Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. Fiscal First Quarter 2022 Earnings Conference Call. I will now turn the call over to Jennifer Graham Clary for the introduction.

Thank you. Good afternoon. Today's agenda will include a review of our first quarter results with Dave Sipes, Chief Executive Officer; and Samuel Wilson, Chief Financial Officer. Following our prepared remarks, there will be a question-and-answer session. Before we get started, just a reminder that our discussion today includes forward-looking statements about 8x8's future financial performance as well as its business, product and growth strategies, including the impact of the COVID-19 pandemic. We caution you not to put undue reliance on these forward-looking statements as they may involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our risk factors in our reports filed with the SEC. Any forward-looking statements made on this call and presentation slides reflect our analysis as of today, and we have no plans or obligation to update them. Certain financial measures that will be discussed on this call, together with year-over-year comparisons in some cases, were not prepared in accordance with the U.S. Generally Accepted Accounting Principles, or GAAP. A reconciliation of those non-GAAP measures to the closest comparable GAAP measures is provided with our earnings press release and earnings presentation slides, which are available on 8x8's Investor Relations website at investor.8x8.com. With that, I will now turn the call over to our CEO, Dave Sipes.

Good afternoon, everyone, and thank you for joining us today. Our first quarter results exceeded expectations with both service revenue and total revenue growing above the high-end of our guidance range at 21% and 22% year-over-year, respectively. Key drivers of growth were strong demand for our integrated UCaaS and CCaaS, offering continued upmarket focus on the enterprise, channel execution and our CPaaS business. We are driving operational excellence throughout our organization and culture that is committed to a CPT mindset, customer first, product first, team first. We strengthened our cash position and improved operating profitability on a non-GAAP basis. Last quarter, we laid out our vision for the next 3 to 5 years and listed 4 major focus areas for fiscal year '22: One, expanding our platform advantage; two, winning together with partners; three, driving operational excellence; four, expanding the base. I would like to use these as a framework for today's update. First, we are working aggressively to expand our platform advantage, specifically at the intersection of UCaaS and CCaaS, focusing our R&D investments to enhance the enterprise-grade elements of our contact center and maximize the intersection and unique use cases between UCaaS and CCaaS. During the quarter, we launched the following products and updates. Capitalizing on the demand for integrated UCaaS, CCaaS and CPaaS offerings, we launched XCaaS, eXperience Communications as a Service for customer and employee engagement. This solution advances the cloud communications industry by breaking down the silos between UCaaS and CCaaS to optimize the employee and customer experience. We are receiving broad recognition from industry analysts, channel partners and customers for fulfilling this need as organizations move to the cloud at a rapid clip. Recent competitor announcements validate this vision and highlights our strong leadership position with XCaaS. We are very proud to be delivering…

Thanks, Dave, and good afternoon. We are pleased to have delivered results that exceeded guidance and improved operating leverage. Key drivers were better-than-expected performance from product categories, XCaaS, standalone UCaaS and CCaaS, and especially, CPaaS. Total revenue for the quarter was $148.3 million, an increase of 22% year-over-year and above our $142 million to $143.5 million guidance. Usage revenue did not sustain a seasonal slowdown. We had a solid quarter from professional services and hardware shipments were stronger than expected. Looking at service revenue, we generated $137.8 million, an increase of 21% year-over-year and above our $132.5 million to $133.5 million guidance. We do not see the seasonal dip in telecom usage revenue customarily experienced during the early summer probably due to regions reopening. Additionally, we witnessed our CPaaS business accelerate quarter-on-quarter. Total ARR was $536 million at quarter end, up 24% year-over-year. Our strategic investments in the channel and product innovation over the last several years are delivering solid results. I want to remind investors that we announced last quarter we were exiting the CPaaS wholesale business. In fiscal 2021, CPaaS wholesale services contributed $15 million in service revenue and essentially zero operating margin. Rationalizing these services will be a near-term 300 basis point headwind to service revenue growth rates in fiscal 2022, and is already incorporated into the fiscal '22 guidance I will provide shortly. We believe this is the right decision to concentrate our resources on our core market opportunities. For the quarter, the part of the business we are exiting contributed roughly $1.1 million in service revenue and little margin. We ended at a zero run rate to -- at quarter's end. First quarter non-GAAP gross margin was 62.6%, as expected, higher sequentially as we finished restructuring our wholesale business, which we discussed on the last…

. Our first question comes from Matt VanVliet with BTIG.

Nice job on the quarter. You talked a lot about a lot of channel recognition and industry analyst recognition, and it sounds like it's coming through on the channel bookings growth that you mentioned. But curious if you could give us a little more context in terms of where you're seeing the most success? And maybe how Europe and the UK specifically are really driving that? It sounded like a number of large deals came from UK. So just curious where you're seeing the most success and whether there's still room to grow in the channel?

Yes. This is David, and thanks for the congrats on the quarter. The -- we're seeing strong momentum on our XCaaS product, which goes -- absolutely integrated contact center and UC product. And we're seeing it across all customer segments, but especially in -- you saw the growth in enterprise and growth in the -- you mentioned in the UK. We've been very strong internationally in the UK as well as UK public sector have been strong verticals for us. But we also see, in a land-and-expand perspective, ability to add contact center into UC seats that is allowing us to get more products into our current customers, which helps improve overall average revenue as well as retention rates, improve as you get multiple products into customers. So I think that the strategy is resonating with from the customers first. And then our job at this point is to go educate our channel as to those advantages and our own sales team and organization. So those are some of the efforts we're doing to reinforce that positive momentum.

That's helpful. And then, Sam, on the side of, I guess, investments in further growth initiatives here, it seems like they're starting to pay off the ones you made over the last year plus. Curious where we're at in terms of duration? Are we pretty much through most of the bigger step function investments now that we've gotten a fair amount of new executives in? Or do we still have a few more quarters ahead of us where -- I know you mentioned the cash burn, but just what we should think about in terms of overall production and margin leverage from here forward?

Okay. A couple of things there. So first off, I mean, we reiterated we want to exit the year at a 2% operating margin and no more. I mean this is very much now that we're back to being non-GAAP profitable being on offense and accelerating our revenue growth as we get into fiscal '23. And so I would say, I don't really view the investments as chunky as much as a continuous stream of increasing our marketing spend, increasing our sales capacity and putting more R&D dollars towards contact center and those types of things on an ongoing basis. And so I would just kind of expect kind of slow linear growth of operating margin towards that 2% exit number as we continue to reinvest in accelerating revenue.

Our next question comes from Meta Marshall with Morgan Stanley.

Great, and congrats on the quarter. I just wanted to ask kind of the CCaaS and wholesale business stats you gave just for a second just so I can have some clarity. So are you saying that you didn't see as much of a headwind as expected in this quarter because you still had $1.5 million of the headwind -- you still had $1.5 million on the wholesale business? And then second, if you could just give whether there was any headwind on the ARR from just kind of rewinding down of that wholesale business? Or if that’s a pure -- what was to consider a pure number at this point?

Okay. So I will take that. So it's $1.1 million. So as we mentioned on the last earnings call, we were exiting the business, and it took a little bit of time going into this quarter as we were ramping it down in April and May. And so for the quarter, we had $1.1 million of what we consider wholesale business. We exited the quarter at a zero run rate. So we fully exited by quarter's end. Yes, there is a little bit of headwind in ARR. It's immaterial. I don't know, it's $1 million, I'd be surprised. I don't know the exact number off the top of my head, but it's a very small number, but it is there. So those 2 things combined. So all I was trying to reiterate there is that two things: One is that we exited most of the business throughout the quarter. We didn't produce much revenue, but we did produce some that's not repeatable.

Okay. And then just -- sorry, one last follow-up on that. Just on the stat about the CPaaS business growing sequentially. That would -- it wouldn't be CPaaS including -- you didn't grow it more than kind of the removal of the wholesale. The ex-wholesale business grew sequentially is what you were saying, right?

Yes, you're 100% correct. I should have been more clear when I said that. Yes, what we're talking about is the core non-wholesale business grew sequentially and fairly nicely sequentially.

Our next question comes from Mike Latimore with Northland Capital Markets.

Yes. Great. Excellent quarter there. On the gross service gross margin, obviously improving with the removal of the wholesale business, but is that kind of a sustainable level to sort of close to 69% level?

I'll take that one. Yes, and I will probably be fired if I don't go up from here. So it is a topic with Dave all the time that we'd like to get our service gross margin to go higher. It's not necessarily going to go linearly up every quarter, but it's definitely an objective of ours to get it higher over time.

Okay. And then you listed a number of good international wins. Any update on what international is percent of ARR or bookings or something like that?

If you have a third question, ask that real quick and I will pull the number real quick from you. It will be in our 10-Q tomorrow, and I just need to get that real quick.

Okay. Got it. I guess just on -- you said CPaaS was strong. So just the CPaaS that's left, are you selling primarily to developers? Or is this -- I think you also wanted to cross-sell into your contact center business, too?

Yes. We're experiencing both. It's predominantly a developer business. You see that in the Coca-Cola business we won in Southeast Asia and the other wins that we had there. But we're also seeing XCaaS customers that they're leveraging our CPaaS and several solutions. And one example this quarter that we didn't mention earlier, but is Alliance Medical in the UK. And they added messaging capabilities to an existing excess deployment, and they're using that for customer alerts for appointments with doctors. So that's one example. So we do get both.

All right. And revenue for the quarter, United States $103.7 million; and international, $44.7 million. There is some rounding in there. Okay, thanks a lot.

Our next question comes from Peter Levine with Evercore.

Congrats on good quarter. You recently called out UCaaS. So maybe 2 questions. What investments or gaps in CCaaS are you filling or you feel are missing today? And give us your view or thoughts on the Zoom-Five9 acquisition? Just curious to know what your initial reaction was and your thoughts on how perhaps changes the competitive landscape?

Yes. So on that combination, those are 2 platforms we compete with today. So fundamentally, the landscape doesn't change the landscape. I do believe it's a validation that other people are coming to the vision that we have of XCaaS, which is bringing UC and CC together. And it's really being driven by the customer demand for that solution. I do think you can draw a few conclusions from that. One is, the era of build your own contact center is over. It is a -- we've been saying at the 10-year build extreme functionality. And it is something that is not known or we haven't talked about it before, but our contact center business is over $100 million revenue run rate and approaching 40% year-over-year growth and under the 6 time Gartner Magic Quadrant challenger. So it's hard or you can't go and develop that yourself today. The other is -- I think it's less obvious, but the era of partnering is ending. And while this was fine when there weren't other solutions for customers to be partnered between UC and CC solution. I think customers, they want more. They want more integration. They want more manageability long term with integration frameworks that work well, and they want a single vendor reliability across that. So I do think we're entering the era of the owned and integrated UC and CC product, and that's an area where we continue to be farthest along on an integrated solution in our XCaaS and message, which we did an industry analyst event since the last call, has been well received. And it's now 30% of our business or over 1/3 of our business growing at 30% year-over-year. So that's where we see the industry and where we see it going and it's really being driven by customer demand.

For the first part of your question, which is on contact center gaps, well, I don't think we really have gaps as much as we continue to push up in scale, some more concurrent agents, more capacity to handle larger and larger contact centers, and then just continued expansion really down the omnichannel side. So more social, more types of chat, more languages. We added a bunch of translation capabilities sort of to handle 116-plus languages on the platform this quarter, those kinds of things. So it's really about pushing the scale boundary and the feature boundary to enable larger and larger enterprises to move to the cloud.

And then maybe one last one for you, Sam. What are your hiring plans or goals, I think, here in the second half? How is hiring trending? Curious to know how -- what retention looks like given kind of the nature of kind of how competitive it is in the environment today?

Look, we're a very global organization, and our hiring has been strong. And we're having success in many markets. So we're not strictly Silicon Valley-based organization, and we're catering to our employees' needs, too, for mobility and hybrid workforce. So we're very pro team, team first element to our employee base, and I believe we're having strong success in that, yes.

Our next question comes from Will Power with Baird.

Okay. Great. Yes. I guess, first question. I just want to come back to the strong enterprise growth. It looked like really nice numbers in the quarter, both the customer growth, 100,000 ARR customer growth, both sequentially and year-over-year. So I just would love to get any further perspective on the key drivers of that. How much of that is the market coming to you versus channel improvement? How much is XCaaS contributing to that? Just trying to better understand the key drivers there.

Yes. So our future there is really the XCaaS elements, and it's a perfect fit for our mid-market and enterprise customers. So you do see the cross-sell elements into that for the enterprise, and alongside that is our channel alignment. We had the addition of Sandler Partners in the quarter. I do think there's opportunities for more channel partners such as Sandler as well as greater enablement of those organizations, which we're doing with our XCaaS messaging.

Let me just ask you just kind of along those lines. As you think about go-to-market for XCaaS, where are you in that evolution? I mean as you think about your key channel partners, are 50% of them pushing XCaaS? I mean how many of them really understand the combined solution opportunity?

Yes. I mean this is -- we're early in that. And even in our own sales organization, we don't have every sales representative pushing XCaaS. So we start with our -- in our own house, and that's -- when I talk about enablement, I talked about it across our entire sales organization, RFEs, our marketing materials and our partners. So that's -- we're all part of the same team at the end of the day. And describing those benefits of having being able to hit every employee in a company that XCaaS does, having unified administration controls and security across your whole organization, having a single integration framework, having analytics across a single point of accountability and things like the five nines platform reliability that we do across our XCaaS platform, both CC and UC is something that can't be done elsewhere. So it's getting those messages across and ingrained. And I think we -- it's very early. And so that's a huge focus for us from now through the end of the year.

Your next question comes from George Sutton with Craig-Hallum.

I wanted to make sure I'm clear on one thing. So last quarter, we talked about -- and we've talked for years about integrated contact center and UCaaS capabilities. Now we're branding an XCaaS and I saw the blogs and things you did a couple of months ago on that. I just want to be clear, what has changed? As I understand it, you're building up employee functionality relative to CX functionality. But I just want to be clear, what's different quarter-over-quarter in terms of the actual product?

Yes. So look, there's a number of things like we talked about the five nines platform SLA we launched. We talked about the presence that we added to our Microsoft Teams, which goes across both UC and CC, and these are examples of that integrated framework. And so every enhancement, future capability we bring comes across both UC and CC, and those are elements where we see improvements. And then we're doing all our contact center investments and scalability and polishing our omnichannel capabilities.

Got you. One other thing on Jitsi and some of the newer capabilities you mentioned. I am a believer that much of the market is becoming video first in their decisioning. And I'm curious how much of a lead engine Jitsi is proving to become for the rest of your services?

Just as a newer JaaS is an element that we launched, we have a lot of developers on it we talked about. So I think it's an interesting element for our business that is both a CPaaS offering as well as a free meetings offering. And it also -- those capabilities and that come from the Jitsi or go into our underlying product across all our employee experience elements. So it's -- since it's newer, it's smaller, but it is something that's growing rapidly with the -- you saw the 4x increase in the developer base as an example.

Our next question comes from Ryan Koontz with Needham & Company.

Circle back to your enterprise strength and customer trends you're seeing there. Microsoft quoted 80 million daily active users on Teams phone, and how you see that impacting the market? And then price points there, I hear about some pretty aggressive price points, and how you're responding to shifts there and how bundling can help kind of prop up the ARPU?

Yes. So on the Microsoft Teams integration, and we are showing wins there. And I think there's like 4 elements that help us differentiate and win in that environment. One is, we're product first, and our innovation cycle continues. We added presence that goes across Microsoft Teams as well as our contact center and employees. And that's in addition to previous things we've announced, such as SMS, MMS and fax, managing call forwarding rules, account settings, logging in and out of call cues and all of these things accessible from the Teams UI. So obviously, the product capabilities are robust, and we keep growing those. I think the second pillar is, we're powering all employees in an organization, company-wide, not just knowledge workers, but also frontline workers, inside sales, contact center agents, and we're doing that globally across 40-plus countries. A third pillar is, we remain aligned and certified with Microsoft. For example, we were the first vendor included in the Gartner Magic Quadrant for Contact Center as a Service that was certified by Microsoft. And then fourth pillar is, we align in a channel perspective with channel partners that are selling the Microsoft offerings such as Ingram Micro or Pax8 or ScanSource or Virgin Media Business. So those are some of the key pillars that we're leveraging to be successful in that market, and it's taken us into a strong enterprise business.

All right. And I'll cover the pricing question. I don't -- we don't really see radically different pricing. Yes, we have occasionally seen a crazy deal across our desk, but our ability to mix and match across that flexibility, across both Teams users, non-Team users, the contact centers, the ability to then have one statement of work with professional services across that old group et cetera, becomes a pretty compelling value proposition. And then when you add the lower total cost of ownership of not having 40 separate carrier relationships around the world or 20 separate carrier relationships out of the world, all those things, the per line pricing just sort of works itself out as being incredibly reasonable for what we offer. So I just -- I don't see any particular pricing pressure from Teams in particular.

. Our next question comes from Daniel Bartus with Bank of America.

This is Tanika on for Dan. Congrats on the great quarter. So I was trying to understand the drivers for bundling UCaaS and CCaaS slightly better. Do you guys see the benefits more tied to IT management and simplicity? Or are customers more drawn to the integrations between the two?

Yes. So there's -- it goes across both, I would say. And you get company-wide collaboration by connecting all employees together with experts in the organization as well as people that are talking to your customers. So that's one. From an IT perspective, it powers every employee in the organization, not just a subset of employees, which you can only do if you're a single UC or CC. It also provides a single integration framework for maintainability into your other enterprise applications. It gives you a 360-degree view analytics across the organization, and it also brings a single point of accountability for reliability, quality, global work networks. So those are some of them, I would say, but I think it goes across kind of both users advantages as well as IT administrability manages.

This concludes our question-and-answer session as well as our conference for today. Thank you for attending today's presentation. You may now disconnect.