8X8 INC /DE/ Q1 2027 earnings call

Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the first quarter of fiscal 2027 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 our future financial performance, including investments in innovation and our focus on profitability and cash flow, as well as statements regarding our business, products, and growth strategies.

We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements, as described in our risk factors in our reports filed with the SEC. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today. We have no plans or obligations to update them. Further, 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 the U.S. generally accepted accounting principles, or GAAP. A reconciliation of these non-GAAP metrics to the closest comparable GAAP metric is provided in our earnings press release and earnings presentation slides, which are available on 8x8's investor relations website at investors.8x8.com.

With that, I will turn the call over to our Chief Executive Officer, Samuel Wilson.

Good afternoon, everyone, and thank you for joining us. We delivered a strong start to fiscal 2027. We achieved record service revenue, our fifth consecutive quarter of year-over-year revenue growth, and exceeded our guidance ranges for service and total revenue, non-GAAP operating margin, and operating cash flow. What matters most isn't simply the quarter we delivered. It's the growing evidence that the investments we've made over the past several years are beginning to translate into broader customer adoption and stronger business performance. We began seeing those trends emerge last fiscal year, and especially in the fourth quarter. This quarter gave us additional evidence that they're continuing to build. Our focus isn't on managing the business for one quarter. It's on building a company that can create durable value over the long term. One observation keeps sticking with me.

When I met with customers and partners around the world, I often hear a version of the same comment, "I didn't know you did that." Sometimes they're talking about 8x8 AI Studio, our native agentic AI builder platform. Sometimes it's our programmable customer engagement capabilities and purpose-built solutions like proactive outreach. Sometimes it's our embedded 8x8 Workforce Management available to Contact Center customers at no additional cost. Sometimes it's as simple as accurate call and meeting transcription across a variety of languages and accents. I actually think of this as both a validation and a challenge. It's a validation because it tells me we've built a platform with more capabilities than people realize. It's also a reminder that innovation only creates value if customers understand how it can help them solve real business problems. I think that observation says a lot about where 8x8 is today.

If you followed 8x8 over the last several years, you've seen us make a series of deliberate investments. Those investments weren't designed to maximize a single quarter. They're designed to build a stronger platform and therefore a stronger company. We've built a unified platform that brings together enterprise voice, Unified Communications, Contact Center, CPaaS, and AI. Along the way, we strengthened our global voice infrastructure, invested in enterprise-grade security and reliability, and created a platform designed for where the market's going, not where it's been. Looking back, I think we've made the right decisions, because today, organizations everywhere are asking the same question: how do we use AI to improve our business? Our answer has never been to build AI for its own sake. Our answer is to make AI useful, and that starts with making complexity simple. I think it's one of the biggest challenges organizations face today.

Our customers don't need more technology. They need less complexity. They want to improve customer experiences. They want employees to be more productive. Always, they want to move faster, and they want to compete more effectively. Our customers don't need more technology. They need less complexity. They want to improve customer experiences. They want employees to be more productive. They want to move faster, and they want to compete more effectively. Our job is to remove the complexity that gets in the way. That's what our unified platform is designed to do. That's what 8x8 AI Studio is designed to do. It's ultimately how we create long-term value for our customers. One of the reasons I believe we're well-positioned is because AI actually increases the value of communications. Every AI agent still has to communicate with customers, with employees, with other business applications, increasingly with other AI agents.

Voice messaging, digital engagement, become the interface between people and intelligent software. We believe communications infrastructure becomes more strategic as AI adoption accelerates. We are one of the only companies with unified communications, contact center, CPaaS's programmable APIs, and native AI development on a single platform. That gives customers one place to orchestrate communications, customer engagement, and AI, rather than stitching together products from multiple vendors. As organizations move beyond AI experimentation and into production, we believe that simplicity becomes a meaningful competitive advantage. One thing I learned over the years is that customers tell you what they think by what they do, not just by what they say. This quarter, we saw encouraging evidence across the business. Adoption of our AI solutions, including AI Studio, Intelligent Customer Assistant, increased 121% year-over-year.

We believe AI Studio, our native AI development environment, changes the game. It levels the playing field for small and mid-sized businesses, giving them enterprise-grade agentic AI capabilities similar to what is available at much larger organizations with much larger price points. Just three and a half months after official launch, more than 200 organizations are building agents with AI Studio. They have created more than 2,900 AI agents. More than half of these customers have moved beyond experimental stage and have become paying customers. These are encouraging metrics. The product is still in beta. Customers using AI Studio span healthcare, IT services, property, retail, insurance, automotive, energy, logistics, and more. They're solving a wide variety of issues, improving IT operations, facilitating insurance policy renewals, role-playing to train human agents in de-escalation. That's the kind of breadth we hope to see.

We're seeing the same momentum across the broader platform. Customers using three or more paid 8x8 products increased 18% year-over-year. Now represent approximately 38% of our recurring revenue. Revenues from our newer products increased 18% year-over-year, driven by strong performance from Engage, AI Solutions, and Analytics. Our channel-generated pipeline grew approximately 25% year-over-year. To me, those metrics all point to the same conclusions. Customers are adopting more of the platform, partners are beginning to bring us into more opportunities. We're building deeper, longer-term customer relationships. That's exactly the kind of durable business model we're working to create. Innovation remains one of our core values and sources of our strength. We measure innovation by customer outcomes, not by the number of features we release. This quarter, we introduced Pulse, helping organizations transform conversations into searchable organizational knowledge.

We also continue expanding AI Studio, making it dramatically easier to build AI applications in almost any language. For enterprises, that accelerates innovation. For small organizations, it levels the playing field by making sophisticated AI accessible without requiring large development teams. For our partners, it creates an entirely new opportunity to develop and deliver differentiated solutions for their customers. Again, our goal is not simply better technology. It's leveraging AI and our unified platform to help customers solve problems faster with less complexity. As we transition to a phase focused on awareness and adoption, our priorities are actually pretty straightforward. Each reinforces the other, creating a flywheel effect. As we have since I became CEO, we will continue to invest in innovation that makes communications smarter, AI easier to deploy, and customer engagement more effective. That hasn't changed. The world of software has.

We believe for the first time in the history of software, innovation cycles are shorter than sales cycles. This makes removing friction from the go-to-market engine increasingly important. We have boiled our fiscal 2027 priorities down to three. First, we will continue strengthening our partner-first go-to-market strategy. Our partners play a critical role in helping customers realize value faster and are the most effective way to deepen and expand our reach. They drive greater adoption at the local and regional level, provide market-specific expertise across new vertical markets, and expand our presence to new geographies. AI Studio creates new opportunities for them to build differentiated solutions on top of our platform. Within the existing sales and marketing cost envelope, we are shifting resources to partner recruitment, training, and enablement. We are building programs that go beyond one-time spiffs to drive durable outcomes for partners as well as for 8x8.

Reinforcing our theme of reducing complexity, we recently introduced our 8x8 small business partner portal for resale partners in the U.K., Ireland, and Australia. In what we believe is an industry first, we have developed a pricing and provisioning platform that breaks out of the traditional SaaS licensing model by enabling consumption-based self-service for small business UCaaS deployments. We are in the early stages of rollout, but we believe this new platform will help partners win more customers, onboard them more effectively, and expand those relationships over time. Second, we remain focused on increasing customer retention. While our retention rates are consistent with industry benchmarks, and actually often a little bit better, we see reducing customer churn as perhaps the single most effective way to drive growth and profitability. We are shifting resources to drive customer success across all customer segments with a focus on awareness and adoption.

We anticipate our channel partners will play a big role in this initiative. Our customers are using the advanced features of our platform. A customer using the advanced features of our platform is the ideal candidate for multiple products, which brings me to our third priority for fiscal 2027, driving multiple product adoption within our installed base. We have made great progress so far, but I believe recent innovations like AI Studio, 8x8 Workforce Management, and 8x8 Engage can accelerate multi-product adoption, simplify deployment, usage-based pricing models, and increase partner and customer engagement all drive this initiative. We are working through external metrics that give investors visibility on these initiatives, and I look forward to reporting our progress in the future. Before I turn the call over to Kevin, let me leave you with one final thought. Transformations like the one we're executing rarely happen in a straight line.

Customers' buying patterns evolve. Large deployments don't always happen the quarter you expect. Markets change. Technology changes. All of these, as well as the timing of things like compensation adjustments, can cause volatility in near-term results. Our commitment to you, our shareholders, is that we will continue making investments that we believe strengthen our long-term competitive position. That's simply part of building an enduring business. We don't judge our progress by any single quarter. We look for strengthening trends, broadening customer adoption, and deeper partner engagement. Quarter after quarter, we're seeing increasing evidence that those indicators are moving in the right direction. That's why we've had the confidence to increase our revenue outlook for the fiscal year, not because of one strong quarter, but because our confidence in the underlying trajectory of the business continues to grow. Our strategy hasn't changed. Our confidence in its success has.

Thanks, Sam. Good afternoon, everyone, and thank you for joining us for our fiscal first quarter earnings call. In addition to our shareholder letter, detailed financial results are available in our press release and on our investor relations website. 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. Q1 marked our fifth consecutive quarter of year-over-year revenue growth, extending the momentum we built in fiscal 2026 as we again delivered healthy operating profit and further strengthened our balance sheet. We exceeded our guidance ranges for service revenue, total revenue, operating profit, and cash flow from operations, and delivered earnings per share at the top of our range.

We had another record quarter for service revenue, and we have had positive operating profit and cash flow from operations in every quarter for more than five years. Total revenue was $190.2 million, and service revenue was $185.3 million, growing 4.9% and 5.1% year-over-year, respectively. These results reflected continued strength in our usage-based offerings. Our platform usage revenue, which include our CPaaS communication APIs, digital channels, and AI solutions, set another all-time record and accounted for approximately 26% of service revenue in the quarter, compared to approximately 17% in Q1 2026. Platform usage revenue grew approximately 63% year-over-year. Gross profit was approximately $117.2 million, above the gross profit dollars implied by the midpoint of our Q1 guidance.

Gross margin as a percent of revenue was 61.6%, reflecting the continued mix shift toward our usage-based offerings, which in aggregate carry a lower margin profile but can add meaningful gross and operating profit dollars as the business scales. We are actively working to expand margins within the usage portfolio, but as that part of the business grows, it does impact the consolidated gross margin percentage. Importantly, we are leaning into where the market is growing and not where the highest gross margin sits today. To be clear, this is a deliberate choice. As demand for AI-driven customer engagement accelerates, we are prioritizing share capture in the fastest-growing part of the market, which we expect to convert into stronger profitability and cash flow over time.

As we have articulated over the past few years, we manage the business to operating income dollars, and we have consistently demonstrated the ability to offset gross margin mix impacts with disciplined operating expense management. Operating expenses were down more than $8 million year-over-year, with the majority of the savings realized on the sales and marketing line as we focused on improvements in go-to-market efficiency. As a result, operating income came in at $18.9 million, and operating margin was 9.9%, both above the high end of our guidance range. We continued to meaningfully reduce our debt service costs through significant pay-downs of debt principal. Trailing 12-month cash interest paid at the end of Q1 2027 was approximately $16.6 million, down approximately $5.6 million, or 25%. Cash interest paid in Q1 was approximately $1.8 million, reflecting our term loan interest payment.

The combination of higher revenue, lower operating expenses, and lower interest expense resulted in net income of $13.6 million and fully diluted EPS of $0.09 per share at the high end of our guidance range. Cash flow from operations was $17 million for the quarter, significantly above the high end of our guidance range. The strong Q1 result reflects both operating over performance and favorable timing of collections and payments, and is a reminder that cash flow from operations can vary meaningfully quarter-to-quarter based on timing. We ended the quarter with $90.6 million in cash and cash equivalents, excluding restricted cash, a decrease of approximately $2.7 million sequentially, reflecting the $14.5 million term loan payment made during the quarter. We ended Q1 2027 with $309.4 million of principal debt outstanding.

This represents a reduction of nearly $240 million, or approximately 44%, from the August 2022 peak of $548 million. I would like to share one reporting note ahead of next quarter. The term loan balance currently classified as long-term debt will move to current liabilities on our balance sheet, reflecting the August 2027 maturity. This is a standard GAAP mechanic, not a change in our financial position. We intend to continue paying down our term loan on schedule and are confident in our ability to refinance our debt balances prior to maturity. We are not prepared to share refinancing specifics today, but we remain confident in the cash-generating capabilities of our business model. Turning to guidance, we are providing both second quarter and updated full year fiscal 2027 guidance.

Our outlook reflects continued discipline and a measured view given the broader macro environment as we continue building a more diversified, durable business. We are leaning into where the market is growing fastest while protecting profitability through the operating discipline we have demonstrated quarter-after-quarter. For fiscal Q2 2027, we are providing the following guidance. Service revenue is expected to be between $180 million and $185 million. Total revenue is anticipated to be between $185 million and $190 million. We anticipate gross margin between 60.5% and 61.5%, reflecting the continued mix shift toward usage-based revenue. We anticipate operating margin between 8% and 9%. This results in a range for fully diluted non-GAAP earnings per share of $0.07 to $0.08 per share based on approximately 149 million fully diluted shares outstanding.

In fiscal Q2, we expect contractual interest expense, which excludes amortization of debt issuance costs, to be approximately $3.9 million based on current interest rates and the principal outstanding on our term loan and 2028 convertible notes. We expect to make cash interest payments of approximately $5.9 million, which reflects both the term loan interest payment and the semiannual interest on our 2028 convertible notes. We do not plan a term loan prepayment in fiscal Q2. Prior voluntary prepayments have already covered our required principal payments through the quarter ending September 30th, 2026, with the next required payment due in the December quarter. We anticipate cash flow from operations to be between $9 million and $11 million. Let me provide a little more color on the model dynamics driving our Q2 guidance.

We are assuming continued strong growth for platform usage, although the year-over-year growth rate is expected to slow from 63% in Q1 to the 30%-35% range year-over-year. The slower growth reflects a tougher compare to a strong Q2 2026 rather than a change in dynamics of the business or the market. The higher platform usage growth drives a modest shift in mix. We expect gross margins to be flat to down slightly quarter-over-quarter. Keeping operating expenses flat to Q1 2027 gives us our operating margin guidance of 8%-9%. Our annual merit increases take full effect in fiscal Q2. We are able to offset the incremental cost with operational efficiencies and a lower cost structure associated with platform usage. For the full year fiscal 2027, we are updating our guidance as follows.

We are raising our service revenue guidance range to be between $725 million and $745 million, an increase of $18 million from our prior range of $707 million to $727 million. This reflects our revenue over-performance in Q1, as well as our confidence in our business trends. Total revenue is anticipated to be between $745 million and $765 million, an increase from our prior range of $727 million to $747 million. We anticipate gross margin to be between 60.5%-61.5%, reflecting the increasing amount of usage-based revenue in our revenue mix. Our prior guidance for non-GAAP operating margin implied non-GAAP operating income of approximately $70 million at the midpoint. We are maintaining that level. This yields a slight adjustment to the operating margin range to 8.8%-9.8%, based on our updated revenue outlook.

We are also maintaining our range for fully diluted non-GAAP earnings per share of $0.33-$0.38 per share, assuming approximately 150 million average diluted shares outstanding. While our updated gross margin range reflects the continued mix shift toward usage-based offerings, we are managing that mix operationally through disciplined operating expense management. This allows us to maintain our full-year non-GAAP operating income and cash flow from operations outlook, even as our revenue mix continues to evolve. For full year fiscal 2027, we anticipate cash flow from operations of approximately $45 million to $52 million, unchanged from our prior guidance. We expect to make $39.5 million of principal payments on the term loan during fiscal 2027, in line with the loan's amortization schedule. In closing, Q1 was a strong start to fiscal 2027.

The investments in our platform are driving top-line momentum, while our commitment to financial discipline gives us the flexibility to invest in high-growth areas while maintaining our profitability and cash flow commitments. Our updated outlook for the fiscal year reflects both our confidence that we are headed in the right direction and our disciplined operating approach. With that, I will turn the call over for Q&A.