Good day, and thank you for standing by. Welcome to the Q1 2024 8x8, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would like to hand the call over to your speaker today, Kate Patterson of Investor Relations.

Thank you, operator. Good afternoon, everyone. Today's agenda will include a review of our first quarter results with Sam 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 future financial performance, including our increased focus on profitability and cash flow as well as 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 reports 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 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 U.S. generally accepted accounting principles, or GAAP. A reconciliation of those non-GAAP measures to the closest comparable GAAP measures is provided in our earnings release and on the Investor Relations website at investor.8x8.com. With that, I'll turn the call over to our CEO, Samuel Wilson.

Much appreciated, Kate, and thank you to everyone for joining us today. This is my first earnings call as the CEO of 8x8. Over the past 6 months, I've spoken at length to our customers, employees and investors about the future direction of the company. As you will recall, we made the decision a year ago to balance our innovation-led growth strategy with a focus on improving profitability and cash flow through disciplined capital allocation. In our Q1 results, you will see both progress on this journey as well as areas for further improvement. I plan to give you our investors, who own the company, a transparent view of how the business is doing today and where it's headed tomorrow. To this end, we will add some commentary about the long-term financial path of the company at the end of my remarks. Now let's get into some Q1 highlights. The increased investment in R&D drove the introduction of new products and enhancements to existing solutions. The reception from customers has been very positive. We increased our win rates, closed significant new customers and expanded our base of XCaaS contact center users. We remained the direct routing solution of choice for customers deploying Microsoft Teams, expanding our 8x8 voice for team seats by over 80% year-over-year. We formally launched our contact center ecosystem and expanded the number of partners, extended our global industry reach to 59 countries, hosted innovation roadshows in the U.S. and U.K. and strengthened our management team with the hiring of Lisa Martin as Chief Revenue Officer, and we delivered record non-GAAP operating profit and cash flow. Our innovation-led strategy seems to be resonating with customers, driving new business and awareness in the industry. As we focus on the right customers, lead with contact center as a service…

Thank you, Sam, and good afternoon, everyone. We remained financially disciplined and delivered strong operating income and cash flow in the fiscal 2024 first quarter, exceeding our guidance range for non-GAAP gross margin and non-GAAP operating margin and exceeding our expectations for cash flow from operations. We have delivered positive non-GAAP operating income and cash flow from operations for 10 consecutive quarters, and we have prepaid $58 million of debt, more than 10% of the total outstanding balance since August 2022. Total revenue for the quarter was $183.3 million, and service revenue was $175.2 million, both decreasing 2% year-over-year and slightly below our guidance range. Our revenue performance was impacted by continued challenges in our CPaaS business in the Asia Pacific region and higher-than-expected churn in our Fuze customer base. Other revenue for the quarter was $8 million, slightly above the prior quarter and in line with expectations. Total ARR was $703 million at quarter end, up 2% year-over-year reflecting CPaaS headwinds and churn and downsell in our inorganic customer base. Excluding CPaaS usage, our total ARR grew approximately 4% year-over-year. Most CPaaS ARR is in the enterprise segment. And consequently, the CPaaS headwinds did disproportionately affect the enterprise ARR. Enterprise customers accounted for 58% of total ARR, and enterprise ARR was flat sequentially and flat versus the prior year given the aforementioned headwinds. Turning to gross margin, operating expenses and operating profit, please remember that all items discussed are non-GAAP unless otherwise noted. Service revenue gross margin came in at 76.2%, up 90 basis points sequentially and 280 basis points higher than Q1 '23. We are continuously managing our cost of goods sold and expect service revenue gross margins to remain healthy. Part of the year-over-year increase in service gross margin has been that we have reduced investments in…

[Operator Instructions] And our first question for today will be coming from Catharine Trebnick of Rosenblatt.

So Sam, a nice job on the Microsoft pull-through, but really, what are you seeing? Yesterday, we had RingCentral support and today you reported. And you are in this pivot, but what are you really seeing in terms of buying patterns from your target market, the SME? That's the first question, I guess I have. And the second one is, congratulations on Metrigy and being in the top 5. RingCentral now, it looks like they are following your lead in terms of the Ring.cx and what's your take on how far you are with your product versus them hitting the same target market?

All right. So you asked what are the buying patterns in our target market. Look, I think there's some cautiousness that's crept into the market. We see it in smaller order sizes, a little bit longer deal times the CFO, we've seen an increase in signature authority on first deals, maybe a longer POC, those kinds of things. I think we mentioned this last quarter also. So we've seen a little bit further elongation of the sales cycle in there. At the same time, it's -- we're absolutely seeing a lot of interest in the new things that we're announcing, right? And those are relatively early, but we have Supervisor Workspace that's now generally available, a lot of interest in that. Intelligent Customer Assistant digital is exiting beta here shortly in the next month or 2, probably, probably nothing promised. And we're -- I mean, we've seen just a massive increase in the amount of usage of that coming out of the beta site customers and we expect that to continue as we go to general availability. So we're in that transition where the new products aren't yet a material amount of money generating revenue, but there's a lot of interest in them on a go-forward basis, and we continue to generate a lot of cash flow. So while there's some economic headwinds, I think, and just some cautiousness in our target markets, I think we're doing all the right things as a company. In terms of RingCentral following us, I'll let them speak for themselves. I guess all I would say is we've been in the market since 2011. It's nice that they're showing up in 2023. I think by 2034, they'll be right about where we are today.

And our next question will be coming from [ Jamie Reynolds ] of Morgan Stanley.

You've got [ Jamie ] on for Meta. I guess just firstly, could you contextualize the uptick in deal activity that you're seeing tied to XCaaS? And then secondly, when customers are talking about adding an AI functionality, do they know what they're looking for yet? Or are they still looking for guidance? I guess another way to think about that is, is it elongating sales cycles?

Okay. So what are they looking for in AI? And what was the first part, Kate?

It was the uptick in XCaaS deals.

It's on XCaaS deals. So the 2 are related to each other, right? So we announced our ecosystem in early July. We've been out on the road talking about the fact that we've got an open ecosystem. We've got a number of partners on nearly 20. We've got integrations out there on the MLAI space. We've got, for example, Cognigy, our intelligent customer assistant out there. And so there's a lot of activity. That's driving a lot of the uptick. We were at CCW, Contact Center World in Las Vegas. And I would say the tone on the show floor was very much I want to deploy this in the next year or 2, help me. So to answer your first part and second part kind of combined, they are looking for help. And I think they're looking for help to not make AI an island onto itself. I think it's very easy to buy a product today that does something very specific, a chatbot, an MLAI chatbot. It's often its own world, et cetera. But what happens if the user of the chatbot has a problem? Then it becomes very complicated. That's why we've entered the market with our API framework and our integration framework so that if you're on a chatbot or you're using voice bots or using these kinds of things and you need a live agent, you need to complete that circle, you can transfer with all the metadata. So no reauthentication, no repeating yourself over and over again. I was recently on a chatbot with our 401(k) provider. I had to authenticate on the chatbot, then I had to authenticate again to the agent. Irritating customer experience. We eliminate all that. And so I think they're trying to figure out what technologies to deploy, when. I would say the biggest ones right now are chatbots. Voice bots are pretty popular in the U.S. and then agent assist. And then I would say those are the big 3 and then health scoring and some of the other stuff is coming up rapidly behind it. But they want it to be part of the overall picture, not an island unto itself.

Our next question is coming from Matthew Bullock of Bank of America.

I'm on for Michael Funk. I'd really appreciate some additional commentary on the CPaaS trends, specifically some incremental color on the carrier price actions taken during the quarter. Any quantification would be appreciated and how you expect those trends to manifest going forward.

Thanks, Matthew. So look, I would say we're not the only one seeing this. We've seen some of our competitors in the CPaaS business also sort of say the same commentary. I think the carriers are raising prices very aggressively, and it's kind of a mistake because I think they've raised prices so quickly and so aggressively. The people are actually moving traffic away. Now that benefits us over the long term because we offer a whole range of channels on our CPaaS business. So what am I talking about? Moving authentication, and some of those may deal with this today, but moving authentication, for example, from SMS traffic to WhatsApp. It's a simple example, very common in Asia. We're a preferred vendor of Meta, on WhatsApp, et cetera. So we've got those capabilities. We can guide customers to that jersey -- journey. But in the meantime, it's causing some disruption in traffic volumes going through that. And that's kind of the color. I think the other thing that we're doing is we're trying to move up the stack, and this goes in line with my innovation mantra. So we're making the hard decisions in the short term to be a better business. What does that mean? We walked away from low margin or negative margin SMS direct business because it just didn't make financial sense. And we've been investing in add-on capabilities. So one product that's in beta today is a product called Fraud Shield. It's where we actually protect the customer from SMS fraud as part of the contract. We've got, I think, 15 beta sites, between 10 and 15 beta sites. Don't owe me exactly on that number, and we're seeing tremendous uptick in traffic, and that makes the product itself stickier. So I think all of us, I think Sinch, Twilio, us, Vonage, et cetera, all the players in CPaaS are looking at adding more value-added services on top of our CPaaS business to make it a better, more sticky business. We started on that a year ago. We're seeing the benefits now.

Yes, I'll just -- I'll reiterate what Sam said. We're not going to go after bad business. And in terms of the quantification, our Q1 miss is roughly half inorganic, half CPaaS. And a big portion of that CPaaS is generated because we didn't go after the bad business.

We're focused on generating cash flow to get that margin.

The next question will be coming Siti Panigrahi from of Mizuho Securities.

This is Abhinav on for Siti Panigrahi. I guess the question kind of is what kind of assumptions on the inorganic or Fuze renewals do you have baked into the full year guide? And at what point are we going to start seeing kind of a lapping effect after we get through them? And I guess related to that, kind of the second piece here is what are the expectations? Or what do you think to go right for revenue to reaccelerate in FY '25? Is that linked to kind of the pieces you've been discussing and new products? Or where can we kind of point to there?

Yes, I'll answer the first part and then the second part Sam can take. This is Kevin. We don't disclose necessarily the detailed renewal rates for our -- for the portion of our business. So basically, we -- it was -- the downsells upon our upgrading the 8x8 platform was more than we expected. I think the important thing is that we've actually pivoted very, very quickly and put our whole customer success team on 100% of the Fuze base to contain the downsell and other losses we see. So in the next few quarters, we do expect -- the next couple of quarters or so, we do expect to be able to contain that over time. And then we'll start the add-on business and other things that we're going to do to cross-sell into that base.

All right. And I'll take the second part, which is basically, I'm going to paraphrase what gives me confidence that we can accelerate revenue in 2025? So here's kind of a laundry list of things I think about every day, right? So our ARR growth improved in all segments XCPaaS. So our core business is doing fine. XCaaS grew double digits year-over-year and was 41% of total revenue. I think that's a big positive. And we're seeing more contact center customers. So our move towards contact center led sales we're starting to see the green shoots behind that. Clearly, Metrigy saw it, top 5 ranking. And as I said in my script, I think most listeners on this call wouldn't have thought of that. And that's ahead of Amazon, Dialpad, Talkdesk, Vonage, Avaya, Zoom and a host of others, right? We've got a darn good contact center product, and that wasn't the D I was going to use. We approved the Gartner Magic Quadrant for contact center. In the critical capabilities, we've improved year-over-year in 12 out of 13 categories. Our contact center is getting better. We've got 12 user awards this summer from G2, both on UC and CC. We've been investing in customer support. We saw it with Stevie Awards for our customer service team and the leader. Lisa Martin joined. She's a fantastic hire to be our Chief Revenue Officer, trust me. She did a lot of due diligence before joining. And then I think our new products and what we're seeing on our new products is absolutely -- I mean, it brings like -- when I get down in a moment or 2, I just look at the usage trends on our new products and a big smile gets on my face very rapidly. So I think those things just need to build to a size where they show up in the income statement and start to nudge that number higher.

Our next question is coming from Austin Williams of Wells Fargo.

This is Austin Williams on for Michael Turrin. I just wanted to go back to the hire of Lisa Martin, new Head of sales. Just anything you can add on what changes we might see with the go-to-market as a result of that? And what the biggest priorities will be to start?

Well, maybe we'll bring Lisa on in a future call. I mean she's been on the job since mid-June, so I don't want to speak for her yet. Let us get her feet underneath there. But I mean, if you look at her LinkedIn profile, she's an incredibly experienced sales leader, both technically and sort of her trajectory. She knows contact center sales inside and out. And so obviously, if she's joining us, I think it's just a good validation that she did her due diligence on what we're doing and where we're going and decided to tag along.

And our next question will be coming from George Sutton of Craig-Hallum.

This is James on for George. You are taking an interesting approach with the Open CX or open CCaaS platform, you mentioned 40 partners onboarded. Can you just sort of talk about what you're hearing from those partners? And how do you envision the open platform approach playing out over the next 3, 4, 5 years relative to some of the closed off competitors? It seems to be that sort of the longer-term bet here.

So let me take that in reverse order. So how do I see this over the next 3 to 4 years? I see it, honestly, how most technology evolves. If you look at Force.com or Marketo or any of the platforms over the last 20 years, anybody that tries to go with themselves failed in the end. And so I just believe that contact center is a replay of traditional technology development. And if you look at a lot of the market research, what contact center buyers want is seamless native feeling integrations, and that's really what we're trying to do. So what we hear from our ecosystem base is, "Thank goodness, you're not trying to compete with us like those other guys. Thank goodness that you're building multi-tiered integration points." So we can integrate at the UI/UX level. We can integrate at the API level or we can integrate the Webhooks level, which allows monitoring the event bus, which is some really unique stuff. And honestly, thank goodness that there's a place where the next-generation technologies. One of the key things, and I think this is one of the reasons why others have gone to a close stack versus us is we've rebuilt the foundation of our contact center over the last 5 years. It's a full CI/CD stack, continuous innovation, continuous deployment. So we're making about 5 releases a day, Monday through Friday, the working week, right? So we're doing 20-plus releases a week. And what that allows us to do is work at these next-generation start-up speeds. I think one of the problems -- and I'm guessing, to be fair, that our competitors have is they're not that full CI/CD stack. So an ecosystem partner needs an API or needs something adjusted. And they're like, great, we'll…

Thank you. And this concludes the Q&A session for today as well concludes the conference for today. Thank you all for joining. You may all disconnect, and have a good evening.

Thanks, Lisa.

Thank you.

You're welcome.