Good day and thank you for standing by. Welcome to Second Quarter 2025 8x8 Inc. Earnings Conference Call. [Operator Instructions] 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.

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. 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 our future financial performance, including investments in innovation and our focus on profitability and cash flow as well as statements regarding our business, products and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our Risk Factors in our 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 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-GAAP metrics to the closest comparable GAAP 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.

Good afternoon, everyone. Thank you for joining us today to discuss our results for the second quarter of fiscal 2025. 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. I believe our results this quarter are a testament to the increasing effectiveness of our go-to-market strategies and the strength of our product offerings. While it is still early, we are seeing important indications that our transformation strategies are working. Reinforcing my conviction is the fact that revenue generated by customers on the 8x8 platform, which excludes revenue from customers still on Fuze, was up on a year-over-year and quarter-over-quarter basis. We first outlined our transformation initiatives nearly 2 years ago, and we saw accelerating progress against everyone this quarter. Briefly, these are: one, 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; three, focus on small and midsized enterprises; four, improve platform win rates and sales productivity; five, 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. Starting with Communications Platform as a Service. 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. Notably, we achieved our highest single platform usage revenue day ever in early September as we continue to extend our leadership, particularly in the Asia Pacific and European…

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 margin. Cash flow from operations was 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. We also repaid $25 million of term loan debt in conjunction with our August refinancing. I’m pleased to report that subsequent to September 30, 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. This represents a debt reduction of over $173 million or 32% since the end of fiscal Q2 ‘23. And we are doing what we said we would do, which is returning value to shareholders primarily through debt repayments. The press release and trended financial results we posted on our Investor Relations website provide a comprehensive view of our results, but I will point out a few of the highlights on this call. Before I continue, let me remind you that I will be using non-GAAP metrics, except for revenue and cash flow, unless otherwise noted. Q2 service revenue was $175.1 million, reflecting continued growth in both subscription and usage on the 8x8 platform. This was offset by a decline in revenue from customers remaining on the Fuze platform as expected. The remaining base of customers on the Fuze platform represented approximately 7% of service revenue in fiscal Q2 versus 12% of service revenue in fiscal Q2 ‘24. We expect this percentage to decline over the next 6 quarters as we plan to complete the customer upgrades from the…

Thank you. [Operator Instructions] Our first question comes from the line Ryan MacWilliams from Barclays.

Hi, this is Eamon Coughlin on for Ryan MacWilliams. And thanks for taking the question. Pleased to see the services revenue 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 2Q results?

This is Kevin here. Thanks for the question. Yes, we had a pretty robust platform usage revenue for the quarter. And also, our core business on the 8x8 platform grew. So it was multifaceted in terms of the growth that we saw this quarter.

I think the last thing, and Kevin, nice question. 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. There is some positive momentum, and I would say we’re cautiously optimistic.

Got it. Thanks, guys and great to see the 200% year-over-year 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 6 months ago?

I think the answer is yes, they’re more willing to adopt than 6 months ago, and it’s going to be sort of the – I am 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 a business outcome. I mean, I think the first year or so of AI, it was a lot of having it write an e-mail for you, but how does this solve a business problem. Now with things like summarization, automatic health scoring, 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.

Got it. thanks, guys.

Thank you. [Operator Instructions] Our next question comes from the line of Michael Turrin from Wells Fargo Securities.

Hey, great. Thanks for taking the questions. Sam, you had a few comments on acceleration throughout the prepared remarks. But team is holding on to the midpoint of the full 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 Fuze migration efforts as you work through the year that could ultimately get you there?

Well, okay. So I think we’re 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 whole company is two things. Number one is as our new products become a larger and larger part and that growth, which is well above corporate starts to become meaningful, that will drive the overall company’s revenue. And number two, Fuze, 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. I know it’s not today or tomorrow, but we – I think we’re starting to get pretty clear line of sight of getting to stable to growing core 8x8 – continued growth in the core 8x8 business. And so that’s just – we need to sort of continue to run off the Fuze business and continue to grow the new products business.

Helpful. And just maybe one on gross margin. Can you just help us unpack a little bit what we’re seeing on the gross margin side? You’re obviously outperforming on operating margin. Is the gross margin impact mostly tied to a mix towards CPaaS? 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.

Yes, that’s correct. The platform business has accelerated pretty well this quarter, and that has a lower margin. So it is mix driven. The underlying UCaaS, CCaaS 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 as it changes.

I would also add one more thing that just we will – on this because you guys on Wall Street 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. So the margins improve as the number of customer use cases and the amount of customer adoption increases. So there’s an upfront cost to getting a customer up and running, getting the models working, getting it deployed, etcetera, etcetera. And so as our new product business grows, 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 a few basis points here or there, but 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.

Yes, that makes sense. appreciate it. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Siti Panigrahi from Mizuho.

Thank you. And it’s good to see that improvement in debt-to-EBITDA ratio. But the question I’m 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’re funding this kind of product? Any trend that you’re seeing would you share?

Yes. 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 Assist, bots of all sorts, voice and chatbots that are AI-based. We’re seeing campaign management and those kinds of things that are AI-based. We’re seeing certain things around health scoring, core CIDP, those kinds of things, all those technologies in some form or fashion are being adopted. In terms of agent trends, we’re not seeing situations where customers lower the number of agents right now. 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 – and so what we see is that – I’ll give you a simple example. 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 2-week shortening of training time is very meaningful when it comes to ramping productivity. And so I think that’s a lot of what we see right now, Siti. We’re not seeing this sort of raw replace humans with robot’s thing.

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?

Yes. So last quarter, we stopped closing ARR for a host of reasons, growth in our usage-based business, et cetera. And so yes, it’s the same trend we saw in the past, right? We continue to – we’re really focused on that enterprise, that multiproduct sale. And so we’ve been growing that segment. The tail – sorry, the headwind to that is we haven’t been extensively focused on micro businesses and very small businesses. And so that’s where we’re generally seeing the customer count not keep up with the change in enterprise. So I think Kevin knows the number, but more than half our revenue comes from sort of XCaaS type customers. So that’s customers that have contact center, UC potentially more products than that. And I think that trend will just continue to grow.

Great. Thank you.

Thanks, Siti.

Thank you. [Operator Instructions] Our next question comes from the line of Meta Marshall from Morgan Stanley.

Great. Thanks. You guys noted kind of channel expansion that you were seeing or kind of success with new customer bookings. And I just wanted to get a sense like what channels are you finding 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, clearly seeing traction in the underlying 8x8 business. Just if you could comment, was the Fuze transition kind of slower or faster than you expected this last quarter? Thanks.

Okay. So two things there. It was kind of channel and our go-to-market and Fuze. So on the channel new logo side, actually – the best source of business last quarter was direct 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 sort of a backdoor indicator in the growth of our international business. 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. And so I think that’s just a testament to 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. On Fuze, is Fuze better or worse than – and the key, Meta, that you used was we because I think we – as we expected, it was an okay quarter. I was kind of hoping for a little bit more acceleration in the Fuze upgrade cycle. We’re continuing to make a lot of progress there. We’re continuing to really get this put behind us. We’re still on track for end of next calendar year to shut down the Fuze platform. But I would certainly like to see us accelerate that if we can. And it’s one of the reasons our guidance ranges are a little bit wider than 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.

Great. Thanks.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of William Power from Baird.

Okay, great. Thanks. You all referenced the CPaaS strength in the quarter. It sounds like that was 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, 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?

Alright. On the Platform-as-a-Service business and usage in general, strong quarter, above expectations, obviously, 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. 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. We are doing a number of things in our CPaaS 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 CPaaS business, I’m just really impressed with. 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, 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 descope and security. I was so blown away by the positive feedback on a roadshow we did. That being said, look, we’ve got Chinese New Year. We’ve got various events. There’s always the trials and tribulations coming up in the beginning of the calendar year around changing the pricing the carriers do to us, those kinds of things. So I would say, like the overall business, we’re very cautiously optimistic on where the CPaaS business could go. There was nothing one-time in the quarter, but I don’t want you to like start drawing a linear line. It was a stronger-than-expected quarter, and we take that business month by month.

So it sounds like there’s some conservatism on that piece that perhaps is driving the slightly weaker sequential service revenue guide?

Definitely, we are trying to be conservative in our guide. Yes, with CPaaS, 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, and there is always a little bit of cautiousness when we pick up a little bit of a tailwind, I think you said how much it was.

Yes, $1.5 million. And so that could potentially flip to some degree. So, we don’t know where that’s going exactly. We don’t forecast FX rates.

And when we do forecast FX, we are really bad at it. So, that’s a little bit will of the other side of the equation we want to just be cautious of.

Okay. And maybe just a quick second one, any kind of updated view on what you are seeing, just from a broader macro customer willingness to spend, sales cycle perspective, kind of, etcetera versus maybe a quarter or two quarters ago.

Yes. Look, what I see is it’s a number of companies fiscal fourth quarter, not our fiscal fourth quarter, but a number of other companies, it’s the fiscal fourth quarter. And I don’t know if they take the irrational pill this quarter on purpose or it’s by accident, but there is a little bit more strange behavior by some of the competitors. I think it’s very fixated on this quarter, and it usually reverses out next quarter. So, I am seeing that, but I think offsetting that is also the fact that we have talked about in the past, is our pipeline is up, that’s our deal pipeline is up. Obviously you can see from RPO, which I think is a record high, etcetera, that we are having some success. So, I think offsetting that is the fact that our product portfolio and our innovation strategy is showing products market fit, right. We are clearly seeing situations where customers are very appreciative in the products and capabilities we are offering. And so I don’t know how much of this desperation is driven by the lack of investment by some of our competitors, etcetera, or it’s 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 my RPO is growing, I know that my leading indicators are pointed the right direction.

Okay. That’s helpful. Thank you all.

Thanks Will.

Thank you. One moment for our next question. Our next question comes from the line of Michael Funk from Bank of America.

Hey guys. Thank you for the questions tonight. So, thanks again for percentage of revenue, service revenue coming from views, I think you said 12% last year and 7% this quarter. So, by math is right, that decline, I guess about $9 million, $9.1 million year-over-year. How much of that migrated to the core 8x8 platform, so core 8x8 grew year-over-year, but how much of it migration from Fuze?

Michael, hi. it’s Kevin, yes. We – let me go get the…

Why, is it looking that up, so the one thing I will tell you is, even without that core 8x8 still grew. So, I like is the number, but if he can find it, one of his 3,000 spreadsheets. But look, we did look at that ahead of time, just to make sure the growth wasn’t all just, left pocket to right pocket. Core, 8x8 grew quarter-over-quarter, and year-on-year without any contribution from the Fuze migration last quarter, upgrade last quarter.

Yes. So, it’s about$5.5 half million or so in Q2 ‘25 was where the Fuze upgrades that moved over.

Okay. Alright. That’s very helpful in framing the future growth potential, so thank you for that. And then, Sam, you mentioned fiscal fourth quarter, some companies with their strange behavior. Can you define strange behavior, or expand on that comment exactly what you might buy that?

I just wonder what they are thinking with some of the bad shit crazy pricing they put in the marketplace. So, I mean I just I don’t understand always what they are 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. In the end, I will be honest with you, we usually win the deals because I think it’s counterproductive, because the customers ask, if you have to price that low, obviously your product isn’t that good, and you are not investing in the future and those kinds of things. But it just slows down deal cycles. And so that’s what I meant by strange behavior.

Yes. Thank you. One really quick one if I could, have you seen a change in the rate of change in seat count in the last 12 months, either a slowing in decline or reversal in decline in C count, and I appreciate you are selling more products from the customers now as well, but just that old legacy C count, is there any change in the rate of change?

Okay. So, what I am going to tell you is that, yes, but I am going to be very – just give me a second to get the full answer out, because I am going to be very cautious in this answer. We are seeing accelerating UC and CC seat sales. But I think that’s us. I am 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 2 years has substantially changed. 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.

Great. Sam, Kevin, thank you so much.

Thanks Michael.

Thank you. One moment for our next question. Our next question comes from the line of Peter Levine from Evercore.

Thanks for taking my question. Sam, as a follow-up to the AI, obviously, the stats you gave, up 50% quarter-over-quarter, 200% year-over-year, and you kind of said business outcomes is kind of what you are solving for. Can you help us remind us how you are monetizing the usage? Meaning is there like a value exchange or a value capture you can monetize? 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 Fuze 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.

Okay. That is a multifaceted question, and I am sort of shaking because I am going to try to give you a reasonable answer, but it’s a multifaceted question, okay. So, on AI, we monetize it multiple ways. So, for our CPaaS partnerships that involve AI, we have the sell-with model and the sell-through model. So, on the sell-with model, we will introduce the prospect to the company, the product or whatever the case may be that we are jointly selling, and we may get a revenue cut or a usage cut based on that in the future. On the sell-through model, we are actually putting it on our paper. And so that’s pretty common with intelligent customer assistant or some of those things where we buy at a lower price and then correspondingly sell at a higher price. You were also asking about usage in general. So, what we find generally when we land with these models, these AI-based models is, we sell the customer one use case. So and we purposely try to minimize this and make it fairly straightforward. But when we do that, we are selling them a platform. The reason we do that is we really want to get a hard ROI relatively quickly, fast time to value. If we get fast time to value, the customer likes it. 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 out – what if becomes the next scenario, what if we deploy this use case, what if we deploy that use case, what if we deploy this use case. And then that’s where we see the usage really ramp. Almost all of our customers that we landed over the last four quarters or five quarters have all grown their usage significantly quarter-on-quarter, kind of that concept of same-store sales. Same-store sales significantly quarter-on-quarter as they expand out the number of use cases because we have given them the platform, we have given them professional services to continue to drive. And so, it’s almost like these turn into a simple use case, the slightly more complex use case, the fully more complex use case, etcetera. And each part along the way, we are monetizing. And as that gets – as the product gets more and more used, we obviously achieve better and better revenues, hence, the greater than 60% 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.

If I take the color, and then maybe just one piggyback off of the Fuze dynamics you kind of talked about 7% in the quarter, call it, $12 million. If you were to annualize that number, is there a line of sight in terms of what percentage of that do you expect to capture or transition to the 8x8 platform, if you are willing.

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 are expecting that some of it won’t transition for a host of reasons, but we would like to transition the maximum amount that we can, and we are putting a lot of resources forth to make that happen.

By the end of calendar ‘25.

Any incentives that you are – anything that you are putting in front of your sales folks or offers that…

Yes and yes. Offers to the customer, like for example, we are talking about if you transition, we will give you, for example, Intelligent Customer Assistant for a month or two months 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 are some incentives to the sales guys to go make the deal happen.

Thank you for the color.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Ryan Koontz from Needham & Co.

Thanks for the question. Nice to see the RPO pick up here. Sam, how is your visibility of that going forward given the indications, down sequential subscription revenue guide? 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 some of your particular customer segments here in the near-term?

Ryan, it’s a completely legitimate question. It’s – the side of my voice is a bit of a tough question to answer. And let me say why, when we get into more of these usage-based businesses, there is not necessarily always contracted revenue. And even if there is contracted revenues, frequently, it’s significantly less than the amount of actual usage on the platform. And so I think what we are seeing is we are seeing an increase in RPO. We are seeing an increase in underlying business momentum. It makes me very cautiously optimistic about the future, 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 interactions per month, and there is a number significantly smaller that’s contracted. 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. In general, we are seeing more and more, 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.

Got it. And just a quick follow-up, please. On the CPaaS 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 up charges for A2P, cloud to person?

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 are seeing here, they don’t necessarily need to be that obsessed about pushing through higher prices because I feel like they have already done it to us. They actually – this year, 2024, we saw some of the most mild price increases we have seen in 5 years, because they had pushed up prices so much. And so I don’t think we need it, I mean the U.S. market is a bit of a Goldberg machine right now because of the whole registration thing, etcetera. I would say we are pretty bullish on RCS coming in the future. So, we have got some product innovation going around RCS. You should expect to hear about that shortly and those kinds of things. But I am not sure we are going to see much more from the carriers pushing forward.

Perfect. That’s all I have got. Thank you.

Thanks Ryan.

Thank you. At this time, I would now like to turn the conference back over to Samuel Wilson, CEO, for closing remarks.

Alright. 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 getting hold, and we look forward to updating you again next quarter. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.