Q2 2025 8x8 Inc Earnings Call
Good day and thank you for standing by. Welcome to the second quarter, 2025, 8x8 ink earnings conference call. At this time, I'm a participant and I'm a listen only mode.
and the speaker's presentation, there will be a question and a session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson, VP of Finance. Please go ahead.
Kate Patterson: Thank you, good afternoon everyone.
Today's agenda will include a review of our results for the second quarter of fiscal 2025 with Samuel Wilson, our chief executive officer and Kevin Kraus, our chief financial officer.
Kate Patterson: 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.
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.
Kate Patterson: 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 obligations to update them.
All financial metrics that will be discussed on this call are non-GAAP unless otherwise noted. These non-GAAP metrics, 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 these non-gap metrics to the closest comparable gap metric is provided in our earnings press 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 Samuel Wilson.
Samuel Wilson: Good afternoon, everyone. Thank you for joining us today to discuss our results for the second quarter of fiscal 2025.
Samuel Wilson: I am delighted to share that we delivered a quarter of solid performance doing better than expected for key financial metrics like service and total revenue and non-GAAP operating income. Also, I am very pleased to report that we generated an operating profit on a GAAP basis.
Samuel Wilson: I believe our results this quarter are a testament to the increasing effectiveness of our go-to-market strategies and the strengths of our product offerings.
Samuel Wilson: While it is still early, we are seeing important indications that our transformation strategies are working.
Kate Patterson: Reinforcing my conviction is the fact that revenue generated by customers on the 8x8 platform, which excludes revenue from customers still on Fuse, was up on a year-over-year and quarter-over-quarter basis.
Kate Patterson: We first outlined our transformation initiatives nearly two years ago and we saw accelerating progress against every one this quarter. Briefly, these are one
Kate Patterson: Accelerate innovation in contact center while maintaining leadership in cloud telephony. Two, establish leadership in our communications platform as a service offerings in the Asia-Pacific and leverage these capabilities globally.
3. Focus on small and mid-sized enterprises
Kate Patterson: 4. Improve platform win rates and sales productivity.
Kate Patterson: Five.
Kate Patterson: Maintain an outstanding experience for our customers. And six, build a fortress balance sheet by reducing debt and remaining vigilant in maintaining our costs, allowing us to deliver value to our investors, customers, and partners.
Kate Patterson: Starting with communications platform as a service.
Kate Patterson: We posted a strong quarter in Q2, with platform usage revenue up more than 20% year-over-year and close to an all-time high.
Kate Patterson: Notably, we achieved our highest single platform usage revenue day ever in early September as we continued to extend our leadership, particularly in the Asia-Pacific and European regions.
Engagement through our public APIs continues to increase and sales of non-SMS products grew more than 50% year-over-year.
Kate Patterson: We recently added Dscope, a customer identification and authentication management solution, as our first technology partner ecosystem member to integrate with our communications platform as a service.
Kate Patterson: The customer response in a series of Asia-Pacific Innovation Roadshows was fantastic.
Kate Patterson: Nurin Group, a leading Malaysia-based e-commerce and digital content provider, is a great example of how our expanded solutions are addressing more complex requirements.
Kate Patterson: with more than 5,000 merchants and 5 million plus active users across three countries.
Kate Patterson: They chose 8x8 WhatsApp business APIs to deliver bulk messaging, automated communications, and real-time engagement to their community.
Kate Patterson: I believe innovation is the spark that gets the growth engine started. It enables new conversations and creates new opportunities.
Kate Patterson: This is why we continue to invest 15% of our revenue in R&D on a non-GAAP basis.
Kate Patterson: The results of our investment in R&D are visible across our CX solutions. Let me share a few data points.
Kate Patterson: Sales of new products were up more than 60% year-over-year, an acceleration from the prior quarter.
Kate Patterson: Sales of artificial intelligence-based new products, including Intelligent Customer Assistant and other solutions from our technology partner ecosystem, increased more than 50% sequentially and more than 200% year over year.
Kate Patterson: We have hosted more than 1 million interactions since these products were introduced and usage is accelerating.
Kate Patterson: I believe this growth reflects our differentiated approach to AI, which is built on four core pillars, each focused on enhancing customer experience through powerful, reliable AI capabilities.
Kate Patterson: First, we prioritize comprehensive AI-driven data processing across all voice and digital interactions on our platform, which can deliver accurate transcriptions,
Kate Patterson: Summaries, Sentiment Analysis, and Topic Tagging while keeping enterprise data secure and compliant.
Kate Patterson: Second, we developed an ecosystem of what we believe to be best-in-class AI applications integrated seamlessly into our CX solutions.
Kate Patterson: This approach allows our customers to achieve consistent AI-driven insights without duplicating costly processing efforts like real-time transcription.
Kate Patterson: Third, we're investing in AI insights that assess the full CX deployment, identifying operational optimizations across both human and AI elements, benefiting both native 8x8 tools and third-party components.
Kate Patterson: Finally, our professional services team is expanding its AI consulting services, providing clients with hands-on support to drive value from their AI solutions swiftly and sustainably.
Kate Patterson: AI is just a tool but we are focused on turning our AI technologies into the business outcomes that our customers want.
Kate Patterson: Our focus on business outcomes is leading to unacceleration in new logo business coupled with an increase in multi-product lands.
Kate Patterson: New Logo Business accounted for an increased percentage of our bookings in the second quarter. It is worth noting that the percentage of bookings from New Logos has increased in each of the last three quarters.
Kate Patterson: Once again, the majority of our top 20 new logo deals included Contact Center as-a-Service in the initial commitment and several included more than four products.
Kate Patterson: If innovation is the spark that ignites the growth engine, our relentless focus on customer success is the accelerator.
Kate Patterson: Our customer loyalty and revenue retention for customers on the 8x8 platform is at multi-year highs.
Kate Patterson: Our customers are being deployed faster with a higher level of satisfaction and a shorter time to value. Our support organization has maintained world-class satisfaction metrics for seven consecutive quarters.
Kate Patterson: and our proactive, white-glove coverage of our top 1,000 revenue-generating accounts has increased customer loyalty and reduced customer churn. We have seen public recognition of our success in the awards we have received.
Kate Patterson: One of our largest wins this quarter demonstrates what I mean.
Kate Patterson: A leading specialty retailer chose 8x8 to help them move from a piecemeal Cisco on-premise solution to a scalable, single-integrated UCNCC cloud platform.
Kate Patterson: Their implementation will ultimately span 1,600 locations and more than 20,000 employees.
Kate Patterson: A critical factor in their decisions process was the recommendation of an affiliated in-store service provider who had used our UC and CC solutions for four years.
Kate Patterson: The ability to integrate the two solutions to enable a seamless customer experience was a clear differentiator, but we would not have had a chance to prove it if the service partner had not been satisfied with their 8x8 solution.
Kate Patterson: Their recommendation is not unique. This quarter we earn the Customers Love Us badge on G2, the customer review site, because they do.
Kate Patterson: Cronus Health, a leading provider of healthcare revenue cycle management solutions, is another example of how our investments in customer success are paying off.
Kate Patterson: A Fuse customer using Teams for collaboration, they chose to upgrade to the 8x8 platform after an extensive proof-of-concept period.
Kate Patterson: supported by a cross-functional Center of Excellence team. This was one of several Q2 deals representing more than a million dollars in annual recurring revenue.
Kate Patterson: Speaking of our portfolio of Teams integrations, 8x8 is proud to be the only Gartner UC Magic Quadrant leader besides Microsoft itself.
Kate Patterson: to be accepted into the OperatorConnect program, leveraging our trusted and strategic partnership with Microsoft to deliver comprehensive integrated team solutions.
Kate Patterson: Scandinavian Designs, a brand with 40-plus showrooms across 16 states, chose 8x8 Contact Center with OperatorConnect for Microsoft Teams to migrate to a single cloud platform.
Kate Patterson: Differentiated features like Teams chat federation and presence visibility in agent workspace were key factors in their decision.
Kate Patterson: They also liked our robust analytics and dashboards, with call transcriptions and evaluation capabilities thrown in.
Speaker Change: 8x8 now supports more than 500,000 Teams users and our Teams base continues to grow quarter over quarter and year over year.
Kate Patterson: Another important aspect of our growing momentum has been our commitment to expanding our partner relationships, including both our reseller partner programs and our technology partner ecosystem.
Kate Patterson: Both programs are closely aligned with our commitment to go beyond technology to deliver outcomes to our customers.
Kate Patterson: New partner Buchanan Industries embraces this vision on multiple levels.
Kate Patterson: A leading managed IT service provider focused on mid-market and enterprise organizations, Buchanan believes in delivering business outcomes by turning their technology into a powerful competitive business advantage.
Kate Patterson: Not only did they sign up as an 8x8 value-added reseller, they are also migrating their legacy on-prem system to 8x8 contact center-as-a-service solution for their nearly 300 contact center agents.
Speaker Change: They chose 8x8 for our shared values and vision, our comprehensive omnichannel solutions, our 7x24 agent support, and our exceptional partner relationships.
Speaker Change: Our technology partner ecosystem has also been a clear win for us and our customers. By offering tightly integrated solutions with a carefully curated community of what we believe are the best in breed partners, we expanded our offerings and accelerated our time to value for our customers.
Speaker Change: I already mentioned our new partner, Dscope. We also added Regal.io, a leader in marketing campaign management, to the exclusive Sell with 8 tier. We already have a customer using Regal and 8x8 in high-volume production.
Speaker Change: These customer wins and our Q2 results reflect the hard work and dedication of our team over the last two years.
Speaker Change: They underscore the resonance of our strategic initiatives in the market, increasing my conviction in our path, and my confidence in the future of 8x8.
Speaker Change: In closing, I want to express my gratitude to our customers, partners, employees, and you the investors.
Speaker Change: Your trust and commitment to 8x8 are what empower us to continue our journey of growth and innovation. We are excited about the opportunities ahead and are committed to converting our momentum into increased value for our investors, partners, and customers.
Speaker Change: With that, I will turn the call over to Kevin, who's back this quarter, for more details on our financial results.
Kevin Kraus: Thanks, Sam, and good afternoon everyone. We delivered solid financial performance in fiscal Q2-25, meeting the high end of our guidance range for total revenue and beating the high end of our guidance range for service revenue and non-GAAP operating margins.
Kevin Kraus: Cash flow from operations is also healthy. Fiscal Q2 is our 15th quarter in a row of positive cash flow from operations and non-GAAP operating profit. Trends we expect to continue.
Kevin Kraus: We also repaid $25 million of term loan debt in conjunction with our August refinancing.
Kevin Kraus: I am pleased to report that subsequent to September 30th, we retired another $33 million of principal value of our term loan debt, reducing our total debt principal balance to $369 million as of today.
Kevin Kraus: This represents a debt reduction of over $173 million, or 32%, since the end of fiscal Q2-23.
Kevin Kraus: And we are doing what we said we would do, which is returning value to shareholders primarily through debt repayments.
Kevin Kraus: The press release and trended financial results we posted on our investor relations website provide a comprehensive view of our results.
Kevin Kraus: But I will point out a few of the highlights on this call.
Kevin Kraus: Before I continue, let me remind you that I will be using non-GAAP metrics, except for revenue and cash flow, unless otherwise noted.
Kevin Kraus: Q2 service revenue was $175.1 million reflecting continued growth in both subscription and usage on the 8x8 platform.
Kevin Kraus: This was offset by a decline in revenue from customers remaining on the FUSE platform as expected.
Kevin Kraus: The remaining base of customers on the FUSE platform represented approximately 7% of service revenue in Fiscal Q2 versus 12% of service revenue in Fiscal Q2-24.
Kevin Kraus: We expect this percentage to decline over the next six quarters as we plan to complete the customer upgrades from the FUSE platform to the 8x8 platform by the end of calendar year 2025.
Kevin Kraus: I would like to point out that Q2 revenue benefited slightly from favorable foreign exchange rates during the quarter of approximately $1.5 million versus our beginning of quarter expectations, and approximately $2 million on a year-over-year basis.
Kevin Kraus: Excluding this FX favorability, we still achieve service revenue and total revenue above the midpoint of our guidance ranges.
Kevin Kraus: Gross margin was 70.2% consistent with our expectations and slightly lower than 70.6% in Q125 as we delivered on our expectations for increased usage on our communication platform as a service business.
Kevin Kraus: We continue to operate within our OPEX envelope for Q2, with operating expenses flat with Q1 on a dollar basis at $105.5 million.
Kevin Kraus: As we have noted before, we have a natural hedge built into our model where the FX impact on revenue is essentially offset by the FX impact on expenses, minimizing any net impact on operating margin.
Kevin Kraus: Thank you.
Kevin Kraus: Our Q2 non-gap operating margin was 11.9%, sequentially higher than 11.3% in Q1 and above the high end of our guidance range due to our strong top-line performance.
Kevin Kraus: I would like to highlight that Q2 stock-based compensation as a percentage of revenue in our GAAP financials was 5.2%, well below our peers and at our lowest point in at least five years.
Kevin Kraus: The continued progress in stock compensation expense
Kevin Kraus: helped us attain GAAP Operating Profitability in Q2, a milestone that demonstrates our financial discipline.
Kevin Kraus: As previously stated, we've increased cash compensation in lieu of equity for the majority of our employees.
Kevin Kraus: Our intention is to reduce dilution by issuing fewer shares over time, but the increased cash compensation gets reflected in our non-GAAP operating margin as it isn't excluded for non-GAAP financials.
Kevin Kraus: Turning to the balance sheet and cash flow, our cash, cash equivalents, and restricted cash was $117.9 million at the end of Q2.
Kevin Kraus: which was down about $13 million from the end of Q1 reflecting the reduction in our debt balance by $25 million as I noted earlier.
Kevin Kraus: You will notice that our current liabilities on the Q2 balance sheet includes $39.4 million of current term loan balance, net of unadvertised debt discount and issuance costs.
Kevin Kraus: The principal value of this current portion is $40 million.
Kevin Kraus: which represents the minimum payments required by our term loan credit agreement for the 12 months following September 30th, 2024.
Kevin Kraus: Bye.
Kevin Kraus: The 33 million dollars of debt repayment since September 30th lowers the remaining current liability to only 7 million dollars as of today.
Kevin Kraus: By the way, the $33 million represents $15 million in required fiscal Q3-25 principal payments plus $18 million in prepayments.
Kevin Kraus: As I stated earlier, the principal value of our total debt outstanding today is $369 million, and $202 million of this total is convertible to equity.
Kevin Kraus: to provide some perspective on our progress over the last two years.
Kevin Kraus: In August 2022, we had $548 million of debt and a net debt-to-trailing-12-month EBITDA ratio of more than six times.
Kevin Kraus: At the end of fiscal Q225 and as of today, our net debt to EBITDA ratio is approximately 2.6 times.
Kevin Kraus: With a solid balance sheet and consistent cash flow, we have greater flexibility to pursue opportunities that align with our innovation-led growth strategy.
Kevin Kraus: Accounts receivable and current deferred revenue increased sequentially, reflecting improved bookings performance in Q2.
Kevin Kraus: Dave's sales outstanding of 32 days is well within a healthy range for our business.
Kevin Kraus: Our remaining performance obligation increased $20 million sequentially, a quarter over quarter and year over year increase of 2.6%.
Kevin Kraus: reflecting improvement in our multi-year customer contract backlog and directionally consistent with the increase in our total deferred revenue.
Kevin Kraus: As a largely recurring revenue business, our PO balance covers a significant majority of our future recurring revenue in the next 12 months, which is a strong stabilizing financial force for us.
Kevin Kraus: Cash flow from operations was 12.3 million dollars in Q2 and total stockholders equity remained positive.
Kevin Kraus: Now, let's discuss a few points about our operating models.
Kevin Kraus: Our total cost structure in Q2-25 on a dollar basis was very similar to our cost structure in Q1-25.
Kevin Kraus: Total operating expenses were virtually identical in Q1 and Q2.
Kevin Kraus: We believe that our target cost structure, with R&D at about 15% of revenue, sales and marketing between 33% and 34% of revenue, and G&A between 10% and 11% of revenue, continues to be the right level investment to drive innovation and customer adoption of our growing portfolio of our products and services.
Kevin Kraus: We still expect service revenue gross margin to remain in the 73 to 74 percent range, but it could vary slightly due to the mix between communication platform as a service usage and subscription.
Kevin Kraus: We expect gross margin on total revenue to be between 69% and 71% as we include other revenue into the mix.
Kevin Kraus: With this operating model context in mind, we established service revenue, total revenue, and operating margin guidance ranges for the fiscal third quarter ending December 31st, 2024 as follows.
Kevin Kraus: We anticipate service revenue to be in the range of $171 million to $174 million.
Kevin Kraus: We anticipate total revenue to be in the range of $177 million to $182 million, implying other revenue of $7 million at the guidance midpoint.
Kevin Kraus: Note that other revenue can vary based upon customer-specific deployment schedules and hardware shipments.
Kevin Kraus: So total revenue can vary based on these dynamics.
Kevin Kraus: The combination of modestly lower revenue compared to Q2 and slightly higher sequential operating expenses related to specific go-to market investments drives our operating margin guidance of 10% to 11% for Q3-25.
Kevin Kraus: For the fiscal year 2025 ending on March 31st, 2025, we provide the following guidance ranges.
Kevin Kraus: We anticipate service revenue to be in the range of $690 million to $701 million.
Kevin Kraus: We anticipate total revenue to be in the range of $714 million to $727 million.
Kevin Kraus: We continue to focus on delivering a solid operating margin and anticipate a full year operating margin between 10.25% and 11%.
Kevin Kraus: Please remember that our fiscal fourth quarter includes seasonally higher expenses as certain employer taxes and benefits restart in January.
Kevin Kraus: At the midpoint of our revenue guidance range, this translates into a non-GAAP operating income of between $73 million and $80 million for the fiscal year.
Kevin Kraus: We expect interest expense including amortization of debt issuance costs to be about 5.5 million dollars in Q3 and 5.3 million dollars in Q4 based upon current interest rates and our outstanding debt balance.
Kevin Kraus: We expect cash paid for interest to be approximately $3.4 million dollars in Q3 25 and $7.2 million dollars in Q4 25 as cash interest on the 2028 convertible debt is due semi-annually.
Kevin Kraus: These interest amounts assume that the interest rate on the term loan remains approximately 7.6, or silver, plus 3%.
Kevin Kraus: Putting all of this together, we expect fully diluted non-GAAP earnings per share to be in the range of 32 cents to 35 cents.
Speaker Change: For more information visit www.FEMA.gov
Kevin Kraus: We anticipate full-year cash flow from operations to be between $59 and $64 million, consistent with our prior comments.
Kevin Kraus: Note that cash flow from operations typically decreases in fiscal Q4 due to the timing of seasonally increased employer expenses and cash paid for interest.
Kevin Kraus: I continue to believe that our vision and strategy will keep us on the path towards profitable growth.
Kevin Kraus: Progress does not always happen in a straight line, but I believe that we are doing the right things to get us to where we intend to go.
Kevin Kraus: I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results and I look forward to reporting our progress throughout the remainder of fiscal 2025.
Speaker Change: Operator, we are ready for questions.
Speaker Change: Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again.
Speaker Change: Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Ryan McWilliams from Barclays.
Ryan McWilliams: Hey guys, this is Damon Coggin, author of Reliability and Sustainability. I have a question. Please see the services, revenues, sequential growth, improvement compared to the prior quarter. What would you attribute the key factors that drove these results? And how should we think about the sustainability of these trends that drove the two key results?
Speaker Change: This is Kevin here. Thanks for the question. Yeah, we had a pretty robust platform usage revenue for the core, and also our core business on the 8x8 platform grew.
Kevin Kraus: So we, you know, it was multifaceted.
Kevin Kraus: in terms of the growth that we saw this quarter.
Kevin Kraus: I think the last thing, and Kevin, look, our gross retention was great, it was fantastic, right, so for any recurring business model, the better that gross retention does, the better we have a strong foundation off which to grow. So I think as long as gross retention remains high, we continue to see leverage in our new products.
Kevin Kraus: There is, you know, some positive momentum and I would say we're cautiously optimistic.
Speaker Change: Thanks guys and great to see the 200% year of your growth in sales of AI based solutions. Can you just help us understand what is driving this sale and then are customers more willing to adopt these features today compared to six months ago?
Speaker Change: I think the answer is yes, they're more willing to adopt than six months ago, and it's going to be sort of the
Speaker Change: I'm going to do these in reverse, right? So the reason we're seeing more momentum is because we, along with our professional services and our customers themselves, are getting to the point where we can turn AI into something that solves the business outcome.
Kevin Kraus: I mean, I think the first year or so of AI, it was a lot of, you know, having it write an email for you, but how does this solve a business problem?
Kevin Kraus: Now with things like summarization, automatic health scoring.
Kevin Kraus: transcription that's being used to improve agent productivity and even detect things like fraud, those kinds of things. We're actually turning AI into meaningful business outcomes. Once we do that, no one has a problem buying it.
Speaker Change: God, thanks guys.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Michael Turin from Wells Fargo Securities
Michael Turin: Hey, great, thanks for taking the question. Sam, you had a few comments on acceleration throughout the prepared remarks.
Michael Turin: But... Thank you.
Michael Turin: teams holding on to the midpoint of the four-year target. So maybe just walk us through what it could take to eventually move those up. And for the business to see a return to growth from a year-on-year perspective, is it a better macro, certain product areas you're focusing on, or just working through the final fused migration efforts as you work through the year that could ultimately get you there?
Speaker Change: Okay, so I think we were trying to be pretty clear about this in the script, right? So number one, core 8x8, which is the customers on the 8x8 platform, up quarter on quarter, year on year. So what's going to drive future growth overall for the, you know, the whole company is two things.
Michael Turin: And that growth, which is well above corporate, starts to become meaningful. That will drive the overall company's revenue. And number two, fuse, which is mid-single digits, high-single digits, whatever, mid-single digits right now, continues to shrink as we upgrade the customers, that headwind will go away over time.
Michael Turin: core 8x8, you know, continued growth in the core 8x8 business. And so that's just, we need to sort of, you know, continue to run off the Fuse business and continue to grow the new products business.
Speaker Change: Thank you.
Speaker Change: Helpful, and just maybe one on gross margin.
Speaker Change: Can you just help us unpack a little bit what we're seeing on the gross margin side? You're obviously outperforming an operating margin. Is the gross margin...
Speaker Change: impact mostly tied to a mix towards CPAS and any commentary just on underlying gross margins across the product set, if those are holding in fairly consistent or just any further commentary there is helpful. Thanks.
Speaker Change: Yeah, that's correct. The platform business is accelerated pretty well this quarter, and that has a lower margin, so it is mix-driven.
Speaker Change: The underlying UCAS, CCAS margin, if you will, has remained very steady for us, which is great to see. We do a lot of work on that to maintain that gross margin profile in the majority of our business. But you will see the mix having some slight impact.
Speaker Change: as it changes.
Speaker Change: I want to be careful about this because you guys on Wall Street are going to blow out my comments a little too large. But there may be a little suppression of gross margins in the short term as we launch more of these AI usage-based products.
Michael Turin: So the margins improve as the number of customer use cases and the amount of customer adoption increases.
Michael Turin: So there's an upfront cost to getting a customer up and running, getting the models working, getting it deployed, etc, etc. And so, as our new product business grows...
Michael Turin: You know as the number of new customers we have on new products grows there may be some near-term gross margin compression Not in thousands of basis points right just you know a few basis points here there But it's it's part of what you're driving at is a little bit of that mix shift And so I want to make sure that you're sort of aware of that
Speaker Change: No, that makes sense. Appreciate it. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of C.T. Panigruhi from Mizuho.
C.T. Panigruhi: Thank you, and it's good to see that improvement in debt-to-ability ratio.
C.T. Panigruhi: But the question on going back to the comment on AI adoption, Sam, so what kind of trends are you seeing from those customers who are adopting this AI solution in terms of their number of human agents and how they are funding this kind of product? Any trend that you're seeing or would share?
Speaker Change: Yeah, right now what we're seeing is, okay, so let me take it, so you talk about products that are being adopted on the AI front, right? We're clearly seeing things like agent assists.
Speaker Change: of all sorts, voice and chat bots that are AI-based. We're seeing campaign management and those kinds of things that are AI-based. We're seeing
Speaker Change: certain things around health scoring, core, you know, CIDP, those kinds of things. All those technologies, in some form or fashion, are being adopted.
Speaker Change: In terms of
Speaker Change: agent trends, we're not seeing situations where customers lower the number of agents right now.
Speaker Change: I'm not saying it's not going to happen in the future. I'm not saying it is going to happen in the future. I'm just saying that right now, we don't see where customers generally lower the number of agents. Instead, what they're doing is they're adding this on as additional capabilities to make their agents more productive, more useful.
Speaker Change: And so what we see is that, I'll give you a simple example.
Speaker Change: The number one use case we're seeing with Agent Assist right now is that it shortens training cycle time. Remember, the average contact center is dealing with something like 40% attrition. Those are third-party numbers, not mine. And so things like two-week shortening of training time is very meaningful when it comes to ramping productivity.
Speaker Change: And so I think that's a lot of what we see right now, Citi. We're not seeing this sort of raw replace humans with robots thing.
Speaker Change: Okay, that makes sense. And you guys stopped disclosing the small mid-market enterprise, but wondering where did you see strength or weakness, any kind of sort of trend by different segments?
Speaker Change: Yeah, so yeah, last quarter we stopped the closing ARR for a host of reasons.
Speaker Change: in our usage-based business, et cetera. And so, yeah, it's the same trend we saw in the past, right? We continue to, we're really focused on that enterprise, that multi-product sale, and so we've been growing that segment. Sorry, the headwind to that is we haven't been extensively focused on micro-businesses and very small businesses.
Speaker Change: and so that's where we're generally seeing the customer count not keep up with the change in enterprise.
Speaker Change: So, I think Kevin knows the number, but you know, more than half our revenue comes from sort of ex-caste type customers. So that's, you know, customers at contact center, you see potentially more products than that. And I think that trend will just continue to grow.
Speaker Change: Great. Thank you.
Siddiq: Thanks, Siddiq.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Mehta Marshall from Morgan Stanley.
Mehta Marshall: Great, thanks.
Mehta Marshall: You guys noted kind of channel expansion that you were seeing.
Mehta Marshall: or kind of success with new customer bookings. And I just wanted to get a sense, like, what channels are you finding?
Speaker Change: kind of most lucrative? Is there a certain vertical or customer type where you're having a lot of success? And then maybe just as a second question, you know, clearly seeing traction in the underlying 8x8 business.
Speaker Change: Just, if you could comment, was the FUSE transition kind of slower or faster than you expected this last quarter? Thanks.
Speaker Change: Okay, so two things there. We're trying to channel and our go-to-market and fuse. So on the channel new logo side, actually the best source of business last quarter was direct.
Speaker Change: not through any channel partners. Global reseller continued to see overall improvement and we're really proud of that so that's something we are focused on is growing our reseller business which is a sort of a backdoor indicator and a growth of our international business.
Speaker Change: The direct business was more driven by North America. We're still a channel first company, but we've managed to close and do better with our direct business.
Speaker Change: and so I think that's just a testament to, you know, what we're doing. We are seeing more and more enterprise customers come to us directly via RFPs and so I think we're just starting to benefit from that.
Speaker Change: on fuse
Speaker Change: And the key media that you used was we because I think we as we expected it was an okay quarter
Speaker Change: you may expect because we don't know what's going to happen, but we are pushing really hard on the teams to get the customers moved over and get this behind us.
Speaker Change: Great, thanks.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of William Power from Baird.
William Power: Okay, great, thanks. You all referenced, you know, the CPAS strength and the quarter. It sounds like that was, you know, one of the sources of upside. Maybe just talk to the kind of the key drivers there and really kind of the sustainability of that, I guess.
William Power: just trying to make sure there's not anything that's more one-time issue there. And I guess just kind of tying into that, I think the guidance is for service revenue to be down a little bit sequentially. So just trying to understand the drivers of that.
Speaker Change: All right, on the platform as a service business and usage in general, strong quarter, above expectations obviously, you know.
Speaker Change: relative to what we were expecting to be in the quarter. Will, I love your question on sustainability because, as I think everyone on the call knows, in general, usage-based businesses don't have contracted revenue.
Speaker Change: So this is the part of the call where you guys want me to stick my neck out really far. So I always try to be at least a little cautious.
Speaker Change: We are doing a number of things in our CPAS business. We have been spending money on R&D, on innovation, on sales capacity and those kinds of things, which drives future business. And the team I've got running the CPAS business, I'm just really impressed with.
Speaker Change: And so from that front, I think it's great. Number two is our investments over the last year in the platform itself are paying benefits.
Speaker Change: Our Intelligent Routing, our Omni-Channel, our Packaging, some of our add-on bot capabilities in our CPaaS business definitely resonating with customers. And the stuff I talked briefly about on the call in the future around Dscope and security
Speaker Change: I was so blown away by the positive feedback on a roadshow we did.
Speaker Change: those kinds of things. So I would say, like the overall business, we're very cautiously optimistic on where the CPAS business could go.
Speaker Change: There was nothing one time in the quarter, but I don't want you to start drawing a linear line. It was a stronger-than-expected quarter, and we take that business month by month.
Speaker Change: So it sounds like there's some conservatism on that piece that perhaps is driving the slightly weaker...
Speaker Change: Sequential Service Revenue Guide.
Speaker Change: Definitely we are trying to be conservative in our guide. Yes, with CPAS we don't have the visibility. The other thing is, I just want to be cautious and I know Kevin mentioned it, but we did get a tailwind because of FX.
Speaker Change: And there's always a little bit of cautiousness when we pick up a little bit of a tailwind. I think you said how much it was... Yeah, one and a half million. And so that could potentially flip, you know, to some degree. So we don't know where that's going exactly. We don't forecast FX rates.
Speaker Change: And when we do forecast effects, we're really bad at it. So, you know, that's a little bit, Will, of the other side of the equation that we want to just be cautious of.
Speaker Change: Okay, and maybe just a quick second one. Any kind of updated view on what you're seeing just from a broader macro customer willingness to spend, sales cycle, perspective, kind of etc. versus maybe a quarter or two ago?
Speaker Change: Yeah, look, I...
Speaker Change: But there is a little bit more...
Speaker Change: strange behavior by some of the competitors. I think it's very fixated on this quarter and usually reverses out next quarter.
Speaker Change: So I am seeing that, but I think offsetting that is also the fact, and we've talked about it in the past, is our pipeline is up. That's, you know, our deal pipeline is up.
Speaker Change: Obviously you can see from RPO, which I think is a record high, etc. that you know we're having some success. So I think offsetting that is the fact that our product portfolio and our innovation strategy is showing product market fit.
Speaker Change: We are clearly seeing situations where customers are very appreciative in the products and capabilities we're offering. And so I don't know how much of this desperation is driven by the lack of investment by some of our competitors, etc. Or it's...
Speaker Change: just the fiscal fourth quarter, whatever. But I will tell you that as long as my pipeline is growing and my new products are growing 60% year-over-year and you know, my RPO is growing, I know that my leading indicators are pointed the right direction.
Speaker Change: Okay, that's helpful. Thank you all.
Speaker Change: Thanks, Will.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Michael Funk from Bank of America.
Michael Funk: Hey guys, thank you for the questions tonight.
Michael Funk: So, thanks again for percentage of revenue, service revenue coming from FUSE. I think you said 12% last year and 7% this quarter. So, if my math is right, that declined. It gets about 9, 9.1 million.
Speaker Change: year-over-year. How much of that migrated to the to the core 8x8 platform? So core 8x8 grew year-over-year, but how much of it migration from FUSE?
Speaker Change: Michael, hi, it's Kevin. Yeah, we, let me go get the actual numbers. While he's looking that up, so the one thing I will tell you is, even without that, Core 8 by 8 still grew. Still grew. Yeah.
Speaker Change: He's going to give you the number, but if you can find it in one of his 3,000 spreadsheets. But we did look at that ahead of time just to make sure the growth wasn't all just left pocket to right pocket.
Speaker Change: Core 8x8 grew quarter over quarter, year on year, without any contribution from the FUSE migration last quarter, or upgrade last quarter. Yeah, so it's about five and a half million or so.
Speaker Change: in Q2'25 were the fuse upgrades that moved over.
Speaker Change: Some companies with their strange behavior Can you define strange behavior or expand on that comment exactly what you meant by that?
Speaker Change: Thank you. Bye bye.
Speaker Change: I just wonder what they're thinking with some of the batshit crazy pricing they put in the marketplace. So, I mean, I just I don't understand always what they're thinking when they do this because it's just overall it's not helpful and it just slows down deal cycles for both of us.
Speaker Change: In the end, I'll be honest with you, we usually win the deals because I think it's counterproductive because the customers ask.
Speaker Change: You know if you have to price that low obviously your product isn't that good and you're not investing in the future and those kinds of things, but it just slows down deal cycles.
Speaker Change: And so that's what I meant by strange behavior.
Speaker Change: Yeah, thank you. One really quick one, if I could. Have you seen a change in the rate of change?
Speaker Change: in seat count in the last 12 months, either a slowing in decline or a reversal in decline in seat count. And I appreciate you're selling more products than the customers now as well, but just that old legacy seat count, any change in the rate of change?
Speaker Change: Okay, so what I'm going to tell you is that yes, but I'm going to be very, just give me a second to get the full answer out because I'm going to be very cautious in this answer.
Speaker Change: We are seeing accelerating UCNCC seat sales.
Speaker Change: Thanks, everyone. Thanks, everyone. Take care.
Speaker Change: But I think that's us. I'm not sure how the industry is working. I think a lot of that's driven by the fact that our value proposition over the last two years has substantially changed.
Speaker Change: and because my phenomenal CRO is busy restructuring my sales organization for the new world order. And both of those could be very macro to 8x8, not necessarily to the industry overall.
Speaker Change: Great. Hey Sam, Kevin, thank you so much.
Samuel Wilson: Thank you, Michael.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Peter Levine from Evercore.
Peter Levine: Thanks, Scott, for taking my question. You know, Sam, as a follow-up to the AI, you know, obviously the stats you gave, about 50% quarter-to-quarter, 200 year-over-year, and you kind of said business outcomes is kind of what what you're solving for. Can you help us remind us how you're monetizing the usage? Meaning, is there like a value exchange or a value capture you can monetize?
Samuel Wilson: I know it's early in the cycle, but maybe just talk us through, like, how much of AI usage is part of that growth acceleration story, excluding, you know, what, excluding, like, fews coming off and obviously bigger products becoming more. But help us walk us through, like, the monetization of AI usage that continues to scale up.
Speaker Change: Okay, that is a multifaceted question and I'm sort of shaking because I'm going to try to give you a reasonable answer.
Speaker Change: but it's a multifaceted question. Okay, so on AI we monetize it multiple ways.
Speaker Change: So for our T-PES partnerships that involve AI, we have the cell-with model and the cell-through model. So on the cell-with model, we'll introduce the prospect to the
Speaker Change: The company, the product, or whatever the case may be, that we're jointly selling, and we may get a revenue cut or a usage cut based on that.
Speaker Change: in the future. On the sell-through model, we're actually putting it on our paper, and so that's pretty common with intelligent customer assistance or some of those things where we buy at a lower price and then correspondingly sell at a higher price.
Speaker Change: These AI-based models is we sell the customer one use case.
Speaker Change: So, and we purposely try to minimize this and make it fairly straightforward. But when we do that, we're selling them a platform. The reason we do that is we really want to get a hard ROI relatively quickly. You know, fast time to value. If we get fast time to value, the customer likes it.
Speaker Change: So, what happens is, we come in, we set up the bot, we get it working, they see very fast time to value, and then it sort of turns the, well, what if, becomes the next scenario. What if we deployed this use case? What if we deployed that use case? What if we deployed this use case?
Speaker Change: And then that's where we see the usage really ramp. Almost all of our customers that we landed over the last four or five quarters have all grown their usage significantly quarter on quarter, kind of that concept of same store sales.
Speaker Change: same source sales significantly quarter-on-quarter as they expand out the number of use cases Because we've given them the platform we've given them professional services to continue to drive And so it's almost like these turn into a simple use case to slightly more complex use case It's fully more complex use case, etc
Speaker Change: and each part along the way we're monetizing and as that gets...
Speaker Change: As the product gets more and more used, we obviously achieve better and better revenues, hence the greater than 50% growth year over year. I would say the other thing that I think is advantageous to us is we become more and more of a strategic partner to that customer, which I think over time should help retention.
Speaker Change: I appreciate the color, and maybe just one piggyback off of the FUSE dynamics you kind of talked about, 7% in the quarter, call it $12 million, if you were to analyze that number, is there a line of sight in terms of what percentage of that do you expect to capture or transition to the A platform?
Speaker Change: Yes, there is. And to all my employees listening on this call, any number less than 100% is a discussion with me. But the answer is, look, I mean, we're expecting that some of it won't transition for a host of reasons, but we'd like to transition the maximum amount that we can. And we're putting a lot of resources forth to make that happen.
Speaker Change: Thanks for tuning in. We'll see you next time.
Speaker Change: by the end of calendar 25.
Speaker Change: Any incentives that you're, anything that you're putting in front of yourselves, folks, or offers?
Speaker Change: Yes, yes, and yes.
Speaker Change: Yeah, offers to the offers to the customer, you know, like, for example, we're talking about if you transition, we'll give you, for example, intelligent customer assistance.
Speaker Change: for a month or two for free to try out some of our AI technologies and those kinds of things that are available on the 8x8 platform to sort of give them an advantage to go sell it and there's some incentives to the sales guys to go make the deal happen.
Speaker Change: Thank you from the caller.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Ryan Kuntz from Needham & Co.
Ryan Kuntz: Thanks for the question. Nice to see the RPO pick up here.
Ryan Kuntz: Sam, how's your visibility of that going forward, you know, given the indications, you know, down sequential subscription revenue guide
Speaker Change: You know, how should we think about kind of setting those sort of expectations for the trajectory of RPO? Is it, do you think of it kind of lumpy? Or are you seeing some risks around, you know, some of your particular customer segments here in the near term?
Speaker Change: Let me say why. When we get into more of these usage-based businesses, there's not necessarily always contracted revenue, and even if there is contracted revenue, frequently it's significantly less than the amount of actual usage on the platform.
Speaker Change: And so I think what we're seeing is we're seeing an increase in RPO, we're seeing an increase in underlying business momentum. It makes me very cautiously optimistic about the future.
Speaker Change: But it's not a straight line either, right? Could it zig or zag? Absolutely, and it could zig or zag simply by kind of the definition of RPO, which is future contracted revenue or a backlog of contracted revenue, where we know intelligent customer assistant may be being used for X number of
Speaker Change: Interactions per month and there's a number significantly smaller that's contracted
Speaker Change: And so, I want to say that what I think is that RPO will grow over time. It won't be a linear straight line and a lot of it will depend on how much usage business we get in and some of the other things that we do from a financial model.
Speaker Change: In general, we are seeing more and more
Speaker Change: I would say customer push or customer request to have a consumption based like pricing or consumption based like commercial opportunities in future deals and so that's just something that we all need to think about
Speaker Change: Got it. Just a quick follow-up, please. On the CPAS business, are you seeing some of your international APAC kind of core markets there, are you seeing any of this A2P fee stuff come along like they do in the U.S., these big upcharges for
Speaker Change: A to P, you know, cloud to person.
Speaker Change: No, but let's be clear, those carriers in 2020, 2021, and 2022 pushed through pretty big price increases. So I think unlike what we're seeing here, they don't necessarily need to be that obsessed about pushing through higher prices because I feel like they've already done it to us.
Speaker Change: They actually, this year, 2024, we saw some of the most mild price increases we've seen in five years because they had pushed up prices so much. And so, I don't think we need it. I mean, the U.S. market's a bit of a...
Speaker Change: A bit of a Rube Goldberg machine right now because of the whole registration thing.
Speaker Change: etc. I would say we're pretty bullish on RCS coming in the future. So we've got some product innovation going around RCS. You should expect to hear about that shortly and those kinds of things. But I'm not sure we're going to see much more from the carriers pushing forward.
Speaker Change: Perfect. That's all I've got. Thank you.
Speaker Change: Thanks, Ryan.
Speaker Change: Thank you. At this time I would now like to turn the conference back over to Samuel Wilson, CEO, for closing remarks.
Samuel Wilson: All right. Thank you, everyone, for joining us. I really want to thank our partners, our customers, our employees, and most importantly, our shareholders for taking time out of their busy day to listen to this earnings call. We appreciate it. As I mentioned earlier, we think the company is sort of on the right path. Our transformation is gaining hold, and we look forward to updating you again next quarter. Thank you.
Speaker Change: This concludes today's conference call. Thank you for participating. You may now disconnect.