Yahoo Finance 8×8, Inc. (NYSE:EGHT) Q4 2024 Earnings Call Transcript
8x8, Inc. (NYSE:EGHT) Q4 2024 Earnings Call Transcript May 8, 2024
8x8, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day. And welcome to the Q4 2024 8x8, Inc. Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call may be recorded. I would like to turn the call over to Kate Patterson. Please go ahead.
Kate Patterson: Good afternoon, everyone. Today's agenda will include a review of our fourth quarter and fiscal 2024 results 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 our investments in innovation and our focus on profitability and cash flow as well as statements regarding 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 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 US Generally Accepted Accounting Principles or GAAP. A reconciliation of those non-GAAP measures to the closest comparable GAAP measure is provided in our earnings press release and in our 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, Sam Wilson.
Samuel Wilson: Good afternoon, everyone. I appreciate you joining us today as we discuss our fourth quarter and our fiscal 2024 results and the strategic initiatives that have defined a year of transformation for 8x8. I'm pleased to report solid fourth quarter in which we delivered results within our guidance range for service and total revenue and once again exceeded our guidance for operating margin. Cash flow from operations for the quarter was also better than anticipated, which resulted in cash flow for the year up 62% from fiscal 2023. This significantly exceeded our expectations for the year. We ended the quarter with about $118 million in cash, restricted cash and investments after repaying the remaining $63 million of 2024 notes.
Since Kevin will review the quarter's financial results in detail, I will focus my comments on the progress we've made on our transformation journey. This year has been nothing short of incredible from both a professional and personal perspective. We've strengthened our leadership team, expanded our product portfolio, and continue to build on our strong financial foundation. A year ago, I outlined a strategic framework with six key imperatives aligned with the three pillars of our transformation strategy – innovation, financial strength, and go-to-market. I'm pleased to report that we are executing well against each of these strategic imperatives. They include, one, accelerating innovation in contact center as a service, CCaaS, while maintaining our leadership in cloud telephony.
This includes embedding artificial intelligence across our integrated platform. Two, establishing communications platform as a service, CPaaS, leadership in the Asia Pacific region. Three, increasing our focus on small and mid-side enterprises as our target customer segment. Four, improving platform win rates and sales productivity. Five, maintaining an outstanding experience for our customers, allowing them to focus on their own core businesses. And lastly, six, increasing profitability and cash flow to drive a fortress balance sheet and fund further innovation. Although our journey has not always been perfectly linear, we are undoubtedly stronger and better positioned financially as we exit fiscal 2024 compared to the end of fiscal 2023. This year has been pivotal in terms of innovation.
We've introduced several new products that not only differentiated our offerings, but also positioned us for future growth. These new products as well as platform enhancements like the customer interaction data platform, composable user interfaces, and the integrated solutions from our technology partner ecosystem are intentionally engineered to deliver superior business outcomes without the heavy integration burden typically required to build an AI-enabled contact center. The introduction of our Engage solution extends our customer experience capabilities beyond the traditional boundaries of the contact center and is one of just many examples of how we're leading innovation in an industry leveraging our history as a combined UC, CC, CPaaS company.
We believe this product dramatically increases our cross-sell opportunities to existing customers and provides an accessible entry point for new customers looking to improve their customer experience across the organization. Shortly after the end of the quarter, we introduced 8x8 Operator Connect for Microsoft Teams, expanding our portfolio of enterprise voice solutions and further strengthening our leadership position in Microsoft Teams environments. With this introduction, 8x8 now offers the industry's broadest portfolio of enterprise voice solutions for Microsoft Teams and is the only operator connect provider with a native contact center solution certified to integrate with Teams. The initial market response has been very positive, generating numerous new opportunities within days of the announcement.
We believe this solution could be the key to unlocking millions of UC seats not yet migrated to the cloud. As we all know, there are hundreds of millions of on-prem telephony seats, and the industry craves low-cost solutions to unlock this base. I want to highlight the progress we're making in broadening our CPaaS product offerings. and expanding this part of our business globally. With the renewed focus on CPaaS, we are finding new ways to embed CPaaS capabilities into our integrated UC and CC solutions to provide complete solutions that deliver specific business outcomes for our customers. First was the Video Elevation 2.0. Most recently, we launched Proactive Outreach, enabling highly personalized messaging campaigns at scale for both contact center and unified communications customers.
These capabilities were important differentiators in the wins at Upward Health in the US, Induction Healthcare in the UK, and PalawanPay in the Philippines. In addition to these product launches, we continue to innovate across our platform with solutions like our AI-powered intelligent customer assistant, available as either digital or voice box. Usage of ICA in self-service options continues to increase sequentially and we are achieving resolution rates as high as 80%. This is a compelling testament to the advanced AI capabilities of 8x8 and our technology partner ecosystem. Further, 100% of our digital intelligent customer assistant customers are referenceable, demonstrating our focus on delivering superior business outcomes with rapid time to value.
Our omni-channel engagement solutions and the introduction of new digital channels and automation were key factors in our win at Southern Housing in the UK. We strive to make our customers heroes in their organizations, and this is driving wins like Sky Chefs, a well-known catering and hospitality expert serving airline customers where our agility and speed to deployment won the day. Customer acceptance of our new solutions is the most important indicator of success. I'm pleased to report that sales of new products were up by more than 50% year-over-year for the second consecutive quarter. Given the timing of launches throughout the year and the enterprise sales cycles, I view this as a positive leading indicator of our future success. From a financial perspective, this year has been about strengthening our foundation and positioning ourselves for sustainable growth in the future.
We've seen a substantial reduction in our non-GAAP cost structure, with cost reductions totaling more than $47 million from fiscal 2023. This disciplined fiscal management enabled us to invest strategically in innovation while increasing our non-GAAP operating margins to double digits. With our cost structure aligned, with our current revenue runway and cash generation objectives, we intend to increase focus on revving our go-to-market engine to drive awareness and sales for our expanded product portfolio. Turning to our go-to-markets efforts, we've made considerable progress. Our sales, marketing, and customer success teams are more aligned than ever, focusing on the cross-functional initiatives that drive value across our customer base. This alignment has improved the quality of our pipeline and resulted in increased close rates, more multi-product lands, and higher customer satisfaction scores.
These are the early indicators that our efforts to build a high-performance go-to-market organization are working. Given the nature of enterprise sales cycles and our ratable revenue growth, there's a lag before our progress is evident in our revenue growth. But I am confident that the changes we've made will drive improved performance and accelerating growth by the end of the current fiscal year. As we look to the future, our strategy is clear. We will continue to drive innovation, intentionally engineered solutions that deliver superior business outcomes for our customers. I encourage you to watch a short video case study of the San Diego Zoo's implementation of our integrated solution as an example of our solution approach and rapid time to value.
Working in partnership with the internal team at the zoo, we implemented a full service contact center with an AI-based self-service option for inbound calls in less than 45 days. We have intentionally engineered our products and solutions for this level of agility and rapid time to value. We can leverage this advantage to develop our own purpose-built solutions as well. For example, 2024 is a big year for elections in both the US and UK. Using the power of conversational AI and automation, our UK team built a library of out-of-the-box templates to support local government and improve citizen access to important information for upcoming elections. To drive awareness and adoptions of our innovations, we are committed to continued improvement in our go-to-market activities.
We intend to remain within our current cost envelope as we make the necessary investments to elevate our partner programs, increase awareness for our solutions, and improve our processes. We are taking a balanced approach to growth and profitability and with cash from operations as our financial North Star. We intend to continue returning value to our investors through reducing debt. We have repaid $88.3 million of principal in fiscal 2024, 35% of our commitment to return $250 million to investors through debt repayments over three years. Before I turn the call over to Kevin, I want to thank our employees, partners, and investors who are with us on this journey.
Kevin Kraus : Thanks, Sam. And good afternoon, everyone. We delivered solid financial performance again in fiscal Q4. Both total revenue and service revenue were within our guidance ranges, and other revenue came in ahead of the target implied by our service and total revenue guidance. Non-GAAP operating margin exceeded guidance by 1.3 percentage points, and cash flow was above expectations at $12.7 million for the quarter and $79 million for the year. During the quarter, we also achieved the significant milestone of repaying the remaining $63.3 million principal on the 2024 convertible notes. With this payment, we have retired $88.3 million in debt during fiscal 2024 and $115 million over the past six quarters. The press release and trended financial results we posted on the Investor Relations website provide a comprehensive view of our financial performance.
So I'm going to take a slightly different approach to my comments this quarter. Instead of going line by line through the quarterly results and then turning to guidance, I would like to take a step back and review our results as well as our forward guidance within the context of our strategy shift. Before I go on, let me remind you that I will be using non-GAAP metrics, except for revenue and cash flow, unless otherwise noted. We really began our transformation in late fiscal 2022 with the acquisition of Fuze. The acquisition immediately increased our capacity for innovation, expanded our customer base, and added more than $100 million to our ARR. This acquisition was immediately accretive to our business performance. Although recent customer attrition has created a near-term headwind to growth in recent quarters, it remains a huge win overall.
With our CEO transition in fiscal 2023, we made a conscious decision to swap near-term revenue growth for profitability and cash flow. Cash flow became our financial North Star, and we implemented multiple actions during the year to reduce our cost structure and improve sales productivity while maintaining our investments in innovation. By fiscal Q4 2023, we had reduced quarterly non-GAAP operating expenses, excluding COGS, by nearly $10 million compared to Q1 2023, which was the first full quarter of combined 8x8 and Fuze results. Our quarterly sales and marketing spend was down even more, dropping by $12.3 million from Q1 2023 to Q4 2023. This equates to almost $50 million in annualized cost reductions in sales and marketing. The decrease in operating expenses, together with higher gross margins, had an immediate impact on our cash flow from operations, which increased from $34.7 million in fiscal 2022 to $48.8 million in fiscal 2023 and $78.9 million in fiscal 2024.
This allowed us to prepay $25 million in principal on the term loan and repay the remaining principal on our 2024 notes, while maintaining cash and investments above $100 million. We exit fiscal 2024 with $118 million in cash, restricted cash and investments, an expanded product portfolio tailored to the needs of our target customer, and a committed and experienced leadership team. We are a stronger company today than we were a year ago, and we are a much stronger company than we were at the end of fiscal 2022. Q4 is our 13th consecutive quarter of positive cash flow and non-GAAP operating margin, trends we expect to continue. I believe we have successfully laid the foundation for the future growth that our innovation will drive. Let's look at leading and lagging indicators of our continued progress and how they flow through our financial model.
Let's first look at the leading indicators, RPO and ARR. We knew when we began this transformation that there could be an impact on our growth. And given our predominantly ratable revenue model, it's not surprising that there would be a lag before our progress manifested as an acceleration in revenue growth. In other words, the turn to growth resulting from increases in sales productivity, partner activity, and new products should be evident in RPO and ARR before appearing in revenue. I believe we are near the turn in our business. RPO is up sequentially in Q4 and flat year-over-year. We ended the year with $697 million in ARR, down about 1% sequentially, with about half of the decline related to a seasonal decrease in CPaaS usage as the impact is magnified in ARR due to annualization.
The remaining portion of the decline is related to a decrease in UCCC ARR, primarily due to Fuze customer attrition. We expect our efforts to retain and upgrade Fuze customers will result in increased retention in fiscal 2025. And as a result, I believe that Q4 quarter-over-quarter decline in non-CPaaS ARR is the steepest we will see. However, it may be a quarter or two before the impact of new products and our retooled go-to-market result in quarter-over-quarter ARR growth given enterprise sales cycle. Importantly, our business remains healthy, and XCaaS ARR has increased sequentially every quarter since we began tracking it. The nature of our business is evolving as we launch and grow multiple products that have consumption-based pricing.
Additionally, we are seeing an amplified impact of relatively minor fluctuations in CPaaS revenue on our current ARR metric, which is leading us to reevaluate the metrics we report to investors. We will provide visibility into any new methodology or new metrics on the Q1. Now let's turn to our primary lagging indicator, revenue. With ARR flat to down slightly quarter-over-quarter over the past four quarters, we expect to see a similar pattern in revenue with a lag of two to three quarters. This is reflected in our revenue guidance ranges for Q1 and fiscal 2025, which I will provide in greater detail later on this call. Consistent with our comments at the product and innovation update in March, we expect service revenue for the full year to be approximately flat with fiscal 2024 at the midpoint, or about $700 million, with first half revenue decreasing by low-single-digits year-over-year compared to the first half of fiscal 2024.
We expect to return to year-over-year growth by the fourth quarter. Now let's discuss a few points about our operating model. Our cost structure in Q4 2024 on the dollar basis was very similar to our cost structure at the end of Q4 2023. Total operating expenses were about $2 million lower versus Q4 2023 as we achieved about $2 million in cost efficiencies in G&A, but R&D and sales and marketing were basically flat with a year ago. We believe that our target cost structure with R&D at about 15% of revenue, sales and marketing between 33% and 34% of revenue and G&A between 10% and 11% of revenue continues to be the right level investment to drive innovation and adoption of our expanded portfolio. Consistent with our philosophy that spending follows growth, we are targeting our 2025 spending to be approximately flat from fiscal 2024 on a dollar basis.
We also expect CPaaS to gradually increase as a percentage of total revenue compared to fiscal 2024. We still expect service revenue gross margin to remain in the 74% to 75% range, but it may vary slightly due to mix. We expect gross margin on total revenue to be between 71% and 72% as we add other revenue into the mix. With this operating model context in mind, we establish service revenue, total revenue, and operating margin guidance ranges for the fiscal first quarter ending June 30th, 2024 as follows. We anticipate service revenue to be in the range of $170 million to $174 million. We anticipate total revenue to be in the range of $176 million to $181 million, implying other revenue of $6.5 million at the guidance midpoint. Note that other revenue can vary based upon customer-specific deployment schedules and hardware shipments, so total revenue can vary based on these dynamics.
The combination of modestly lower year-over-year revenue, a higher mix of CPaaS, and flattish sequential operating expenses explains our operating margin guidance of 11% to 12% for Q1 2025. For the fiscal year 2025 ending on March 31, 2025, we provide the following guidance ranges. We anticipate service revenue to be in the range of $693 million to $707 million with year-over-year revenue declines in the first half and exiting the year with single-digit growth rates. We anticipate total revenue to be in the range of $720 million to $738 million. We continue to focus on delivering a solid operating margin and anticipate exiting the year between 12% and 13% and achieving between 11.5% and 13% for the full fiscal year. Our operating margin results will depend on revenue performance and opportunities for investments.
At the midpoint of our revenue guidance range, this translates into non-GAAP operating income of between $89 million and $90 million for the fiscal year. We expect interest expense to be about $8.7 million in each of Q1 and Q2 based upon current interest rates. We expect cash paid for interest to be approximately $6.7 million in Q1 2025 and $10.4 million in Q2 2025 as cash interest on the 2028 convertible debt is due semi-annually. We are currently anticipating that the interest rate on the term loan remains approximately 12%, or SOFR plus 6.6 percentage points. The prepayment penalty on the term loan expires in August, and we expect to begin reducing the principal outstanding immediately thereafter. This will enable us to reduce quarterly interest expense in the second half of the year.
Since our financial position is considerably stronger today than it was in August 2022, we are actively exploring term loan refinancing options which could also bring interest expense down further later this year. Cash flow from operations remains our financial North Star. It funds our continued investments in innovation that will drive our future growth. It also enables us to return value to investors as we pay down debt in the near term and increases our flexibility to pursue additional opportunities to drive value in the long term. We generated $79 million in operating cash flow in fiscal 2024, an increase of 62% over 2023. We remain committed to our goal of a 20% three-year CAGR in cash flow off our 2023 base of $49 million. This implies operating cash flow of about $80 million to $85 million in fiscal 2026 or about $225 million over the course of fiscal years 2024, 2025 and 2026.
We believe we can generate at least that much in operating cash flow over the three-year period, but we now expect fiscal 2025 cash flow from operations to be between $15 million and $20 million less than in fiscal 2024. This is due to a combination of factors, including outperformance in fiscal year 2024 caused by our cash from operations to be higher than we had expected for the year, slightly lower operating income compared to fiscal year 2024, strong year-end collections in fiscal Q4 2024 which helped our fiscal year 2024 cash flow, but resulted in a lower accounts receivable balance to collect as we enter fiscal 2025, and one-time cash payments related to Fuze indirect taxes. In Q4, we booked a $10 million charge related to Fuze indirect tax liabilities, primarily telecom taxes.
We already made a portion of this payment in April, which will impact our Q1 and fiscal 2025 cash flow results. We are as committed as ever to reducing our outstanding debt and are on track to meet our commitment of returning $250 million to investors, primarily through debt repayments over the three-year period from fiscal 2024 to fiscal 2026. With the $25 million prepayment on the term loan in Q1 2024, plus the repayment of the remaining $63.3 million of our 2024 notes on February 1st, we are 35% to completion. The final piece of information to keep in mind is share count. We expect fully diluted shares of about 128.5 million for Q1 and average approximately 133 million shares for the full year. We remain committed to increasing shareholder value by reducing future equity dilution over time.
Putting all this together, we expect that non-GAAP fully diluted earnings per share to be in the range of $0.37 and $0.45 for fiscal 2025. This EPS range is calculated using the operating margin guidance range and the midpoint of revenue guidance as calculation inputs. I realize this is quite a lot of detail. And I think it's important for investors to understand our 2025 guidance within the context of our longer term strategy and overall business model. We summarize these comments in our investor slides. I continue to believe that our focus on profitability and cash flow, while maintaining targeted investments in innovation and improving our go-to market efficiency is the correct strategy for us at this time. I am confident this will enable a return to revenue growth while we also return value to our shareholders initially by reducing our debt.
I would like to thank the entire 8x8 team for working together to deliver this quarter's solid results, and look forward to reporting our progress throughout fiscal 2025. Operator, we are ready for questions.
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