk you through how our strategies to build shareholder value overtime drive our expense structure.
We expect sales and marketing to be in the range of 33% to 34% of revenue for fiscal 2024 down from 36% in fiscal 2023, as we focus our go to market motions on our target small to medium enterprise customers and cross selling into our installed base I b.
Leave this cost envelope can accommodate programs to drive awareness of our innovations as well as incremental investments to develop our value added reseller channel in North America.
We expect R&D as a percentage of revenue to remain about 15% as we continue on the path of investment in our customer focused product strategy.
Finally, we expect G&A expense to remain at approximately 11% of revenue for fiscal 2024, we believe we can achieve leverage from our Jna functions overtime as revenue increases and we achieved greater efficiencies through automation. However in the near term our expectation is for G&A to remain in the range of 10.
10% to 11% of revenue as we absorb the increases in cash payroll expenses and investments in automation.
Regarding non-GAAP gross margin, we anticipate the second half of the fiscal year to be similar to the first half year average of 72%.
And note that this metric can be influenced by product mix.
With this framework in mind, we reiterate our fiscal year revenue and operating margin guidance ranges and establish outlook ranges.
For the third quarter of fiscal 2024, ending December 31st 2023 as follows.
For the third quarter, we anticipate service revenue to be in the range of $173 million to $178 million.
We anticipate total revenue to be in the range of $180 million to $186 million.
We are targeting an operating margin between 11% and 12%.
We expect cash flow from operations to declines sequentially, but remain over $10 million.
We anticipate interest expensive approximately $9 million in cash interest payments of approximately $7 million.
Note that interest expenses can change as our term loan is subject to monthly interest rate adjustments.
We estimate a fully diluted share count of approximately 125 million shares.
We are reiterating guidance for fiscal 2024, ending March 31st 2024.
As a reminder of the <unk> the Rangers were.
Service revenue in the range of $701 million to $711 million.
We anticipate total revenue to be in the range of $732.5 million to $742.5 million. Please note that other revenue can vary based on customer specific deployment schedules and hardware shipments. So there could be some movement in the queue for 24 other revenue as a result of these dynamics.
We continue 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.
We expect cash flow from operations to be Directionally aligned with a non-GAAP operating margin tread subject to timing differences in collections that interest in other payable.
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, which has been increasing in recent quarters.
We estimate an average fully diluted share count of approximately 123 million shares for fiscal 2024.
In closing I believe that our continued focus on profitability and cash flow from operations is the correct financial strategy for us at this time. This approach will enable us to continue making targeted investments and innovation and growth, while we returned value to our investors primarily through that prepayments.
Fiscal 2024 is a period of transition and our goal is to show some revenue reacceleration in fiscal 2025 <unk>.
I would like to thank the entire eight by 18 for working together to deliver this quarter solid results and I look forward to the continued execution of our strategy as we move forward in our quest to become an innovation led growth company.
<unk>, we are ready for questions.
Thank you ladies and gentlemen, if you have a question or comment at this time. Please press star one one on your telephone. What's your question has been answered you wish to move yourself from the queue. Please press star wouldn't want again, we will pass for a moment, while we can Paula Q&A roster.
To manifest Ryan.
Mmm.
Our first question comes from Adam Marshall with Morgan Stanley. Your line is open.
Okay, great. Thanks, and thanks for all the additional disclosure it's very helpful.
Sam in the past, you've kind of talked pretty openly about where there are opportunities in contact center.
Where some of those are likely you know just given the amount of investment in the space to kind of reduce the opportunity you know as you kind of build out that portfolio and.
Utilizing your own services and somebody third party services, just kind of how has that view evolved and just kind of how do you view the gross margin opportunity with some other C cast products. Thanks.
Alright so.
Viewed it's hard for me to answer this with a flat out quick sound bite answer because the number one thing I see over and over again is it.
Partners and prospects and customers don't even know are full range of capabilities at eight by eight as we brought things like intelligent customer interaction video.
Until she customer assistant video interaction to that when everything to market. You know we have a gap I would say just relative to what your question is you know.
There is the day to day in a context in our manager trying to put an AI product into production have it feel native to his contact centre habits fully integrated have a way to have it work well inside the contact center and the hype. They you know C N N or whatever C. N B C puts out about how.
AI is going to revolutionize the world and so we are very much on the pragmatic side, we're seeing very rapid adoption of our AI base intelligent customer assistant voice in digital versions because those are fully integrated into the contact center. They work really flawlessly seamlessly and it's it's it's just sort of straightforward and easy to put.
Production, we've got agent assist available we've got a new kind of a next generation version of agent assist that we're working on right. Now. So those are all things that I think are very practical very easy to put into the contact center show immediate agent productivity case deflection benefits those kinds of things.
What's the second part of my this question if you wanted to know about this.
Oh, So you must see it was it see caspers, yes, yeah, especially with the effect of gross margins.
<unk>.
What we see really clearly as as we start to sell a portfolio of products to a customer or retention rates go up in our <unk> you know our revenue ability to generate forgiving customer goes up and so when that happens our gross margins have a tendency to trend higher but it can also be offset by seasonality of the sea.
<unk> business and everything else and so the underlying trends is contact centers, a more margin rich landscape for us as a business and so there's upward ability to grow margins, but it's always in the overall product mix of the company.
Great. Thanks.
Our next question comes from Ryan recordings with Barclays. Your line is open.
My second question I think here S. M. B are are definitely help hold up better than investors might've expected I'm missing tougher environment, but I'm, saying, maybe just on the macro overall, how do you think if I had fared during the quarter and like did you see any changes throughout the quarter and how it's October been so far.
Well I I'll, just sort of make it general about macro so I think last quarter was a tougher quarter for macro we definitely are starting to see the bite.
Of the increasing interest rates and you know change in economic sort of environment. Overall I mean, there's the natural places you would see a credit card default rates a little bit more downtown pressure on renewals, where customers you know if they're at 100 seats before 197 seats at renewal those.
Kinds of things I think we see a little bit more of that it does make us a little bit more cautious in terms of our of our forward guidance and expectations and just to be clear you know sort of relating it back to the company.
October is any different than the rest of the quarter Uhm. The last place we saw and I I just sort of just give you a sense of I lived down the stories, we set a Doc you signed out to close the deal at the end of the quarter and I think originally had four signatures on it from the customer and by the time went back and forth a couple more times, we ended up with 10 customer signatures were.
Wired.
To get the deal done now we got the deal done.
But that's when people ask me like what is the economic slowdown looked like it's the customer requiring 10 people to sign it including that one person is on vacation and whenever the poconos today, and we had to track that person down again to sign on their phone, but that's what economic slowdown looks like.
You're kind of.
<unk> ran my weekend plans, because I won't be adding to the poconos [laughter].
Four fair enough.
<unk> you guys have got a lot to get ahead of you know refinancing your debt and you've significantly improved the cost up your business over the last year and I. Appreciate it information fly deck and Kevin's prepared remarks, just all new capital structure, but you know I think it might be worthwhile, hoping for folks just if you can walk through like the high level plan.
The attack on how to address or your thoughts on like addressing the capital structure over the next few years.
Yeah, and I I can wrapping the SMB comments also so look I mean, Kevin was really clear and last quarter, we put our financial Northstar right. So our financial northstar's cash from operations per share.
Because the best if he rules, we obviously can't guide to that number but you know that's how we think about the company we want to use that cash from operations that we generate to return money to investors and that's primarily through debt repayments because that just makes the most logical sense and then eventually if we you know sort of pay off majority of data have all of that will start with chalk repurchases I mean that would be the next lot.
You have stuff to do with some future point, especially with our valuation at bumped puzzling levels and so I.
I think the key there cause it's all about capital allocation, where cash flow positive business. We continue to generate very solid levels of cash we're gonna use that cash to strengthen our balance sheet first and then continue to invest in growth second you also said something earlier about S. M B held up, particularly well given the macroeconomic environment and.
I think a lot of that has been that we've restructured some things down there we've got it running more with the <unk> I'm not a fool, but the cops are easier. We've also got to restructure we've got the right people in the right seats doing the right things and you know we hear a lot about customers there and so we're seeing some benefit from that and some efficiency improvement.
<unk> okay.
Thank you.
Our next question comes from Catherine <unk> with the Rosary about your line is open.
Oh, Thank you very much yeah. He Sam nice job. So two things one can you parse the difference between your traditional channel partner in your <unk>, Microsoft elevate program and and how are each one helping you layer in the new products for growth.
Thank you.
Okay. So the biggest difference so elevated as the name of our channel program overall, an accident capital Capsulate.
Encapsulates TST agent bar et cetera, It's just the general name of our program. The Big difference between the Microsoft Partners are these are traditional Microsoft bars, and so their best known for selling office 365, an exchange and as you are and those kinds of things, but with the rise in teams.
We obviously have a presence there and so we've we've gone out over the last couple of years and recruited Microsoft partners to resell our products.
In that space I think it's very successful because we've you Microsoft has a strong partnership and I think Microsoft and I don't want to speak for them, but at least from what I hear from them as they view us as a strong partner, we don't view each other as competitors. We think we enable Microsoft teams deployment in the enterprise and we can do great things for it and we embrace it and I'm sort of a.
A big fan of Microsoft teams and so for that it was just a matter of going out and getting partners that when they're selling teams know that we have a great direct routing solution stay tuned on the operator connect side, but there's lots of great things to talk about on that and since leases here. Lisa is there anything you'd care to add on Microsoft and the <unk>.
No actually I mean, I think you covered it Sam I would also just add the elevate program in general really.
Drives loyalty and rewards are partners for working with us, whether that's our solution or jointly with Microsoft.
Alright. Thanks.
Thanks, Catherine our next question comes from Josh Nichols would be Riley. So your line is open.
My question, Great to see the company coming in above the guidance range pretty much across the board with good cash flow. So.
Most of the questions had been hit on.
At this 0.1 thing I did want to touch on a little bit as I no longer term you've talked about one seeing some more revenue growth acceleration next year, and maybe ultimately getting back to somewhere around like 10% growth longer term as some of these AI and M. L investments come to fruition like what's the timing potentially.
Monetizing that and how are you approaching it differently Where's your not really competing with hyperscalers relative to.
Some of the peers and what makes you kind of unique in that factor.
I appreciate Johnson I laughed as you were saying that because whenever answer I'm about to give you know in my heart I'd like it to happen faster.
But I just have to be realistic right. So I think you're asking great question and the question is really around we are changing fundamentally we're transforming as a company and we're being innovation led and the place you see that the most is today, we can sell eight products to a customer and just a couple of years ago. We sold two we sold you CFCC and unlike some of our competitors.
They fundamentally sell one you see we can sell a U C. C C ICA digital ICA voice workforce management.
And on professional services see past and secure pay and so what yeah. The question. We're doing is we're restructuring or go to market motions around becoming that portfolio sale as we sell more of the portfolio that were given customer, we see higher retention rates and higher <unk> I mean, a higher starting to some of these or usage based.
I don't want to get into all the <unk> details.
Timing behind that is a lot of the products are in beta or exiting beta now.
So we saw as I mentioned on my prepared remarks, we saw for example, and I see a the number of interactions double 50 per cent quarter on quarter and accelerate on a month on month basis throughout the quarter as we're starting to expand out the number of customers and the number of customers in the pipeline is up triple digits, you know a couple hundred per cent.
Quarter on quarter as that moves to G E and so I think we'll start to see like we see it internally. The question you're really asking is when will it be on the income statement. I think later this fiscal year early next year I'm, hoping knock on wood it'll be big enough that you'll see it in the income statement.
As as moving the needle and starting to drive that Reacceleration.
Your second question is great, which is like how may not competing with the hyperscalers. So what we've done is we've built a platform that allows us a series of integration needed like feeling integrations with this host of next generation startups, you're seeing these startups that are raising I mean, it's no have to raise $250 million round or $500 million round.
On these next generation technologies, but they need to contact Senator work on they need a contact centre workflow to ride on top of and we've developed and we've re-engineered our platform over the last three or four years to enable those next generation technologies to ride on top of our platform. This is very much different than most of our competitors in the contact center.
Space, who haven't Re-engineered their technology stack, and therefore, mainly forced to fight a native battle, which means they buy companies they hard wire in the integration and they basically me basically have to use their in-house solution. For example, we offer three or four different agent assist platforms and.
We can offer a few more they're coming shortly we offer our chatbot ICA, which is based on <unk> well. We also have customers running balto and awake and others that are phenomenally successful and so what's that enabling us is that we're not competing with those companies. They all want a partner with us with anything here to head.
I mean, I think with these partners allow us to do is really continue to blur the lines between customer and employee engagement with those native integrations and that really gives us the end customer the right tool kit to be able to deliver that experience. Yeah. I think right now we have.
A company can handle more and use cases, just about anybody out there with our ecosystem.
Thanks, Josh.
Our next question. Thanks, Sorry, our next question comes from George starting with Crickhowell them. Your line is open.
Thank you Sam I wondered if you could walk through the massive the or the thought process of the push and pull between this $250 million return to shareholders, which is great.
Against the potential for growth investments How're Ya, okay driving that line.
Yeah. So let me let me let me tackle a couple of these things. So first I was <unk> to investors not to shareholders snowed y'all share buyback and my lawyers always like me to say that the bondholders are not considered shareholders. So I have to correct that because I'll get a nasty gram from my G C.
Look into the pushing plus a fair comment I think I would invest more in growth. After we get our G. T M engine sort of retooled for our next generation of portfolio selling.
That's why I always leave the Optionality out there now look I think I want to strengthen the balance sheet. So I'm gonna get rid of the term loans fast the 250.
We'll get that taken care of plus the 63, and 20 fours and we'll be like financially well set we won't have a lot of interest costs those kinds of things.
But really to me, it's about retooling the G T M than spending more we have enough money and would generate enough operating income that if we see an investment opportunity with a very high or <unk> will go after it we have more margin room to play with it's not like our backs against the wall and so right now.
We're more focused on putting the incremental dollar into re accelerating growth in the company and just maintaining margins generally where they're at plus minus depending on timing and a bunch of other things by God.
Tradeshows and all those things that drive up margins any particular quarter.
But really it's it's continue to strengthen the balance sheet continue to strengthen the company overall and reaccelerate growth as quickly as possible.
I don't think an incremental dollar right now in sales and marketing is the right play as soon as it is the right play will have we make that investment.
And just to restate. We we are you continue to be investing in innovation. So that investment is going 50 per cent of revenues are targets. So we continue to do that because we believe it's going to result in fantastic products that are attractive in the market. So that investment is going to continue.
As a follow up on the contact center you know a couple of your large competitors have come out and talked about disruptive pricing with relatively new platforms. I think what I'm hearing from you is given your way of having built the platform you really don't compete directly because you're offering a <unk>.
Sort of things that none of them have really even contemplated does that my hearing that correctly.
I think that's absolutely true and and a lot of the disruptive pricing models aren't nearly as disruptive I mean, the one that comes to mind is the one that's interaction based.
And anybody with like a calculator, leaving a basic calculator can quickly figure out that an interaction based system and an average contact center cost you more than buying a proceeds. So it's it's great from a marketing Billboard perspective, but it's actually not going to win that much business once that anybody gets a calculator out.
Gotcha, Thanks, guys.
Thank you George.
Our next question comes from Michael Turner was Wells Fargo. Your line is open.
Hi, This is Michael Berg going from Michael turn Thanks for taking my question I'm, just going back to the contact center space. This be curious there on it was overall progress in pricing trends as you incorporate more and more AI into this any feedback that'd be helpful. Thank you.
I mean, I would say on average I mean, it's hard to tease it out completely but like when we sell a portfolio of products. We see the dollars of revenue that we generate from our customer go up now.
Now part of that is a mix of seat plus usage or C. Plus consumption based cause like for example, when you have a bot you can't charge a seat bought or bought proceed I know exactly how to map the English would work.
Cause it's not a user you charge based on the interactions until it's a little different I think one of the things and I'm going to expand your question slightly.
What are the things that people talk a lot about it Oh my goodness a is gonna put the contact center out of business completely false hope you guys completely false for at least until I am you know 40 years retired what we see today is when we deploy our next generation technologies, we get more productive agents maybe we.
One agent or two agents last and a 250 C contact center, but what we see generally as attrition rates, which are 40 and 50% go down the actual hourly pay too agents goes up because they're adding more value and the rope parts of their jobs go away and the value added parts of their jobs increase.
And so I'm Super bullish on AI, making contact center jobs substantially better last year based on Bureau of Labor Statistics data. The average contact center work on the United States made $18.31 an hour, which is about 30% less below the median wage of an hourly.
Employee.
Corporate America is waking up that you can't have your lowest priced employees the ones dealing with your customers. If you want customer loyalty and that's with a I is enabling a change too we can have more productive contact center agents that we pay more to turn off your better customer experiences that improve reorder and renewal rate.
<unk> across industries, and I think that's the magic that's happening.
Got it thank you.
Our next question comes from Peter Levine with Evercore. Your line is open.
Alright, thanks for screaming in here or maybe just one for Lisa.
You experienced trivia Genesis. So I guess you know you've been on the road for a couple of months explained to us from a higher level, where do you see the opportunity what are your priority and said if you can share like what are some of the changes or you know I think anything <unk> to go to market that you're implementing today, where do you think will.
How about a change to this business over the next 12 months.
Yeah. Thank you for that question I think the first thing I would go back to you is what I mentioned earlier, which is the way that our our portfolio of products really starts to blur the lines between customer and <unk> and what that really allows companies to do which is to use the insights in the analytics that we give them.
To drive the right business outcome and I think we're really uniquely positioned to capture that I think when I look at the organization that I've come into we were very much too old to focus on the U C positioning in the marketplace and the contact center discussion with was not.
Front and center and what I'm doing is building out the organization from a skill set perspective from the tools and sales motion perspective, so that we are coming to the customers with the right use cases to drive the right business Dotcom and that is number one my focus so there's a lot of any.
<unk> going on within my organization, we're looking at the tools that we use the insights that we're able to provide our teams in terms of the <unk> account, they're working with and making sure that we're able to capitalize on that.
Alright, so that maybe you you know just.
I will send you mentioned with within the fewest customer base your store.
We're downtown nutrition is that something that pop up this quarter or any color you can provide them. When do you think that kind of drops router.
Yeah, we talked about it last quarter so.
So far uses performed better than our original financial model.
And we have double industry churn rates. The first year and then we expect it to moderate in the first year. It was substantially better than we expected, but the second year has been slightly worse than we expected. What we've seen is a little bit of I think last quarter's probably the worst it got a little bit better this quarter in the sense that we saw a quarter on quarter significant improvement in <unk>.
Number of logo churn.
We're still dealing with a little bit of right sizing, especially as we upgrade the customers to <unk> I think it will get better next quarter and the quarter. After what we are seeing really clearly as we've accelerated or move of moving fuse customers to eight by eight and the sea sat scores when they get to eight by eight E. R. Awesome I'm Super happy the customer satisfaction.
Once they're on the.
Platform is outstanding and the renewal rates are high <unk>. So we just need to accelerate it can I get through the bubble that we.
The sort of self inflicted gunshot wound we at around it I think probably the worst quarter was last quarter, we saw a little bit of signs of improvement this quarter and knock on wood hopefully it will be a little bit better next quarter.
Thank you for the caller.
Our next question comes from Michael first with Bank of America. Your line is open.
<unk>. Thank you for the question. So you know first.
First started general contact Center health do you have any comments or an agent hiring even if you're able to see during the quarter and usage trends as well and if you do have any color how did that trend during October heading into the holidays.
[laughter] method to good question I mean at least you can chime up your anytime you want I mean, what we're seeing is the normal purchase a bursting seats by our retail customers. So the seasonality the normal activities that you would expect to see by the retail customers of adding.
Agents in September and October getting them trained I don't think I mean, I think that's happening in general I still see more onshoring, then off shoring I still see the trend of bringing contact centers back from developing countries back onshore to drive higher C sat scores.
Hi, or M. P S scores to drive renewal and retention rates those kinds of things. So I think underlying I dunno.
Yeah, I think the other thing that I would add in terms of our retail customer base is that they're really looking to get more.
More out of the folks who are front and center with with their and consumer and giving them the tools to be more effective. So I think what we're seeing more is is the.
The interest in wanting to give someone who's in a retail store location access to the same insights and tools that someone who does sit in the contact center, so that they're able to serve that kind of consumer just like the person's words and that contact center.
He is 20th is Lisa said that kind of <unk> look it's a little hard for us like we've never been the world's biggest player in contact center right there's others.
And so what we see is a lot of our customers specially when we launched this host of new products.
Utterly surprised by the just the sheer volume and Wonderfulness of the products. We're launching right now gosh, our customers are just happy with US right now when they get these new products in their hands and they get to play with them and see what the capabilities are.
That was a great. That's a great color Tonight. Thank you both one more extreme if I try to I'm trying to parse your comments on Orange juice. I think you said that you know that churn head.
<unk> are about to ask the industry average you know I think you mentioned this last quarter you saw the highest level of pressure on their business. So just try to map that <unk> may no longer be a headwind.
Business. So if I tried that math in my head fair to assume that at the earliest a second happen next year, we're back in line with industry.
<unk> you know my migration kept progressing and a few businesses no longer a headwind does that the right. When you think about timing for that.
Heart I'm trying to do to my head hard to say I mean, if it's the second half of next year.
I am Walter going to have a bit of a discussion I want it faster.
Look I think we've sort of peaked in the worst. The question is how fast can we get a better. We're we're very we've got a triple digit number of migrations underwear or I'm, sorry upgrades underway right now and so I think like the the basis.
The basics are happening I think we're past the worst the question really is the top 400 customers and they are a little bit of each one's a little bit of a snowflake and it's hard for me to kneel down the timing when will get them all moved over and it will no longer be a thing we ever mentioned again right everybody will be.
On the eight by a platform I'm, hoping in the next few years cause I'm like a force that top 400 to move over.
I think it was also interesting as we are starting to see more cross-sell opportunities in that top 400. So it's it's a balancing act right now I don't know I don't have a good answer for you if I <unk> one more frequent my card uhm when you're also been top of mind a lot of companies talking about you know see contraction App. When you all contact center you know you you see.
How are you a new one with walking for the for fourth quarter. This year in the beginning of next year right kind of taking the Python to worry about.
Mm no there's no sneaking the Python to worry about we have seen that I was asked earlier, a little bit about economic pictures and I'm seeing Michael and what I'm seeing is a little bit of downtown pressure not so much on the logo side, but a little on the downward on the downhill side 100 seats becomes 97 seats, because they they've shrunk term bleed.
<unk>, what's interesting is will usually pick that up a year or two later as a run rate order.
Flex black up so I would say look it's not.
It's a little worse than it was a quarter ago, but it's not meaningful worse.
Okay, great. Thank you all for time I really appreciate it.
Thank you.
Our next question comes from Ryan comes with medium accompany your line is open.
Thanks for the question relaxed job and the cash flow, obviously here I'm Gonna ask you about the the geographic theaters and any comments you could make it at that are on your customer segment. Sam It seems like the malaise is kind of broad based in and if you've kind of retooled. Your go to Mark a machine, but any kind of color you can share across the theaters.
For your strength in UK or APAC or across a different you are segments be helpful. Thanks.
I mean look I'd be remiss in not starting with a basic like CPAP killed it in southeast Asia. They are great quarter. The changes we've made over the last six to nine months really started to kick in their pipeline activity is up the revenue produced was up it was a great quarter and see past and there's a lot of room to run their you know we have to get all the.
Ducks lined up to make that show up in the income statement, but there's a lot of potential in activity. There. So that'd be first and foremost I think secondly.
We are retooling or go to market, but there are a lot of green shoots around our new products and the uptake in customer activity reference ability coming out of beta the raw number of customers that are interested in our new products those kinds of things the pipeline, yet activities et cetera, Big Big plus.
Definitely was sort of a bent on airlines retail public sector in the UK, We obviously mentioned Westminster those kinds of things those are logical places for chatbots in those high velocity common questions to get answered over and over again I think third as we saw a sizable improvement in pipeline in our North American value added.
Resellers are far community, we've been making more investments in that space is I'm sure a number of your channel checks show that we've been investing more in the bar side of the business then the TST agent side of the business and we're seeing some sizable pipeline increases there and I think that's a pretty sizeable benefit and then.
I don't know in terms of verticals anything cause I mean, we've had good luck last quarter of two and health care and that's when it comes to I think health care field services field services is a great wine, where anyone who rolls a truck or has someone like Ah.
<unk> all of those types of things have really been resonating with the the video API that we've introduced as well.
Yeah, Yeah, Yeah. That's that's helpful and on on your comment on North America bars, or U C. N. It's increased kind of engagement on on the contact Center arena from these bars or would you have to really change out to a new set of ours to drive that this.
No no no we see them very interested in the contact centers out of the house and and and we're adding new bars rapidly bidding on a number of our rfps that are out there and recruiting new bars in general I think that's actually place bring your earlier answer around Microsoft It plays into contact center, and I think that that Holy Grail Bar community.
Is really starting to open up.
Got it extra <unk>.
Thank you.
Our next question comes from William Power was Bared your line is open.
Mmk, great. Thanks, I guess, a couple of if I can squeeze in here Sam you just touch on is actually a bit but I don't see fast business I think he noted upside and a quarter I think you just indicated.
Go to market and <unk>, but anything else there.
Point to that really drove the <unk>.
Better performance and I guess, we could even more importantly, you know the captain installed going for to those those appointments <expletive>.
Well I mean I'd be remiss I mean, the guy we hired and I won't mention his name because you'll probably get in bed recruiting calls is not a phenomenal job and so leadership matters and leadership matters right on top of that we've announced new products, we've improved and streamline or go to market activity. So as the company grew it's go to Mark.
Activities need to synchronize with what it was doing.
Can't speak highly enough about army shields, and the new product innovation were driving we've we've launched a new platform over the last year. So our stability are availability are dynamic routing capabilities on our platform absolutely phenomenal and we've been in the box because of those capabilities by the way because of that.
The channel because of the platform capabilities were in the box for just some super large see past deals I don't know if we're going to win them. There is certainly not in the financial model, but we're we're we're playing in the big leagues and see past in Southeast Asia.
Okay, great to see the appointment that I guess.
Yeah second question would be around teams Uhm, which you know I noticed bad <unk>.
Positive area for some time, maybe just to add a color you can share on trends you know see grow some kind of what you're seeing competitively from others that are trying to you know.
Go after that base of user soon.
So keep making me under the table some sliding away from her to tell you. We just passed 400000 seats of Microsoft teams.
Isn't the size right, we have over 400000 seats and Microsoft teams I think we're growing still like 67, 67% year over year.
So those are all like those as well as a quantitative so here's what I'm most proud us to be fair. So Microsoft I got a chance to see Microsoft partner slides I think they presented in June and we were listed as a strong partner Microsoft versus our competitors Withdrawl listed as Microsoft competitors. So I am I am very happy with her.
Relationship with Microsoft and I wish them nothing but the best of luck every day of the week.
Yeah sounds good thanks.
Our next question comes with Matthew Vanfleet with me to Yohji. Your line is open.
Thanks for taking my question, maybe I'll just ask one in the interest of time here, but Sam you talked about a number of years until the contact center may or may not be fully automated and so maybe more importantly, what are what are your customers sort of goals over the next couple of years in terms of whether it's <unk>.
All the flexion or at least reduce time of the agent on the phone what what's realistic what are the customers asking you to do and then as you wrapped it all together how additive versus moving revenue from one pocket to the other cannot be over the next couple of years as you embark on some of those goals for your Cussed.
Mercy.
Alright, so that's a great question like when.
When I talked to contact centre leaders and Lisa chime in anytime you want here I think what I hear is like it'd be great. If we could get overall like a 2030 per cent case deflection type of number to get the run of the mill cases, they simply use cases out of the system number two is we improve meantime, the resolution through things like agent assist.
And number three is the street never talks about this but it's such a day to day activity in a context and a leader is get attrition down.
Every contact center leader I've talked to deals with attrition at 40% to 50% and through things like boss, an agent assist and you know and how scoring and those kinds of things if they can make the job better and bring attrition down I mean, I don't think anyone on this call can imagine what it's like literally turn it off.
We're almost your entire workforce every other year that would just be Ryan giggs in terms of trying to improve customer satisfaction and those kinds of things and so to me. The big three are case deflection meantime to resolution and an agent attrition.
Okay, and then uhm what does it mean for us in terms of revenue a lot more revenue in a lot higher retention rates, which means a lot more revenue right. We generate more revenue and we know for example, when we sell and and these are rough numbers I'm not gonna get it but like when we sell one product with customer we have a mid eighties type of retention rate given our small business days, we saw two products low 93 products.
94, more products high nineties, right and so as a recurring revenue model the more products, we sell to hire our retention rates and higher dollars of revenue, we generate not magic every large software company Oracle Salesforce, Microsoft et cetera does this we're just at the point given our size to start to transition to that portfolio of products.
That allows us to sell more and more and get to take care of <unk>.
Thank you I'm not showing any further questions I'd like to turn the call back to Samuelsson for any closing remarks.
Thank you so much I really appreciate it.
Everyone out there we remain confident in our future we have all the building blocks in place to achieve our long term objectives. We saw early indications of success in our results this quarter's or adoption of new products increased I just want to you know sort of reiterate transitions don't happen overnight, but what the market. We address is huge.
We're coming at it from a position of strength, we have an installed base that loves us in the products. We're launching we have a terrific contact center platform that can enable next generation AI technologies.
For Kevin sake, I mentioned were very cash flow positive and profitable and were you know driving a return of money to investors and lastly, I think most importantly for everybody on this call I feel like we have the right team in place to drive this business to the next level. So thank you for your time today. Thank you to all the employees that are listening to this thank you to all the partners.
And customers that listen to this and I look forward to talking to you again in three months. Thank you.
Well, ladies and gentlemen does conclude today's presentation. You may now disconnect and have a wonderful day.
Mmm.
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