Good afternoon. Thank you for attending today's 8x8 Fiscal First Quarter Conference Call. My name is Amber, and I will be your moderator for today's call. I now have the pleasure of handing the conference over to Kate Patterson, Head of Investor Relations. Kate, please proceed.

Thank you, operator, and good afternoon, everyone. Today's agenda will include a review of our first quarter results with Dave Sipes, Chief Executive Officer; Sam Wilson, our Chief Financial Officer; and Hunter Middleton, our Chief Product Officer, who will give you an overview of our product strategy. 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 our increased focus on profitability and cash flow as well as our business, product and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our risk factors in our report filed with the 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. 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 accepting accounting principles or GAAP. A reconciliation of these non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release and earnings presentation slides, which are available on 8x8 Investor Relations website at investors.8x8.com. With that, I'll turn the call over to our CEO, Dave Sipes.

Thank you, Kate. Good afternoon, everyone, and thank you for joining us today. On the call today, I will review our first quarter results and give an update on the integration of Fuze, which continues to go well. I will also discuss our plans for fiscal year 2023 as we place greater emphasis on profitability and cash flow generation in the near term. We believe that this is the right strategy to deliver value to all our stakeholders, customers, employees and shareholders. We delivered another solid quarter with ARR growth, non-GAAP profitability and positive operating cash flow in the first quarter. Fuze continues to outperform our expectations with strong customer retention. We continue to advance our strategy of empowering every employee company-wide through integrated contact center and unified communication capabilities, and we are strengthening the foundation for sustainable growth in the future. The quality of our ARR continues to improve with the shift to enterprise and XCaaS. Enterprise ARR grew 54% year-over-year and now accounts for 59% of total ARR. XCaaS ARR continues to grow at over 40% year-over-year and contributed more than 35% of total ARR. The sequential growth in excess ARR was very strong, and we see an opportunity to grow this materially over the next several years. Our CPaaS business declined sequentially and year-over-year and was an $8 million headwind to total and enterprise ARR growth. Our continued focus on operational efficiency resulted in higher gross profit with first quarter non-GAAP service revenue gross margins at another multiyear high of 73%. The improvement in gross margin resulted in sequential and year-over-year increases in non-GAAP profitability and operating cash flow. As a result, both non-GAAP operating income and operating cash flow were ahead of our expectations. As we look to the remainder of fiscal 2023 and beyond, we…

Thanks, Dave, and hello to the investment community. I'm joining today to give an update on our R&D investments and product strategy. As you already know, our R&D efforts saw an infusion of resources with the recent Fuze acquisition. Q1 FY '23 was our first full quarter since the acquisition. And while early, we have been pleased with the R&D results so far. Overall output of the combined R&D team is already up 25% compared with Q4 of last fiscal year and the investment in sustaining engineering for the Fuze platform and an upgrade automation to get customers to the combined XCaaS platform are looking right on target. The integration of the development teams is fully complete. We have one 8x8 road map and a single platform that we're investing in. I'm personally very impressed by the quality of the Fuze technical teams, and I'm extremely proud of how everyone has come together. With this increase in innovation capacity, 8x8 has the ability to accelerate our delivery of differentiated services. A wide range of market segments find value in our services, with the core target as a mid-sized enterprise organization using MS Teams for internal collaboration and with a high-value customer base that demands engagement throughout the organization, not just in the contact center. Let me cover each of those points in turn to share how we differentiate. With the move to cloud, midsized enterprise organizations don't want to worry about maintaining their own in-house telephony expertise. Now more than ever, they are looking for a vendor that is a longtime cloud telephony and carrier expert, not a recent entrant. 8x8's best-in-class global cloud voice solution with the Five9's reliable, full-featured enterprise-ready voice and SMS service and the largest global footprint of any cloud vendor continues to be the premium…

Thanks, Hunter, and good afternoon. We remained a financial agile and disciplined organization and delivered solid results for the quarter. We continue to experience some challenges in our CPaaS business during the first quarter, and foreign currency headwinds were strong, both of which impacted service revenue performance and will make us adjust fiscal '23 guidance. In spite of these challenges, revenue was near the high end of our guidance range, and we continue to post broad improvements in gross margin, delivered solid operating income and another quarter of positive cash from operations. Total revenue for the quarter was $187.6 million, an increase of 26% year-over-year and inside of our $185 million to $188 million guidance range. We generated $179.2 million in service revenue, an increase of 30% year-over-year and in line with our $177 million to $180 million guidance range. The CPaaS business did not bounce back as hoped with a year-over-year and sequential decline for the second quarter in a row. The strengthening dollar, especially versus the pound sterling negatively impacted revenue by about $1.5 million. Fuze accounted for $29.3 million of service revenue and $29.5 million of total revenue. Service revenue from Fuze was better than expected, driven by higher retention. On the whole, Fuze did better than expected in both revenue and costs, and therefore, was accretive to non-GAAP operating income. We committed to remaining non-GAAP profitable post acquisition and so far, so good. We expect further cost savings opportunities as we continue to integrate Fuze operations with our own, but these will take time to achieve as we communicated at the time of the acquisition. Total ARR was $688 million at quarter's end, up 28% year-over-year. As we stated in our prior earnings calls, we will not be breaking out Fuze from 8x8 separately for ARR…

. Our first question comes from Siti Panigrahi with Mizuho.

Just wanted to ask about your plan to reduce your guidance for this fiscal year. You didn't talk about the demand environment or any kind of macro slowdown. Wondering what are you seeing in the market right now? I appreciate. Also, what's triggered this lowering sales and marketing spend after Q1?

Yes. On the demand side, our enterprise customers were not seeing any material impact. We have seen some impact on small business and our CPaaS customers. We do have in a few cases customers performing additional due diligence and a slight decline in average contract length may reflect some caution, but it's not a clear sign. But overall, not a major signals coming from our enterprise business.

All right. And I'll take the second part of that. We're moderating our sales and marketing spending growth. And I think that's just driven by the fact that we are continuing to focus on sales efficiency and ROIC, and we just want to be careful that we continue to drive up the ROIC, and we're also setting the stage for debt refinancing later in the year. So I think just all those things combined, just make it so we moderate our sales and marketing growth a little bit this year.

Okay. And then a quick follow-up to Microsoft Teams. Where do you see the competition at this point? Where do the Microsoft Teams telephony offering what it is? And what's Microsoft strategy? How do you planning to compete in the next few years with their offering, especially pricing is so competitive?

Yes. On Microsoft Teams, there is a platform approach to enable telephony into Microsoft Teams, both through direct connect and operator connect in addition to calling plans. So we really see direct connect, operator connect as the big opportunities. We're a top player in direct connect, and we're -- we've added over a couple of hundred thousand users there. We see that as a big opportunity to get -- make that even significantly larger. That's why we launched the Elevate program focused on Microsoft Partners and our XT SKU that will fit nicely into the Teams' offering. And so I'd like to see us 10x those users over the next couple of years.

Our next question comes from Ryan MacWilliams with Barclays.

Just a followup on the Microsoft Teams side. Another 50,000 seats added to 8x8 Voice for Teams. Are you seeing good success here in upselling cloud contact center into the Microsoft opportunities?

Yes. We're seeing good success with XCaaS, which is both contact center and UC and that's a specialty of our platform. The XT SKU does fit into our X Series as well as our X1 and X2 and X3 SKUs. So those are all UC SKUs. We sell X6, X7, x8, our contact center SKUs, and those do sell nicely. We did see XCaaS ARR continue to grow at over 40% year-over-year and it's 35% of our installed base. So it's accreting share within our business, and the goal is to push that up into a majority of our business.

Excellent. And then, Sam, just on the guide, I guess, how do you think about like where conservatism is here? Like is it in the next quarter or more towards the end of this year from the top line perspective? Just because if I add like for each quarter, that kind of gets you to the midpoint of your guide, but then you would exit the year kind of mid-single digits revenue growth. So is it more near term or towards the end of this year? And then if you could just double click on what are your thoughts around maybe some of that CPaaS traffic coming back, what the outlook looks like there. We appreciate that.

All right. So in terms of conservatism or just visibility, I guess I'll just use a more generic term, I mean, like all companies, we have more visibility in the quarter we're in. And then progressively, over time, the visibility gets less and we naturally get more conservative. We bottoms up forecast, and so that's what drives that. We did further de-risk the CPaaS model because it was down quarter-on-quarter. So incrementally, that business got a little worse. And as everyone knows, we sort of take the exit run rate of that business and run it flat in perpetuity and then that's kind of how we think about it for those customers, then we layer in new customers on top of that. And so I would say, definitely more conservative. And I think I did say in my script that exit the year kind of mid- to- high single-digit growth once we lap the Fuze numbers. And then just in general, your question on CPaaS, I would say, incrementally, the environment has gotten a little harder. I don't know exactly if it's macroeconomic or just specific customer things, et cetera. It's always hard for us to tell in a usage-based business. We're not seeing substantially more customers go to 0. So I don't think the traffic is moving. We're just seeing less total aggregate traffic.

Our next question comes from Meta Marshall with Morgan Stanley.

A couple of questions. Sam, when you kind of mentioned the mid- to- high single-digit services growth rate exiting fiscal '23, how do you think that, that compares to the overall market growth? Do you think you'll be kind of sustaining share at those growth rates? And then on the second question, just as you kind of get focus on operational efficiency and get a little bit more conservative on your spend on sales and marketing. What opportunities do you think you're foregoing? And does that -- basically just trying to see, does that impact the enterprise or SMB business more?

All right. I think I'll take both of these, and let Dave chime in. So on the mid- to- high -- and remember, we're in a bit of a transition here, right? So we've talked about this in the past. So our small business is coming down. That's a headwind. While our enterprise is growing relatively quickly and the quality we believe over our ARR pool is improving. And so we would expect that we'd be -- exit the year with a higher growth rate in enterprise and then offset by a slow growth rate, take it for whatever that means in the small business side. Relative to the market, look, the last industry numbers I saw is the market overall -- is on the UC side is growing at around 10% plus/minus. So I think plus/minus, we're in that ballpark. I think we're growing faster, we're gaining share on the enterprise side, particularly relative to the on-prem vendors. And on the small business side, where it's less strategic, and it's got a host of other issues, we may be just treading water in that general area. In terms of improving efficiency and foregoing some things, I think, look, that's a great question, Matt. It's a constant conversation we're having. I think sometimes you have to forgo some opportunities to invest in new opportunities. What you see very clearly and one of the prime reasons we wanted Hunter on the call this time was the place we are really pushing the envelope is innovation. So if you think about it, we've now increased our R&D spending to 14% to 15%, which is what we talked about in our intermediate and long-term model we wanted to be at. So where we are pushing is on the innovation side to fund that and meet our corporate financial objectives. We're pulling back a little on sales and marketing. Once we get through that R&D cycle, we'll look to reinvest in sales and marketing. But right now, I think the place to invest is definitely in innovation, and you see that coming through on the financial model.

Our next question comes from Matt VanVliet with BTIG.

I guess can you give us an update on where we're at with Fuze integration in terms of not just migrating customers to the overall XCaaS platform, but also what you're seeing in terms of attach rates and upsell on the contact center as I know you highlighted that as a big opportunity when you closed the deal?

All right. So Matt VanVliet at BTIG, I'll take that part of the equation. All right. So look, I would say in terms of the back-office operations, we're effectively integrated now with Fuze. You can't really tell the difference. And I would love R&D, I'll say, is a separate case. And if Hunter, you want to throw a few words and please do. But in terms of Fuze and R&D, we're fully integrated now. You can't tell the Fuze Teams from the non-Fuze Teams? And I don't know if you want to add anything?

No, I think that's exactly right, Sam. We've fully integrated the development to Teams. We're working on a single road map. The innovation is focused on a single platform going forward. So that integration has gone really smoothly. We're really excited about the team that has come on board and everybody is working great together.

All right. Specifically on migration and cross-sell, we've always sort of hinted that this is a fiscal '24 type of initiative. And so we still think that, I mean, remember, the average, we've only had this company 6 months. The average sales cycle is a year generally for that type of stuff. And so we're focusing on that. And also it takes time to get the automation of those other things. And we're not pushing Fuze customers to migrate. We'll get there over time. But right now, we want them to get comfortable with us. We want them to be comfortable through the transaction. And if you notice, just point blank, the Fuze revenue numbers have actually been substantially better than we even hoped for. And I think our strategy is really showing through in the numbers of really trying to baby these customers, keep them engaged, keep in front of them and not push them too aggressively. We'll get there and get them migrated over really starting next year as we make it super easy for them, et cetera. The cross-selling activities are occurring. We're having things like webinars, marketing campaigns, a lot of interest from the Fuze base, that's just going through now our normal sales cycle.

All right. Very helpful. And then as you ramp up the channel to help further sell into the Teams in the broader Microsoft ecosystem, how should we think about the contribution rate or the profitability of the Elevate program relative to your more traditional partnerships and channel partnerships selling XCaaS. Is there any meaningful difference there? Can the volumes of a Teams' organization often offset a little bit lower pricing?

Yes. I think economically, the volumes are significant in that market, and the Elevate program is focused on people that have traditionally been Microsoft resellers and not necessarily cloud telephony resellers. So it's bringing an incremental group into the fold. And as far as how we go to market, you're right, it's higher volumes in that category with Teams' add-ons, and we make it up through additional contact center sells into that installed base and our XCaaS selling. So overall, when you look at the revenue per account, it's very -- it's large, larger than average and creates that opportunity for the partners as well as our sellers.

Our next question comes from Peter Levine with Evercore.

Also, thanks for the color on the convert. Maybe, Sam, can you kind of talk through what some of the options on the table that you have now and how you're thinking about it? And then just to confirm, you'll probably convert -- the convert before it becomes a current liability. What is that kind of -- is that how we should think about it?

Well, I did say this year, so you could take it as calendar fiscal, which everyone suits my needs in the moment. But this year, we'll get it taken care of and it would become a current liability with -- at the end of this fiscal year. And yes, that would be our objective to do that. In terms of options, we've got term loan capabilities. We've got exchange capabilities. We've got equity capabilities. I mean, it's pretty amazing at how much -- how many different options there are. I mean, 20 years ago, when I first -- was first on the street, for a company like us, it would be equity and equity only. And now literally, there is a broad range of options from traditional banks, alternative lenders. Sovereign funds have approached us. We've talked to literally a host of different opportunities. Each with certain pluses and minuses, and we're trying to weight through all those options and come together with a complete package that's literally best for all of our stakeholders.

And then just a final one here is how much of the guide down is related to CPaaS, if you can break it out like CPaaS versus FX versus kind of like the macro environment. And then to that is, how much of an FX headwind do you think there is for the remainder of the year?

I mean so if you take a look at the $20 million to $25 million kind of service side and $25 million to $30 million, I would say, number one is maybe 1/3 FX, 1/3 CPaaS and 1/3 UC/CC or applications kind of when you mix it all together, and look, for -- be it for me to use the word macro, we're a small fish in a big pond. So I'm never sure I'm like willing to buy all those kinds of things. But I would say that's really the way to think about it. And then the only thing I would add is on the UC/CC side, look, we're trying to be really conservative with the small business piece. That's where we expected. We continue to expect the enterprise side will grow. That's where our money is going. That's where our strategic initiatives are going, et cetera. It's really -- we're trying to be more cautious, given the environment. And so maybe that's where you would say macro is on the small business side, just -- it's gotten incrementally tougher on that side of the house.

Our next question comes from James Breen with William Blair.

Can you talk a little bit about the channel and any changes you may have seen there, whether it's a slowdown in potential bids, et cetera. And maybe some of the pricing dynamics?

Yes. We brought in new leadership on the channel back at the beginning of the year, Lisa Del Real, and that team is performing very well. We've also gone into the channel with improved -- how we deal with escalations, customer support elements and have improved our reputation in the channel and continue to do that. And as you know, the channel has been growing quite nicely, I think, growing at 70% year-over-year. So we're having success in that market. And I'd love the specialized programs that we're doing now with Elevate and some other programs that we're doing in the market. That lease is bringing to bear. So overall, I think we're improving our traction and you're seeing it in the numbers. But I think there's a lot more opportunity there for us.

Our next question comes from Tim Horan with Oppenheimer.

On Elevate, can you just describe what your competitors are doing there? Maybe how far ahead of the competition you are at this point? And I would think the relatively new channel partnership would really probably prefer to use you guys at this point than maybe even Microsoft themselves or others. Just a little bit more color around that would be great.

Yes. I think the channel itself doesn't really make much money selling Microsoft. And so the opportunity for them is really getting into the higher-level services, such as cloud telephony and contact center. And the things we're doing to make our product fit well, stuff that Hunter's team is doing with our XT SKU create a nice alignment. And now going after these incremental sellers that have traditionally not been able to sell those high -- are not focused on those higher-value services like cloud telephony and contact center, bringing those into the fold and teaching them how to sell that category and get that incremental economics is a huge win for the channel.

And maybe just can you talk a little bit of how much free cash flow you think you can generate next year if all goes well? Any color around that?

Next year, you mean fiscal '24, don't you?

I do.

I'd like to see us be generating between $30 million and $40 million, but that's an off-the-cuff guess, it's not guidance, put some other SEC words around it. But that's an off-the-cuff guess on plus/minus. And if give me couple of hours, I'll probably get you a more refined number.

Our next question comes from Will Power with Baird.

This is Charlie Erlikh on for Will. I had a question on gross margin, Sam. They're coming in strong and just wanted to ask what the expectations are for next quarter and the remainder of the year?

Next quarter, I would think flat to down. Slightly down, Kate's yelling at me. Not a big down, just flat to slightly down quarter-on-quarter. We just have some moving pieces in there. And then on -- for the year, look, we have a lot of programs underway, and we'd like to continue to see gross margins trend up. Look, the rate of increase will slow down. The wildcard being the CPaaS business, obviously, with the CPaaS business being a little weaker that improves gross margins. If the CPaaS business bounces back, you'll see some gross margin dilution from that. But over multiple quarters, still want to see it trending higher.

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

You mentioned shortening of contract duration, I just wondered if you could go into a little more detail on where you're seeing that shortening?

That's a great question, George. I didn't look at it in that detail. I looked at the over RPO pool. And so the RPO pool, we saw like a month, 1.5 month decline quarter-on-quarter in just to the overall pool duration. I didn't break it -- I could guess that I'll tell you, we'll probably see it more on the small business side. That's just generally where we see slightly weaker business trends. The enterprise side still remains relatively solid, strong, whatever word you want to use there.

A quick question for Hunter. You mentioned that output was increased by 25%. I wasn't sure what you were referring to being up 25%. Can you just clarify that?

We -- what we track every quarter is the number of projects that we initiate and complete and our overall project completions were up by 25%. Now I mean, we do -- we have a lot of projects across the R&D team of our size. So we're relying something on law of averages there. But essentially, we're getting a significant higher throughput in terms of projects that we complete.

Our next question comes from Michael Funk with Bank of America.

One for Sam again if I could. Sam, there is always a balance between messaging to equity versus debt holders. So how much of the guidance and then the decisions around sales and marketing and profitability is geared towards the debt market and the expected refi versus your view on near-term market opportunity?

Look, I don't view them radically differently. I mean I would say what we do see is that more and more our equity holders are pushing us to become more profitable. And potentially trim back low ROIC projects given the change in the overall market environment that we're in and a little more certainty in the growth profile of the company. And so I don't think that there is a different message or a different push between the two of them. I mean in the end, a discounted cash flow model works both the same ways. I would say that we want to make sure that if we do -- depending on how we do the equity -- I'm sorry, the debt refinancing, we want to make sure that we maintain cash flow profitability post any refinancing. So there is some -- making sure that we're prepared for that also.

I understand it. And then one more, if I could, in sales and marketing efficiency comment, just to clarify, a number of different ways to think about that dollar per sales and marketing, obviously, return and profitability of those sales and marketing dollars. So are we talking more about return on profitability. So shifting away from product in the group becoming less profitable, lower return, more towards innovation? Or is it just simply revenue dollars per sales and marketing or sales per salesperson?

Okay. So I would say it's a great question and definitely what I'd love to talk to you about at length, and I'll try to give you a shorter answer, knowing that there is a deep, long answer that sits behind this. We look at it both ways. We certainly look at the core change in ARR or change in service revenue divided by sales and marketing spending, those types of metrics. We also look at change in bookings and those kinds of things relative to sales and marketing. But also, if you take a step back, there's a bigger picture here. Right now, we see more and more enterprises wanting to make the move to cloud. We see it benefiting our numbers. We see that industry trends that logjam starting to break through. And to meet those enterprise customers, we -- it makes sense to spend more on R&D and continue to innovate our product to meet that market need. And so when you get those enterprise customers, obviously, they have lower business mortality risk, better LTV-to-CAC ratios and all those kinds of things also. So the more we can innovate, the more we can create product differentiation. The more we can land enterprise customers, the better our sales efficiency numbers will be naturally. And then on top of that, we are always continuing to focus on making sure that we put incremental sales and marketing spending in the areas of higher efficiency.

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

Wonder if you could give some more color on the CPaaS decline. Is this driven by cost and your respective price increases with your customer set driving lower volumes? Or are these like lost deals to like alternate communication channels? And then secondly, for transparency, any way you can give us the organic ARR growth without Fuze?

I'll take the second part. Dave, you want to take the first part?

We talked about there were some large accounts that reduce their marketing programs that were going over our API -- communication APIs. And those customers have not come back. What we're working on is getting better ROIC for them in those marketing campaigns through lower costs. Additionally, we continue to add customers, but we see overall usage down a bit. It's a usage-based business, so we don't have the level of predictability that we do in our standard UC/CC business. And I believe on the ARR...

I'll take that one. So we don't break out ARR by Fuze and 8x8. We give you the revenue numbers, which you can extrapolate how you see fit. The big reason we don't is because we now have customers migrating and so you get into this conversation of should you count them on the 8x8 side or the Fuze side or whatever the case may be. And so we're just trying to give you the revenue numbers because that's clean, easy to go through and we don't have to add anything. I would say when we think about segments, the big thing for us is that our enterprise ARR continues to grow very healthy, as we mentioned, XCaaS, which you can sort of take as a euphemism for enterprise which we think is over 40% year-on-year. Enterprise probably growing over 30% year-on-year, those types of numbers. So there is where the stronger parts of the ARR is.

Thank you. That concludes the Q&A session as well as today's 8x8 Fiscal First Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.

Thank you, Amber.