EGHT - NASDAQ

Hello, everyone, and welcome to the Third Quarter 2025 8x8, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. Now, it’s my pleasure to turn the call over to the Vice President of Investor Relations, Kate Patterson. Please proceed.

Thank you. Good afternoon, everyone. Today’s agenda will include a review of our results for the third 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 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 release and the 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, and thank you for joining us on today’s third quarter fiscal 2025 earnings call. It’s my pleasure to share results, progress, and vision for the future. Our third quarter story is one of continued transformation. We delivered solid results and made strides in executing our broader strategic initiatives. We achieved service revenue above the midpoint of our guidance range, even with an FX headwind of more than $2 million from last quarter. Operating margin was also above the midpoint. The quality of the earnings remained high, and we generated record cash flow from operations. We used the excess cash to further reduce our debt by $33 million in the quarter and another $15 million in early January. Our results for the quarter show both resilience and opportunity as we navigate a rapidly evolving landscape. Signs of our progress on our CX transformation journey were evident in various operational metrics as well. New product MRR increased more than 60% year-over-year, reflecting strong growth in AI-based intelligent customer assistance, secure payments, and video elevation, our video-enabled solution for field service organizations. The number of customers with three or more products continued to increase. The average monthly recurring revenue of customers with three or more products is more than 3 times the MRR of two product customers and retention is higher. For these reasons, we’ve made cross-sell a high priority at 8x8. We continue to expand our presence internationally, especially in Asia-Pac region, as we expand our Platform-as-a-Service offerings. The region even booked its largest deal ever with a well-known auto manufacturer. We closed the largest follow-on deal in our history when a major U.S. retailer chose 8x8 for their new contact center and expanded their UCaaS commitment. This customer is in the process of evaluating additional products. Customer satisfaction remains high. This is reflected in our own customer satisfaction surveys, which show CSAT scores in the mid- to high-90% range for our targeted enterprise customers. Finally, our platform and our reputation as an innovator in CX are rapidly gaining increased visibility with customers and industry analysts. Our peer review scores on Gartner’s insights reflect our strong product portfolio and continue to increase as the number of reviews have grown. Our UC and CC score are now both 4.4 on a scale of 1 to 5. Also, as our market presence continues to grow, we are frequently included on the short list of companies to watch. For example, in an article in CX Today, Liz Miller of Constellation Research and

Thanks, Sam. Good afternoon, everyone, and thank you for joining us today for our fiscal third quarter earnings call. This quarter marked another period of strong execution across our business, including record communications platform usage revenue, solid profit margins, and record cash flow from operations. Fiscal Q3 2025 represents our 16th consecutive quarter of positive cash flow from operations and non-GAAP operating profit. We continued our disciplined approach to debt reduction, repaying $33 million of our term loan debt during the quarter and an additional $15 million in January 2025 during our fiscal fourth quarter. Including this latest prepayment, we have now reduced the principal value of our debt by over $194 million, or approximately 35% since the peak in August 2022. The press release and trended financial results on our Investor Relations website provide a detailed view of our performance, but I will highlight a few key points on today’s call. Before continuing, I would like to remind you that unless otherwise noted, I will be discussing non-GAAP metrics except for revenue and cash flow. For the third quarter of fiscal 2025, total revenue was $178.9 million, near the midpoint of our guidance range. Service revenue totaled $173.5 million, exceeding the midpoint of our guidance by $1 million. Subscription and usage-based service revenue on the 8x8 platform continued to grow both sequentially and year-over-year. Growth was offset by the anticipated decline in revenue from customers still on the Fuze platform. During Q3, we made continued progress upgrading Fuze customers to the 8x8 platform, reducing the remaining Fuze base to approximately 5% of service revenue, compared to 7% in the prior quarter and 11% in Q3 2024. We’ve remained on track to complete these upgrades by the end of calendar year 2025, which will simplify our operations and strengthen customer engagement. Our multi-product strategy continues to drive results, with committed monthly recurring revenue from customers using three or more products, increasing over 10% since the start of the fiscal year. This growth highlights the effectiveness of our strategy to deepen customer engagement by offering a comprehensive suite of solutions, fostering stronger customer relationships, improving retention, and unlocking additional value for both our customers and our business. These results underscore the resilience of our underlying business, despite facing approximately $2.2 million in foreign exchange headwinds relative to our expectations at the beginning of the quarter. Without this FX headwind, total revenue would have been near the high end of our guidance range and service revenue would have exceeded it. Gross margin for the quarter was 69.5% within our guidance range and impacted by the revenue mix as lower margin platform usage revenue was approximately 13% of total revenue, up sequentially and year-over-year. The underlying gross margin of our subscription based business remained healthy and consistent with recent quarters. Operationally, our spending level remained consistent with earlier quarters and our business model continues to benefit from a natural FX hedge, where the impact of foreign exchange on revenue is largely offset by a corresponding opposite impact on expenses. As a result, we delivered an operating margin of 10.7% during the quarter, slightly above the midpoint of our guidance. Stock-based compensation expense for Q3 was 5.3% of total revenue, near the multi-year low of 5.2% recorded last quarter. This reflects our commitment to managing this expense responsibly and reducing shareholder dilution over time. Our continued focus in this area has allowed us to achieve GAAP operating profitability for the second consecutive quarter, a milestone that underscores our financial discipline. As part of this effort, we have shifted toward primarily cash compensation for the majority of employees, which is reflected in our non-GAAP operating income. Turning to the balance sheet and cash flow. We ended Q3 with $104.6 million in cash, cash equivalents, and restricted cash, down approximately $13 million from Q2 due to the $33 million terminal repayment I mentioned earlier. The Q3 balance sheet includes $16.5 million in current term loan liability, net of unamortized discounts and issuance costs. This represents a principal balance of $17 million, the minimum required payments for the next 12 months. With the $15 million prepayment we just made in January, our remaining current liability is effectively $2 million. Our net debt-to-trailing 12 months EBITDA ratio has decreased to approximately 2.6 times, down from over 6 times in fiscal Q2 2023, giving us greater flexibility to pursue strategic opportunities. Additionally, stockholders’ equity increased for the 3rd consecutive quarter, reflecting continued progress in strengthening our financial position. Our remaining performance obligation remains steady at $800 million, representing a year-over-year increase of 4.6%. This growth reflects the strength of our multi-year customer contract backlog and provides a strong foundation for future revenue visibility. We are particularly proud of generating $27.2 million in operating cash flow this quarter, a record for us. This achievement demonstrates our ability to generate strong returns, while maintaining a disciplined and efficient operating model. However, while this milestone reflects our strong execution and operational efficiency, it is important to recognize that cash flow performance does fluctuate due to market dynamics, investment timing, and other factors. We remain committed to proven financial management to sustain long-term growth and value creation. As we look ahead, our cost structure remains stable and we continue to invest in innovation and customer success. We believe our target cost structure with R&D at approximately 15% of revenue, sales and marketing between 33% and 34% of revenue, and G&A between 10% and 11% of revenue, provides the right balance of investment to drive growth while maintaining profitability. With this context, we are providing the following guidance for fiscal Q4 2025. Service revenue is expected to be in the range of $170 million to $175 million. Total revenue is expected to be between $175 million and $181 million. Please note that the total revenue and service revenue reduction due to foreign exchange rates since we gave our prior guidance is approximately $2.3 million. This means that on a constant currency basis, our service revenue guidance midpoint remains about the same as the guidance midpoint we provided last quarter. Operating margin is expected to be in the range of 9% to 10%. Please remember that our fiscal fourth quarter includes seasonally higher expenses as certain employer taxes and benefits restart in January. For the full fiscal year 2025, we are guiding as follows. Service revenue is expected to be between $691.3 million and $696.3 million. Total revenue is anticipated to be between $713 million and $719 million. Please note that the total revenue and service revenue reduction due to foreign exchange rate changes since we gave our prior guidance is approximately $4.5 million. This means that on a constant currency basis, our full year service revenue guidance midpoint remains about the same as the guidance midpoint we provided last quarter. Full year operating margin is projected between 10.7% and 11%, translating to non-GAAP operating income of approximately $77.5 million at the midpoint of our full year revenue and operating margin guidance. We expect interest expense, including amortization of debt issuance costs, to be about $5.3 million in Q4, based upon current interest rates and our outstanding debt balance. We expect cash paid for interest to be approximately $7 million in Q4 2025, as cash interest on the 2028 convertible debt is due semi-annually. These interest amounts assume approximately 7.3% on the term loan, or SOFR plus 3%. Putting all of this together, we expect fully diluted non-GAAP earnings per share to be in the range of $0.35 to $0.37 for the year. We anticipate full year cash flow from operations to be between $61 million and $65 million, an increased range compared to our prior comments. Note that cash flow from operations typically decreases in fiscal Q4 due to the timing of seasonally increased employer expenses and cash paid for interest. While we are not providing guidance for fiscal 2026, I want to point out that we plan to make strategic investments that support our go-to-market initiatives in the next fiscal year. While these investments are expected to result in a lower non-GAAP operating margin compared to fiscal 2025, they are essential to strengthening our market position and accelerating long-term revenue expansion. We believe that by enhancing our commercial capabilities, we will be well positioned to capture new opportunities, improve customer relationships, and drive growth over time. In closing, I remain confident in our vision and strategy as we navigate the path to sustainable, profitable growth. While challenges may arise along the way, the progress we continue to make reinforces my belief that we are taking the right steps to achieve our long-term goals. I am deeply grateful to the 8x8 team for their hard work and dedication in delivering these strong results, and I look forward to sharing our progress in the quarters ahead. Operator, we are now ready to take questions.

Thank you so much. [Operator Instructions] One moment for our first question. And it’s from the line of Josh Nichols with B. Riley. Please proceed.

Yeah, thanks for taking my question. Great to see that the record operating cash flow and it looks like the company is making some good progress towards getting back to growth. On that point, I just had a question. If you look, take out the FX impact, it looks like would service revenue have been up quarter-over-quarter, but also year-over-year, and then looking at the 4Q service revenue guide is that it’d be effectively flat year-over-year, maybe up a little bit. I assume that that also includes a little bit of FX headwinds. If you exclude that, it would maybe be a little bit more of a material amount. Is that accurate?

Hey, Josh. This is Kevin. Yeah, we do see $2.3 million or so of FX headwind in our Q4 relative to what we guided last quarter, so that would imply roughly a raise to guidance for the full year, by the way, and kind of flat quarter-over-quarter, as you say.

Got it. And then just touching a little bit on some of the AI and other offerings, very good growth you’re seeing, I think you mentioned like 60% growth there. Any opportunity to quantify, I know that was still relatively low base and low mid-single-digits. Is that beginning to ramp up? And when you think about next fiscal year without talking about guidance specifically, is that position you in the situation combined with the runoff of the remaining Fuze business to get back to service revenue growth that’s pretty consistent throughout the year or maybe accelerating towards the back half?

All right, Josh, I think it’s a great question. The new product revenue, the AI stuff, still single-digit millions for the quarter. It’s growing very rapidly, but it’s still not quite enough to move the needle overall. Our goal next year is growth at some point throughout the year. There are a lot of moving pieces. I’ve been surprised by the FX kind of tailwind-headwind/tailwind-headwind phenomenon we’ve been dealing with a little bit. That’s causing a little bit of the rounding errors and some of the things going on around that, along with just the industry dynamics in general. So it’s certainly our goal to return to growth without getting into guidance and all those other things. It’ll be a combination of new product growth, multi-product customers having higher retention rates and continuing to just add new customers into the mix.

Thanks. And then last question for me, I think you talked about before at some conferences, just like ex-Fuze that the company would be getting to maybe like low- to mid-single-digit growth. It seems like that transition and runoff continues to be on track for the end of this calendar year. What else has to be done overall and any potential thoughts on like also the savings when you’re not running two platforms parallel to each other anymore?

Yeah. So, okay, and you – I’m sorry you asked me that last question. I didn’t really do a good job of answering it. I apologize. Yes, we’re still on track to run down Fuze, I think we’re down to 5% of revenue and you can see the trend we’re really pushing hard to get that done. It is absolutely our objective to turn shutdown the Fuze platform at the end of this fiscal year. My mandate to the teams is 11:59 on p.m. on 12/31 we turn off the Fuze platform. In terms of savings, hard savings probably mid-single-digit millions of dollars. There’s an intangible savings, it’s a little bit harder to measure, which is maintaining security compliance maintaining HIPAA qualifications, maintaining software upgrades and OS upgrades and all those kinds of things. That are a little bit harder to quantify other than just the cost savings of AWS for running the platform or whatever the case may be. And so, I don’t know if you want to take a rough guess, I probably double that in my mind in terms of hard cost savings, when it comes once Fuze’s behind us. And, I think running off the Fuze platform will definitely help in terms of getting the growth next year.

Appreciate the context. Thanks.

Thanks, Josh.

Thank you. One moment for our next question and it’s from the line of Ryan Koontz with Needham & Company. Please proceed.

Great. Sam, you mentioned your prepared comments just some turbulence in the UC space. Can you expand on that kind of where you feel like we are in its saturation kind of where pricing has been headed and what the competitive environment’s been like? Thanks.

Yeah. So, I think last quarter on UC, I’m going to broaden your question here in a second. But on UC, we did see a little bit of aggressiveness on pricing not unheard of it, I would say it’s pretty typical in the fourth quarter, calendar quarter, the year, because some of the companies have fiscal year ends and they could always get a little bit more aggressive at the end of the year. Obviously, this is something the industry analysts, you the financial analysts have been talking about for a while. So I wouldn’t say it was anything bizarre or crazy. I think for us, I just want to switch sort of broaden the question slightly for us, because you asked about the market, but for us I think what matters a lot more is we saw more deals last quarter that were contact center led that really are viewing UC is just an add-on or at a condiment if you will to the CX sale. Our CX messaging is really resonating. We’re seeing us land with more platform wins. I consider platform win three plus products and UC it’s typically one of those to deal with those and we’ve got engaged in those other things. And so, I think we’re really well positioned to deal with anything around pricing around UC in that area. I think I gave a good answer, and if I didn’t, ask me to follow-up.

That was great. Can you comment briefly on the international opportunity, how you size that up these days, what your thoughts are?

Man, I love the international opportunity 8x8, right? I mean, we see the CPaaS business doing fantastic, the platform usage business doing fantastic, and we’ve been bringing that around the world. Our presence in Europe is growing, and I really love that. And honestly, there’s just less – I don’t want to be struggling for words here right for a second. There’s less irrational behavior, because we don’t have this post-COVID. We raised a bunch of money. We’re some startup, and we’re just going to willy-nilly throw pricing, or free professional services, or contract buyouts, or any of that other ridiculous stuff that we typically see sometimes in the United States.

Yeah. Still Western Europe is still an area you plan to expand in?

Yes, sir.

All right. Thanks, Sam.

Thank you so much. One moment for our next question. And it’s from the line of Siti Panigrahi with Mizuho. Please proceed.

Hey, thanks. It’s Chad [ph] on for Siti. Just wondering if you can talk about what you’re hearing from customers in their appetite for AI products and if that’s differing sort of at the low-end versus the high-end and any updates you can share around whether these guys are using AI to complement existing agent functions or starting to see any reduction in the human agent? Thank you.

Okay, Chad, quite a big question there. So I may ask a couple small follow-ups along the way. So when you talk low-end versus high-end, I presume you mean customers or by customer size are sort of where you’re at.

Correct.

Okay. What I would say is like our target market is that upper small business to low-end enterprise and what they love is that we give best in breed AI capabilities. We’re talking Gartner Magic Quadrant leading bots which most of our competitors do not offer. Natively integrated into our contact center space, natively integrated into our UC, natively integrated into Engage. So it works absolutely fantastic. And, we’re really focused on solving those CX problems and when you do that AI plays a pretty pivotal role inside of that. In terms of the low-end, so let’s say small businesses those kinds of things, I don’t see it as much, where we see a lot of interest and there’s – I’m going to be a little bit cautious there’s a little bit overlap between the things, where we see a little a lot of interest is around things like digital messaging, SMS, two-way communications with the contact center using WhatsApp, appointment reminders those kinds of things. Now, where all the overlap starts to occur is when you start looking things like at our appointment management for healthcare a remote fix, where you’re starting to bring multiple solutions together. So I mentioned, I’ve been talking about bots a little bit, but our voice bot is just on fire. I mean, it’s been amazing at how fast that’s grown. And it can speak 50 plus languages and 91 accents, I think I said in my prepared remarks. And I think that’s super important, because that’s a little bit where we’re starting to see a little overlap between large businesses and small businesses, when we start getting into self-service and those kinds of things, particularly around contact center. So we’re doing some amazing stuff around self-service payments, highly secure payments where you can do Apple Pay, 100% self-service, those kinds of things, PCI compliance, through a voice bot, dealing with an agent if there’s a problem in the payment, those kinds of things. Those solutions really, really, really across the board, horizontally, high demand for. Another question was about agent counts. Okay, and I get asked this question a lot and I’m going to tell you a little bit of what I see and a little bit of what I think. What I see is it’s hard to see. I mean, people just ask us for X number of agents for contact center, how many agents they have, et cetera. And so, in real time today, do I see AI replacing agents here, there, and everywhere? And a few select cases, sure, but nothing major, no big trend. I absolutely believe that AI will replace some agent capability over time. It’s what technology’s done well my entire career, which is to replace human labor with machines effectively. So, I absolutely think that’s going to case. However, the reason we’ve built the company the way we have is our average revenue per customer at the places they deploy AI, at the places they deploy these next generation technologies, is actually up substantially, even if, let’s say, our per seat count is flat to even down a few.

That’s super helpful. I’ll pass it on. Thank you.

Thanks, Chad.

Thank you. Our next question is from the line of Peter Levine with Evercore.

Thanks, guys, for taking my questions. A few, maybe I’ll start with you, Kevin. Your last question around the margin outlook for fiscal 2026 – calendar 2026, sorry. What would be lower, given some of the strategic opportunities you guys are investing from on the kind of market front? Can you maybe just help us understand like what that translates to the top-line? Is there a calculated ROI that you’re expecting? And then can you maybe just caveat that with what you think that will translate to growth?

Yeah. So I’ll take the part of that, Kevin will put in some finer points, because – to be fair I’m going to dodge part of your question, because I really don’t want to give guidance out an entire year in front of what I’m supposed to, and also it’s not quite as clean as maybe it looks in a spreadsheet. So, do we have an ROI to our operating income investments or operating investments, absolutely. Am I going to share that with you? No, I am not. Because if I share with you I’m sharing it with every competitor currently listening on this call right now and I’m not doing that, I’m not a nice guy. And so, what I’ll tell you is, yes, there’s a calculation, we monitor it very carefully. The hard part and I know you have a ton of experience with this Peter is that the timing, at the timing variable, timing aspect of the investments is always the difficult thing for the financial model and sort of what we’re going through, right? So if you go back in time, you go back to fiscal 2023 and 2024, we really focused on ramping up cash flows, paying off debt. We’ve paid off 35% of the debt. We’ve made 10 separate payments to pay off debt. We’ve really been focused on that. Our EBITDA to net debt ratio is fine. The banks are happy. Everyone’s happy. And so, we’re really focused now getting kind of back on offense and driving more growth. And we are making selective investments. Definitely the right thing to do given the market opportunity, our competitive position, really impressed where the innovation is right now, those kinds of things. How quickly and exactly to three decimal places, that much sales or bookings or revenue that’ll lead, we’ll keep that internal to us right now. Kevin, anything you want to add about it?

Yeah, I will say that it’s not just about investment and we’re doing various things, but we’re also focused on improving the efficiency of our investments as well. So, yes, we’re going to do more things, which we won’t divulge or recall, as Sam said, but we’re also focused on our operational excellence internally in the company. So that is also another lever for growth over the long-term. So that’s the color.

Yeah, and actually, Kevin raises a really great point, just to put a fine point out. We are investing in AI to use internally. I think we tend to see these calls get viewed as a company that sells AI, which we absolutely do across the platform growing very rapidly. We’re also a buyer of AI to actually improve how we provide CX, how we engage with the customer, how efficient we can be internally. That’s some investments we’re making internally to our company also, and that costs us a few dollars.

Great for the color. Last question, Sam, you mentioned in your remarks, like customers of free products versus customers of two, the uplift to the ARR number. I forgot like the exact metric you said, but can you maybe talk about what products are they buying? Meaning, what’s driving that massive uptick from like two to three product customers? And then maybe just outline like what is that and type of that product, and…

Yeah, no problem. So, I think exactly what I said was, if you look at the cohort of customers that have two products, and the cohort of customers that have three products, the cohort of customers that have three products is, the average deal size is 3 times as large. So, it sort of translates. Okay, what do they buy? I’d love to tell you it’s really simple. I’m going to put in a couple of buckets. What really works is when you sell on business outcomes and you do some of those things, you start just to get these, it’s easier to cross out products. So, they almost all have UC and CC, in sort of bucket categories. After that, the key add-ons in my mind are Engage, which is kind of a contact center for not agents. Fantastic product. Proactive outreach or digital messaging of all sorts and kinds of shapes. And the bots, the intelligent assistants, voice and digital bots. And then, of course, there’s workforce management. There’s all kinds of other little up and ends. But those are, I’d say, the big three. I think what’s key, though, I really want you to think about is, it’s really about solving customer problems and the use cases associated with it. If we do something like field service management, we end up selling digital messaging, we sell a bot, we sell video elevation in the contact center, we sell contact center, we sell UC, we sell Engage. They rapidly turn into multi-product customers very quickly. And it’s just a nice way to wrap up solving the customer problems. I think the thing I want to leave you with is when we sell those multiple products, of course, we get a higher GRR, we get a higher NRR, financial numbers are better. But really, it’s about we solve customer problems better. And when we solve customer problems better, everything else sort of takes care of itself.

Thank you, guys.

Thank you.

Thank you. Our next question is from the line of Catharine Trebnick with Rosenblatt. Please proceed.

Hi, thanks for taking my question. Sam, have you tweaked the go-to-market at all? You’ve done really well with the three products versus the two. Anything else we should look at that you’ve fine-tuned in terms of your partners or your go-to-market motions or what your messaging is in the channel? Thanks.

Oh, Catharine, that’s such a loaded question, because I know what I think what you’re getting at. Yes, there was a couple of things we’re doing overall. Number one is, yes, we continue to evolve our sales organization. If you guys are regular purveyors of LinkedIn, you will see that some people have come and gone from our company over time for various reasons. A lot of that is driven by the fact that we’re looking more for consultative solution sellers versus to use an industry vernacular circuit slingers, et cetera. So that continues to evolve. I cannot speak highly enough about the work, the marketing department is done around rebranding and really branding us as a CX company. And the thing is, it’s not just paint on the outside of an old building. This really is, as we’ve launched the products and as we have these solutions, we are a CX company. And this is about highlighting what we truly are to the marketplace. That will continue to evolve as we drive more sort of capabilities around that, et cetera. And then on the partner side, I think that’s more of an evolution. We continue to invest in our partners. We are a channel-centric company. We do a majority of our business through channels. And so, I mean, a majority of our new business through channels, to be fair. And so, we’ll continue to do that, and we continue to evolve in terms of the right tools and capabilities and those kinds of things that support our channel partners and their success.

All right. And then you add in a transformational leader to the team and any organization that you specifically look at in detail, can you give us some details on that?

Yeah, so I had a chance, I’ve known Joel for several years now. So if you’re familiar with Joel’s work – I’m just going to assume for everybody for a second you’re familiar with Joel’s work and try to fill in what he does, but he is a phenomenal leader, he’s a former military guy like me, so we speak a common language, but the big thing for me is he brings a lot of AI skills and capabilities into the company and this is about using artificial intelligence inside of ourselves to drive more insights and better decision making inside of our company. And Joel is really heading that up to transform as a company how we deliver our products and services, how we build our products and services to our customers, super important. And Kate pinged me, but I should use this forum because it’s the right thing to do, I’d really like to call out Michelle Paitich for being recognized as a channel chief by CRN Magazine, she is phenomenal. And so, as Kate pings me, I get a chance to use your question to highlight what a wonderful channel chief she is.

Yeah, I know she started last year, I think I met her at channel partners. Thanks.

Yeah, she came to us I think from Twilio if memory serves me, where I hired her out of and she’s been absolutely phenomenal for us as a channel team.

All right. Thanks, Sam.

Thank you. For all the competitors you can’t hire her, that’s a no.

Thank you. And our next question is from Meta Marshall with Morgan Stanley. Please proceed.

Great. Thanks. Maybe first you commented on CPaaS being strong internationally, I just wanted to get a sense of an attraction that you were getting in the U.S. or where you were kind of finding markets that were more attractive there? And then second, over time you’ve commented on kind of customers wanting more kind of a la carte kind of packages put together. Just wondering if you’re kind of seeing any consistency form around like whether people want more consumption-based pricing or whether they’re kind of want a la carte or whether we’ll stick to this kind of per se model that we’ve been in. That’s it.

Okay. So, Meta, thank you for the question. So, yes. So, last quarter, the quarter before you reach [ph], the product of outreach in the United States. We’ve got our first customers. These are regular CPaaS customers in the United States now. We’re still having a few growing pains as we ramp our CPaaS business in the United States, but I’m pretty happy where it’s at. And this is regular SMS, WhatsApp, voice, all those kinds of capabilities in the U.S., still really small. I mean, it’s not a huge number of customers, but we’ve got them. The bugs are working out. They’re happy. The referenceable, good CSAT scores, those kinds of things. So steps in the right direction. In terms of the evolution of pricing and packaging, it’s a great question, and it’s certainly one that we spend a lot of time thinking about. I fundamentally believe if you look at a lot of the AI technologies and even the CPaaS technologies, these are all sold on a consumption basis, right? So if you look at how OpenAI can charge some stuff, they charge for tokenization. For our bots, we charge per interaction. For digital messaging, we charge per message. Those kinds of things. I think certainly those types of pricing models will continue to grow. I’m not sure that it’ll ever work on sort of a per agent basis. I know that some people have tried contact center on a per interaction basis, and the feedback I’ve heard from customers is pretty universally negative. And so there is some fine line there, I think the key is building the products and the underlying systems that can kind of support a multitude of models that meet the customer where they are, not where we want them to be, if that makes any sense.

Yeah. No, that makes sense. I appreciate it.

Thank you, Meta.

Thank you. One moment for our next question, please. And he’s from the line of Ryan MacWilliams with Barclays. Please proceed.

Hey, Ryan.

Hey, Sam. And, Sam, for the record for an earlier question, I think you’re a nice guy. Go ahead and lay yourself short. With on the macro, since the election, any differences by smaller or larger customers since the presidential election, or any differences by geo in terms of customer purchasing?

It’s funny you asked me this. I was hoping I wasn’t going to get this question. And the reason I was hoping I was going to get this asked question is I don’t have a good answer right this side. So let me tell you a bit of what we’re seeing, and you guys can be smarter than me and draw some conclusions. If you look at 2024, I think there was a record number of bankruptcies in the United States, or at least that’s – sorry, 14-year high in the number of bankruptcies in the United States, sorry, not a record, because 2008 probably was the record, but 14-year high in the number of bankruptcies. And we have seen some customers have to move to things like cash revenue recognition, because they’re currently going through bankruptcy proceedings and those kinds of things. So it’s not like we’re untouched. It’s not a material number, I’m not phased by it, but it’s a clear thing. Now, on the other hand, I’ve talked about this in the past, is one of the numbers I use in our credit card default rates as a really sensitive indicator that there’s something going on in the small business base and sort of those basic mom-and-pop economics. And so far there, it’s been steady as she goes, no real unusual stuff around credit card default rates, et cetera. So it feels like the interest rate stuff that the Fed did bit a little bit, but a bit in larger businesses, maybe because they were more indebted, more sensitive to interest rates than some of the smaller businesses, which are probably more cash driven. And so, I’d say it’s a bit of a tale of two cities, hence the reason I really didn’t want the question. In European markets, we see a little bit more selectivity by specific verticals. So, for example, in the UK, some state and local have seen a reduction in spending, while NHS has seen an increase in spending, those kinds of things. And so I think it’s a little bit of vertical by vertical. And in the U.S., I think it’s a little bit large versus small. That’s my best guess.

Just a quick point of clarification on credit card. We were talking about decline rates from our customers. We got a lot of credit card customers. It’s not the default rate of the industry.

Yeah, sorry, the credit card – yeah, the ones where they turn off the credit cards.

Yeah. No, I appreciate that color. And then, Sam, how do you view Salesforce as a potential partner and competitor in the customer service space? Like, you think…

Well, I’m currently on the fifth floor, and Salesforce is on the first floor right now, so they’re a partner. They’re a really good partner of ours.

Do you just alongside each other?

Yeah.

Okay. Can you elaborate on that? Like how that would work with Agentforce?

Well, I don’t want to reveal any future products, knock on wood. But, those are fit technologies we’re looking at, Agentforce, et cetera. We’re a large Salesforce customer and partner. We use them extensively for things like our communities that we deal with customers and those kinds of things. And so, I view Salesforce as a great partner and would like to do more with them in the future. I don’t really view them as a competitor.

Nice color. Thanks, guys.

Thank you.

Thank you so much. Our next question comes from the line of Michael Funk with Bank of America. Please proceed.

Hey, good evening, guys. Thank you for the questions. First one is clarification. So, of the 200 basis point reduction in Fuze percentage of revenue going from 7% to 5%, how much of that migrated over to your core platform? Was that all lost?

Some migrated. We do have a component of that that gets lost, and there’s timing effects as well on that, Michael. So, I’ll say the average over time that we keep is, you know, 60%-plus of our Fuze base revenue. So, that’s kind of where we’ve been, where we expect to be.

And let me put a finer point on that because 60% sounds like a terrible number and you guys are going to freak out. So, let me put a finer point on that. What we see typically with Fuze customers is we see a step down when we migrate them and then their NRR is substantially above corporate average. So what generally ends up happening is they’re going through a redeployment process, so they’ll shrink it down to a smaller size, whatever they need, and then they start adding back in really rapidly. And it’s not like we’re losing 40% of the revenue to Fuze overnight.

And the other thing is to add to that, when we do that we often and almost always extend the life, extend the contract. So we keep that customer for longer. So the long-term, it’s a better deal for 8x8.

Got it. Thank you. Second one is for UC, we’re more philosophical. So the market is saying one thing, if we look at the free cash flow multiple, look at EV-to-EBITDA, it seems to be very different than what you are about stabilizing top-line. Seems to be very different than the improvement in free cash flow, cash flow from operating activity. Same thing very different than what I’m forecasting in my own model. So how are you thinking about addressing that? Number of levers you could pull, I guess, right? I mean, stock repurchase, strategic review. So how do you think about addressing what the market is telling us in your valuation, whether it’s free cash flow, EV-to-EBITDA, and what you believe and I believe is the likely outcome?

Well, it’s interesting, Michael, you bring this up, right? So there’s obviously I having spent much time on Wall Street also, I could make some comments about Wall Street’s predictive capability sometimes. But let me take a step back. I think at a very basic level, I’ve tried to be really crystal clear with investors. Our North Star was cash flow from operations per share. And the reason I think about it that way is it’s the cash flow that we generate per equity holder. And I think that is, if you think about Graham and Dodd, and a discounted cash flow and the present value of a business is the sum of its future cash flows, it’s a very pure way to think about how a company should operate and the optionality of a company during uncertain times. So let me further elaborate on that a bit. If you go back 2 years when I started making the comments that that’s our metrics, we’ve obviously done a lot of things. We’ve given a lot of cash flow, a record quarter for cash flow from operations. Our stock-based compensation is 5.3% of revenue, which I think is one-third industry average or our competitors or those kinds of things. And so we’re very focused. You see it in the fact that some of my competitors have seen declining shareholder equity, while I’ve seen increasing shareholder equity. So what I’m trying to drive is the right thing. Now, is the market rewarding me in any given moment? Maybe yes, maybe no. But what that does, and I want to take this back into the market environment we’ve been in. What cash flow does is it buys me the maximum amount of optionality to run this business. I can invest in product development. I can buy other companies. I can buy my own equity. I can continue to pay off debt, which is primarily what I’ve chosen to do with all that excess cash flow is reduce the debt, thereby further reducing the risk of the company and actually if enterprise value stays unchanged, driving more value of those future cash flows to our equity holders. So what I’ve really thought about is the market we’ve been in coming out of COVID is one of increased risk, increased competition, startups, what’s going to happen, AI, what’s the future. Let’s really focus on de-risking the company from a – have a fortress balance sheet, drive cash flow, get debt out, et cetera. Let’s invest in the right areas in innovation and those kinds of things. Now, as we look to the future, right, the company’s massively reduced the amount of debt it has. It’s massively reduced its leverage ratios, et cetera. It’s much less risky. The innovation we’ve produced has these incredible green shoots in my eyes. What are those green shoots? We invested in it. We built it. It works. We have product market fit and we’re now ramping. And so, it’s actually okay to take some of that cash flow and now pour it back into growing revenues and growing future cash flows via revenue and those kinds of things. Your last part of your question is, is Wall Street going to reward me for this? I think at some point they’ll recognize it. They’ll get around to it. They’ll figure it out. You know, that’s the hard part. I always go back to what Ben Graham said to Congress, right? When Congress asked Ben Graham, how does he know stocks are going to go up when they have these type of characteristics? He said, just because they do. And so, what I go back to is the fact that The Street will reward us at some point, our stock, our capabilities. When they realize that owning a share of 8x8 is an incredibly valuable asset, it’s going to get you a stream of future cash flows, it gets you a very profitable business, and it gets you all the right things that you want in the characteristic of an equity holder. My simple answer.

Very thorough. Thank you for that, Sam. And thank you again, Kevin, for the clarification on the migration.

Thank you.

Thanks.

Thank you. One moment for our next question, please. It is from the line of Michael Turrin with Wells Fargo. Please proceed.

Hi, this is Richard Poland on for Michael. Thanks for taking my question. So you noted the potential expanded range of near-term outcomes around Fuze, and you gave kind of the breadcrumb there around that 60%. Could you expand on what you hear from that base as they’re going through that decision-making process? And what’s kind of like the biggest pushback that you have to shifting over to the 8x8 platform? Any color around that would be helpful.

Yeah, I think it’s just been – so we’re down to, I think maybe around 100 customers left to migrate. And it’s only 5% of our revenue you guys can do the track is. So it’s coming down. Those last 5% don’t want to make the effort to move, not ready for it, holding out for an extra price discount. Will you take me to a sports game if I promise to migrate? It could be any of those things, right? So it’s really just the dogs and cats that are at the end. We are, and we’ll get through this, committed to migrating, upgrading every single customer onto the 8x8 platform. And the most interesting is once they’re there, they’re incredibly happy. They have a full portfolio of new and exciting products, and they’re buying those once they get there. So it’s really just the blocking and tackling of getting those last customers to move there. And don’t over-rotate on the 60% number. It just happens to be there’s timing and pieces, et cetera., how to think about it. And so, I think Kevin just wants to be really sort of specific about it.

Okay. Great. That’s super helpful. And then just another one from me. I understand not wanting to divulge too much around the ROI of some of those accelerated investments next year. But I guess is there any specific growth opportunities that you’ve kind of identified that you really want to go after? Is it just more generalized, hey, our foundations are in their place? We see potential to drive more growth going forward. So we’re going to tap into that.

Okay. So I don’t know how to invest in number two that you listed. I don’t do general investments across whatever, right? We invest on specific projects with specific to find outcomes. That is absolutely the case. I absolutely see opportunities in front of us to make those investments and get compelling ROI, which then drives future cash flows. And then go back to Michael’s answer I gave a couple of minutes ago.

Okay. Great. I appreciate it.

Thanks, Rich.

Thank you so much. And as I see no further questions in queue, I will turn the call back to Samuel Wilson for final remarks.

Thank you so much, operator, and thank you for a fantastic call today. In summary, the third quarter was a solid quarter for 8x8. While the market dynamics remains challenging, we continue to face headwinds as our transition of Fuze customers to the 8x8 platform, our focus on disciplined execution, strategic differentiation, operational excellence positions us well, exceptionally well for the future. We’re committed to delivering value to our customers, our partners, our shareholders as we drive innovation, and transform business communications into intelligent customer experiences. And lastly, thank you to you, the analysts who are on the call. Thank you to our investors, and thank you to my employees. I love each and every one of you. Thank you for your continued support.