Q3 2024 8x8 Inc Earnings Call
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Speaker Change: Hello, and thank you for standing by welcome to eight by eight third quarter 'twenty 'twenty four earnings conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you will need to press star one on your telephone you within her automated message advising Joanne just race to withdraw your question. Please press star one again.
Speaker Change: Now I'd like to hand, the conference over to Kate Patterson you may begin.
Kate Patterson: Thank you. Good afternoon, everyone. Today's agenda will include a review of our third quarter results with Samuel Wilson, Our Chief Executive Officer, and Kevin Kraus, Our Chief Financial Officer. Following our prepared remarks, there will be a question and answer session. Before we get started let me remind you that our discussion today includes forward looking statements about <unk>.
Financial performance, including investments in innovation, and our focus on profitability and cash flow as well as statements regarding our business products and growth strategies.
Kate Patterson: We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward looking statements as described in our risk factors in our report filed with the SEC any forward looking statements made on this call and in the presentation slides reflect our analysis as of today and we have no.
Kate Patterson: Plans or obligation to update them.
Kate Patterson: Certain financial measures that will be discussed on this call together with year over year comparisons in some cases were not prepared in accordance with U S. Generally accepted accounting principles or GAAP, a reconciliation of those non-GAAP measures to the closest comparable GAAP measure is provided in our earnings release and earnings presentation slides, which are available on ebay.
Kate Patterson: <unk> Investor Relations website at investors thought eight by eight dot com with that I'll turn the call over to Sam Wilson.
Sam Wilson: Thank you Kate and thank you to all of our investors analysts employees customers and partners for joining us on our Q3 call. We delivered solid operating results again in the third quarter, our financial North Star as cash flow from operations per share and our cash flow from operations performance for the quarter was the second highest ever cash flow from.
Sam Wilson: <unk> on a trailing 12 month basis is up 55% year over year, and we continue to be very mindful of share count.
Cash flow was driven by non-GAAP operating margins significantly above our guidance range.
Sam Wilson: Q3 dollars 24 marks the anniversary of the official launch of our innovation led strategy to build durable long term growth.
Sam Wilson: Our path to complete transformation is underway from operating losses, and negative cash flow to sustained non-GAAP profitability and increasing cash generation from our U cast led to a C cast led sales motion across our customer base from three individual products to an increasingly integrated portfolio.
Sam Wilson: We have eight products with more to come.
Sam Wilson: From selling products to delivering solutions that address urgent business challenges from transactional arms link customer relationships to being a strategic partner in our customer success.
Sam Wilson: From over Levered to Delever.
Sam Wilson: Comprehensive transformations take time and the progress is not always perfectly linear but I'm impressed by the strides our teams have made over the past year across all three fronts financial product innovation and go to market.
Sam Wilson: We have been profitable on a non-GAAP basis and positive cash flow for 12 consecutive quarters.
Sam Wilson: For perspective in fiscal 2020, we reported non-GAAP operating losses of nearly.
Sam Wilson: $61 million and negative cash flow from operations of almost $94 million. Three years. Later, we are on track to deliver non-GAAP operating profit of about $92 million in operating cash flow of more than $70 million for fiscal 2024.
Sam Wilson: We said in the first quarter that we would return $250 million to investors by Delevering, our balance sheet over the three years from fiscal 'twenty four through fiscal 'twenty six tomorrow, we will officially redeemed the remaining $63 million of our 2024 notes using cash on hand, we have already said.
Operator: Thanks for watching! Hello, and thank you for standing by. Welcome to 8x8's Third Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode.
Sam Wilson: The funds to our transfer agent.
Sam Wilson: Since we announced the plan at the beginning of the fiscal year, we have returned to debtholders over $88 million or about 35% of the $250 million plan.
Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again. I would now like to hand the conference over to Kate Patterson. You may begin. Thank you. Good afternoon, everyone.
Sam Wilson: We are.
Sam Wilson: Civilly delevering on our way to creating a fortress balance sheet.
Sam Wilson: All things being equal it should drive increased shareholder value as a greater proportion of our enterprise value accrues to our equity holders.
Sam Wilson: Increasing shareholder value is one cornerstone of our strategy and it is at the heart of our decisions around compensation operating expenses and M&A.
Kate Patterson: Today's agenda will include a review of our third quarter results with Samuel Wilson, our Chief Executive Officer, and Kevin Krause, our Chief Financial Officer. Following our prepared remarks, there will be a question and answer session. Before we get started, let me remind you that our discussion today includes forward-looking statements about future financial performance, including investments in innovation and our focus on profitability and cash flow, as well as statements regarding our business products and growth strategies. We caution you not to put undue reliance on these forward-looking statements, as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements, as described in our risk factors in our report filed with the S Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligation to update them.
Sam Wilson: For example, we took steps to increase the ratio of cash compensation versus equity compensation for many of our employees, while our employees see less volatility in their income we will reduce dilution due to share count issuance over the intermediate term. This is a sharp contrast to some of our peers who have increased.
Sam Wilson: Stock based compensation expense as their stock prices have declined.
Sam Wilson: We are harnessing the power of AI to empower our customers to deliver better experiences to their customers. Our unified platform allows us to capture analyze and correlate data from customer interactions across the organization.
Kate Patterson: Certain financial measures that will be discussed on this call, together with year-over-year comparisons in some cases, were not prepared in accordance with U.S. Generally Accepted Accounting Principles, or GAP. A reconciliation of those non-GAAP measures to the closest comparable GAAP measure is provided in our earnings release and earnings presentation slides, which are available on 8x8's Investor Relations website at investors.8x8.com. With that, I'll turn the call over to Sam Wilson. Thank you, Kate.
But the platform is not the end game, we are closing the loop breaking down silos in customer engagement and extending specific contact center tools to everyone in the organization he engages with the customer.
Sam Wilson: Today, we announced a new product line to deliver cross organization customer engagements empowering end to end CX orchestration.
Sam Wilson: All customer touch points across the entire organization. The beta program is in progress for qualified customers.
Sam Wilson: And thank you to all of our investors, analysts, employees, customers, and partners for joining us on our Q3 call. We delivered solid operating results again in the third quarter. Our financial north star is cash flow from operations per share, and our cash flow from operations performance for the quarter was the second highest ever.
Sam Wilson: This is perhaps the most significant new innovation, we have introduced in several years and it is a direct result of the increase in our innovation investment through a combination of cutting edge AI solutions platform level contact center component and both native and third party data, we will be able to offer built for purpose.
Sam Wilson: Cash flow from operations on a trailing 12 month basis is up 55% year over year, and we continue to be very mindful of share. Cash flow was driven by non-GAAP operating margins significantly above our guidance.
Sam Wilson: <unk> for CX professionals outside the contact center.
Sam Wilson: This initiative further bridges, the gap between UC and Cc and.
Sam Wilson: 2324 marks the anniversary of the official launch of our innovation-led strategy to build durable long-term growth. Our path to complete transformation is underway from operating losses and negative cash flow to sustain non-gap profitability and increasing cash generation. From a UCAS-led to a CCAS-led sales motion across our customer base. From three individual products to an increasingly integrated portfolio of eight products with MortarCom.
Sam Wilson: And transforms the availability utilization and contextualize Asian of customer interaction data through the entire organization.
Sam Wilson: The resulting customer intelligence provides powerful predictive insights to enable smarter decisions and positive customer outcomes across many different touch points in an organization.
Sam Wilson: We believe we have a clear lead in delivering built for purpose experiences for CX professionals outside the contact center.
Sam Wilson: In addition to expanding our product portfolio with newly targeted experiences for an expanded set of users we are changing the entire dialogue with prospects and existing customers.
Sam Wilson: From selling products to delivering solutions that address urgent business challenges. From transactional, arm's-length customer relationships to being a strategic partner in our customers' success, from over-levered to de-levered. Comprehensive transformations take time, and the progress is not always perfectly linear.
It's no longer only about migrating phone service to the cloud are replacing on Prem PBX, it's about making easier for all employees to deliver great customer experiences both inside and outside the formal contact center.
Sam Wilson: But I'm impressed by the strides our teams have made over the past year across all three fronts, financial, product innovation, and go-to-market. We have been profitable on a non-gap basis and have positive cash flow for 12 consecutive quarters. For perspective, in fiscal 2020, we reported non-gap operating losses of nearly $61 million and negative cash flow from operations of almost $94 million.
Sam Wilson: As important as this initiative as it is by no means the only area we are driving innovation.
Sam Wilson: Let me call your attention to a press release, we issued last week with details on new features and enhancements delivered over the last few months.
Sam Wilson: On the <unk> side, we have included improved AI based call summaries for improved speech analytics expanded omnichannel capabilities and enhancements to our agent and supervisor Workspaces and more.
Sam Wilson: Three years later, we're on track to deliver non-gap operating profits of about $92 million and operating cash flow of more than $70 million for fiscal 2024. We said in the first quarter that we would return $250 million to investors by delevering our balance sheet over the three years from fiscal 24 through fiscal 26. Tomorrow, we will officially redeem the remaining $63 million of our 2024 notes using Cash on Hand. We have already sent the funds to our transfer agents.
Sam Wilson: We continue to enhance our <unk> solutions with value added features like smart some reason analytics improved usability productivity and efficiency. We also continue to expand our outbound customer engagement capabilities available through our <unk> solutions, enabling customers to build more effective customized outbound campaigns.
Sam Wilson: Sure.
Sam Wilson: With just a few new products that general availability, we are already seeing 60% year over year growth in revenue from our new products with quarter on quarter acceleration driven by workforce optimization, our intelligent customer assistant digital and voice payments compliant solutions all wrapped in add on.
Sam Wilson: Since we announced the plan at the beginning of the fiscal year, we have returned over $88 million to debt holders, or about 35% of the $250 million plan. We are aggressively de-levering on our way to creating a fortress balance. All things being equal, this should drive increased shareholder value as a greater proportion of our enterprise value accrues to our equity holders. Increasing shareholder value is one cornerstone of our strategy. And it is at the heart of our decisions around compensation, operating expenses, and M&A. For example, we took steps to increase the ratio of cash compensation versus equity compensation for many of our employees.
Sam Wilson: Subscription based services. This is before any benefit from new product spoken about here today, along with several other products in data.
Sam Wilson: We are delivering intentional innovation that addresses the needs of a well defined target customer.
Sam Wilson: New customers like Yakima Valley Farm workers clinic, and the museum of Science in Boston have chosen <unk> for capabilities like a broad feature set configuration simplicity ease of use reporting and analytics and integration with other workflows.
Sam Wilson: While employees see less volatility in their income, we will reduce dilution due to share count issuance over the intermediate term. This is a sharp contrast to some of our peers who have increased their stock-based compensation expense as their stock prices have declined. We are harnessing the power of AI to empower our customers to deliver better experiences to their customers. Our unified platform allows us to capture, analyze, and correlate data from customer interactions across the organization. But the platform is not the end game.
Sam Wilson: <unk> customers are also continuing to embrace our leading communications and contact center solutions for Microsoft teams with over 400000 feet sold to date.
Sam Wilson: Customers like Wal Shoal housing group in the UK Antero data are implementing AI based solutions to take advantage of our seamless integration with teams, our global presence and our unified Ucas and sekos capabilities, including AI, driven digital self service to keep our products future friendly where can.
Sam Wilson: <unk> to innovate on teams and expect to have some very exciting news in the near future.
Sam Wilson: We are closing the loop, breaking down silos in customer engagement, and extending specific contact center tools to everyone in the organization who engages with the customer. Today, we announced a new product line to deliver cross-organization customer engagement, empowering end-to-end CX orchestration for all customer touch points across the entire organization. A beta program is in progress for qualified 8x8 customers.
Sam Wilson: A third area of innovation and I'm really excited about is our C pass solutions until recently this part of our business has focused almost exclusively on SMS customers in the Asia Pacific region, where we remain a leader but.
Sam Wilson: But we believe there is a large and growing opportunity to attract new customers and expand C pass adoption with our installed base of UC and Cc as we add additional services.
Sam Wilson: This is perhaps the most significant new innovation we have introduced in several years, and it is a direct result of the increase in our innovation investment. Through a combination of cutting-edge AI solutions, platform-level contact center components, and both native and third-party data, we will be able to offer built-for-purpose experiences for CX professionals outside the contact center. This initiative further bridges the gap between UC and and Transforms the Availability, Utilization, and Contextualization of Customer Interaction Data through the Entire Organization. The resulting customer intelligence provides powerful and predictive insights to enable smarter decisions and positive customer outcomes across many different touch points in an organization.
Sam Wilson: With an extensive roadmap of new solutions like outbound customer engagement and automated employee notification. We are 10 channel about engineering solutions for specific use cases, and wrapping them in a highly automated easy to transact set of technologies like our solution for cross organization engaged.
Sam Wilson: These new <unk> solutions allow us to partner strategically with our customers shifting the narrative from price to value.
Speaker Change: Okay, I would be remiss, if I didn't talk about AI.
Speaker Change: AI permeates our solutions. It is embedded in our platform provides transcriptions analytics and summaries of shared services across UC and cc.
Speaker Change: Powers, our digital interactions, where we achieved deflections rates as high as 80%.
Speaker Change: It is at the heart of our New cross organizational engagement initiative and of course, it is a large part of our highly integrated ecosystem.
Sam Wilson: We believe we have a clear lead in delivering built-for-purpose experiences for CX professionals outside the context. In addition to expanding our product portfolio with newly targeted experiences for an expanded set of users, we are changing the entire dialogue with prospects and existing customers. It's no longer only about migrating phone service to the cloud or replacing on-premise PBX. It's about making it easier for all employees to deliver great customer experiences both inside and outside the formal contact center. But, as important as this initiative is, it is by no means the only area we are driving innovation. Let me call your attention to a press release we issued last week with details on new features and enhancements delivered over the last few months. On the CCAS side, we have included improved AI-based call summaries for improved speech analytics, expanded omni-channel capabilities, and enhancements to our agent and supervisor workspaces, and more.
Speaker Change: Our approach to AI integration is two pronged and is intentionally designed to give customers the flexibility to adapt as the market evolves.
Speaker Change: First we allow customers to reap the benefits of AI for common use cases with native AI powered features built into the platform.
Speaker Change: We enable deep native like integrations with third party AI tools built for specific needs, including a curated technology partner ecosystem.
Speaker Change: Some of the advantages to our approach or.
Speaker Change: We have the data and the platform we can focus our engineering teams on analytics integrations and universally used cases justice interaction summarization, which we announced last week.
Speaker Change: Our customers can adopt AI in their own timeline with the flexibility to choose the best in breed solutions for their needs.
Speaker Change: And we can leverage the massive investments made by the venture capital community and startups focused on AI based products through our technology ecosystem.
Sam Wilson: We continue to enhance our UCAS solutions with value-added features like smart summaries and analytics that improve usability, productivity, and efficiency. We also continue to expand our outbound customer engagement capabilities available through our CPaaS solutions, enabling customers to build more effective, customized outbound campaigns. With just a few new products at general availability, we are already seeing 60% year-over-year growth in revenue from our new products, with quarter-on-quarter acceleration driven by workforce optimization, our intelligent customer assistant digital and voice payments compliance solutions, all wrapped in an add-on subscription-based service. This is before any benefit from new products spoken about here today, along with several other products in beta. We are delivering intentional innovation that addresses the needs of a well- New customers like Yakima Valley Farm Workers Clinic and the Museum of Science in Boston have chosen 8x8 for capabilities like a broad feature set, configuration simplicity, ease of use for reporting and analytics, and integration with other workflows.
Speaker Change: Our ecosystem extends across UC cc and now the cross organizational engagement products to allow for highly differentiated solutions to solve specific customer needs.
Speaker Change: Similar to our own innovation initiatives, our technology ecosystem aims to transform customer experiences engagement for organizations of all sizes without requiring complex custom development or exorbitant overhead costs that have traditionally only been feasible for the largest of enterprises.
Speaker Change: We are focused on depth, rather than breadth offering our customers a carefully curated portfolio of integrations with leading technology providers.
Speaker Change: We recently expanded our technology partner program with a new exclusive tier cell with eight.
Speaker Change: So with a allows a select group of strategic technology partners to sell directly with eight by eight to solve customer pain points jointly for example, awaken intelligence and inaugural cell with a partner offers an integration with the API a contact center that Leverages, our persistent cross platform data to provide real time agent Guy.
Sam Wilson: 8x8 customers are also continuing to embrace our leading communications and contact center solutions for Microsoft Teams, with over 400,000 seats sold to date. Customers like Walshall, Housing Group in the UK, and Teradata are implementing 8x8 solutions to take advantage of our seamless integration with Teams, our global presence, and our unified UCaaS and CCaaS capabilities, including AI-driven digital self-service. To keep our products future-friendly, we are continuing to innovate on Teams and expect to have some very exciting news in the near future. A third area of innovation that I'm really excited about is our CPAS solutions. Until recently, this part of our business has focused almost exclusively on SMS customers in the Asia-Pacific region, where we remain a leader.
Speaker Change: <unk> and AI supported assistance are foundational partner ecosystem initiatives, including cell with eight is one of the foundational building blocks in our go to market transformation.
Speaker Change: When we began the transformation process I knew that go to market will take the longest and will be the most difficult part of our strategy.
Speaker Change: Transforming GCM is not about throwing more money into Google adwords or increasing sales capacity.
Speaker Change: We are shifting market perception, developing and empowering channel partners building pipelines and increasing accountability with experienced leaders and a relentless focus on customer success. It.
Speaker Change: It has taken us the better part of year, but I believe we are now have the right people in the right roles to Reaccelerate revenue.
Speaker Change: In closing I want to summarize our journey, so far and the early signs of our success last quarter I discussed, becoming a portfolio of product company we are.
Sam Wilson: But we believe there is a large and growing opportunity to attract new customers and expand CPAS adoption with our installed base of UC and CC as we add additional services. With an extensive roadmap of new solutions like outbound customer engagement and automated employee notification, we are intentional about engineering solutions for specific use cases and wrapping them in a highly automated, easy-to-transact set of technology. Like our solution for cross-organizational engagement, these new CPAS solutions allow us to partner strategically with our customers, shifting the narrative from price to value. Okay, I would be remiss if I didn't talk about AI. AI permeates our solutions.
Speaker Change: We're still in the early stages of a lengthy but exciting transformation.
Speaker Change: Our innovation led momentum.
Speaker Change: Is also evident in our ex cat.
Speaker Change: <unk>.
Speaker Change: Which is up with double digit year over year gains in Q3, the average IRR of our enterprise customers has been steadily increasing as we expanded from three individual product to an increasingly integrated portfolio of eight.
We also see a steady increase in larger deployments with RR from customers with more than 250 contact center seats up more than 50% year over year.
Speaker Change: We have been working towards this vision for a long time, we believe we have the ingredients for success our product portfolio is compelling we have a solid financial foundation, we have a seasoned leadership team committed to achieving our objectives and we have amazing talent at every level of the organization.
Sam Wilson: It is embedded in our platform, provides transcriptions, analytics, and summaries as shared services across UC, and powers our digital interactions where we achieve deflection rates as high as 80%. It is at the heart of our new cross-organizational engagement initiative, and, of course, it is a large part of our highly integrated ecosystem. Our approach to AI integration is two-pronged and is intentionally designed to give customers the flexibility to adapt as the market evolves. First, we allow customers to reap the benefits of AI for common use cases, with native AI-powered features built into the platform. Second, we enable deep, native-like integrations with third-party AI tools built for specific needs, including our curated technology partner ecosystem.
Speaker Change: I believe the best is yet to come I want to thank our customers our partners, our investors and our employees for their hard work and continued support.
Speaker Change: With that I will turn the call over to Kevin.
Kevin Kraus: Thanks, Sam and good afternoon, everyone. We remained financially disciplined and delivered strong operating income and cash flow in the fiscal 2024 third quarter exceeding our guidance range for non-GAAP operating margin and exceeding our expectations for cash flow from operations.
Kevin Kraus: We have delivered positive non-GAAP operating income and cash flow from operations for 12 consecutive quarters.
Sam Wilson: Some of the advantages to our approach are that we have the data and the platform. We can focus our engineering teams on analytics, integrations, and universal use cases, such as interaction summarization, which we announced last week. Our customers can adopt AI on their own timeline with the flexibility to choose the best-in-breed solutions for their needs. And we can leverage the massive investments made by the venture capital community in startups focused on AI-based products through our technology ecosystem. Our ecosystem extends across UC, CC, and now cross-organizational engagement products to allow for highly differentiated solutions to solve specific customer needs. Similar to our own innovation initiatives, our technology ecosystem aims to transform customer experiences and engage organizations of all sizes without requiring complex custom development or exorbitant overhead costs that have traditionally only been feasible for the largest of enterprises. We have focused on depth rather than breadth.
Kevin Kraus: Total revenue for the quarter was $181 million in service revenue was $175 1 million.
Kevin Kraus: Service revenue was approximately flat year over year, and roughly equal to our guidance midpoint.
Kevin Kraus: Other revenue for the quarter was $5 9 million.
Kevin Kraus: Which was below expectations due to lower onetime professional services and product revenue.
Kevin Kraus: Total <unk> was $707 million at quarter end up 1% year over year and flat sequentially.
Kevin Kraus: Enterprise <unk> increased 2% year over year and $2 million sequentially.
Kevin Kraus: A significant amount of the total churn occurred within smaller customers, which shows up in the sequential decline in smaller and mid market business.
Kevin Kraus: We have been devoting additional resources to retention of the fuse enterprise customers and expect to see an acceleration in upgrades to AIA, but we probably have at least one more quarter before this headwind to our growth begins to dissipate.
Speaker Change: Turning to gross margin operating expenses and operating profit. Please remember that all items discussed are non-GAAP unless otherwise noted.
Sam Wilson: We're offering our customers a carefully curated portfolio of integrations with leading technology providers. We recently expanded our technology partner program with a new exclusive tier, Cell, with 8. Cell with Eight allows a select group of strategic technology partners to sell directly with 8x8 to solve customer pain points jointly. For example, Awaken Intelligence, an inaugural Cell with Eight partner, offers an integration with the 8x8 Contact Center that leverages our persistent cross-platform data to provide real-time agent guidance and AI-supported assistance. Our foundational partner ecosystem initiative, including Sell with Eight, is one of the foundational building blocks in our go-to-market transformation. When we began the transformation process, I knew that going-to-market would take the longest and would be the most difficult part of our strategy.
Speaker Change: Overall third quarter gross margin was 71, 6% a decrease of half a percent year over year, primarily due to an increased mix of lower margin SMS usage revenue compared to Q3, 'twenty three which shows up in our service revenue margin.
Speaker Change: Service revenue gross margin was 74, 5% roughly flat sequentially, but down approximately one two percentage points year over year, driven by pressure on SMS text gross margin.
Speaker Change: We continuously manage our cost of service revenue and expect service revenue gross margins to remain healthy in the 74%, 75% range, given our mix of subscription and usage revenue.
Speaker Change: Other revenue gross margin came in at negative 11, 9% for the quarter compared to negative one 4% in Q3 dollars 23, a lower professional services deployment revenue, which mainly has a fixed cost base.
Sam Wilson: Transforming GTM is not about throwing more money into Google AdWords or increasing sales capacity. We are shifting market perception, developing and empowering channeled partners, building pipelines, and increasing accountability with experienced leaders and a relentless focus on customer success. It has taken us the better part of a year, but I believe we now have the right people in the right roles to re-accelerate revenue. In closing, I want to summarize our journey so far and the early signs of our success. Last quarter, I discussed becoming a portfolio of products. We are still in the early stages of a lengthy but exciting transformation; our innovation-led momentum is also evident in our XCAS ARR, which is up with double-digit year-over-year gains in Q3. The average ARR of our enterprise customers has been steadily increasing as we expanded from three individual products to an increasingly integrated portfolio of eight.
Speaker Change: Turning to operating expenses R&D was 14, 9% of revenue in line with our 15% target and indicative of the continued investment we're making in product innovation.
Sales and marketing expense was 33% of revenue slightly down from 33, 1% in Q2, 'twenty four but well below the 36, 3% of revenue in Q3 23.
Speaker Change: On a dollar basis sales and marketing expense was down more than $7 million year over year. The decline reflected the resource realignment. We did in Q4 'twenty three as the first step in our go to market transformation.
Speaker Change: G&A as a percentage of revenue was 10, 3% down slightly sequentially as we incurred seasonally lower employer taxes and benefits costs as more employees hit the maximum contribution levels for FICA and other benefits.
Sam Wilson: We also see a steady increase in larger deployments, with ARR from customers with more than 250 contact center seats up more than 50% year-over-year. We believe we have the ingredients for success. Our product portfolio is compelling. We have a solid financial foundation. We have a seasoned leadership team committed to achieving our objectives. And we have amazing talent at every level of the organization.
Speaker Change: I would like to point out that we took a noncash charge of approximately $11 million on our GAAP financial statements for ceasing the use of office space, primarily in the U S and to a much lesser extent internationally as we continue to support hybrid workforce.
Speaker Change: Total non-GAAP spending as measured by non-GAAP cost of goods sold R&D sales and marketing and G&A was down approximately $9 $3 million or nearly 6% year over year and reflects our strategic cost realignment actions since the prior fiscal year.
Kevin Krause: I believe the best is yet to come. I want to thank our customers, our partners, our investors, and our employees for their hard work and continued support. With that, I will turn the call over to Sam. Thanks, Sam, and good afternoon, everyone.
Speaker Change: The combination of a healthy gross margin carefully manage operating expenses and one time favorable expense items that increased operating margin approximately one percentage point resulted in non-GAAP operating margin of 13, 4% above the high end of our guidance range of 11% to 12%.
Kevin Krause: We remain financially disciplined and delivered strong operating income and cash flow in the fiscal 2024 third quarter, exceeding our guidance range for non-GAAP operating margin and exceeding our expectations for cash flow from operations. We have delivered positive non-GAAP operating income and cash flow from operations for 12 consecutive quarters. Total revenue for the quarter was $181 million, and service revenue was $175.1 million.
Speaker Change: Operating profit was $24 $3 million up approximately 32% year over year.
Speaker Change: Adjusted EBITDA, which is reconciled to our GAAP results in our press release was $30 7 million.
Speaker Change: 16, 9% of revenue and up 19% year over year.
We have generated over $126 million of adjusted EBITDA over the past four quarters.
Kevin Krause: Service revenue was approximately flat year-over-year and roughly equal to our guidance midpoint. Other revenue for the quarter was $5.9 million, which was below expectations due to lower one-time professional services and product revenue. Total ARR was $707 million at quarter end, 1% year over year and flat sequential. Enterprise ARR increased 2% year-over-year and $2 million sequentially.
Speaker Change: Cash flow from operations was $22 4 million for the quarter, our near record driven by strong profitability and solid cash collections.
Speaker Change: Given that cash flow can vary quarter to quarter due to the timing of interest payments collections and changes and other balance sheet items I prefer to look at cash flow from operations on a trailing 12 month basis when evaluating our performance.
Kevin Krause: A significant amount of the total churn occurred within smaller customers, which shows up in the sequential decline in small and mid-market business ARR. We have been devoting additional resources to retention of Fuse Enterprise customers and expect to see an acceleration in upgrades to 8x8, but we probably have at least one more quarter before this headwind to AR growth begins to dissipate. Turning to Gross Margin, Operating Expenses, and Operating Profit, please remember that all items discussed are non-GAAP unless otherwise noted.
Speaker Change: Over the last four quarters, we have generated approximately $80 million in cash from operations, an increase of 55% compared to the trailing 12 month period, ending December 31 2022.
Speaker Change: We ended the quarter with approximately $170 million of cash restricted cash and investments up over $20 million from the prior quarter.
Speaker Change: As we have said earlier, our plan is to return $250 million to our investors from fiscal 2024 through fiscal 2026 by Delevering our balance sheet.
Kevin Krause: Overall, third quarter gross margin was 71.6%, a decrease of half a percent year-over-year primarily due to an increased mix of lower-margin SMS usage revenue compared to Q3-23, which shows up in our service revenue margin. Service revenue Gross Margin was 74.5%, roughly flat sequentially, but down approximately 1.2 percentage points year-over-year, driven by pressure on SMS text gross margin. We continuously manage our cost of service revenue and expect service revenue growth margins to remain healthy in the 74-75% range given our mix of subscription and usage revenue. Other revenue growth margin came in at negative 11.9% for the quarter compared to negative 1.4% in Q3'22 on lower professional services deployment revenue, which mainly has a fixed cost. Turning to operating expenses, R&D was 14.9% of revenue, in line with our 15% target and indicative of the continued investment we are making in product innovation. Sales and marketing expenses were 33% of revenue, slightly down from 33.1% in Q2'24, but well below the 36.3% of revenue in Q3'23. On a dollar basis, sales and marketing expense were down more than $7 million year over year.
Speaker Change: Our most recent step in that direction is the $63 million, we pay to the loan administrator earlier this week, who will be paying the 2024 debtholders tomorrow to redeem the remaining 2024 notes.
Speaker Change: As you heard from Sam earlier on this call. This latest payment brings us to 35% completion of our $250 million repayment call from fiscal 2024 through fiscal 2026.
Speaker Change: 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 and immediate impact on our operating cash flow by reducing our cash interest payments.
Speaker Change: You can expect us to begin voluntary early repayment of principal immediately after the exploration of the prepayment penalty in August 2024.
Speaker Change: Before turning to guidance I want to restate, what we are doing to build shareholder value over time.
Speaker Change: First we are investing in innovation with the goal to drive long term durable growth.
Speaker Change: Second we are focused on leading with our contact center solution to our targets small and medium enterprise customers.
Third we are reducing the mix of equity based employee compensation, which will moderate the pace of new share issuances due to employee stock programs over the long term and fourth we are retooling our go to market organization under new leadership.
Kevin Krause: The decline reflected the resource realignment we did in Q4'23 as the first step in our go-to market transformation. G&A as a percentage of revenue was 10.3%, down slightly sequentially as we incurred seasonally lower employer taxes and benefits costs as more employees hit the maximum contribution levels for FICA and other donors. I would like to point out that we took a non-cash charge of approximately $11 million on our GAAP financial statements for ceasing the use of office space, primarily in the U.S. and to a much lesser extent internationally, as we continue to support hybrid workplaces. Total non-GAAP spending, as measured by non-GAAP cost of goods sold, R&D, sales and marketing, and G&A, was down approximately $9.
Speaker Change: Focus on revenue growth, while maintaining solid non-GAAP profitability and cash flow.
Speaker Change: The increase in cash flow from operations, while reducing shareholder dilution over time remains our financial North Star.
Speaker Change: And our goal remains to generate cash from operations at a compound growth rate of approximately 20% for fiscal years 2024 through 2026.
Speaker Change: I would like to point out that the significant growth in cash from operations. We expect in fiscal 2024 implies more muted growth rates through fiscal 2026 to arrive at that 20% compounded growth rate goal.
Speaker Change: We are very focused on delivering cash flow with reduced dilution over the long term as the best way to build shareholder value over time.
Speaker Change: Let me walk you through how our strategy is to build shareholder value over time drive our operating expense structure.
Speaker Change: We expect sales and marketing to be in the range of 33% to 34% of revenue for fiscal 2020 for.
Speaker Change: Down from 36% in fiscal 2023, as we focus our go to market motions on our target SME customers and cross selling into our installed base.
Kevin Krause: The combination of a healthy gross margin, carefully managed operating expenses, and one-time favorable expense items that increased operating margin by approximately one percentage point resulted in a non-gap operating margin of 13.4 percent, above the high end of our guidance range of 11 percent to 12 percent. Operating profit was $24.3 million, up approximately 32% year over year. Adjusted EBITDA, which is reconciled to our GAAP results in our press release,
I believe this cost envelope can accommodate the aforementioned go to market retooling as well as programs that drive product awareness and investments required to develop our value added reseller channel in North America.
We expect R&D as a percent of revenue to remain at about 15% as we continue on the path of investment in our customer focused product strategy.
Speaker Change: Finally, we expect G&A expenses to remain in the range of 10, 5% to 11% of revenue for fiscal 2024.
Kevin Krause: 16.9% of revenue and up 19% year over year. We have generated over $126 million of adjusted EBITDA over the past four quarters. Cash flow from operations was $22.4 million for the quarter, a near record driven by strong profitability and solid cash collection.
Speaker Change: We believe we can achieve leveraged from our G&A functions over time as revenue increases and we achieve greater efficiencies through automation.
Speaker Change: Okay.
Speaker Change: Regarding non-GAAP gross margin, we anticipate Q4 'twenty four to be in the same range as Q2, and Q3 with the full year and 72% range.
Speaker Change: Please note that this metric can be influenced by product mix.
Kevin Krause: 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 cash flow from operations on a trailing 12-month basis when evaluating our performance. Over the last four quarters, we have generated approximately $80 million in cash from operations, an increase of 55% compared to the trailing 12-month period ending December 31, 2022. We ended the quarter with approximately $170 million of cash, restricted cash, and investment, up over $20 million from the prior quarter.
Speaker Change: Over the past quarter, we have seen longer sales cycles on large deals greater scrutiny by the customer regarding contract approval and a generally tougher economic environment.
Speaker Change: With this context in mind in the operating expense framework described above we established outlook ranges for the fourth quarter and the full year of fiscal 2024, ending March 31, 2024 as follows.
Speaker Change: For the fiscal fourth quarter, we anticipate service revenue to be in the range of $171 million to $175 million.
Speaker Change: We anticipate total revenue to be in the range of $176 million to $181 million.
Speaker Change: Implying other revenue of $5 5 million at the guidance midpoint.
Kevin Krause: As we have said earlier, our plan is to return $250 million to our investors from Fiscal 2024 through Fiscal 2026 by delevering our balance. Our most recent step in that direction was the $63 million we paid to the Loan Administrator earlier this week, who will be paying the 2024 debt holders tomorrow to redeem the remaining 2024 notes. As you heard from Sam earlier in this call, this latest payment brings us to 35% completion of our $250 million repayment goal from Fiscal 2024 through Fiscal 2020. 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 and immediate impact on our operating cash flow by reducing our cash interest payments. You can expect us to begin voluntary early repayment of principal immediately after the expiration of the prepayment penalty in August 2024.
Speaker Change: Note that other revenue can vary based upon customer specific deployment schedules in hardware shipments. So there could be some movement in the Q4 'twenty four other revenue as a result of these dynamics.
Speaker Change: We are targeting an operating margin of approximately 10% as a reminder, our spending increases in calendar Q1, which is our fiscal fourth quarter.
Speaker Change: As social security taxes, and other employee benefits such as the 401K match restart in January.
We expect cash flow from operations to decline sequentially as our cash expenses increased seasonally in fiscal Q4 as I just mentioned plus we expect to make other planned operating cash payments such as higher debt interest.
Speaker Change: And indirect taxes.
Speaker Change: We anticipate interest expense of approximately $9 million in cash interest payments of approximately $11 million.
Speaker Change: Cash interest payments in Q4 will include the semiannual payments on our 2024 and 2028 convertible notes as well as quarterly interest payments on the variable rate term loan.
Kevin Krause: Before turning to guidance, I want to restate what we are doing to build shareholder value over time. First, we are investing in innovation with a goal to drive long-term, durable growth. Second, we are focused on leading with our contact center solution for our target small and medium enterprise customers. Third, we are reducing the mix of equity-based employee compensation, which will moderate the pace of new share issuances due to employee stock programs over the long term.
Speaker Change: We are currently anticipating that the rate on the term loan remains approximately 12% or so for plus six 6%.
Speaker Change: We estimate our fully diluted share count of approximately 126 million shares for fiscal fourth quarter.
Speaker Change: Given the fourth quarter guidance range is above fiscal 2024, ending March 31, 2024 is expected to be as follows we.
Speaker Change: We anticipate service revenue to be in the range of $699 million to $703 million.
Kevin Krause: And fourth, we are retooling our go-to-market organization under new leadership to focus on revenue growth while maintaining solid non-gap profitability and cash flow. Increasing cash flow from operations while reducing shareholder dilution over time remains our financial north star, and our goal remains to generate cash from operations at a compound growth rate of approximately 20% for fiscal years 2024 through 2026.
Speaker Change: We anticipate total revenue to be in the range of $725 3 million to $733 million.
Speaker Change: We continue to focus on delivering a solid operating margin and anticipate achieving between 12, 5% and 13% for the year versus the eight 4% achieved in fiscal 2023.
Speaker Change: We expect cash flow from operations to exceed $70 million as Sam stated in his remarks.
Speaker Change: Note that cash flow from operations is impacted by timing differences in collections debt interest and other payables.
Kevin Krause: I would like to point out that the significant growth in cash from operations we expect in fiscal 2024 implies more muted growth rates through fiscal 2026 to arrive at the 20 percent compounded growth rate goal. We are very focused on delivering cash flow with reduced dilution over the long term as the best way to build shareholder value over time. Let me walk you through how our strategies to build shareholder value over time drive our operating expenses.
Speaker Change: We anticipate that interest expense and cash paid for debt interest of 35% to $36 million again, noting that our term loan is subject to monthly interest rate adjustments.
Speaker Change: We estimate an average fully diluted share count of approximately 123 million shares for fiscal 2024.
Speaker Change: In closing I believe that our continued focus on profitability, while maintaining our targeted investments in innovation plus our go to market retooling is the correct strategy for us at this time.
Kevin Krause: We expect sales and marketing to be in the range of 33 to 34% of revenue for fiscal 2024, down from 36 percent in fiscal 2023 as we focus our go-to-market efforts on our target SME customers and cross-selling into our install date. I believe this cost envelope can accommodate the aforementioned go-to-market retooling as well as programs that drive product awareness and investments required to develop our value-added reseller channel in North America. We 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. Finally, we expect G&A expenses to remain in the range of 10.5% to 11% of revenue for fiscal 2024.
This strategy will enable a return to revenue growth. While we also returned value to our investors initially by reducing our debt.
Speaker Change: Our goal is to show improving revenue trends in fiscal 2025.
I would like to thank the entire <unk> team for working together to deliver this quarter's solid results.
Speaker Change: Operator, we are ready for questions.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.
Speaker Change: To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Speaker Change: Yes.
Speaker Change: Our first question comes from the line of Matt <unk> with <unk>. Your line is open.
Matt: Yes. Good afternoon, thanks for taking my question.
Matt: Tim You mentioned continued focus on being.
Matt: Contact Center focused company and starting to see some really good traction there.
Kevin Krause: We believe we can achieve leverage from our GNA functions over time as revenue increases and we achieve greater efficiencies through automation. Regarding non-GAAP gross margin, we anticipate Q4-24 to be in the same range as Q2 and Q3, with the full year in the 72% range. Please note that this metric can be influenced by product.
Matt: So maybe just walk us through how the go to market process has evolved there or are you looking to land with new contact center opportunities or are you finding that a lot more of these deals tend to be a sort of combination replacement come in and sort of build a whole new stack.
Speaker Change: Yes so.
Speaker Change: First of all thank you for the question, it's definitely the latter part of what you said.
Speaker Change: We do see that the on Prem to cloud transition and digital transformation are frequently linked.
Speaker Change: As CMO CRO and Ceos want to transition their business in this new digital age they realize that their communication system becomes a core bottleneck and they have to move it into the cloud and then the fact that we are on a single platform handling UC cc and now closing the loop with things in the middle on a single day.
Kevin Krause: Over the past quarter, we have seen longer sales cycles on large deals, greater scrutiny by the customer regarding contract approval, and a generally tougher economic environment. With this context in mind and the operating expense framework described above, we establish outlook ranges for the fourth quarter and the full year of fiscal 2024 ending March 31st, 2024 as follows. For the fiscal fourth quarter, we anticipate service revenue to be in the range of $171 million to $175 million.
Speaker Change: Our platform makes it really attractive for those kinds of things. So when I talk about transitioning the GTS and this is not going to be a straight line.
Speaker Change: But really it's about the fact that we need to get out of starting with UC only sale, we need to lead with contact center <unk> has done some great research, saying that two thirds of the buying decision. When you are buying these products together is driven by the contact center choice number one number two is obviously when we.
Kevin Krause: We anticipate total revenue to be in the range of $176 million to $181 million, implying other revenue of $5.5 million at the guidance. Note that other revenue can vary based upon customer-specific deployment schedules and hardware shipments, so there could be some movement in the Q4-24 other revenue as a result of these dynamics. We are targeting an operating margin of approximately 10%. As a reminder, our spending increases in calendar Q1, which is our fiscal fourth quarter, as Social Security taxes and other employee benefits, such as the 401k match, restart in January. We expect cash flow from operations to decline sequentially as our cash expenses increase seasonally in fiscal Q4, as I just mentioned, plus we expect to make other planned operating cash payments, such as higher debt interest and indirect taxes. We anticipate interest expense of approximately $9 million and cash interest payments of approximately $11 million.
Sell multiple products the retention rates that <unk>, all those things are better.
Speaker Change: And it's really about becoming that portfolio of a products company and we know I used to say, we went from two products to a products and with today's announcement around <unk>.
Speaker Change: Loosely referred to as in formal contact center I don't really like that name because it will different than that.
Speaker Change: We now sell effectively nine products and so that's where we need to lead we need to lead by coming into a business figuring out where they are and that digital transformation what their business problems are and selling them a package of products specifically solve their business needs.
Okay.
Speaker Change: Maybe just a follow up there on the customer engagement.
Speaker Change: Our product you announced today.
Speaker Change: Who are the core users that you're envisioning seeing this is more of an outbound sales type of motion or is it truly that sort of customer success type of room.
Speaker Change: Curious on how you're doing it in sort of what the crux of coming up with this product was how much was existing customers sort of using the product in unintended ways that open up your eyes to this.
Kevin Krause: Cash interest payments in Q4 will include the semi-annual payments on our 2024 and 2028 convertible notes, as well as quarterly interest payments on the variable rate term loans. We are currently anticipating that the rate on the term loan remains approximately 12%, or so for plus 6.6%. We estimate a fully diluted share count of approximately 126 million shares for fiscal fourth quarter.
Speaker Change: Okay. So we started about a year year and a half ago I think we've envisioned about year and a half ago and started actually coding with a significant number of scrum teams a year ago.
Speaker Change: The core user is specific users inside of a business, whose job title is generally not contact center agents, So let's say.
Speaker Change: Helpdesk billing departments or billing support department.
Kevin Krause: Given the fourth quarter guidance ranges above, fiscal 2024 ending March 31st, 2024 is expected to be as follows. We anticipate service revenue to be in the range of $699 million to $703 million. We anticipate total revenue to be in the range of $725.3 million to $730.3 million. We continue to focus on delivering a solid operating margin and anticipate achieving between 12.5% and 13% for the year versus the 8.4% achieved in fiscal 2023. Additionally, we expect cash flow from operations to exceed $70 million, as Sam stated in his remarks. Again, note that cash flow from operations is impacted by timing differences in collections, debt interest, and other payoffs. We anticipate debt interest expense and cash paid for debt interest of $35 to $36 million, again noting that our term loan is subject to monthly interest rates. We estimate an average fully diluted share count of approximately 123 million shares for fiscal 2024.
Speaker Change: Skilled service workers health care workers these kinds of things and what's interesting is frequently this problem is solved with a regroup UC solution and they'll do a regroup and 10 People's phone ring simultaneously and whoever picks up picks up.
Speaker Change: The problem with that and this was the feedback from customers is the <unk>.
Speaker Change: Some of that is can't really use in ecosystem, because it's not really designed have parts in front of it and handovers et cetera cant get analytics can't get AI technologies can't get a bunch of things that our contact center functions. In this hybrid type of use case and so it's very targeted on specific use.
Cases, where there is a desire to have like high octane you see mixed with high octane cc in a specific use case and so.
And we've seen some players in the market that have done bits and pieces of it but there is no player in the market that can span that full range that can do everything from you see this new.
Speaker Change: Cross organizational engagement product.
Speaker Change: And the regular contact center full featured high performance product designed for that and so the last part of your question is.
Speaker Change: The idea is look the.
Speaker Change: Analysts you guys. The third in the industry and also talked about this informal contact center Thats, maybe where the idea started we talked a lot to our customers. We researched a lot with our customers to really figure out the exact specific use cases, and then we went and built the product and its going to beta now.
Kevin Krause: In closing, I believe that our continued focus on profitability while maintaining our targeted investments and innovation plus our go-to market retooling is the correct strategy for us at this time. This strategy will enable a return to revenue growth while we also return value to our investors initially by reducing our debt. Our goal is to show improving revenue trends in fiscal 2025. I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results.
Speaker Change: Alright, great. Thank you. Thanks.
Speaker Change: Thanks, Matt.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of city with Mizuho. Your line is open.
Mizuho: Thanks for taking my question.
Operator: Operator, we are ready for questions. Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again.
Mizuho: Just wanted to ask I know at the macro environment.
Mizuho: Some of the peers some of your peers talked about weakness in small business and consumer vertical I am wondering I know you talked about some churn and fuse side, but what are you seeing in terms of macro and different verticals.
Operator: Please stand by while we compile the Q&A box. Our first question comes from the line of Matt VanVliet with BTIG. Your line is open.
Mizuho: Yes. So this is Kevin we do see some some down sell pressure on some renewals right now.
Sam Wilson: Yeah, good afternoon. Thanks for taking the time to ask the question. So, Sam, you mentioned continued focus on being a contact center focused company and starting to see some really good traction there. So maybe just walk us through how the go-to-market process has evolved there. Are you looking to land new contact center opportunities? Are you finding that a lot more of these deals tend to be a sort of combination replacement come in and sort of build a whole new stack? Yeah, so first off, thank you for the question. It's definitely the latter part of what you said. We do see that the on-premises to cloud transition and digital transformation are frequently linked. As CMOs and CROs and CEOs want to transition their business into this new digital age, they realize that their communication system is a core bottleneck, and they have to move it into the cloud.
Kevin Kraus: As we as customers maybe need fewer seats and so forth. So we are seeing.
Kevin Kraus: Some of that and I did mentioned in my in my remarks that we did see some some of that in the smaller to into the mid market business areas, which affected our.
Kevin Kraus: Our growth rates there.
Kevin Kraus: Okay.
Speaker Change: Great and then the follow up.
You talked about the fuse headwinds dissipate maybe by.
Speaker Change: But this quarter our fiscal Q4.
Speaker Change: Sam you talked about this innovation led growth suddenly you're.
Sam Wilson: Last one year, we have done a lot of products now two products. So how should we think about the growth I know this year. It was almost like 2% decline, but is this like the Q4.
Sam Wilson: It's sort of a bottom and then we should start uptick.
Sam Wilson: And then the fact that we are on a single platform handling UCCC and now closing the loop with, you know, things in the middle on a single data platform makes it really attractive for those kinds of things. So when I talk about, you know, transitioning the GTM, and you know, this is not going to be a straight line, But really, it's about the fact that we need to get out of starting with a UC-only sale. We need to lead with the Contact Center. Medergy has done some great research saying that two-thirds of the buying decision when you're buying these products together is driven by the Contact Center choice, number one.
Sam Wilson: Any kind of plan.
Sam Wilson: And then Directionally would be helpful.
Speaker Change: Yes muted speakers.
Speaker Change: Yes.
Speaker Change: We can hear you now okay, sorry, so city Youre asking the right question. Its one I ask of myself and the management team every day are we at the bottom when are we going to see the growth.
Speaker Change: We definitely see and I hate using this term bonds right term views, we see green shoots when I talked about for example, new products growth being up 60% year over year that gives me a sense that we are seeing product market fit on that innovation and we're seeing an acceleration on a quarter on quarter basis in terms of bookings in the forward looking indicators around the new products. So.
Sam Wilson: Number two is, obviously, when we sell multiple products, the retention rates, the ARPUs, all those things are better. And it's really about becoming that portfolio of products company. I used to say we went from two products to eight products, and with today's announcement around what you guys loosely refer to as the Informal Contact Center, I don't really like that name because it's a little different than that, we now sell effectively nine products. And so that's where we need to lead. We need to lead by coming into a business, figuring out where they are in that digital transformation, what their business problems are, and selling them a package of products, specifically for their business, And maybe just a follow up there on the customer engagement product you announced today.
Speaker Change: I think we're sort of seeing the positive green shoots when the number will be big enough to really drive a thing year over year growth rate as you know in these these business models, we need a couple of quarters to stack on top of each other to really get those numbers to kick in and so I.
Speaker Change: I am not yet ready to call the exact date and time of the bottom it definitely feels like it's close.
Speaker Change: Close is in it's in the recent past now Mexico next week I don't know, but I'll tell you what I'm really happy that you mentioned is the innovation right those new products. The fact that we're seeing acceleration, we're seeing customer demands. It is just going to take a little while for it to get to be a big enough number and to continue to drive up a higher retention rate.
Sam Wilson: You know, who are the core users that you're envisioning seeing this? Is this more of an outbound sales type of motion, or is it truly that sort of customer success type of realm? Curious on how you're doing it and sort of what the crux of coming up with this product was, how much was, you know, existing customers sort of using the product in unintended ways that opened up your eyes to this? Okay, so we started about a year and a half ago. I think we envisioned it about a year and a half ago and started actually coding with a significant number of Scrum teams a year ago. The core user is specific users inside of a business whose job title is generally not, you know, a contact center agent. So let's say IT help desk, the billing department, or the billing support department, field service workers, healthcare workers, these kinds of things. And what's interesting is that frequently this problem is solved with a ring group.
Great. Thank you.
Speaker Change: Thank you Cindy.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Ryan Macwilliams with Barclays. Your line is open.
Speaker Change: Hey, Kevin This is David Coghlan onshore Ryan Macwilliams, Thanks for taking my question.
David Coghlan: How does the contact center agent hiring and call volumes in fiscal <unk> compared to last year's fiscal Q.
David Coghlan: Are there any differences, particularly for any verticals.
David Coghlan: Any particular strengths or weaknesses.
Speaker Change: Can I ask.
Speaker Change: Mike If I can just youre asking me like literally how many phone calls were received by contact centers in the third quarter.
Sam Wilson: They use a UC solution, and they'll do a ring group, and, you know, 10 people's phones ring simultaneously, and whoever picks up, picks up. The problem with that, and this was the feedback we got from customers, is that you can't really use an ecosystem because it's not really designed to have bots in front of it and handovers, etc. Can't get analytics, can't get AI technologies, can't get a bunch of things that are contact center functions in this hybrid type of use case. And so it's very targeted at specific use cases where there's a desire to have high-octane UC mixed with high-octane CC in a specific use case.
Mike: Yes, I'd say usage or in general.
Mike: Like seasonal hiring that typically would.
Mike: I would call up.
Mike: For like I say open enrollment.
Speaker Change: Okay. So.
Speaker Change: So as you know we have.
Speaker Change: We offer our customers in the contact center capabilities is the ability to surge seats for kind of.
Speaker Change: Holidays, or Easter or whatever for whatever campaigns theyre running political campaigns those kinds of things.
Speaker Change: I would say we saw a little less unusual I mean in these in these contracted business models, you see a little bit of this lag rate and so contracts come up and they may have done a layoff previously et cetera.
Speaker Change: So hard for us because we are seeing increased sales of larger contact centers as I mentioned.
Speaker Change: In my script, we've seen a 50% increase in the contact centers over 250 seats. So it's a bit of a moving thing because we are selling more new customers contact center, we are selling more seats in contact center, we're selling more stuff in contact center and at the same time, we do see some and Kevin mentioned that some of the economic prep.
Sam Wilson: And so, and we've seen some players in the market that have done bits and pieces of it, but there's no player in the market that can span that full range, that can do everything from UC, this new cross-organizational engagement product, and the regular contact center, full-featured, high-performance product designed for that. And so, the last part of your question is, the idea. Look, the analysts, you guys, the industry analysts have talked about this informal contact center. That's maybe where the idea started. We talked a lot to our customers, we researched a lot with our customers to really figure out the exact specific use cases, and then we went and built the product, and it's going to beta now. All right. Great Thank you. Thank you. Please stand by for our next question. Our next question comes from the Line of City with Mizzou. Your line is open.
Speaker Change: <unk> around we probably saw a little less surge.
Speaker Change: Seats that I would've expected, maybe I was a little overly optimistic those kinds of things.
Speaker Change: And I think it's been mentioned earlier, but I think at every segment in the retail vertical probably.
Speaker Change: Maybe the Squishes, maybe that some travel leisure type stuff. It's hard I mean, we have I mean, we basically have no customer greater than 5%. So we have a lot of different verticals represented and so.
I don't know, it's kind of my sense.
Speaker Change: Perfect. Thank you.
Speaker Change: And then did.
Speaker Change: Did the CFS business in Southeast Asia continued to show stability like it did in <unk>.
Speaker Change: And maybe what assumptions are factored into the guide for <unk> for this business.
Speaker Change: So the <unk> business performed as we expected it and yes. It showed stability for the quarter. So thats good news.
Speaker Change: I want to point out, though that seasonally we have seasonal variability in that business is as certain promotions get done over the holiday period and so forth.
Kevin Krause: Thanks for taking my question. I just wanted to ask, I know in the macro environment it's tough. Some of your peers talked about weakness in small business and even the consumer vertical. I'm wondering, I know you talked about some churn and fuse on the side, but what are you seeing in terms of macro and different verticals? Yeah, so this is Kevin. We do see some, you know, some downsell pressure on some renewals right now, as we as customers maybe need fewer seats and so forth. So we are seeing some of that. And I did mention in my remarks that we did see some of that in the smaller to mid-market business areas, which affected our AR growth rates there.
Speaker Change: The Q4 guide.
Speaker Change: Some there is some downward trend as normal as we enter like the lunar new year period and other other.
Speaker Change: The Ramadan Ramadan, yes in other periods. So that's factored into our guide Alright, now, let's you mentioned the CFS business. So im going to consider this a lay up to sort of do that thing would deviate a little bit, but we've got some great new products coming out on the <unk> side. There is some pre configured bundles for specific use cases that will stay youll CSR.
Speaker Change: Pushing into our installed base and our contact center customers stay tuned before the end of the quarter. So.
Speaker Change: The reason I brought this up as I'm sort of warning the audience that in the future, it's going to get a little messier because we're starting to view, our CFS business not as a separate.
Sam Wilson: And then, in your follow-up, you talked about the huge headwinds should dissipate maybe by this quarter, fiscal Q4. And Sam, you talked about this innovation-led growth. Certainly your, you know, last one year we have done a lot of products, now two to eight products. So how should we think about the growth? I know this year is almost like a 2% decline, but is this like Q4 is sort of a bottom, and then we should start uptake? You know, any kind of trend in the direction of upward would be helpful. You're muted, speaker.
Speaker Change: And TD inside of eight by eight but it's all starting to become blurred right. You've got UCC C&C passes how we traditionally think about it but now we have low and you see we have cross organizational customer engagement. We have you see and then we had.
Speaker Change: <unk> riding on top of all of it so it's becoming a bit of a mix and its really all being driven out effectively one platform as we bring it all together so.
Speaker Change: You get economies of scale and engineering capacity and CIC continuous innovation can use deployment and all those things are starting to spin in the right direction.
Sam Wilson: All right. We can hear you now. Okay, sorry. So Citi, you're asking the right question. It's one I ask myself and the management team every day. Are we at the bottom? When are we gonna see growth? We definitely see growth, and I sort of hate using this term, but I don't know the right term to use.
Speaker Change: Got it perfect. Thanks, guys. Thank.
Speaker Change: Thank you. Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of Michael Funk with Bank of America. Your line is open.
Sam Wilson: We see green shoots. When I talked about, for example, new product growth being up 60% year over year, that gives me a sense that we're seeing product market fit on that innovation, and we're seeing acceleration on a quarter-on-quarter basis in terms of bookings and the forward-looking indicators around new products. So I think we're sort of seeing positive green shoots. When the numbers will be big enough to really drive up that year-over-year growth rate, as you know, in these business models, we need a couple quarters to stack on top of each other to really get those numbers to kick in. And so I'm not yet ready to call the exact date and time of the bottom, but it definitely feels like it's close.
Michael J. Funk: Yeah perfect. Thank you for the question and thank you for the color on the call and the focus on.
Michael J. Funk: Profitability I wanted to dig in some more into the revenue.
Michael J. Funk: You lowered the guide for the year.
Michael J. Funk: Trying to dissect the piece parts here relative to reading the tea leaves right. So.
Michael J. Funk: I'm sure you have an internal forecast for net new.
Michael J. Funk: For NR and then four.
Michael J. Funk: <unk> customer contraction, so maybe help us with more precision with our own modeling.
Michael J. Funk: <unk> pointed out which piece of that fell short or is falling short.
Michael J. Funk: Relative to the prior expectation and then bottle piece related I think you spoke about $130 million in revenue you've said that's been a turning off but should stabilize in a quarter or two can you provide us the current revenue number for the fuse customers. So we can figure out that attrition rates and the potential stabilization.
Sam Wilson: Close as in it's in the recent past, now, next week, I don't know. But I'll tell you what I'm really happy about, and you mentioned it, innovation, right? Those new products, the fact that we're seeing acceleration, we're seeing customer demands, it's just gonna take a little while for it to get to be a big enough number and to continue to drive up higher retention. Great, thank you. Thank you, Siddhi.
Michael J. Funk: <unk> points.
Speaker Change: Okay. Thanks, Michael so on the on the revenue for this you are asking about Q4, right. So I talked about headwind in C pass due to the holidays coming up in terms of our fuse we do see what we're doing internally as a company, which is a great thing, it's actually we're migrating and upgrading up via were up.
Operator: Please stand by for our next question. Our next question comes from the line of Ryan MacWilliams with Barclays. Your line is open. Hey, Kevin and Sam, this is Damon Coughlin on behalf of Ryan MacWilliams.
Speaker Change: Great and lower to the AIA platform as we do that we are seeing some.
Speaker Change: Down sell you would call it as those customers right size their needs for us. So there is a bit of erosion, there and thats, what I was referring to as headwind in the in the prepared remarks, but doing that and doing that early and proactively helps us retain those customers and thats, what we believe so.
Sam Wilson: Thanks for taking my question. How did contact center agent hiring and call volumes in Fiscal 3Q compare to last year's Fiscal 3Q? Were there any differences, particularly for any verticals, any particular strengths or weaknesses?
Speaker Change: That's a good thing for us because they'll stick with us Okay and I wanted to I wanted to the second part of your question I can't give you a number on exactly use anymore. Because we've migrate we've upgraded CLEC, maybe do it with upgraded hundreds of customers between the platform. We've cross sold we've done a lot of things now and we don't really break them out.
Sam Wilson: Can I ask a small question because you're literally asking me like literally how many phone calls were received by contact centers in the third quarter? Yeah, like I say, it's a usage or and then in general, like seasonal hiring that typically would come up for an open enrollment.
Speaker Change: Lee internally anymore, we view all of our metrics internal or a combined company.
Sam Wilson: So, as you know, we offer our customers, in the contact center capability, the ability to surge seats for, you know, kind of holidays or, you know, Easter or whatever for whatever campaigns they're running, political campaigns, those kinds of things. I would say we saw a little less than usual. I mean, in these contracted business models, you see a little bit of this lag, right? And so contracts come up, and they may have done a layoff previously, et cetera. It's also hard for us because we are seeing increased sales of larger contact centers. As I mentioned in my script, we've seen a 50% increase in contact centers with over 250 seats.
Speaker Change: And it's just.
Speaker Change: Sort of hard to do without just it's easier for us when we manage everything to do it that way and Thats. The way we do it I just don't have the number to really give you effectively in front of me I will tell you, though what we do see is the core business is vibrant.
Speaker Change: We do expect in the next couple of quarters, we should start to see improving growth trends and a resumption of growth in fiscal 'twenty five its one of those quarters will definitely I think we'll see a resumption of growth and you asked me like why do I have confidence in that and it's going to come back to new products right. If we can get that 60% number thats accelerating to keep kind of bumping along and keep going.
Speaker Change: As we add more new products and as we retooled the go to market force around that product portfolio I really do think the math will work itself out to show that resumption of growth and in the meantime, we paid off $63 million in debt at a cash flow yesterday, we wire the money yesterday I think are paying off officially tomorrow.
Sam Wilson: So it's a bit of a moving thing because we are selling more new customers contact center. We are selling more seats in contact center. We're selling more stuff in the contact center. And at the same time, we do see some, and Kevin mentioned this, some of the economic pressures around. We probably saw a little less surge in seats than I would have expected. Maybe I was a little overly optimistic about those kinds of things. And I think it's been mentioned earlier, but I think out of every segment, I mean, the retail vertical, probably the, maybe the squishiest. Maybe that, some travel and leisure type stuff. It's hard.
Speaker Change: Love the Delevering just make sure I understand you came in in line with the revenue forecast for this quarter and then lowered the full year. So explicitly lowered <unk> or are you, saying that that reduction is entirely due to see past and theirs.
Speaker Change: Engine Undershooting on net new.
Speaker Change: And there are no no we're not.
To be clear <unk> is it going to be a little bit below what we had expected 90 days ago and Thats driven by the fact that we are seeing some of the customers a little.
Speaker Change: Were more reluctant to run marketing campaigns during the lunar new year and Ramadan Thats, what they are forecasting to us right now.
Sam Wilson: I mean, we basically have no customer group at half a percent. So we have a lot of different verticals represented. And so it's, I don't know, it's kind of my sense. Perfect. Thank you. And then did the CPAS business in Southeast Asia continue to show stability like it did in 2Q?
Speaker Change: And also we are seeing a little bit more I don't want to have inventory award as pressure or whatever but as these contracts come due we have customers that say, hey look I don't need 100 seats anymore I need 92 seats. The other thing I would like to add also and this is important in terms of total revenue were seeing a trend toward more soft phone.
Kevin Krause: And then maybe what assumptions are factored into the guide for 4Q for this business? So the CPAS business performed as we expected it, and yes, it showed stability for the quarter.
Speaker Change: Usage and less hardware. So if you look at our other revenue is the component obviously, the total that has a bit of pressure as the customers are focused drops.
Speaker Change: Kevin It's dropped a heck of a lot more than anything else, yes, so that that's baked in there as well.
Sam Wilson: So that's good news. I want to point out, though, that seasonally, we have seasonal variability in that business as certain promotions get done over the holiday period and so forth. In the Q4 guide, there's some downward trend as normal as we enter the Lunar New Year period and other Ramadan and other periods. So that's factored into our guide. All right.
Speaker Change: Okay.
Speaker Change: It's all very helpful sorry, sorry for my own modeling.
Speaker Change: Got it.
Speaker Change: Reluctance to provide too much detail secret sauce in the metrics.
Speaker Change: No more would be better we can forecast them.
Speaker Change: Michael It's completely fair, it's not that it's just we don't I mean I don't.
Speaker Change: Two years ago. It was easy to track to use as a separate thing because we just bought them, but two years in.
Sam Wilson: Now, you mentioned the CPAS business, so I'm going to consider this a layup to sort of do that CEO thing and deviate a little bit. But we've got some great new products coming out on the CPAS side. There are some pre-configured bundles for specific use cases that you'll see us start pushing into our install base and our contact center customers.
Speaker Change: We have.
Speaker Change: Hundreds of customers that have upgraded the billing systems or merged Theres all kinds of things happening. It's just no longer that easy unless unless I stick a team of people going line by line and it is just kind of not worth doing that I got my team is doing other things right now.
Sam Wilson: Stay tuned before the end of the quarter. So the reason I brought this up is I'm sort of warning the audience that in the future, it's going to get a little messier because we're starting to view our CPAS business not as a separate entity inside of 8x8, but it's all starting to become blurred, right? You've got UC, CC, and CPAS is how we traditionally think about it.
Speaker Change: Of course, thank you guys for the questions.
Speaker Change: Thank you. Thank you.
Speaker Change: Please standby for our next question.
Sam Wilson: But now we have low-end UC, we have cross organizational customer engagement, we have UC, and then we have CPAS riding on top of all of it. So it's becoming a bit of a mess. And it's really all being driven on effectively one platform as we bring it all together. So you get economies of scale and engineering capacity and CICD, continuous innovation, and continuous deployment, and all those things are starting to spin in the right direction. I got it.
Speaker Change: Our next question comes from the line of meta Marshall with Morgan Stanley. Your line is open.
Meta A. Marshall: Great. Thanks.
Meta A. Marshall: I just wanted to go into.
Meta A. Marshall: A lot of initiatives on kind of selling customers initially, but just what are kind of the initiatives. Our sales motions you guys are having to kind of add some of these additional solutions to existing customers and then maybe piggybacking on that you guys have talked a little bit about the field upgrades that are happening but is there.
Kevin Krause: Perfect. Thanks, guys. Thank you. Thank you.
Operator: Please stand by for our next question. Our next question comes from the line of Michael Funk with Bank of America. Your line is open.
Meta A. Marshall: <unk> like an end of life date is there any point, where we should kind of consider that the fuse platform, albeit kind of transitioned or upgraded to kind of backup gas platform.
Kevin Krause: Yeah, so thank you for the question. And thank you for the color on the call and the focus on profitability. I wanted to dig into that some more on revenue. You know, you lower you lower the guide for the year. You know, trying to dissect the piece part here rather than reading the tea leaves, right?
Speaker Change: Okay. So Martin I believe your question Marshall meet a completely fair question.
Martin: So let me dig in reverse order on the fusion of life. There is not a set end of life date.
Kevin Krause: So, I'm sure you have an internal forecast for net new, for NRR, and then for FUSE customer contraction. So maybe help us with more precision with our own modeling by pointing out which piece of that fell short or is falling short relative to the prior expectation. And then, related, I think FUSE was about $130 million in revenue.
Martin: We're busy moving hundreds of customers over right now a lot of them are in flight. We've got kind of the top 400, there are a little bit more special we're taking care of them.
And so there is not a defined date and we also.
Martin: The top 400 customers were really doing it in conjunction with them. So I don't want to use that term because that hesitancy that has unintended consequences for us. So it's really we work with them on that migration.
Kevin Krause: You said that's been a trade-off, but should stabilize in a quarter or two. Can you provide us with the current revenue number for the FUSE customers so we can figure out that attrition rate and the potential stabilization points? Okay, Michael. So on the revenue, you're asking about Q4, right? So I talked about headwinds in CPaaS due to the holidays coming up.
Martin: The first part of your question is to me a really insightful question, which is around how do we have to change our motions as a company as a company historically, we've been kind of a.
Martin: Sell most of the sell most of the wallet share on the first deal and Thats kind of it may be a few add on seats here or there as you add employees and those kinds of things that's really changing and so if you look at how we've evolved for example, well we know the exact number we probably doubled the number of <unk>, we have at the company over the last year.
Kevin Krause: In terms of Fuse, we do see what we're doing internally as a company, which is a great thing, is actually migrating them, upgrading them over to the 8x8 platform. As we do that, we are seeing some, you know, downsell, you would call it, as those customers right-size their needs for us. So there is a bit of erosion there.
Martin: And that's really allowing us to then further expand we've really restructured how we do some of our account management.
Martin: And some of those things.
Kevin Krause: And that's what I was referring to as headwind in the prepared remarks. But doing that, and doing that early and proactively, helps us retain those customers. And that's what we believe. So that's a good thing for us, because they'll stick with us. Okay, and I want to just say part of your question. Look, I can't give you a number on exact fuse anymore because we've migrated, we've upgraded. Maybe you can do it.
Martin: Around.
Making sure that we can land and then further expand those customers I think what's interesting is a lot of the technologies.
Martin: Secure pay or workforce management or intelligent customer assistant are generally not sold on the initial transaction. Most of the time. The initial transaction is typically UC and cc only and then over the next three 612 18 months Theres further add ons that are done at <unk>.
Sam Wilson: We've upgraded hundreds of customers on the platform, we've cross-sold, we've done a lot of things now, and we don't really break them out separately internally anymore. We view all of our metrics internally or as a combined company. And it's just sort of hard to do it that way, you know; it's just easier for us when we manage everything to do it that way. And so that's the way we do it. I just don't have the number to really give you effectively in front of me.
Recently hired and it's in the press release, Mike Mccarron from gladly and he and I worked together at mobile Iron is it just a phenomenal executive but he is really coming in to help us further expand our motions around that land and expand and further add on sales.
Martin: And then the other thing we're doing.
Kevin Krause: I will tell you, though, what we do see is, you know, the core business is vibrant. We do expect, in the next couple quarters, we should start to see improving growth trends and a resumption of growth in fiscal 25. It's something, you know, one of those quarters will definitely see a resumption of growth. And you're going to ask me, like, why do I have confidence in that?
Martin: This.
Martin: This is great for me I don't know if you guys are excited as I get it about this stuff, but we've got product led growth now. So if you go into our products today are contact center product, we can do things like and I know all you people have been around for a while they're going to say Oh My God has existed for 20 years. Yes. We're there now we're caught up which is we can do admin notifications, we can do <unk> product led growth.
Martin: Directly in the platform where people can sign up for feature functionality automatically added to their invoice and drive further add on sales and so those are all things that we've developed under the notion of innovation and retooling over the last year.
Sam Wilson: And it's going to come back to new products, right? If we can get that 60% number that's accelerating to keep kind of bumping along and keep going, as we add more new products, and as we retool the go-to-market force around that product portfolio, I really do think the math will work itself out to show that resumption of growth. And in the meantime, we paid off $63 million in debt out of cash flow yesterday. We wired the money yesterday. I think we're paying it off officially tomorrow. Yeah, I love the de-levering process.
Speaker Change: Okay perfect. Thanks.
Speaker Change: Thanks Peter.
Speaker Change: Ladies standby for our next question.
Speaker Change: Okay.
Speaker Change: Okay.
Our next question comes from the line of Josh Nichols with B Riley Your line is open.
Josh Nichols: Yeah. Thanks for taking my question.
Josh Nichols: Just wanted to check in I mean, so congrats on paying back the $63 million that youre still going to have north of $100 million.
Kevin Krause: Just make sure I understand. You came in in line with the revenue forecast for this quarter and then lowered it for the full year. So, explicitly lowered 4Q.
Josh Nichols: Cash on the balance sheet, I know that there's going to be some.
Kevin Krause: Are you saying that that reduction is entirely due to CPAS, and there wasn't an undershooting on net new? No, we are not saying that. To be clear, TPAS is going to be a little bit below what we maybe expected 90 days ago, and that is driven by the fact that we are seeing some of the customers a little more reluctant to run marketing campaigns during the Lunar New Year and Ramadan. That is what they are forecasting to us right now.
Josh Nichols: Additional pay downs on the higher <unk> term loan at least later this year.
Josh Nichols: The repayment penalties gone but.
Josh Nichols: I would think that now with the company's balance sheet much better profitability on the upswing.
Josh Nichols: Is also potential opportunities for the company to do like a potential refi is that something that you are.
Josh Nichols: Actively exploring or.
Josh Nichols: What's the company doing in terms of looking to potentially reduce that cost outside of the repayments.
Kevin Krause: Also, we are seeing a little bit more, I do not know what the right word is, pressure or whatever, but as these contracts come due, we have customers that say, hey, look, I do not need 100 seats anymore. I need 92 seats. The other thing I would like to add, and this is important, in terms of total revenue, we are seeing a trend toward more soft phone usage and less hardware. So, if you look at our other revenue, it is a component, obviously, of the total, that has a bit of pressure as customers are focused. And it has dropped, I mean, to be fair, it has dropped a heck of a lot more than anything else. Yes, so that is baked in there as well.
Speaker Change: So absolutely great question, Josh we do have the opportunity to look at refinancing that expensive term loan debt and we are.
Speaker Change: So more to come on that later, we'll see the timing on that we also have an opportunity potentially to look at.
Speaker Change: Potentially opportunistic buybacks in the future no commitment on that yet, but that's an opportunity for us as well, we're generating plenty of cash flow and we have options. So I'll make the pitch like our leverage ratios have dropped in half basically over the last year. If you look at some sort of adjusted EBITDA to net debt kind of Ray.
Speaker Change: <unk>, so any commercial bankers out there call me because we've already got people at our front door. So.
Kevin Krause: Okay. It's all very helpful. I'm just trying to get more precise. I'm my own modeling guy.
More can come to the table at any moment.
And we will take them <unk> directly, but it's nice to be in the position. We're in now because we are.
Kevin Krause: That's all I'm trying to do. I know it's reluctance to provide too much detail, the secret sauce in the metrics, but the more we have, the better we can forecast. Michael, it's completely fair.
Speaker Change: As a as a credit risk per se, we're way better now than we than we've been for quite some time. So it's a good position for us to be in.
Sam Wilson: It's not that it's just we don't, I mean, I don't, like, two years ago, it was easy to track usage as a separate thing because we just bought them. But two years in, we have, you know, hundreds of customers that have upgraded, the billing systems are merged, there's all kinds of things happening. It's just not that easy anymore unless I sort of stick a team of people going line by line. And it's just kind of not worth doing that.
Speaker Change: Good to hear and hopefully there is some news over the next few months potentially.
Speaker Change: Then just looking here so the company's operating margin for the third quarter came in materially better than the guide under 40 bps or so.
Speaker Change: I know.
Speaker Change: Our taxes and our.
Speaker Change: Our employees.
Speaker Change: Costs and whatnot that are going to be.
Speaker Change: This year with the new calendar year that theyre going to pressure operating margin.
Kevin Krause: I got, you know, my team's doing other things right now. Now, of course, thank you guys for the question. Thank you. Thank you.
Speaker Change: The quarter could you give a little bit more detail on just like the 300 or so bps.
Speaker Change: Sequential decline in like how do we kind of break out that.
Sam Wilson: Please stand by for our next question. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
Speaker Change: To be sure given that gross margins are kind of going to be.
Speaker Change: And service revenue at least it was only down like a couple of million Bucks I think sequentially yes.
Sam Wilson: Great, thanks. I just wanted to go into, you know, you have a lot of initiatives for kind of selling customers initially, but just what are the initiatives or sales motions you guys are having to kind of add some of these additional solutions to existing customers? And then maybe piggybacking on that, you guys have talked a little bit about the fuse upgrades that are happening, but is there like an end of life date? Like, is there any point where we should kind of consider that, you know, the fuse platform will all be kind of transitioned or upgraded to kind of the XCAS platform? Thanks. Okay, so Marshall, a completely fair question. I'm Marshall.
Speaker Change: Good question, So just to point out as I mentioned in my prepared remarks, we had some onetime goodness in Q3 that helped us about a point.
A couple of a couple of things there so.
Speaker Change: Normalized the normalized is more like 200, or so basis points down to 40 or whatever to the 10%. So a couple of things that go on in our fiscal Q4, which is January through March we have the.
Speaker Change: Reset of the social security taxes, the FICA and the 401K match in the company. So that's a few million dollars right there.
Speaker Change: And that really impacts us that's really most of the change from a quarter over quarter perspective say, the $5 million or so range.
Sam Wilson: Meta, a completely fair question. So let me take this in reverse order. On the fuse end of life, there's not a set end of life date. We're busy moving hundreds of customers over right now. A lot of them are in flight.
Speaker Change: That's really driving it.
Sam Wilson: We've got kind of the top 400. They're a little bit more special. We're taking care of them. And so there's not a defined date. And we also, you know, with the top 400 customers, we're really doing it in conjunction with them. So I don't want to use that EOL term, because that has a tendency that has unintended consequences for us.
Speaker Change: Got it it's just those two items and I would assume that those would kind of.
Speaker Change: B alleviate as you move to the cash.
Speaker Change: I Wonder you are right they do they dissipate throughout the year.
Speaker Change: However, you historically, what we've done as a company is our is in our fiscal Q2 is when we have the annual pay increases and so forth. So there's a few things that move up and down throughout the quarter throughout the year.
Sam Wilson: So it's really, you know; we work with them on that migration. The first part of your question is, to me, a really insightful question, which is around, how do we have to change our ways as a company? As a company, historically, we've been, you know, kind of a, you know, sell most of the wallet share on the first deal. And that's kind of it, maybe a few add-on seats here or there as you add employees. That's really changing.
Speaker Change: Got it thanks.
No problem.
Speaker Change: Please standby for our next question.
Yeah.
Speaker Change: Our next question comes from the line of Peter <unk> with Evercore. Your line is open.
Peter: Great. Thanks, guys for taking my questions squeezing me in here.
Peter: Just to piggyback off the last one is you've talked about obviously repay.
The convert cleaning up the balance sheet, but if you think about your strategy of innovation led growth how.
Peter: How do you manage.
Sam Wilson: And so if you look at how we've evolved, for example, and Walt would know the exact number, we've probably doubled the number of CSMs we have at the company over the last year. And that's really allowing us to then further expand. We've really restructured how we do some of our account management and some of those things around making sure that we can land and then further expand those customers. I think what's interesting is a lot of the technology... SecurePay, or Workforce Management, or Intelligent Customer Assistant are generally not sold on the initial transaction. Most of the time, the initial transaction is typically a UCNC only.
Peter: Cash on the balance sheet versus innovation.
Peter: Versus what your competitors are doing.
Peter: <unk> market given it is a lot more competitive today than it was 12 months ago.
Peter: Do you balance it all.
Speaker Change: It's a great question so.
<unk>.
Speaker Change: I think I'm going to take you back to Q1, when we talked about what our sort of our fiscal plan for the next three years was we talked about increasing cash flow and de levering the balance sheet. So step one would be.
Speaker Change: Generating enough cash to pay down the debt delever the balance sheet and put all this garbage behind us from the past would be step one step two is be an innovation led company. So we want to spend between 10 and 16% any given quarter on R&D that further continues to then drive and.
Sam Wilson: And then over the next 3, 6, 12, 18 months, there are further add-ons that are done. I recently hired, and it's in the press release, Mike McCarron from Gladly, and he and I work together at MobileIron. He's just a phenomenal executive, but he's really coming in to help us further expand our activities around that land and expand and further add-on sales. And then the other thing we're doing, and you know, this is great for me. I don't know if you guys are excited as I am about this stuff, but we've got product-led growth now. So if you go into our product today, our contact center product, we can do things like, and I know all you people have been around for a while, they're gonna say, oh my god, this has existed for 20 years.
Speaker Change: <unk> sales and marketing motion.
Speaker Change: We're a software company and we should be judged by our software first and foremost and so that would be second and then third which is more of a swing factor is how much we spend in sales and marketing and those kinds of things and where we need to get that sales and marketing engine a lot more efficient now there's a lot of overlap between R&D and sales and marketing as you build the product and everybody wants it's easier to.
Speaker Change: And if you build a product that has <unk> built and product led growth built in there can be more efficient to sell and so it's a little bit of the innovation we're going through.
Speaker Change: What I've said in the past and as you think forward.
Speaker Change: At the levels, we're at the cash flow levels, we're at.
Speaker Change: Should pretty easily make our $250 million number do we promise to return to investors and so after that we're more focused on spending for reacceleration of growth for resumption of growth.
Sam Wilson: Yes, we're there now, we've caught up, which is that we can do admin notifications, we can do PLG product-led growth directly in the platform where people can sign up for feature functionality automatically added to their invoice and drive further add-on sales. And so those are all things that we've developed under the notion of innovation and retooling over the last few years. Perfect. Thanks, Meta.
Speaker Change: We haven't talked about Lisa I know she's been onboard now for couple of months, but maybe talk about how she is thinking or how you guys are thinking about go to market channel versus direct obviously the announcements you made today, but curious what.
Speaker Change: She's made what she's changing kind of what you have in the pipeline with higher if you can share with us.
Sam Wilson: Please stand by for our next question. Our next question comes from the line of Josh Nicholas with B Rally. Your line is open.
Speaker Change: So.
Speaker Change: If there was ever a softball, I mean, I am absolutely amazed watching lease on action. It is phenomenal to watch a world class sales executive who really knows what she is doing.
Kevin Krause: Yeah, thanks for taking my question. I just wanted to check in. I mean, congratulations on paying back the $63 million of debt; you're still going to have north of $100 million of cash on the balance sheet. I know that there's going to be some additional paydowns on the higher interest term loan, at least later this year, after the repayment penalty is gone. But I would think that now with the company's balance sheet, much better profitability on the upswing, that there are also potential opportunities for the company to do Is that something that you're actively exploring?
Speaker Change: Execute our plan and I think she has a fantastic vision provision is about a balanced go to market strategy with <unk>.
Speaker Change: Balanced in every region. So for example in Australia, New Zealand, we're focused mainly on value added resellers.
Speaker Change: Those kinds of things.
Speaker Change: But we're more balanced strategy in the U S and more more.
Speaker Change: Appropriate strategy in the U S.
Speaker Change: Number two is she is very focused on the sales process and solution selling and running a correct sales processes and focusing on business outcomes versus do you need dial tone or are you, making the move from on Prem to cloud those kinds of things and then lastly.
Kevin Krause: Or what's the company doing in terms of looking to potentially reduce that cost outside of repayment? So absolutely, great question, Josh. We do have the opportunity to look at refinancing that expensive term loan debt, and we are. So more to come on that later. We'll see the timing on that.
Speaker Change: She's tough she has a high level of accountability and I'm sure. There's already been some notes written but she has a high level of accountability and high expectations that she expects of the TTM Martin <unk> engine.
Kevin Krause: We also potentially have an opportunity to look at potentially opportunistic buybacks in the future. No commitment on that yet, but that's an opportunity for us as well. We're generating plenty of cash flow, and we have options. So I'll make the pitch, like our leverage ratios have dropped in half basically over the last year if you look at some sort of adjusted even data to net debt kind of ratios. So any commercial bankers out there, call me, because we've already got people at our front door. So more can come to the table at any moment. It's nice to be in the position we're in now because, as a credit risk per se, we're way better now than we've been for quite some time, so it's a good position for us to be. Oh, that's good to hear. And hopefully, there'll be some news over the next few months.
Speaker Change: She is search that accountability across the board and so it's just absolutely phenomenal watch are in action and I think also that bruno's onboard he's even newer than Lisa.
Speaker Change: We see.
Speaker Change: As our new CMO and.
Speaker Change: They work hand in glove better than any of the previous combination <unk> I've seen it <unk>. So it is a fantastic thing to see in <unk>.
Speaker Change: Completely aligned on a whole variety of topics in terms of the quality of lead Gen. The conversion rates. All these all these.
Operational things that are going on there just trying to improve everything.
From soup to nuts, so it's great to see.
Speaker Change: If I could squeeze one more so I don't want to put you in a corner or hold you accountable for this metric, but you did say 250, <unk> contact center seats up I think 50%.
Speaker Change: We do hear a lot from your competitors that are starting on the lower end of the market scaling up investing the time to kind of build out that functionality, but can you maybe just give us an idea of how many customers that represents.
Speaker Change: What percentage of your base.
Kevin Krause: And then just looking here, so the company's operating margin for the third quarter was materially better than the guy by 140 bips or so. I know there are some taxes and our employee stock costs and whatnot that are gonna be starting up this year with the new calendar year that are gonna pressure operating margins at the beginning of the quarter. Could you give a little bit more detail on just like the 300 or so bits?
Speaker Change: Of contact center customers that are 250 north of that.
Speaker Change: I actually don't know the exact number off top my head. It is not an insignificant amount of number it's not a vanity metric and to be clear our products. These are customers that are in excess.
Speaker Change: Of seats of contact center running concurrently.
Speaker Change: The reason I the marketing team pulled together the metric for me was because we had this reputation of Oh My gosh. It's eight by eight only works on 12 contact center agents or a contact center agent. It's just be assets marketing side its way competitors like to do all the time is right around and make our story instead of delivering value added.
Kevin Krause: And how would we break out the attribution given that gross margins are going to be flat, and service revenue is only down a couple million bucks, I think? Good question. Just to point out, as I mentioned in my prepared remarks, we had some one-time goodness in Q3 that helped us by about a point. A couple of things there. Normalized, it is more like 200 or so basis points down to 40 or whatever to the 10%.
Speaker Change: To the customers and so.
Speaker Change: We've seen a significant growth in larger contact center deals that were participating in and we see it in the pipeline every day and so I'm sorry, I can't give you a number I'll see if I can scrounge it up by next.
Speaker Change: This call.
Speaker Change: Thanks, guys I appreciate it thank.
Speaker Change: Thank you.
Speaker Change: Ladies standby for our next question.
Kevin Krause: So a couple of things that go on in our fiscal Q4, which is January through March, we have the reset of the social security taxes, the FICA, and the 401k match in the company. So that's a few million dollars right there. And that really impacts us. That's really most of the change from a quarter over quarter perspective, say in the $5 million or so range. That's really driving it. I got it. It's just those two items, and I would assume that those would kind of be alleviated as you move through the calendar year, right? They do. They dissipate throughout the year.
Our next question comes from the line of Catherine threatened with Wilson Your line is open.
Catherine: Thanks for taking my question, Hey, Sam lets go back to your press release today.
Catherine: You talk about the non agent that you're targeting do you have a total addressable market for that and a growth projection and then the follow on question is it seems like this is a very different sale than you currently have what type of a sale.
Catherine: Sales motions theyre going to put into play to make this happen. Thank you.
Speaker Change: Okay. So I'm gonna take these in reverse order so you're talking about sales motions for I don't think they are different from the new sales motions were developing the different from the old sales motions that we had but I think in the new sales motions, where our solutions selling.
Kevin Krause: However, historically, what we've done as a company is in our fiscal Q2 is when we have the annual pay increases and so forth. So there are a few things that move up and down throughout the quarter, throughout the year. We got it. Thanks. No problem.
Speaker Change: Wrapped in a TTM team shows up and really dive into what the customers' needs are we're going to find.
Speaker Change: Service workers are health care workers were billing people or accounts you are inside sales reps or any of those kinds of in every company and get them the right solutions for that.
Operator: Please stand by for our next question. Our next question comes from the line of Peter Levin with Evercord. The line is open.
Sam Wilson: Thanks, guys, for taking my question and squeezing me in here. Maybe just to piggyback off of the last one is, you know, you've talked about obviously repaying, you know, the convert, cleaning up the balance sheet. But if you think about, you know, your strategy of innovation-led growth, how do you manage, you know, cash on the balance sheet versus innovation? versus what your competitors are doing, you know, in the CCAS market, given it is a lot more competitive today than it was 12 months ago. How do you balance that? That's a great question.
That capability.
Speaker Change: You asked a great question on Tam, Let me, let me dig I know Gartner has done some work on this as a <unk> and some of the others.
Speaker Change: I'm presuming, it's a multibillion dollar Tam because they talk a lot about the quote in formal contact center.
Speaker Change: Really despite that term because it implies that it's like an informal agents, but a lot. The most use cases, we see are where the worker needs contact center like functionality, but in fact is not in Egypt, it's not their day to day job to sit at a terminal waiting for the next case to be delivered.
Speaker Change: Or to make outbound phone calls, but instead they have some other job nurse plumber, whatever the case may be but they are on call they need to deal with emergency situations those kinds of things and so it's a useful.
Sam Wilson: So, um... I think I'm going to take you back to Q1, when we talked about what our sort of fiscal plan for the next three years was. We talked about increasing cash flow and de-levering the balance sheet. So step one would be, you know, generating enough cash to pay down the debt, deliver the balance sheet, and put all this garbage behind us from the past. Step two is to be an innovation-led company.
Speaker Change: I guess I understand the non agent part I mean with this.
Speaker Change: All in with the light contact center that everybody can round is the new name, calling them light also yes, yes, but I mean like.
Speaker Change: What is that wasn't like contact center.
Speaker Change: The problem is the informal context underlying causes our Tommy terrible names because it's like light beer is it appears of water.
Sam Wilson: So we wanna spend between 10 and 15% of our revenue in a given quarter on R&D that further continues to then drive an efficient sales and marketing motion. We're a software company, and we should be judged by our software first and foremost. And so that would be second.
Speaker Change: And so it's.
Speaker Change: I don't know I really think and Thats why we put the press release today to start the dialogue of what really the category should be as we go into these products.
Speaker Change: Look I know some of our competitors have some products in this area and I think this product is more analogous to them they call their contacts they call their product contact center, 99% of the time I laugh.
Sam Wilson: And then third, which is more of a swing factor, is how much we spend on sales and marketing and those kinds of things. We need to get that sales and marketing engine a lot more efficient. Now, there's a lot of overlap between R&D and sales and marketing. If you build a product that everybody wants, it's easier to sell. And if you build a product that has PLG built in, product-led growth built in, it can be more efficient to sell. And so that's a little bit of the innovation we're going through. What I've said in the past, and as you think forward, at the levels we're at, at the cash flow levels we're at, we should pretty easily make our $250 million number that we promised to return to investors.
Speaker Change: Theyre not contact center products.
Speaker Change: Yeah, and then what you have.
Speaker Change: You said it was in beta at what point do you think it will go DAA and then percent revenue do you think you'll be able to drive in the next 12 to 15 months from now because it's actually.
Speaker Change: Better gross shoots.
Speaker Change: Yes exactly right.
Speaker Change: So it's a great question look if you look at surprise workspace I think we kept it in beta for nine months.
And if you look at intelligent customer says in digital I think it was data from us in three months I suspect. This one may be in beta a little longer so at least maybe towards that nine months number but its purely a guess on my part and I would like to see this is 10% of revenue as quickly as possible I think it is absolutely a new extent product line extension for.
Sam Wilson: And so after that, we're more focused on spending for the re-acceleration of growth and for its continuation. We haven't talked about Lisa, who has been on board now for a couple of months, talk about how she's thinking or how you guys are thinking about going to market channel versus direct, obviously, the announcements you made today, but curious if you know what she's made and what she's changing and kind of what you have in the pipeline with her. If you can share with us. So, if there was ever a softball, I mean, I'm absolutely amazed watching Lisa now.
Speaker Change: For us as a company.
Speaker Change: Alright, thank you.
Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our.
Speaker Change: Next question comes from the line of will power with Baird. Your line is open.
Speaker Change: Hi, This is Jonathan on for Willpower, Thanks for taking the question.
Sam Wilson: It is phenomenal to watch a world-class sales executive who really knows what she's doing, you know, execute her plan, and I think she has a fantastic vision. Her vision is about a balanced go-to-market strategy, not balanced in every region. So, for example, in Australia and New Zealand, we're focused mainly on value-added resellers, those kinds of things. But a more balanced strategy in the U.S. and more... Appropriate Strategy in the U.S. and other things
Jonathan: So it's clear that operating cash flow has been a.
Jonathan: And our focus and it's grown nicely over the past few years.
Jonathan: Looking forward you talked about more muted revenue growth.
Jonathan: Can you talk about some of the other levels levers that you sell and Paul to help reach at 20% annual growth target the more on the margin side, maybe more working capital improvements can you just help unpack that a little bit.
Jonathan: So yes on the three year CAGR that we gave right starting starting from just to reset starting from the end of 'twenty. Three we're expecting we just grew cash flow from ops, 55% on a trailing 12 month basis.
Sam Wilson: Number two is she's very focused on the sales process and solution selling and running a correct sales process and focusing on business outcomes versus, you know, do you need dial tone or are you making the move from on-prem to cloud, those kinds of things. And then lastly, she's tough.
Jonathan: And as I mentioned in my prepared remarks, we would expect a bit more muted in 2025 fiscal and then.
Going up there in 2026 in terms of levers.
Sam Wilson: She has a high level of accountability, and I'm sure there's already been some notes written, but she has a high level of accountability and high expectations that she expects of the GTM engine. She asserts that accountability across the board, and so it's just absolutely phenomenal watching her in action. And I think also that, you know, with Bruno's on board, he's even newer than Lisa, and we see, you know, as our new CMO, and they work hand in glove better than any of the previous combination CRO-CMOs I've seen at APITE, so it's a fantastic thing to see, and they're completely aligned on a whole variety of topics in terms of the quality of lead gen, the conversion rates, all these operational things that are going on that are just trying to improve everything from soup to nuts, so it's great to see.
Jonathan: Product mix.
Jonathan: We've had we sustained our we've been able to sustain really very good underlying service margins right now we've got a lower margin business in southeast Asia.
Jonathan: But as that market expands into other parts of the world, where we could see an uptick in that part of the usage business that we have but we're always looking at cost of goods sold getting better rates on our telephony. For example, so we're able to maintain pretty healthy gross margins in the face.
Jonathan: Of.
Jonathan: Whatever price pressures may exist at the low end of the market. For example, so we're always looking at that Sam.
Sam Wilson: If I could squeeze one more, Sam, I don't want to paint you in a corner or hold you accountable for this metric, but you did say 250 contacts and receipts up, I think, 50%. You know, we do hear a lot from your competitors that are starting on the lower end of the market, scaling up, investing, you know, a ton to kind of build up that functionality. But can you maybe just give us an idea of how many customers that represents or what percentage of your base are contact center customers that are 250 north of that? I actually don't know the exact number off the top of my head.
Jonathan: Sam mentioned earlier about sales and marketing and getting efficiencies out of the group it's not.
Jonathan: We want to get more with the same.
Speaker Change: As an example, there so I think with the go to market retooling that we have going on in the company. We can get more from the same that's what we really need a better operational efficiency out of sales and marketing. So those are the kinds of things that we're really focused on two to maintain a decent level of profitability and.
Speaker Change: And cash flow and look I mean, I think we're generating enough cash flow more than our cash flow right. Now. So for me. It's all about scale now it's about resuming growth and getting back on that growth curve. So that's where that's where the focus of the company is et cetera could we pull levers that we need to sure but really the focus on the company from here is is getting that growth rate higher.
Sam Wilson: It is not an insignificant amount of number; it's not a vanity metric. And to be clear, our product, we've got customers that have thousands of seats of contact center running concurrently. The reason the marketing team pulled together the metric for me was because we had this reputation of, oh my gosh, it's 8x8, it only works on 12 contact center agents or 8 contact center agents. It's just BS.
Speaker Change: Got it thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Okay.
Speaker Change: Our next question comes from the line of Ryan <unk> with Needham and company. Your line is open.
Ryan Macwilliams: Thanks for the question. Thanks for squeezing me in quick housekeeping item on our Po and any puts or takes there in that metric alright, and then see it in the slide deck.
Sam Wilson: It's marketing FUD. It's what competitors like to do all the time. It runs around and makes up stories instead of delivering value added to the customers. And so, you know, we've seen a significant growth in larger contact center deals that we're participating in, and we see it in the pipeline every day. And so, I'm sorry I can't give you a number; I'll see if I can scrounge it up by next, next call.
Ryan Macwilliams: Yes, no so $765 million <unk> is where we have at the end of the third quarter.
Speaker Change: No I wouldn't say any necessarily big commentary on puts and takes there.
Speaker Change: Yes, it's up year on year over year basis, I know thats slightly down sequentially.
Speaker Change: But but up on a year over year basis.
Sam Wilson: Thanks guys, I appreciate it. Thank you. Please stand by for our next question. Our next question comes from the line of Catharine Trebnick with Rosenblatt. Your line is open.
Speaker Change: Okay.
Speaker Change: And Sam as you are thinking about as you think about your seat count and maybe this is kind of the old way of looking at it but I'm an old guy.
Speaker Change: Is.
Sam Wilson: Oh, thanks for taking my question. Hey, Sam, let's go back to your press release today. You know, you talk about these non-agents that you're targeting.
Sam Wilson: As you think about your growth coming from CPC and Cps.
Sam Wilson: Pressure on Ucas, and you've obviously got some down selling going on with fuze churn pricing probably pressuring you see if you look at the <unk>.
Sam Wilson: Do you have a toll-addressable market for that and a growth projection? And then the follow-on question is, it seems like this is a very different sale than you currently have. So what type of sales motions are you going to put into play to make this happen? Thank you.
Pressure on the UC market, so what I'm, saying the seats, how would you kind of allocate down selling pricing and kind of general customer churn.
Sam Wilson: Pressuring your UC seats. Thank you.
Sam Wilson: So in general customer churn will be the bottom.
Sam Wilson: And down selling and price pressure.
Sam Wilson: It's hard for me to tell the difference I can turn a calculated out.
Speaker Change: I would say probably and this is pure guessing on my part is that.
Sam Wilson: So you talked about sales motions. I don't think they're different from the new sales motions we're developing. Yeah, they'd be different from the old sales motions that we had.
Speaker Change: Down selling.
Speaker Change: Number one in price pressure on the low end number two and then the last one.
And then we've got some new things coming out hopefully in the near future to really start to address the pricing environment.
Sam Wilson: But I think in the new sales motions where we're solution selling, and a rep in a GTM team shows up and really dives into what the customer's needs are, we're going to find service workers, or healthcare workers, or billing people, or accounts people, or inside sales reps, or any of those kinds of things in every company and get them the right solutions for that capability. You know, that's a great question on TAM. Let me dig.
Speaker Change: As you know we do a lot of work around teams and so I think we've got some really interesting things for maybe that could get us.
Speaker Change: More traction in that lower end market really efficiently.
Speaker Change: Great good to hear about that look forward to it about thanks, thanks for the questions.
Speaker Change: Thanks Ryan.
Thank you.
Speaker Change: I'm showing no further questions in the queue I would now like to turn the call back over to Kate Patterson for closing remarks.
Sam Wilson: I know Gartner's done some work on this, as has MetaG and some of the others. I mean, I'm presuming it's a multi-billion dollar TAM because they talk a lot about the, quote, informal contact center. I really despise that term, because it implies that it's like an informal agent. The most common use cases we see are where the worker needs contact center-like functionality, but in fact, he is not an agent. It's not their day-to-day job. I sit at a terminal waiting for the next case to be delivered or to make outbound phone calls, but instead, they have some other job; nurse, plumber, whatever the case may be, but they're on call. They need to deal with emergency situations, those kinds of things, and so it's a specific use case.
Kate Patterson: Thank you all thanks for staying online I know, we ran a little bit over so I'll look forward to talking with you. This afternoon or later tomorrow or during the following week. Thanks a lot.
Kate Patterson: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Kate Patterson: Okay.
Kate Patterson: [music].
Hmm.
Sam Wilson: I get that. I understand the non-agent part. I mean, would this also fall in with the light contact center that everybody's bouncing around with the new name, calling them light also? Yes. What is that? What's a light contact center? The problem is informal contact center and light contact center are, to me..., terrible names because it's like light beer. Is it a beer or is it water? I mean, it's like neither.
Kate Patterson: Yes.
Kate Patterson: Yes.
Kate Patterson: [music].
Kate Patterson: Yes.
Kate Patterson: Okay.
Kate Patterson: Okay.
Kate Patterson: [music].
Kate Patterson: Yes.
Kate Patterson: [music].
Kate Patterson: Okay.
Kate Patterson: [music].
Sam Wilson: And so it's, I don't know, I really think, and that's why we put up the press release today, to start the dialogue of what the category should really be as we go into these products. And it's, you know, look, I know some of our competitors have some products in this area, and I think this product is more analogous to them. They call their contacts, they call their product contact center. 99% of the time, I laugh.
Kate Patterson: Okay.
Kate Patterson: Yes.
Kate Patterson: Yes.
Okay.
Kate Patterson: Yeah.
Sam Wilson: They're not contact centers. Yeah, and then what do you have for like, you said it was in beta. So at what point do you think it will go GA and then what percent of revenue do you think you'll be able to drive in the next 2012 to 15 months from this?
Sam Wilson: Because this actually could be one year of better growth. Yeah, exactly. Right. So it's a great question. Look, if you look at Supervisor Workspace, I think we kept it in beta for nine months. And if you look at Intelligent Customer Assistance Digital, I think it was in beta for less than three months.
Sam Wilson: I suspect this one may be in beta a little longer, so I would lean maybe towards that nine-month number, but it's purely a guess on my part, and I'd like to see this as 10% of revenue as quickly as possible. I think it is absolutely a new product line extension for us as a company. All right, thank you. Thank you. Please stand by for our next question. Our next question comes from the line of William Power with Bayer. Your line is open.
Kevin Krause: Hi, this is Yannis Samoulissan from Willpower. Thanks for taking the question. So it's clear that operating cash flow has been a focus, and it's grown nicely over the past few years. But looking forward, you talked about more muted revenue growth. Can you talk about some of the other levers that you still can pull to help reach that 20% annual growth target? Some more on the margin side, maybe more working capital improvements? Can you just help unpack that a little bit?
Kevin Krause: So yeah, on the three-year CAGR that we gave, starting from, just to reset, starting from the end of 2023, we're expecting, you know, we just grew cash flow from operations 55% on a trailing 12-month basis. And as I mentioned in my prepared remarks, we would expect a bit more muted in 2025 fiscal and then going up there in 2026. In terms of levers, look at our product mix. You know, we've had, we've sustained, or we've been able to sustain really very good underlying service margins right now. You know, we've got a lower margin business in Southeast Asia. But as that market expands into other parts of the world, maybe we can see an uptick in that part of the usage business that we have.
Kate Patterson: [music].
Yes.
Kate Patterson: Yes.
Kate Patterson: Yes.
Kate Patterson: Yes.
Kate Patterson: Yes.
Yes.
Kevin Krause: But we're always looking at the cost of goods sold, getting better rates on our telephony, for example. So we're able to maintain a pretty healthy gross margin in the face of whatever price pressures may exist at the low end of the market, for example. So we're always looking at that. Sam mentioned earlier about sales and marketing and getting efficiencies out of the group. It's not, you know; we want to get more with the same, as an example there.
Kate Patterson: Okay.
Kate Patterson: Okay.
Kate Patterson: Okay.
Kate Patterson: Yes.
Kate Patterson: Yes.
Kate Patterson: Okay.
Kate Patterson: Okay.
Sam Wilson: So I think with the go-to-market retooling that we have going on in the company, we can get more from the same. That's what we really need, better operational efficiency in sales and marketing. So those are the kinds of things that we're really focused on to maintain a decent level of profitability and cash flow. And look, I mean, I think we're generating enough cash flow, more than enough cash flow right now. So for me, it's all about scale now.
Kate Patterson: Okay.
Kate Patterson: Okay.
Kate Patterson: [music].
Kevin Krause: It's about resuming growth and getting back on that growth curve. So that's where I am, that's where the focus of the company is, et cetera. Can we pull levers if we need to?
Sam Wilson: Sure, but really, the focus on the company from here is getting that growth rate. Got it.
Kevin Krause: Thanks for taking the questions and squeezing me in. Thank you. Please stand by for our next question, which comes from the line of Ryan Coons with Needham & Company. Your line is open. I thank you for the question, thanks for squeezing me in. A quick housekeeping item on RPO and any puts or takes there in that. Yeah, no, so 765 million RPO is where we are at the end of the third quarter. I wouldn't necessarily say any necessarily big commentary on puts and takes there. It's up on a year-over-year basis, I know that, slightly down sequentially, but up on a year-over-year basis. And Sam, as you think about your seat count... That's kind of the old way of looking at it, and Matthew Guy.
Sam Wilson: Thank you. Thank you. When you think about your growth coming from CC and CPAS, pressure on UCAS.
Sam Wilson: You've obviously got some downselling going on with fews, churn, pricing, probably pressure. Look at the pressure on the U.C. market. How would you kind of allocate downselling prices?
Sam Wilson: General Customer Churn as pressure. So in general, customer return will be the lowest. And downselling and price pressure, it's sometimes hard for me to tell the difference. I mean, I can sort of calculate it out.
Sam Wilson: I would say probably, and this is pure guessing on my part, is downselling, number one, and price pressure on the low end, number two, and then the last one. And then we've got some new things coming out, hopefully, in the near future, to really start to address the pricing environment. As you know, we do a lot of work with teams, and so I think we've got some really interesting things for maybe that could get us more traction in that lower end market really efficiently.
Kevin Krause: Great, that Thank you. Thanks, Ryan. Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Kate Patterson for closing remarks. Thank you all. Thanks for staying on the line. I know we ran a little bit late, so I'll look forward to talking with you this afternoon or later tomorrow or during the following week. Thanks a lot. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you for watching!