8X8 INC /DE/ Q3 2026 earnings call

Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the third quarter of fiscal 2026 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. In addition to our prepared remarks, we have posted a more detailed letter to shareholders in the quarterly results section of our investor relations website. 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 press release and our 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 our Chief Financial... Sorry. With that, I'll turn the call over to our Chief Executive Officer, Samuel Wilson.

Good afternoon, everyone, and thank you for joining us today. I'm excited to share the highlights of our third quarter results, which show our strategic investments across innovation, operational efficiency, and distribution are beginning to yield measurable results. More details are included in our letter to shareholders posted on the investor relations website. I can summarize our Q3 results and our outlook in a single sentence: We're seeing encouraging momentum across multiple dimensions of the business, though we remain focused on the execution work ahead. The most visible evidence of our growing momentum is our return to top-line growth. This marks our third consecutive quarter of year-on-year service revenue growth and our 20th consecutive quarter of positive operating cash flow. We exceeded the high end of our guidance range for service revenue, total revenue, operating profit, and cash flow. I believe this shows our operating model is working.

We're driving growth in strategic components of our service revenue while maintaining discipline on profitability and cash generation. A key driver of our growth was our increased consumption of our usage-based offerings, which grew nearly 60% year-over-year and now represents more than 20% of our service revenue, up from mid-teens a year ago. Much of this growth comes from our CPaaS APIs. We are also seeing an acceleration in the adoption of digital channels and AI-based offerings as customers move beyond pilot projects into production at scale. This is clear from some of the metrics we shared in a separate press release. Customer contracts for our Intelligent Customer Assistant increased 70% year-over-year. Voice AI interactions increased more than 200% and now represent a vast majority of all AI interactions on our platform.

Voice remains the channel of choice, and our core IP in voice communications is an increasingly valuable competitive advantage. We've built this capacity over decades, and it positions us uniquely as voice becomes the preferred interface for AI-powered customer experiences. The increase in consumption of our usage-based solutions reflects a broader industry shift away from pure SaaS subscriptions to hybrid and tokenized pricing models. The pay-as-you-go approach appeals to customers because it reduces risk as they adopt new technologies. It also raises the bar for vendors. Revenue is linked directly to successful customer outcomes and business activity instead of long-term subscriptions that may or may not be implemented. We believe this is the way of the future.

We are positioning ourselves ahead of the curve in multiple ways, with investments that enable simplified, consumption-based pricing across our portfolio, process improvements that make it easier to do business with us, product-led growth initiatives that allow customers to try before you buy, and AI-driven automations that allow us to scale our customer success organization. We are customer zero as we reimagine every aspect of our business for the AI era. We are seeing the impact of these transformational initiatives across our business. Our multi-product strategy is gaining traction. All of our top 20 customers now have multiple products, and most have three or more. This matters because customers with multiple products see us as a strategic platform partner rather than a point solution.... This results in substantially higher revenue, customer satisfaction, and retention.

On average, customers with three or more products generate more than three times the revenue of customers with two products. We are seeing a re-acceleration in sales of new products, reflecting our investments in innovation. Four of our strategic new products grew triple digits year-over-year, including 8x8 Engage. 8x8 Engage is one of the fastest-growing products in our history, and it continues to gain momentum across industries like healthcare, retail, and professional services. A substantial portion of customer interactions routinely occur outside the formal contact center in these industries, making Engage a compelling solution. Engage recently won gold at the London Design Awards for User Experience, a strong external validation of our product strategy and design focus. This is one of many awards won by Engage for its incredible user interface. We are seeing increased momentum in our revenue from our channel partners.

We know we have work to do to expand our distribution globally, but we are seeing early traction from newly implemented partner programs and incentives. Importantly, channel source pipeline is showing sequential improvement as new programs take root. Let me share three examples that bring the momentum we're seeing across the business to life. First, a regional healthcare system with over 850 employees selected 8x8 over both Zoom and RingCentral for a competitive UC and contact center deployment. We went on site when competitors didn't. We provided industry-matched references and demonstrated a deep understanding of their patient care operations. We won because we approached the sale as a strategic partner, not just a technology vendor. Next, a major national early education provider with over 43,000 employees chose us for a significant UC expansion. This complex sale required a flexible OpEx model aligned with their finance-driven process.

We acted as a transformation partner, maintaining strong alignment across IT, procurement, finance, and professional services throughout their buying cycle. Finally, a large veterinarian pet hospital company expanded their contact center capacity with us. We earned this business through disciplined weekly engagement with their leadership team, aligning on roadmap priorities, and then demonstrating how our solutions supported their evolving initiatives. This is land and expand done right. These wins reflect a common theme. Customers are choosing integrated platforms over point solutions, valuing strategic partnerships, and selecting vendors positioned for the future of AI-powered communications. These also reflect our internal commitment to leveraging AI across the organization. In our sales process, we're using AI to map customer journeys, tailor solutions to customers' requirements, and improve the quality and quantity of customer interactions.

Over the last year, we've made huge progress in using AI to improve our go-to-market analytics and coaching, and it's starting to show up in our results. Beyond new customer wins, we reached a significant operational milestone in Q3 with the completion of the final upgrades of Fuze customers to the 8x8 platform. Every 8x8 customer is now on our modern, integrated 8x8 communications platform. This sets the stage for improved customer interaction, better expansion opportunities, and higher satisfaction, and more meaningfully, more efficient operations across our network and back office. While the decommissioning of the Fuze platform has created a near-term revenue headwind, as not all the remaining Fuze customers elected to upgrade, resulting in higher churn in Q3 that will be reflected in Q4 and fiscal 2027 revenue, the strategic benefit is clear.

We can now focus 100% of our energy on growth and customer success rather than managing legacy infrastructure. To wrap up, we are seeing encouraging signs across the business. Usage-based revenue is scaling rapidly. Adoption of our AI-based solutions is accelerating. Multi-product customers are expanding. New products are gaining traction, and our outcome-focused platform strategy is resonating with customers and partners. As we look ahead, we're realistic about the competitive and the evolving marketplace. We know we need to accelerate installed base expansion and drive stronger channel momentum. Kevin's updated guidance ranges reflect this realism as we navigate through these market dynamics. We believe that Q3 marks a true inflection point. We have momentum entering Q4, and strong confidence in our ability to deliver sustained, profitable growth and shareholder value. With that, I will turn it over to Kevin for the financial details.

Thanks, Sam. Good afternoon, everyone, and thank you for joining us for our Fiscal Q3 2026 Earnings Call. In addition to the shareholder letter Sam mentioned, detailed financial results are available in our press release and in the trended financials on our investor relations website. Therefore, I'll focus my remarks on a few key highlights. Unless otherwise noted, all figures other than revenue and cash flow are presented on a non-GAAP basis. First, let me put our Q3 results in context. This was our third consecutive quarter of year-over-year revenue growth and an all-time record high for service revenue. We exceeded our guidance ranges for service revenue, total revenue, operating profit, earnings per share, and cash flow from operations....

Total revenue was $185 million, and service revenue was $179.7 million, both exceeding the high end of guidance by approximately $3 million and growing 3.4% and 3.6% year-over-year, respectively. These results reflected strong growth in consumption of our usage-based offerings, combined with improved sales execution. Looking into the details, our usage-based offerings, which include our CPaaS communication APIs, digital channels, and AI solutions, saw another record quarter and accounted for approximately 21% of service revenue, compared to approximately 14% in Q3 2025. 8x8 service revenue, excluding revenue from Fuze customers, both upgraded and those still on the legacy Fuze platform, rose approximately 6% year-over-year, a growth rate similar to the previous quarter.

As of December 31st, 2025, we met our commitment to successfully complete the upgrade of the Fuze customer base to the 8x8 platform. Operating on a single platform improves efficiency, reduces complexity, and supports higher customer satisfaction and engagement. Gross profit was approximately $120 million, about $3 million above the gross profit implied by the midpoint of our Q3 guidance ranges for revenue and gross margin. Gross margin as a percent of revenue was 64.8%, down sequentially due to the continued mix shift toward our usage-based offerings, which carry a lower margin profile but add meaningful operating profit dollars as usage-based revenue continues to scale.

Operating income came in at $21.7 million, an increase of over $4 million sequentially, resulting in a 11.7% operating margin, substantially above the high end of our guidance of 9%-10%. Additionally, year-to-date operating expenses are down approximately $8 million compared to the first nine months of fiscal 2025. We are on track to reduce our operating expenses by about $12 million in fiscal 2026 compared to fiscal 2025, reflecting continued discipline in how we manage our cost structure. Interest expense of $4.2 million was consistent with our previous guidance, but down more than 20% from Q3 2025 as we continue to reduce our debt.

The combination of higher revenue, lower operating expenses, and lower interest expense resulted in net income of $17.1 million and fully diluted EPS of $0.12 per share, which was $0.03 above the high end of our guidance range. Cash flow from operations was $20.7 million for the quarter, well above the high end of the guidance range, due to a net timing benefit from our collections and payments. We ended the quarter with $88.2 million in cash, cash equivalents, and restricted cash, after making a $5 million principal prepayment on the term loan. Since August 2022, we have reduced our debt principal by $224 million, or 41%. As a result, we have reduced our annualized interest expense by more than 50% versus the second half of fiscal 2023.

Following our strong Q3 results, we are raising our fourth quarter revenue and operating margin guidance relative to the implied Q4 guidance midpoint from our prior earnings call. This outlook continues to reflect expected seasonality in our usage-based offerings, as well as the remaining revenue dynamics associated with the Fuze upgrades and related churn resulting from the December 31st end of life of the Fuze legacy platform. For fiscal Q4 2026, we are providing the following guidance. Service revenue is expected to be between $173.5 million and $178.5 million, an increase of approximately $7 million versus the midpoint of our prior implied guidance.

Total revenue is anticipated to be between $178.5 million and $183.5 million, also a $7 million increase over the midpoint of our prior implied guidance. Our revenue guidance ranges reflect a year-over-year decrease in revenue generated by former Fuze customers of approximately $4.5 million compared to Q4 2025, and a quarter-over-quarter decrease of approximately $3 million. We also expect typical seasonality in revenue from our CPaaS APIs related to holidays in the Asia-Pacific region. We anticipate gross margin between 64% and 65%. Our operating margin range of 8.5% and 9.5% reflects the lower revenue compared to the prior quarter and a seasonal uptick in operating expenses associated with the January 1st restart of employee-related expenses like FICA taxes and 401(k) matching.

This is a typical pattern for us. This results in a range for fully diluted non-GAAP earnings per share of $0.07-$0.08 per share, based on approximately 145 million fully diluted shares outstanding. In fiscal Q4, we expect to make cash interest payments of approximately $6.1 million, which reflects both the term loan interest payment plus the semiannual interest on our 2028 convertible notes. We anticipate cash flow from operations to be between $1 million and $4 million, reflecting the higher cash interest payments compared to Q3, and a lower balance of collectible receivables starting Q4 compared to Q3. Note that our updated Q4 cash flow range, plus our year-to-date performance, implies an increase in fiscal 2026 operating cash flow of about $4 million.

We are updating the rest of our full year guidance as follows: service revenue is anticipated to be between $708.6 million and $713.6 million, an increase of $12 million compared to the midpoint of our prior guidance. Total revenue is anticipated to be between $729 million and $734 million, an increase of $12.5 million compared to the midpoint of our prior guidance. Our guidance ranges for service and total revenue reflect our Q3 overperformance and the increase to the previously implied Q4 guidance. We anticipate gross margin to be between 65% and 66%. Full year operating margin is projected between 9.5% and 10%, translating to non-GAAP operating income of approximately $71 million at the midpoint.

The additional $6 million of operating income compared to our prior guidance midpoint reflects overperformance relative to the guidance midpoint in Q3 and our confidence in Q4. We expect non-GAAP net income to increase year-over-year, supported by lower interest expense compared to fiscal 2025. We expect fully diluted non-GAAP earnings per share to be in the range of $0.36-$0.37 for the year, assuming approximately 142 million average diluted shares outstanding. Before we finish, I want to provide a little more context around the impact of the Fuze acquisition. As of December 31, 2025, we met our commitment to successfully complete the upgrade of the Fuze customer base to the 8x8 platform. This marks a major milestone for us, both culturally and financially.

Comparing 8x8 pre- and post-Fuze, it is clear the acquisition was a catalyst in our transformation to a larger and more efficient organization. Over the last four years, the former Fuze customers generated cumulative revenue of more than $300 million. The resulting cash flow from the acquisition allowed us to increase our investments in innovation, just as the market's pace of change accelerated. It also enabled us to aggressively pay down the principal balance of our debt while still maintaining healthy cash balances. As we look at the business today versus Q3 2022, the quarter preceding the Fuze acquisition, our service revenue is up 20%. Operating income has increased nearly 7x, and our net income has increased nearly 9x. Our solid financial foundation and proven ability to achieve operational efficiencies sets the stage for the future.

While we are not providing guidance for fiscal 2027 at this time, I would note that we will continue to experience year-over-year growth headwinds related to Fuze churn as we move through the next fiscal year. We expect these impacts to be most pronounced in the first half of fiscal 2027 and to fully roll off by the fourth quarter. Even with this headwind, we expect to deliver service revenue growth in fiscal 2027. In summary, the quarter reflected continued steady execution, consistent profitability, and ongoing progress in strengthening our balance sheet. With disciplined expense management and a clear focus on profitable growth, we enter the final quarter of the fiscal year with solid momentum and confidence in our ability to deliver sustained shareholder value. With that, I will turn the call over for Q&A.