8x8, Inc. Stock

Good day, and thank you for standing by. Welcome to the 8x8, Inc. Q2 2027 Earnings Conference Call.

[Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Kate Patterson, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the second 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.

Unless otherwise noted, all financial metrics discussed on this call other than revenue and cash flow from operations are non-GAAP. These non-GAAP metrics were not prepared in accordance with the U.S. generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP metrics to the most directly comparable GAAP metric is provided in our earnings press release, shareholder letter and earnings presentation slides, each of which is available on 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, our plans to refinance our debt 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 most recent report 10-K -- Form 10-K and our quarterly report on Form 10-Q to be 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.

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

Thank you, and good afternoon, everyone. We delivered another strong quarter ending in September; our sixth consecutive quarter of year-over-year revenue growth. Service revenue reached $187.8 million, up 4.9% year-over-year. Platform usage revenue, which includes the use of our communications APIs, digital and voice AI interactions, telephony minutes grew 51%, driven primarily by the use of our communications APIs in Asia Pacific. Our second quarter outperformance led us to raise our full year outlook for revenue, profitability and operating cash flow. Kevin will cover the financial results and outlook.

I want to focus on the business we're building and how we turn more of our platform into value for customers and growth for 8x8. Our promise is to make every conversation count. AI gives that promise new power. It can automate the work of a conversation sets in motion, help people resolve problems faster and turn conversation data into knowledge that makes the next interaction more useful. That starts with reliable communications. Our global carrier-grade voice network combines decades of voice expertise with the connectivity, quality and operating experience needed to serve businesses around the world. Voice remains central to customer service, particularly when an interaction is complex, urgent or personal. As AI agents handle more conversations, reliable connections, high-quality audio and seamless handoffs to employees become even more important. Our platform brings that network together with contact center applications, communications APIs, interaction data and native AI. Customers can put these capabilities to work together with fewer systems to integrate and manage.

Our priorities remain the same as we outlined in Q1, become truly partner first, improving customer satisfaction and retention and increasing multiproduct adoption. Let me start with partners. We are committing resources, strengthening leadership and tailoring our offerings to help partners win customers, retain them and expand their relationships. Our growth depends on their success. During Q2, we introduced a tiered reseller program that rewards those outcomes. We also introduced 8x8 Small Business, a flexible consumption-based offering that lets resellers serve smaller organizations without fixed seat commitments.

Microsoft Teams gives us another opportunity to expand our reach. On November 2, we announced that 8x8 has earned Microsoft certification for our session border controller technology for both Direct Routing and Operator Connect. We will now run this SBC infrastructure ourselves with no third-party infrastructure provider, which we will expect to result in improved quality and reliability with better economics for both 8x8 and Microsoft partners. We are one of the only native cloud communications company providers with Microsoft-certified SBC technology, enabling both calling options. Hundreds of millions of people use Teams, bringing external calling into the environment where they already work is a substantial opportunity for us and our partners.

The next opportunity is within our installed base. Many customers first choose 8x8 for a single product. As their needs grow, we want them and their trusted partners to look to us for more. AI increases what those products can do; transcription, analytics, call summaries turn conversations into useful knowledge. Shared context makes that knowledge available to employees and AI agents, so the next interaction can pick up where the last one ends. Our October updates make this tangible. Customer 360 brings interaction history into agent workspace with sentiment and topic insights where speech analytics is enabled. JourneyIQ puts voice interactions across Work, Contact Center, Engage and AI Studio on one time line, helping teams see where calls transferred, stalled or dropped. Engage brings contact center capabilities to customer-facing employees in sales, field service, finance and customer success. They gain tools for more responsive service while supervisors get visibility across Engage and the contact center. Engage customers more than doubled year-over-year.

CPaaS APIs extend those workflows further. Teams can move from a call to a video, send a secure payment link or follow-up through messaging. Those are enterprise applications connecting communications directly to business processes. Outside Asia Pacific, customers integrating CPaaS APIs into their workflows doubled year-over-year. More than half of those year-over-year customer additions came in the second quarter. As customers deploy applications and build usage, we see an opportunity to expand this enterprise traffic, particularly in EMEA and North America. We are also seeing broader adoption of premium capabilities and an acceleration in the adoption of our AI solutions. Overall, customers using three or more revenue-producing 8x8 products grew 19% in the second quarter. Those using four or more products grew more than 50%, both year-over-year numbers.

Recurring revenue from our AI solutions grew 58% year-over-year and customers using at least one AI solution represented approximately 13% of total recurring revenue at the end of September, up from 7% a year ago. AI Studio opens up another dimension to the AI opportunity. Communications, conversation intelligence and shared context are the building blocks for better customer experiences. AI Studio is our native development environment built directly into the platform where customers and partners can bring those capabilities together in their own agents and workflows. They describe what they want to accomplish in a plain language, their agents can draw on customer contacts, connect to business systems and work across voice and digital channels.

Starting within 8x8's platform reduces the complexity of assembling separate technologies and connecting them afterwards. AI Studio has moved from open beta to our early adopter program. We provide free credits for every customer to get them started with AI Studio through our App Store without additional AI Studio licensing fees, so they can get started building agents immediately. AI Studio is HIPAA-ready and designed to support our customers' GDPR compliance, helping them address privacy and data handling requirements. Interactions powered by AI Studio have grown nearly 450% since it became available through the App Store in April. The numbers are still small. but the customers are already putting agents to work in production. A health care organization is routing callers to the right department, an IT services provider has connected the phone and chat agents to its ticketing system, an utility provider has expanded priority routing into after-hour technical support and automated call evaluation. That last example illustrates the expansion opportunity.

A customer solves one problem, sees the value, identifies another use case and builds another agent. Partners can multiply this effect. They can turn industry expertise into applications that they adapt and deploy across multiple customers. Pool credits and consolidated invoicing makes those accounts easier to manage. It's a classic flywheel. Partners build differentiated services, customers get applications tailored to their needs, and our opportunity grows as adoption expands.

Here's the message I want to leave you with before I turn over the call to Kevin. 8x8 is a healthy growing business with a strong financial foundation and substantial opportunities ahead. Our network connects the conversations businesses depend on, our platform turns them into insights and shared context, AI Studio allows customers and partners to build their own agents and apps, creating more ways to put those capabilities to work. Capturing the opportunity ahead of us takes focused execution, helping customers succeed and stay with us, expanding adoption and helping partners grow. That is how we intend to deliver on our promise to make every conversation count and create greater long-term value for our stockholders. Thank you to our customers, partners and employees and to our stockholders for their continued support.

Kevin, over to you.

Thanks, Sam. Good afternoon, everyone, and thank you for joining us for our fiscal second quarter earnings call.

In addition to our shareholder letter, detailed financial results are available in our press release and on our Investor Relations website. Therefore, I'll focus my remarks on a few key highlights. Unless otherwise stated, all figures other than revenue and cash flow are presented on a non-GAAP basis. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our press release and shareholder letter.

Q2 marks our sixth 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 the high end of our guidance ranges for service revenue, total revenue, operating margin, earnings per share and cash flow from operations. We had another record quarter for service revenue and generated positive cash flow from operations for the 23rd consecutive quarter.

Total revenue was $192 million and service revenue was $187.8 million, growing 4.3% and 4.9% year-over-year, respectively. These results again reflected continued strength in our usage-based offerings. Our platform usage revenue, which includes the use of our communication APIs, digital and voice AI interactions and telephony minutes set another all-time record, growing approximately 51% year-over-year and representing an increasing share of our service revenue. Gross profit was approximately $115.5 million, above the gross profit dollars implied by the midpoint of our Q2 guidance. Gross margin was 60.1%, reflecting the continued mix shift toward our usage-based offerings, which in aggregate carry a lower margin profile, but can add meaningful growth in operating profit dollars as the business scales.

We are focused on increasing gross profit dollars. As platform usage grows, we expect gross profit dollars to increase, but the mix shift will continue to impact the consolidated gross margin percentage, and this is a deliberate choice. We are prioritizing share capture in the fastest-growing part of the customer engagement market, where AI is reshaping how enterprises connect with customers. Usage-based revenue scaled efficiently and combined with disciplined expense management, this allows us to continue growing operating income dollars and cash flow, which we expect to strengthen over time.

Operating expenses were down approximately $9 million year-over-year with savings realized across several functional areas. As a result, operating income came in at $20.7 million and operating margin was 10.8%, both above the high end of our guidance range. The combination of higher revenue, lower operating expenses and lower interest expense resulted in net income of $17.6 million and fully diluted EPS of $0.12 per share, also above the high end of our guidance range. Contractual interest expense was $3.9 million, down from $4.5 million a year ago, reflecting the continued decline in our debt balances. As expected, cash interest paid in Q2 was approximately $5.9 million since we paid both our term loan interest payment and the semiannual interest payment on our 2028 convertible notes.

Cash flow from operations was $13.1 million for the quarter, above the high-end of our guidance range. We ended the quarter with $102.6 million in cash, cash equivalents and restricted cash, an increase of approximately $10.3 million sequentially, reflecting strong operating cash generation. We ended Q2 '27 with $309.4 million of principal debt outstanding. On October 9, we repaid an additional $12.5 million in principal, bringing the balance of the term loan down to $95 million and total debt to approximately $297 million. On a post-payment basis, we have reduced principal debt by more than $250 million or approximately 46% from the August 2022 peak of $548 million.

As we previewed last quarter, our remaining term loan balance has been reclassified to current liabilities on our balance sheet, consistent with standard GAAP treatment ahead of the August 2027 maturity. We are well along in our refinancing process, and we are confident that we will have a solution in place that addresses our debt structure, including the term loan and the 2028 notes ahead of the August 2027 maturity of the term loan. Our consistent cash flow generation, operating discipline and multiyear track record of debt reduction provide a strong foundation for this process. We will share additional details at the appropriate time.

Turning to guidance. We are providing both third quarter and updated full year fiscal 2027 guidance. Our outlook reflects continued focused execution and operating discipline as we continue building a more diversified durable business. We are leaning into where the market is growing fastest while protecting profitability and cash flow through the operating discipline we have demonstrated quarter after quarter.

For fiscal Q3 '27, we are providing the following guidance. Service revenue is expected to be between $184 million and $188 million. Total revenue is anticipated to be between $188 million and $192 million. We anticipate gross margin between 58% and 60%, reflecting the continued mix shift toward usage-based revenue. We anticipate operating margin between 8% and 10%. This results in a range for fully diluted non-GAAP earnings per share of $0.08 to $0.09 per share based on approximately 150 million fully diluted shares outstanding. In fiscal Q3, we expect contractual interest expense, which excludes amortization of debt issuance costs, to be approximately $3.7 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 $1.7 million, reflecting our term loan interest payment. We anticipate cash flow from operations to be between $11 million and $13 million.

Let me provide a little more color on the model dynamics driving our Q3 guidance. We are assuming continued strong growth for platform usage, although the year-over-year growth rate is expected to moderate from 51% in Q2 to the 35% to 45% range year-over-year as we lap a strong Q3 '26 comparison and focus on higher-margin solutions within the CPaaS portfolio. That said, the continued mix shift to platform usage drives our gross margin outlook slightly down from Q2. We are keeping operating expenses tightly managed, consistent with our commitment to deliver on our operating income and cash flow targets for the year.

For full year fiscal 2027, we are updating our guidance as follows. We are raising our service revenue guidance range to between $732 million and $752 million, an increase of $7 million from our prior range of $725 million to $745 million. This reflects our revenue overperformance in Q2 as well as our confidence in current business trends. Total revenue is anticipated to be between $750 million and $770 million, an increase of $5 million from our prior range of $745 million to $765 million. We anticipate gross margin to be between 59.7% and 60.2%, reflecting the increasing amount of usage-based revenue in our revenue mix.

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 raise our full year non-GAAP operating income, earnings per share and cash flow operations outlook even as our revenue mix continues to evolve. Our prior guidance for non-GAAP operating margin implied non-GAAP operating income of approximately $70 million at the midpoint, and we are raising this to a midpoint of $73 million and a range of $68 million to $78 million. This yields an operating margin range of 9.1% to 10.1%. We are also raising our range for fully diluted non-GAAP earnings per share to $0.36 to $0.40 per share from our prior range of $0.33 to $0.38 per share, assuming approximately 150 million average diluted shares outstanding. For full year fiscal 2027, we are raising our guidance range for cash flow from operations to between $49 million and $54 million, up from our prior range of $45 million to $52 million.

In closing, Q2 was another quarter in which we delivered strong financial results. 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 raising our profitability and cash flow outlook for the fiscal year. Our updated outlook reflects both our confidence in the trajectory of the business and the operating discipline we continue to demonstrate. I want to thank our customers for their continued partnership, our employees for their dedication and our investors for their continued support.

With that, I will turn the call over for Q&A.

[Operator Instructions] Our first question comes from Matthew Maus from B. Riley Securities.

It's Josh Nichols here from B. Riley. Well, look, congrats on the record quarter. Clearly, like the usage revenue came in well above the 30% to 35% guide. Maybe if you could just give a little bit more color on what's driving that, traditional CPaaS versus AI and Engage platform offerings overall?

All right. I'll take the first part of that, and I'll let Kevin make any comment on the number. Okay. So it's across the board, we're seeing increases in usage product. But a couple of things are going on, Josh. First, yes, the core CPaaS business in Southeast Asia continues to grow very robustly. We've seen some of our competitors effectively exit the market, opening the door to more opportunities there, and we've been seizing on them. Also, all of our AI products are usage-based by nature for the most part when we charge for them. And we're seeing a very rapid adoption of AI products into our base and those kinds of things. And we put out numbers recently in a release. We mentioned them on the call also, right? I think it's -- Kate can bring it. I think it's 13% of our revenue now has -- of our revenue has an AI product attached to it. So we're seeing that adoption increase, and that's coming through in the usage base line also. And so the hard part, obviously, with usage is not contracted. And so there's not that forward certainty of revenue, but we're really pleased with how it's been going.

Yes. And I'll echo what Sam just saying, Josh, it is we do have growth in various areas across the platform usage. Still the bulk of the revenue is in APAC, but we are seeing upticks elsewhere. So that's a good sign.

And I noticed a couple of things. One, you've had very good success, the multiproduct customers that are ramping. I'm kind of curious with like the new customers that you're seeing coming on board, are they coming in like strictly as usage customers or are some landing and then expanding like more UC and contact center or more of the customers now signing up initially from like a multiproduct offering?

I mean the thing is it's a little bit of everything, right? So we are winning more multiproduct land new logos. Obviously, a vast majority of our usage-based are add-ons to existing UC/CC customers. And still landing with that seat message is -- that seat product is generally the first -- the core of the land. So even if we sell an AI Studio or we sell one of CPaaS or one of the other things or SMS messaging or WhatsApp or anything else, most of those are effectively added on to that core UC platform land for our main business. And then in Asia, for our CPaaS business, that just starts as all usage, all new logos or usage. We sell obviously, in Australia, New Zealand and other places, UC/CC, but it's not as big as the CPaaS business. But it's a little bit of everything. I'd love to tell you it's really straightforward, but it all depends on the problem the customer is trying to solve.

Fair point. I think that's good for now.

[Operator Instructions] I'm showing no further questions at this time. I would now like to turn it back to Sam Wilson for closing remarks.

All right. So thank you, everyone. I know it's a super busy day with the elections yesterday and lots of earnings today. So I appreciate the time to be on the call tonight. I just want to refer everybody back to in our IR section as we did an analyst event or kind of a readout, a virtual event last quarter. I think there's a lot of super important information, long-term operating model, those kinds of things. We're in that thing. So you have any questions about the company, et cetera, as you read this transcript, please refer to that. That's a great source of information. And otherwise, we won't probably speak to you again until after the holidays. So I wish everybody a happy holidays coming up and look forward to talking to you again in January and February. Thank you.

Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.

Welcome, everyone. Thanks for joining us today for 8x8 investor update. We're going to handle this a little bit differently today, more of a sort of a talk show format with slides accompanying it. And I'm here with Sam Wilson, our CEO; Bryan Martin, our CTO; and Kevin Kraus, our CFO, and they'll be here to answer questions and take us through. Before we get started, I want to transition to our safe harbor statement and a couple of other housekeeping items. So I just want to caution you, let me remind you that today's discussion includes forward-looking statements about future financial performance, including investments in innovation, focus on profitability and cash flow and other statements regarding our business, products and growth strategies.

And we caution you to not put any undue reliance on these and take no obligation to update. And then I also want to remind you that we will include non-GAAP financial measures and the appendix to the slides will have a reconciliation of those non-GAAP to the corresponding GAAP metrics.

So with that, let's turn over to our regular content. Housekeeping. Yes, housekeeping item. If you would like to ask any questions in the chat, this is how to do it. [Operator Instructions] I'll be monitoring that chat window for any questions that come up. Okay. I think, Sam, a good time for you to talk about why 8x8.

Okay. So obviously, I feel passionately about this because it's 8x8, and I'm the Chief Executive Officer of the company. But I just want to remind investors some of the basics about what we do and how we do it, right? It's a large and growing market opportunity. And by large, it's, I don't know, $100 billion, $150 billion, $200 billion, a really big number compared to our $735 million a year in revenue. And so it's super important that we remember that this is a large opportunity that is coming our way because we are still in the process of moving from on-prem to cloud. And so our opportunity inside of the large TAM is a growing opportunity around the cloud version of it. Now that growth has slowed down from the heydays, like all technology adoptions, the heydays. But you still have a core tailwind around the on-prem to cloud.

Second, voice network creates a structural advantage. There's this belief that with the hyperscalers in existence, the ability for software companies to create structural advantage, infrastructure advantage, if you will, has changed and maybe it has for some companies, but it certainly hasn't for us, right? We have a global voice network that we've been investing in. We offer PSTN replacement to 59 countries. We have users in 160 countries. We make billions of phone calls per year, and it transverses across our network. And we believe this voice network becomes more important in an age of AI. I gave a talk not too long ago, and I showed a picture of James Kirk from Star Trek talking to his AI in the 60s. And Gene Roddenberry clearly understood that Kirk was going to speak to his AI. He had no keyboard.

He was not furiously typing away at 30 words a minute. He was speaking to his AI. So I'm a firm believer that the next billion phone numbers used in the world will be on with AI agents, and those will be used, and we offer a global voice network, and that is a structural advantage. We have a unified platform with native AI. What does that mean? We offer voice, video, chat, contact center, field service workers. We offer CPaaS. We offer it on one unified platform, which means common analytics, common administration, common user interface, common conversational OS, common capabilities that allow users and customers to mix and match that technology for success. We've reaccelerated growth, right? We've had 5 quarters of year-over-year growth. We dipped as we retrenched the company and expanded our product portfolio.

There was much doubt in the investor community whether we grow again, and we've had record revenues. And then lastly, we've had record profitability in terms of dollars of profits over the last year or 2, and we've used that to continue to delever the balance sheet, pay off debt and drive more and more profits into the company. Because remember, when we pay off debt, that means less interest, less interest means higher EPS over time, all things being equal. And so I think these are just core aspects of what makes us a company, right? We're a software company in the telecom space. We have AI. We have a unified platform. We have global capabilities and our customers value that tremendously from us.

Okay. We'll come back to each of those as we go through the presentation. I am now going to turn it to Kevin to take us through the numbers.

Yes. Okay. So this complements some of what Sam has already said. We are a growing business. Last fiscal year, $736 million in revenue. We serve over 52,000 customers globally. Again, you heard from Sam, we're a PSTN replacement in over 50 countries around the world. And we have a lot of third-party validation that goes along with our success. We've been a multiyear Gartner Magic Quadrant winner in both Unified Communications and Contact Center. Strong performer awards for both Unified Communications and Contact Center and Forrester. We've got a lot of other customer success-oriented awards, lots of Stevies. So we have a lot on our trophy case at the office. So very proud of what we've been doing as a company.

And just real quickly, last quarter's highlights.

Sure. You heard from Sam already. It was our fifth quarter of year-over-year growth. We did $185 million in service revenue, $190 million in total revenue. Service revenue up about 5% year-on-year. And the profitability of the company, I will just say the multiproduct customers is a metric that we really focus on here because multiproduct customers tend to be stickier, higher retention, et cetera. All the things that we mentioned in our earnings calls. That customer growth was up 18% and a little bit nuance on the revenue growth rate. We bought a company called Fuze about 4 years ago. The people who follow us know this. And we've successfully transitioned those customers over to 8x8. And after the migration headwinds end or when you discount them rather, which is ending now, they've ended, we've migrated all the customers over.

We had an 8% revenue growth rate. So 5% with -- in total, 8% without the Fuze headwinds. On the profitability side, we are GAAP profitable last quarter. Non-GAAP operating margin healthy, nearly 10%, 22nd quarter in a row of positive cash flow from operations and non-GAAP operating profit. So we focused on that. We want to generate the profits and cash flow to pay down the debt for all the reasons you heard Sam just mentioned. And we generated $17 million of cash flow from operations last quarter and ended the quarter with $92 million of cash and cash equivalents and restricted cash. So we've got a very healthy balance sheet that we continue to work on and improve over time.

Great. Great. So Bryan, I don't want to leave you out here. You've been with 8x8 for a long time, and I think you're the best person to take us through the defensive moat that we have. We get that question a lot from investors.

Yes. It starts with what Sam talked about. It's that carrier-grade network in the cloud. It seems simple. A lot of investors wrote off voice long ago, but voice is the channel of choice that you go to for your most important conversations. When you need to call the plumber or I miss my flight in the morning, I'm not going to start texting with United Airlines. I'm on the phone. I need a flight now, and that's the urgent channel that you go to. And then this little technology that came along, we love acronyms at 8x8. And finally, an acronym came along called AI that every one of our customers, it's the only acronym we use that I don't have to define what it is or what it means.

And the exciting thing about it for investors that have been with us through the migration to the cloud, industries like banking, finance and legal, the late adopters of cloud are all early adopters of AI. So everyone is trying to figure out what it means for their business, how do they use it? They've got to go in front of the Board or their CEO and not just the IT teams anymore. And that's the other difference is cloud was something we sold to the IT team. AI is something that we sell to every business, every department. And the solutions -- the early solutions and 8x8 was applying AI to communications very, very early way back before 2015. And we were bolting AI on to things that we were selling. And I see a lot of that out there. I see a lot of our customers trying to bolt it on here, different departments bolting it on and applying it to a subset of their data.

And I think it's a huge mistake. And I think if you listen to the salespeople coming in from your CRM suppliers or marketing has got this marketing tool and they've got a bolt-on AI solution for that, you end up with disparate AI solutions that are working on a subset of data. And what 8x8 has really figured out across our communications platform is we can apply a universal solution that works on every piece of communications data that comes across our platform. And you think about we see all of your communications. We see every message that's sent between your employees. We see every communication and interaction between our customers and their customers, and we can actually apply a holistic AI approach to processing all of that data. And that makes a huge difference in the outcomes and the solution that we can provide versus a piecemeal approach. And that -- it just -- we've applied it to ourselves. We were customer 0 of everything we've developed, and we're now able to take those solutions and make them real for our customers.

So you're saying context matters that the AI is smarter and gives you better outcomes with context. The next slide, we just have a few things here about the Global Voice network, and I know that you've been instrumental in helping create this. So maybe just walk us through a couple of the highlights, and then we'll sort of move over to the product.

Yes. Well, again, I want to actually give Sam credit because he's been in the chair. Are we at 8 years yet?

I've been at the company 10, but I've only been the CEO for 3.5.

Time runs.

It's dog years.

110.

At the same time when the industry was saying voice is dead, Sam really came in and doubled down on our investment in voice. So we've been investing in really increasing our presence, especially in Europe and North America, becoming a stronger -- I don't want to call it a carrier, but we're really investing in the strength of our cloud presence. And we've also now -- you saw the numbers that Kevin went through. We have the volume to actually tie in with the Tier 1s out there. We're not having to go through wholesalers in order to get to the Tier 1s. We can interconnect directly to the Tier 1s. It saves our customers' money because we're not having to pay those markups along the way. But it actually gives us better control of the numbering resources, gives us faster porting, which is a 4-letter word in our industry, porting numbers and dealing with number management is one of the hardest things to do in the voice world in any country around the world, tying those services together, providing better toll-free services to our customers.

And when you think about it in the world of AI, people are looking for things that will be durable in an AI world. The world of voice, you can't go to pick your favorite hyperscaler AI provider. You can't go to a Claude prompt to use as an example and say, give me a toll-free number in Indonesia. You can ask it, but it won't be able to provide it. Versus 8x8, we can give you a prompt that can do that. And we can do it inside of Claude or OpenAI or Google Gemini. But the actual resources that provide that are being supplied by 8x8. And so we have those resources. It's an extremely difficult capability to run and run reliably. It's truly mission-critical. I go back to -- I missed that flight. I've got to have those voice resources available. They've got to work 24/7, 365. They are mission-critical in the sense that we're running Tier 4 trauma centers on them. They are life and death literally. And they have to work and they have to work all the time, and our customers depend on that day in and day out. And we've been doing this for a very, very long time. And when everything works, no one thinks about it.

That's right.

It's only when they stop working that people realize it really is mission-critical, life and death. And we have an incredible team of teammates around the world. We employ more than 2,000 employees now. which I pinch myself every night because I remember the days when it was just a very small group of us sometimes on a Friday night around my kitchen table making this thing work. But it is amazing what this company has become and the resource and network that we've built around the world.

I just want to add one small thing because I know you highlighted it. But if you look in the upper left of the chart, right, best voice quality. When you are that Tier 1 carrier, there's no wholesaler in the middle. The call goes through less hops, the signaling is cleaner. There's -- it's going to be a higher quality. And in a world of AI, it's different than the legacy world that we used to be in, right? The legacy world of 7x24 support coverage was, I have a contact center in the United States, I have a contact center in India, I have a contact center in Poland or whatever the case may be, and that's my 7x 24 coverage. But in the world of AI, I'm going to have one AI agent that speaks 50 languages with 100 accents variants located in the United States or located in the United States and Europe for GDPR reasons.

We need to transfer those calls. Those calls need to be crystal clear so that the AI agent can pick up that clarity and understand how and what to do effectively. Otherwise, the AI benefits won't be there. And that is so important. And Bryan, you're so spot on when you say no one notices bad voice quality like a cell phone. Nobody notice bad voice quality until you say, can you hear me for the fourth time, right? And we see it all the time in our low-grade competitors. This is an easy place to cheat, buy cheap services from crappy wholesalers, I was going to use that word and offer low-priced VoIP. And the consequence is, yes, your AI is not going to work very well.

That's a great segue into kind of where we're going from a vision. So let's start, Sam. You just outlined part of the problem. Let's talk a little bit about what customer expectations are and what data fragmentation really means.

Right. So when you think about our platform, right, it's one platform that covers digital channels, Viber, Signal, WhatsApp, SMS, et cetera, covers the voice side of the network. And to make -- like we have the capability since it's all passing through our network to grab the context, the interaction, the transcription of every single message. And what we can do is put that together in one context of the situation, right? And so we know we can be able to see in a real-time type of dashboard, what was said on the call, what was the messaging, what are those kinds of things. And what -- when you do that, you can easily capture context. What's a simple example? We at 8x8 have the capability of grabbing all of our internal calls, all of our external calls unless they're specifically cited to not be transcribed and say, what was the #1 reason people -- our customers were upset yesterday or the #1 reason why people called our contact center yesterday or what was the #1 thing on people's minds yesterday, internal and external to our company. That is such powerful information.

This is the things that people have guessed at for years by asking sales reps, hey, what is the customer thinking? You no longer have to do that. You don't have to ask 1 sales rep who dealt with 5 customers yesterday. We can get a snapshot of every single customer interaction yesterday globally. We can slice it and dice it any way we want, right? Number two is, from a customer standpoint, this allows a substantially better customer journey.

I was on the phone with a Tier 1 financial service company not long ago. It happens to start with an F&B located in Boston, who runs our 401(k), and I had to have a simple thing done, and I had to repeat myself 5 times. 5 times, I had to repeat myself, 4 of which I explained, I sell a product, so I never have to repeat myself again. It was ridiculous, but they had to transfer me from department to department to finally get to retirement services and get it done. And then this gets back into the whole thing, right? Data fragmentation, separation, systems of record, systems of workflow, et cetera. IT professionals don't want another product, an AI bolt-on that has data located somewhere else in the cloud, not interlinked with everything else and no ability to measure the quality of the performance.

I think one of the biggest crazy things, and we offer products that don't do this, by the way. But one of the biggest crazy things is you ask the AI agent vendor, how is the AI agent doing. The quality management is from the same person who sold you the product. And as an industry, are we surprised when they always go, it's not my fault. It was perfect. It did everything perfect. And you have no ability to see that. Those things should be separate. What does a voice network give you? The ability to separate those things out. So AI raises CX expectations. We see the data from Metrigy and from others very clearly. Customers don't mind dealing with AI as long as the experience is fantastic. If you want the data -- if you want the experience to be fantastic, can't be siloed, can't be data fragmented and the AI agent has to have context to be successful. That's the problem. And we can solve that.

So that's a great way to talk about what we're trying to do.

That's right. So what does it take to solve that, right? Number one, you have to have one unified platform. Look, with every vendor, you end up with a separate set of contacts with every PBX vendor or every tenant vendor is a different call recording system, a different administration, a different contract, a different everything. And so stitching it together becomes a complex data science problem. I don't understand why you'd want to do that. We give it to you all in one platform ready to go. You want one workspace, right? You don't want half your vendors on one UC provider and another half on another UC provider and constantly trying to manage what all the employees are doing.

And what about all the employees that aren't knowledge workers. They need to be on something, so you can capture what they're doing, what's happening. You need to scale without complexity, right? It needs to be easy. Seasonal staff, new locations, onboarding, et cetera. I mean, usage is now 26% of our revenue because we are actively working to get rid of complexity and make it easy to scale up and scale down. And then AI that works for everybody, right? It needs to be, I don't know, seamless, easy, buildable, customizable, those kinds of things. And AI for everyone is not only every call, every meeting, but AI for me, if I'm 8x8 and I want AI in my tech support, it's different than AI in my billing engine, right?

If I'm a retailer in pet goods, that's different than a retailer in women's clothing or a retailer of sporting goods, right? And so you want the ability to have AI that works for everybody. That doesn't mean a generic AI that sort of gives blah answers. What it means is the ability to post train and be successful in offering AI that works in every vertical situation where it makes sense. Because if you're in the medical health care industry and you're scheduling an appointment, it's pretty different than if you're scheduling your pet for a grooming thing.

Right. So Bryan, the next few slides are your slides where we're talking about why every conversation matters. We want to make account, but you're going to talk about why. And I'm going to let you just go with the slides, tell me when you want to switch.

Okay. So we already talked about this a little bit that voice is the dominant channel for really, really important conversations. My dishwashers is ruining my brand-new hardwood floor, I'm going to call a plumber. But Sam already talked about the Star Trek example that it's also the dominant. It will become increasingly -- I can talk really, really fast, not as fast as Sam. But the AI can keep up. Like try to out talk, you can't. You can go really, really quick. So go ahead and go forward. I think we made that point. This is what's really important is that the paradigm has changed. So I used to go to a classroom with my notebook, and I tried to take notes on what was important about what the professor was saying. The compute power of AI has changed the paradigm. I don't need to take notes anymore. I go to Sam's meetings. I don't need to take notes because I can take the transcript from the meeting, and I have a perfect record of everything Sam said. I have a perfect impression of what mood he was in during the meeting.

Plus, you better have a to-do list coming out of this thing.

And I know everything that he asked me to do, unfortunately. And I have no excuse to say, well, Sam, I forgot that you asked me to that.

If he has a list also.

Of course, he does. And next week, he's going to know exactly what he asked me to do, and I'm going to know exactly what he asked me to do and which things I didn't do. So now you have a perfect record of the conversation, and it's flipped the paradigm of how we think about how we store that information completely on its head. So I no longer need those notes -- and you can see at the very bottom, a study that was done, they took 10 million call recordings, compared that with the notes that were in a CRM of those same interactions and guess which one was more accurate, right? The actual recording was a better record. So go forward.

I want to interrupt.

Go ahead.

We recently did something -- I don't know if you know this, we recently did something one of our top customers. We got -- at the permission of one of our top customers, we asked them, we wanted to pull all their call transcripts for 2 days, okay? And then we asked them, what do you think the #1 reason your customer was calling the last 2 days into your local stores? And what was the #1 reason they were calling in your contact center? They got both wrong.

Because they were using notes or because...

They were just using tribal knowledge guesses, ask somebody, et cetera. But when you actually pull 17,000 phone calls, drop it into AI. Now 10 years ago, we would say we're going to statistically sample 3% of those phone calls and spend 12 hours or 18 hours listening to these phone calls and take some sort of guess. But with AI today, we can take all 17,000 phone calls, drop it in, get a cup of coffee, probably get a burger and fries, come back and there's the answer.

And with the unified platform, we're capturing those conversations, whether they're into the contact center or into billing or technical.

The local store, the billing.

8x8 is taking it one step further. So the traditional way in the market companies are thinking about this equation right now is you're capturing every conversation between the contact center and your customers or maybe between your salespeople and your prospects, right? At 8x8, we're capturing every conversation, every employee chat, what your employees are talking about, Billing department got an escalation. We want to know what our employees in the billing department are talking about that escalation. How are they resolving it? What problems do we have that are causing that issue so that we can resolve that quicker. And we're tying all that information together.

And we're getting it omnichannel. We're getting across all...

E-mail...

Digital...

Digital video, meetings, WhatsApp.

Think about the old days, I'm going to go meet one of our customers tomorrow. In the old days, I want to know what's the last interaction someone at 8x8 had with that customer. I would go into my favorite CRM system. I would look at the customer, what do I typically find? Nothing. Because the salesperson that last visited the customer didn't even bother to take notes and put it in there. So now if I've got a recording of the last time that salesperson went to the customer, I've got a perfect record of what happened in that last interaction.

So we'll go to the next one.

I don't know what other slide. Okay. So then you can build, and I credit Jeff Pulver, a good friend of mine for building this concept. You actually build what we're calling a business conversation stack. And the way to read this is bottom up, you've got the actual conversations stored in the bottom. You actually store them in a very structured way, which is a global standard that 8x8 is supporting called virtual conversations. You actually now think about all the data we're storing. This is a company's most value -- because I got our employee conversations. I've got to worry about security, compliance, how is this being audited. Did we have consent to store this information? How is that being tracked? So there's a whole layer of -- now that you're storing all this data, you've got to secure it properly. That's what that -- is that teal. I don't know what that color is.

Then you let the AI start chomping on it. That's the next layer in the stack. Now you actually start getting intelligence out of it and then you start driving outcomes at the top. So that's how the entire stack works. That's a huge problem, but it's very valuable. If you can actually turn this loose inside of your business, now you're actually making a huge difference in the world. And that's what 8x8 is supplying to our customers.

And you asked me a question about vision earlier, right? So when I look out what we're doing 3 to 5 years, eventually, what we'll do is as we run through this, it will start to be a loop back to that AI platform, right? So as we get that trusted conversational infrastructure and as you -- it's really easy for us to start the process of saying generic answers are no longer appropriate for customer ABC, you can get a custom answer. For your customers, here's a custom answer for you to solve that problem. So we will not only go from a situation where you can query the system and say, what was the #1 reason people called, what was my last interaction, what's happening, et cetera? We can actually get to the next steps, which starts to say, when the customer calls and he asks for ABC, for that individual customer, we can answer their specific question. We can get the context of who are they, what products do they have, what are they doing? What historically have customers in their customer journey done, all those kinds of things and start to make this a cycle over.

So it's personalization at scale based on each customer. We can do that for our customers and our customers can start to do that for their customers.

Right.

So I think that's a great way to transition into the products and the platform. So the power of the platform, we'll skip through this pretty quickly. I think we've told people what we do. But we have our products at a glance. This kind of just gives you the overview for those of you who...

All right. So I want to stop here though. So think about this from a journey perspective, right? So we're known for the left, right? We're known as a unified communications company. Bryan, thank you for all your hard work. We've got like 500 patents in UC and everything else. We've been in the business since it was created. Since Gartner had their first Magic Quadrant, we were there. And like that's what we're known for, right? We've been in the contact center business since 2011, when we bought contextual, et cetera. And we've been in the CPaaS game since 2019 when we bought Wavecell. But the part that I think people actually misunderstand is also that CX beyond the contact center, right? And it's one of our fastest-growing products. Every business has a whole bunch of people, about 40% of their customer interactions that are dealing with customers that are not in their contact center.

And here's the secret. The secret is with AI, the contact center sleeve may shrink over time. It's not shrinking for us today, but it may shrink over time. But as it shrinks, the CX beyond the contact center is going to grow, right? That's the key. Like we're not losing agents and therefore, we're losing business. What we're losing potentially, and we're not seeing it yet, but let's just hypothetically, as AI gets better and better, we may have less need for a human being sitting in a contact center, sitting in a workspace, waiting for the next phone call to be more of a person out doing a job who takes phone calls on the side. And we've built products specifically for that. And that I think is why it's one of our fastest-growing product areas.

And that's the 8x8 Engage product.

It is.

And of course, we've already talked about our carrier-grade network that sits underneath all this and powers it as well as the communication intelligence, which is that ability to capture and analyze all the data.

And then the last thing just -- and I know it was on an earlier slide, but like I'm super proud of this. I think people miss this platform right here is doing over 16 billion interactions per year, 16 billion. That is phone calls, SMS messages, WhatsApp, everything, right, 16 billion interactions across this platform. That is not an insignificant number. Like the sheer internal computer science to have 16 billion transactions running at five 9s reliability every day is a pretty gosh darn big moat.

So Kevin, we'll have plenty of time to talk about financials in a few minutes. I feel you kind of let me sit over there, but I think we're going to transition here to a little bit of a technical explanation of the platform, and Bryan is going to walk us through this. And then a little bit about data security, compliance and data privacy.

Yes. I mean I'll just cover it at a 20,000-foot level. Again, I'll read it just bottom up. The global network that we started the conversation with is at the bottom of this slide. The intelligence we've been talking about sits above that, but it's connected to it because one of the things that we see great value in is actually utilizing data from the network and with the network to drive some of this decision-making and some of this intelligence. And I think that's also very unique. A lot of the AI solutions in the market are really divorced from that network connectivity. And a lot of those messages that Sam was just talking about, the WhatsApp and the Vibers and the SMS, and there's a brand-new channel out there called RCS, which is -- think of it as a very graphical kind of WhatsApp for old style text messaging.

If you're not connected to the network, you're missing all of that data. And there's a lot of data down there. So having -- it may look strange to have like intelligence down at the network level. I think it's very unique, and I think it's an 8x8 value add. The rest of this is we have a burgeoning ecosystem of partners, people like Microsoft and their Teams product that we've been partnered with since I think we made the decision in 2018, maybe late 2017. And I remember very vividly, I was sitting with our Head of Sales at one of our largest customers, still a customer today in New York City with their CIO. And he said, Bryan, before you guys leave, I want to show you this Teams thing and see what are you guys doing with Teams? And I just remember so vividly as a guy named Scott Sampson and I said, what's Teams? I never heard of Teams.

He said, well, come over here. A lot of my employees are starting to use Teams. And I came back to 8x8 here in Silicon Valley. And I said -- I remember calling a special meeting and said, we got a new Microsoft thing we got to talk about. It's called Teams. And I think it's going to be important. So let's talk about it. And sometimes better to be lucky than good. We decided back then to partner, not to compete. And to this day, we're one of their largest global partners for connectivity. So that ecosystem there, and Microsoft is not the only partner. They're just one of the largest ones. It's a big part of what we do. And that connectivity and the intelligence and the data that feeds into our AI ecosystem and our capabilities includes the data that comes from some of those partners in that part of the chart, too. The rest of it, I can just wave my magic wand and say the rest of it is...

I want to add one small thing because I can help myself, right? There's always buzz in Silicon Valley about one small box here, right? Like Agent Assist, [Tinybox ], $2 billion valuation, voice and digital bots. Oh my God, there's like 400 of these things, right? Look, we're one of the few companies across our entire industry that actually has the complete platform, right? And we have voice and digital bots. We have [ Micropersona ] front ends. We have an enterprise voice network, et cetera.

Everyone else goes to the customer and says, here's a box of Legos, you figure it out. We're the company that's differentiating ourselves from our competition because we go to them and say, we've already figured out how to put this together for you. And that is a key differentiator. In a world of Claude Code where any particular widget can be built relatively quickly, it's building the platform and the systems that will differentiate the companies, not the individual Lego blocks.

So I want to emphasize that point, but also the security compliance...

I was going to say that. We also bring that part of it, too. So every -- all of this doesn't work if your data is not kept secure, if you can't [ comply ] GDPR in Europe, all of your security compliances in the U.S., we do HIPAA. We were the very first cloud communications company to do PCI, HIPAA, E911 emergency service, like the list goes on and on and on.

The SEC in just the last 4 months has put out over 300 pages on STIR/SHAKEN robocalling compliance, right? This is a regulatory barrier. We need it. We will need it. We continue to meet it. We're awesome at it. We block robocalling every day. And yet like -- I mean, so this is when people talk about I'll just go build a voice network, sure, you will. I'll start with a couple of thousand pages of FCC regulations on STIR/SHAKEN alone. And by the way, the U.K., France and other countries have completely different versions of the same thing, right? And I'm just picking 1 of, whatever, 5 boxes that are out there.

And I just remember the days, I cited those banks, financial, legal, like the institutions that care about this stuff. In the old days, we're not going to communicate through your cloud. These days, it is the best practice because we've got more than 2,000 employees who spend 24/7 of their lives worried about this stuff. As opposed to a bank that's got a little tiny department with half-time people that spend a fraction of their time worried about how to secure these communications. So this is best practice. Now this is state-of-the-art in the industry for security.

We don't throw rocks because we live in a glass house. It is a -- security and compliance are -- they always have been the #1. But in this day and age, it is very, very difficult out there. And so we spend a lot of time at 8x8 worried about this stuff.

Well, I'm going to go back just one -- I went the wrong way, sorry. But never mind. Anyway, we talked a lot earlier about how we could see every conversation and everything. But I want to make the point, and I think we can go -- we'll go into it a little bit further later that we don't use our customers' data for -- is that we capture it so the customer can look at it. There's a data privacy.

We are huge believers that customers' data are -- it's their data. We were never -- I mean never, never, but we're not in the business of holding data hostage and there's plenty of businesses. There's plenty of people in this AI space that won't be ever able to say that. So I think partners that we work with and end customers that are interested in talking about that, they should come talk to us because it's something everyone should be aware of. There are walled gardens. There's walls going up every single day and you need to know where your data is and who you're entrusting it to and make sure you're working with the right vendors.

And how much they're going to charge you to get your data back to you.

Absolutely.

So one platform, every connection, but completely private. Okay. Now I'm going to go forward where I should have been before. The AI tailwind. We've been talking a lot about where AI is in platform, where it's going. I want to talk a little bit, and this is where we're going to give Kevin a few minutes to shine, I think. And although maybe not right away. And Katherine, when I saw your question, we'll be able to answer that as well. So I put together this little slide on the history of AI innovation at 8x8 because I think that a lot of people missed the how early we were in integrating AI capabilities into the platform and taking it all the way up to today. So Bryan, if you want to give us a couple of highlights.

Before you do, actually, I want to mention one, Kate was really nice to us. She actually should have started this in 2019. Do you remember when we made the voice bot?

I didn't do this.

We made the voice bot in 2019. It was a disaster. It was that text-to-speech, speech-to-text voice bot that worked like crap.

This is the one slide she didn't steal from me. So much earlier. So we've been doing this for a long time. It's just -- this is when it started to kind of get interesting...

This is the when where we all became aware of ChatGPT. We are like, have you ever heard this before?

Yes. I mean, I would just say this is kind of the time frame. And it's even earlier than this because I'm even remembering, I would actually credit a guy named Alton Harewood, who started telling me, and hopefully, he's listening because I invited him to this. But I think it was like middle of 2022 that he's like, yes, we're getting some amazing transcription results in like Scottish. Scottish is one of the worst dialects to transcribe.

Yes, we've all seen that.

And we're getting like 96% accuracy out of this little company, and we actually started working with OpenAI because of their transcription. And so yes, so we were -- before it became a household name, [indiscernible] in late '21. I have to look. But anyway, yes, so we were -- like I said, better to be lucky than good. You find some of these things before they blow the world apart. But yes, I think what happened was you suddenly had this amazing compute ability to operate on vast data stores that just suddenly changed everything. And that really is what changed the game. And so we had a team of R&D people that spotted it early and then immediately applied it to Studio, which hopefully we're going to have time to show. So let's move on.

This should be a truncated history of AI innovation.

Just positives.

So Kevin, we have some stats here on momentum of AI at 8x8 and I'll let you walk through a few of the things here.

Sure, though we had some excitement going on in the company. In the same vein, how we talk about multiproduct customers, we're also looking at customers who are purchasing our AI products. And the exciting thing for me isn't just the numbers and the growth here, it's the -- just thinking about how the customers are having such a better experience using our products. So I had my own lightbulb moment using AI in my daily working. And to see some of these numbers here, like the 67% year-over-year increase in the number of customers with paid AI solutions is exciting to me because I know how I felt when I started using it regularly a while back and how it made my life better.

So you're talking about hundreds of customers here that are growing with the products and making their lives better and making the customer experience with their customers better. So internally at our customer and between our customer and their customers, 18% year-over-year increase in recurring revenue for customers who buy our AI products. I mean it obviously translates into monetary benefit for us, while the customers are benefiting from these products that we're offering. But that's -- these are really big growth numbers. And 9% of our recurring revenue in the company is attached to an AI product that we sell. This is tens of millions of dollars. So this is -- these are real numbers now and it's growing, and we're really fortunate that we're able to help our customers in this way.

Just like 3 product customers, we talk about how retention is better with multiproduct customers. And AI could be one of the multi products that we sell, but the retention over 100% on average for customers who purchase an AI solution from 8x8. So better -- it's a good average for us. And the size of the customers 14x larger on average for customers, the deal volume or rather the deal size, 14x more than the average deal size for customers who aren't buying AI products. So there's huge benefit there to the company. And then on the AI portion of the deals where customers are running AI, there's about a 10% revenue uplift in those deals due to the AI product. So these are real meaningful numbers for us. And it's just a really exciting time as we release all these products to market and seeing the impact that they have.

Still super early, a lot of this stuff. I know I was looking at the data that I used to come up with these stats. And I noticed that even though enterprise class customers represent a huge portion of that ARR, the distribution of the size of the customers that are using this. We have lots of smaller customers using that, in fact, somewhere in the range of about 40% or so are what we would consider small less than $25, 000 ARR a year.

That's the beauty of having such a broad base of customers, right? And we have a big base of customers. It's over 50,000 customers, and we have a lot of opportunity to sell into that base. So there's customers of all sizes that can benefit from it.

Certainly that circles right back to the TAM. Okay. So let's talk about AI Studio. This is like the most exciting part of this presentation. Bryan, take us away.

Yes. So AI Studio is something we launched into our customer base beginning of this calendar year. It spans every part of our platform. So it's not a contact center product. It works with our telephony services. It works with our messaging services. It doesn't care about the licensing or the technology silos of the platform. It even works outside of the 8x8 platform. So it works across our integrations if you're integrated with Salesforce or one of our other integrations, it can easily do things with those integrations as well.

At the heart of the technology is something that we call the Builder. Builder does exactly what you would think of it. You tell it what you want it to do, and it goes and you tell it in English, by the way. That's the first time we've ever had anything like that. So you don't have to go to 8x8 University. You don't have to get certified. You don't have to know anything. You just have to be able to speak or write and tell it what you want it to do. And I know, Kate, you got super excited because you got to build something.

That's right. Yes.

This is 100% native to us. So as everybody knows, with Phase 1 of AI, we partnered with another company because we knew that Phase 1 wasn't going to be the end solution from our previous experiences with AI. It was -- we knew it was going to be temporary. The whole text-to-speech, speech-to-text was not going to be the end answer. AI Studio is 100% native to us. It is our code. It doesn't have partners in it. It's our stuff running on our platform in our world.

And we've made it available to every 8x8 customer, no matter what they buy from us, no matter what size they are, it's completely free of charge to use and build things. We even give them a bunch of, we call them, credits. They're essentially tokens. Think of them as tokens, but for accounting reasons, we call them credits. And our customers can play with it. We send sales engineers in to help them get started if they need help.

But as Kate found out, you need very little help to get started. Kate built her own little agent. And in minutes, literally, you can [ stand ] something up. And the way we make money off of AI Studio is when a customer starts using what Builder built for them, it's a consumption-based model. And it's got behind the scenes LLMs, we support out of the box, Google, OpenAI and Grok. That's what's built into the platform. But if you want to bring your own favorite LLM, you can do that as well. It's open platform. And here's some stats on what we've seen since we launched it to our base. It's -- I'll let Kevin characterize it in proper investor terms.

Yes. So look, we have lots of customers in the development environment, like Bryan said. I just want to mention one thing about the -- like how we're releasing the product, right? We're releasing this -- there's no upfront license fee. This is a land-and-expand type of motion. The customers will pay for what they use. So we're trying to make it as frictionless and easy as possible for these solutions to be deployed in the customer as quickly as possible. So that's where we can see -- I expect to see a pretty big ramp. We've already had a ramp, but a pretty big ramp in this product area. This is essentially through our 3-year model, too.

It just launched in April and we've got a substantial number of customers, and they've already built over 3,000.

That chart is as of August 22, which is like 2 weeks ago, it's already massively updated, right? I know what the numbers are because I get a report on it weekly and it's growing high double digits month-to-month.

Yes. The way we've done it is, as Bryan explained, you give, call it, freemium or whatever term you prefer to use. It's open. It's open to everybody. We're not -- we're deploying it in such a way as that anybody can use any size customer, and it's picking up steam. It's great. Lots of customer excitement.

Going the wrong way. Sorry. I think you missed one of the key things, though. Right here, this is key. So what is it doing, right? It's doing -- like there's lots of -- you can get a health care bot or you can get a reception bot or you can get whatever. Builder because of the way it's built can do just about anything that has an API or a data hook or a web hook or something that it gets hands on. And so it's being used across a whole range of applications. And this is how it beats those nichey little bots. There's like 400, 500, 600 companies out there. But it has this capability to do it all. And it all deals with the fact that they're sort of communications are the things that underlines all this.

So I'm going to skip a couple of slides, and I'm going to introduce everyone to IRA, our virtual Investor Relations Assistant, and we built this using AI Studio. Bryan was very generous in saying, I built it, but I did have a little bit of help from our IT department. So what it does is it actually looks through everything and it answers your Investor Relations questions. So it has a number of tools that it can leverage. Some are voice only and some are digital. It covers both the digital and voice channel. And we built guardrails into it. So it doesn't make up answers. It doesn't go looking out on the web for someone's opinion, it uses our financial information that we posted on our Investor Relations.

It's all the hedge funds out there. You can't get material nonpublic information. We put those guardrails in too.

So it took a little bit of time to do that. So I'm going to give you a little demo of this is the digital version. We'll just watch that for a sec. I think it answers some interesting questions.

Yes. Well, it's typing. I should have said it's -- I hate the word omnichannel. But it works across every channel that 8x8's platform support. So it can send text messages, it's fully digital. It's also fully voice-enabled as well.

And let's be clear, it speaks, I think, 60 languages and over 100 accent variants. So it speaks English, Welsh, U.K. English, Scottish, Irish and every other version of English that we have floating around the world. .

And it understands all those dialects.

Yes, it understands them. And to any Australians listening, it speaks Sydney, and I forget East Melbourne, which I guess, is a different accent completely.

So the digital version, since our website, our IR site, is hosted is not yet live, but the voice one is live, and so I'm going to go.

[Presentation]

Let's see how he does with our Spanish.

[Presentation]

I'm going to move on to the next slide. As I didn't give the prompt for what we wrote for IRA, but Bryan shared with me the prompt that he used for the perfect CTO assistant. Is that what to say?

Yes. The perfect CTO. So I just wanted to -- so the agent like the point of the example isn't that IRA is like some breakthrough agent. Although I will say our agents are -- like you get to pick the voice, you get to pick, as Sam said, the language and it will default. If you start speaking Chinese, it will go to Chinese. You can interrupt it. The latency is amazing because this is coming directly in. Like we're not going -- it's native to 8x8 platform. We're not going out to some third-party. So you see the back and forth is very natural.

We're not hopping across.

But the point of the demo is not to say, hey, my agent is better than XYZ's agent. The point is Kate built the agent, and she did it in like a few minutes and it's like it's so easy to do. So I just wanted to show you behind the scenes. This is a little application that's running on my direct dial number that rings all my devices. And I get between 30 and 50 junk calls a day of people trying to sell me AI, and I get really tired of it. And I just want to show you like how easy it is. So there's something that lets Kevin, Sam or Kate, anyone that works at 8x8, I want them to be able to reach me 24/7. But everyone else, I really don't want them to be able to reach me unless they know the passcode 1444 to get through to me. So all of you investors know how to get through to me now.

This is literally all I told Builder. I said, "I need a voice agent that only lets employees or people that know my passcode through". That's literally it. I type that in, go to the next slide. Builder went off for 30 seconds, and it literally gave me a much more formal structured version of exactly what I typed except it's now -- this is what's left in my application. So if I ever want to change the code or I want to change the rules or I want to let -- who's on the line, Katherine. If I want to let Katherine through on her mobile phone, I can add Katherine to the script. Like this is how I maintain the little application and then one more screen, last screen.

And then I just -- I say I want this to run in Google Gemini because they're our favorite partner. I pick the voice that I want spoken to the people calling. I pick whether I want all the calls recorded or whether I want a transcript and that's it. And I just say go and launch it, attach it to my phone number and it's done. And it literally like when I put this up, it took like -- and actually, you can say, hey, Builder, test this. Kevin had trouble getting through to me one Sunday afternoon, and I went back into Builder, and I'm like, hey, my CFO couldn't get through to me today. What the F? Like can you go check why Kevin couldn't get through. And it's like, oh, yes, I see what happened, do you want me to fix it? And I'm like, yes, I'd like my CFO to be able to call me on a Sunday afternoon. Please fix it, and it did. And it's literally that easy.

So even as little things that you catch...

But that's what we're trying to -- it democratizes every one of our customers' abilities to use our platform and customize it and make it do what their business needs it to do without having to come to us and say, Oh, can you guys do this or that for me? Now any one of our customers and anyone that works for one of our customers can go customize our stuff for them and make it work for their business.

It makes sense for small business, mid-market, right, everybody.

Back to IRA. I mean we talked about in past earnings calls and so forth about case resolution using AI and so forth, right? So this example got perhaps the case resolved. But think about it from the standpoint of the experience that you can have with your customers that require human connection. For us, it could be can you spend more time on the phone with investors that needs to have the human back and forth experience. Maybe the call is a little bit more detailed. So it's not just about, hey, when is your next investor -- when's your next earnings call, just like a bank could say, what's my balance, right?

But take it one step further sort of -- that's clearly one [indiscernible] IRA's but that's practical. But take a bank that wants -- because we have a bank that does this, that uses AI Studio in conjunction with AI routing and says, okay, here's what I need you to do. First, when the call comes in, I need you to figure out what the person needs, authenticate them. Like remember, this used to be done by a human. No, no, I need to authenticate them. They could pick 1 of 3 different ways. I need you to SMS message them. I need you to get the SMS message back, do the OTP so that I am 100% sure I'm not -- fraud is being committed against my bank. Then, I need you to talk to them. And then I need you to route the call to the agent with the skills that are most likely to be able to help that person with their problem at this exact moment. That's the future.

That is -- and that's that mass personalization that you're going to see when you have that full context. You have the SMS and you can build. So okay, that is a great thought to keep in mind. And now Kevin is going to shine. So we are going to turn to the financial model, just a few slides, so we won't take very long. We're a little past the hour here. But Kevin is going to walk us through.

Sure. You heard earlier, look, we're back in growth mode as a company, 5 quarters in a row of revenue growth. And so we've extended our high-level model for the public to consume here. We are -- clearly, we've been driving our revenue growth with the platform usage. We've shown that growth over several quarters. The long tail Fuze customer attrition is largely going to be behind us. This is the post-COVID created headwinds. And as we migrated those customers over, then again, excluding the Fuze headwind, we're growing much, much greater rates. We said 8% last quarter versus the 5% or so that we reported. So we have good revenue growth happening in the company right now, and we've demonstrated that over multiple quarters.

On the gross margin side of the business, we've publicly mentioned this. There's a different margin profile for usage or consumption versus our subscription business. We are focused on gross profit dollars and operating profit dollars and cash flow generation for our investor base. We use that cash to pay down the debt. So we're less concerned about the margin percentage than we are with the dollars that accrue to the bottom line and to the gross profit line. A little bit more about the platform usage, I'll restate a lower gross margin percentage, but the operating expense requirements are much lighter than a standard subscription model. So more falls to the bottom line from the gross profit line. So we can enjoy that bottom line profitability as the platform usage portion of our business grows.

So in our model, we have from '26 to '27 in our return to growth model, we're seeing a relatively flat operating margin, a little down about 1 point year-over-year, but we're trying to preserve those dollars and the dollars largely are being preserved on the bottom line, again, generating the cash flow so we can use that for debt service.

On the multiple years here that we're showing, the past 3 years or so, you can see that the composition of the revenue and where it came from, the Fuze customers' revenue has gone down over time because it's migrated into the 8x8 revenue base. The headwind is largely behind us. We fully migrated those customers at the end of calendar 2025. And you can see the revenue growth here, 6% or 5% or so, 8% rather without the Fuze headwinds, 3% in total with all in here. So for the full year, we're showing growth in our guidance midpoint, mid-single digits. And next chart, I think we have a longer-term view.

On the 3-year model, we could carry this out to fiscal '30. So CAGR numbers for 3 years in total, the revenue 8% CAGR. Over the -- from '27 to fiscal '30 with platform usage growing about 20%, a CAGR basis and the subscriptions growing 2% to 3%. So this is not too different from what we've seen from a platform usage perspective, now we're growing like 60% or more each quarter, but this is a 3-year model. So our growth drivers continued adoption of our AI products, continued consumption growing in the business and the retention of our existing base on the subscription side.

I would add these [ law of ] large numbers playing in the platform usage. But you also -- this is roughly what a consolidated market estimates are for growth. So we are growing with the market, if not a little bit faster. We're anticipating that. So let me go to the next slide, Kevin, which is kind of what we're looking for in profit.

Sure, profitability. So we went through '26, '27, there was a lot of numbers on this chart. But fundamentally, what we're seeing here is the revenue mix fiscal '27 guidance, 25% to 30% platform usage. We expect that to go up over time, and that's no secret. We see the growth there becoming a bigger -- it's the fastest-growing component of our business. So 35% to 40% of the revenue in the 3-year target model with 60% to 65% being on the subscription side and measure 8% CAGR.

Other revenue, we're holding it roughly flat at about $20 million a year. This is the product revenue and the deployment services revenue and things like that. Gross margin, we have a mix shift going on, which I just said, and we've been saying in our earnings calls. Again, we're seeing this maybe 4 points this year per our guidance. And the mix shift will continue where we see it in the low to mid-50% range, but profitability of the business in dollars and in margin percentage for operating margin, we expect to increase over time because of the high scaling of our business, particularly around the platform usage portion of the business. So focused on operating profit dollars, focused on continuing cash flow generation. So we can move to continue paying down our debt, which I believe is on the next slide.

Over the last few years, we've paid down 40% since the end of '23. It's about 44% since the peak which was August of 2022. So we've done a terrific job, I think, of paying down our debt with the cash flows that we've generated in our business. Again, it's been 22 quarters in a row of cash flow from operations generated. And we do use that to improve our balance sheet over time, and we've been doing that for years now. So we paid over $200 million in debt, as you can see in this chart.

With our ultimate goal being getting back to negative net debt, if you will, the cash plus debt is a positive number. We have done a really good job in my view of taking down our leverage ratios, as you can see here, just a few years ago before it's not on the chart, but we were like 6.5x leverage. Now we're down to about 2.3x with the objective to go to 0 or better. So we are on that trajectory and we continue to make improvements because we're very, very disciplined about how we manage the business, investing in the right areas, to grow in the right areas, which we've discussed, AI being one of the key areas and continuing to generate the profits and cash flow, so we can get this leverage ratio down further over time.

I think that's the last financial slide. So I am going to try to -- yes, there we go. I'm going to send it back to Sam to sort of wrap up.

Look, I know we told -- I think we've told all the story here, right? Monster market opportunity, competitive barriers to entry, profitable business model, reaccelerating growth, big moats compared to our competitors and where the industry is going, an AI story, which is a big part of the growth industry today. I think we have it all. I just -- I think sometimes people don't know us and think we're the company of 10 or 20 years ago, but they don't know what we are today. As this chart shows, we are these things.

Reaccelerating growth, paying down debt and AI driving growth.

By the way, when we run out of debt, we'll start buying back stock.

Or lots of other...

Or lots of other opportunities.

So thank you, everyone, for joining us today. Really appreciate it. We'll take any calls or any questions that you have, and I think that wraps it up.

Thank you, everyone.

And thank you to Kevin, Bryan and Sam.

And thank you, Kate.

Good day, and thank you for standing by. Welcome to the 8x8 Inc. Q1 2027 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kate Patterson, Head of Investor Relations. Kate, please go ahead.

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, and 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. But 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 we're talking about AI Studio, our native agentic AI builder platform. Sometimes it's our programmable customer engagement capabilities and purpose-built solutions like proactive outreach. And sometimes it's our embedded 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. But 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 is 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 and always they want to move faster. And they want to be 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 AI Studio is designed to do. And 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. That's why we believe communications infrastructure becomes more strategic as AI adoption accelerates.

Many companies will say they deliver an integrated platform, but 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 midsized businesses, giving them enterprise-grade agentic AI capabilities similar to what is available at much larger organizations with much larger price points.

Just 3.5 months after official launch, more than 200 organizations are building agents with AI Studio, and 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, and the product is still in beta. Customers using AI Studio span health care, IT services, property, retail, insurance, automotive, energy, logistics and more, and they're solving a wide variety of issues, improving IT operations, facilitating insurance policy renewals, role playing to train human agents and deescalation. That's the kind of breadth we hope to see.

We're seeing the same momentum across the broader platform. Customers using 3 or more paid 8x8 products increased 18% year-over-year and 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, and 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, but 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 organizations -- for enterprises, that accelerates innovation. For small organizations, it levels the playing field by making sophisticated AI accessible without requiring large development teams. And 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 and 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. But 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 '27 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 onetime 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 resell partners in the U.K., Ireland and Australia. In what we believe is an industry first, we have developed 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 are seeing reducing -- 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 '27, 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 multiproduct adoption, simplify deployment. Usage-based pricing models and increased 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. But 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. So 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, not because we've declared victory, but because we're seeing more customers succeed with our platform. We're still early in this journey, but we are building momentum. Our job now is simple: continued execution with discipline, continue innovating, continue helping customers remove complexity and realize the full value of the platform we've built. If we do that well, I'm confident we'll continue creating long-term value for our customers, our partners and you, our shareholders. It's impossible to share all our progress on our earnings call. So we are planning on a product and model update for investors sometime in early September. We will get more information out to you in the next few days.

With that, let me turn the call over to Kevin.

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. 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.

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 5 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 '26.

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 continue to meaningfully reduce our debt service costs through significant paydowns of debt principal. Trailing 12-month cash interest paid at the end of Q1 '27 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 overperformance 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 '27 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 '27, 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 30, 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% to 35% range year-over-year. The slower growth reflects a tougher compare to a strong Q2 '26 rather than a change in dynamics of the business or the market. The higher platform usage growth drives a modest shift in mix, and we expect gross margins to be flat to down slightly quarter-over-quarter.

Keeping operating expenses flat to Q1 '27 gives us our operating margin guidance of 8% to 9%. Our annual merit increases take full effect in fiscal Q2, but 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 overperformance 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% and 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, and we are maintaining that level. This yields a slight adjustment to the operating margin range to 8.8% to 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 to $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 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.

[Operator Instructions] Our first question comes from Josh Nichols from B. Riley.

Great to see the record service revenue with continued year-over-year growth. Since you touched on it, one of the key focuses you mentioned was like customer retention, minimizing churn. I know you've been growing your multiproduct customer base very well. Any type of high-level commentary you could tell us about what you've been seeing on those fronts? And if some of these additional features like AI-enabled solutions has been driving churn lower for customer adoption.

All right. So let me -- Josh, let me give you a couple of data points that you're sort of asking around retention, et cetera. First, I think it would be helpful to understand on a year-over-year basis, both our number of contact center seats in both our contact center and UC seats are up. So when you think about what's driving sort of the churn issues right now, we're still seeing a ripple through of street pricing on UC, and particularly smaller customer UC being sometimes below what our installed base is. And so they've come up for renewal. We continue to see some ASP downsell pressure. It's driven a lot by competitors who have been pushing lower prices.

I don't think it's gotten worse over the last 18 months. I sort of -- I think last quarter, I think I said we still have sort of a few quarters to go through this, but it continues to ripple through the customer base. That is by far the biggest portion of the sort of the churn retention aspect, is downsell pressure. We're not losing that many customers. As a matter of fact, our customer loss are less and less all the time, and we're really proud of that. It's just dealing with that.

And then we need to continue to push our multiproduct strategy. We see a clear correlation between more products equals higher retention and higher average revenue per customer. There's a pretty big jump as you go from 1 to 2, 2 to 3, 3 to 4. And so I think that's really the key. We need to continue. I'm not fully satisfied how we're doing. I'm not dissatisfied we're doing. I think we can just do better in that area.

And then last question for me. You've done a good job balancing going after some of these high-growth areas. The top line of the revenue guidance is going up, but you're meanwhile, still able to maintain the profitability outlook for the company. When you think about the dynamics between a little bit lower gross margin versus the operating leverage that you're able to get from this usage-based revenue, is that expected to continue? Or is there also like a threshold where the operating leverage starts going -- even more positive for you as the usage-based revenue hits some threshold and it could start boosting profitability further?

I'll give you a bit of a high-level answer, and then I'll let Kevin chime in if he wants to add anything. So usage-based models typically carry lower gross margin than traditional SaaS business models because there's no vaporware, right? There's not that empty seat sitting on the shelf. That's why buyers like them so much and they use them more, but they also generally carry a lower OpEx profile. And so as our model evolves and as usage revenue scales, we do expect continued growth in the revenue, the usage revenue, and that should generate higher operating profit dollars and cash flow over time.

We need to get a lot of the newer products to an economies of scale where we can start to drive down unit costs. I can certainly get into the technical aspects of this. But as you think about it, all new products start with relatively low volumes, and it's hard to drive unit cost, hard to spend money to drive unit cost advantages out of that. As you scale them up and you get economies of scale, and, trust me, our AI products and our other products do have economies of scale as they get larger in size, you'll start to see this. And so you'll start to see that phenomena of usage eventually driving higher operating profit dollars and cash flow. It was true in the first quarter. And at some point in the future, it will rectify itself out. I can't get exact because it's hard and there's a bunch of assumptions in the model. But I do expect that, that's the trend we're on.

Yes, I think so. I think that's a good summary. The other thing I'll point out is that our historical usage, and even within our usage, the mix is shifting. So our historical usage margins have been typically on the lower end because of where our revenue existed in APAC, for example. And as we develop these new products that we're talking about here, that is not so geographically concentrated in low profit areas and geographies. So that should have its own effect -- a positive effect over time. It will take some time to do that. But I see that helping to sustain the gross profit dollars, again, we're focused on gross profit dollars and operating income dollars to run the business.

Our next question comes from Andrew King from Rosenblatt.

Congrats on the really strong quarter. First of all, could you just give us an idea of how much of those strong usage-based results were related to AI versus your CPaaS business? And then within that also, are you seeing any pressure on your seat-based pricing as AI becomes more of a revenue lever rather than an add-on?

Okay. The second question I may ask -- the second part of the question, I may ask some clarity. So you're asking about AI as separate from CPaaS. And I want to be a little careful here because the 2 are deeply interconnected with each other. So when you send an SMS message or you use WhatsApp, frequently, that is hitting our AI Studio on the backside of that. And so the two together as a complete product. What CPaaS provides is our digital channels. And historically, that's been, as Kevin mentioned, in Southeast Asia, lower-margin business compared to corporate averages. We're starting to see as our volumes go up, we're getting better margins on that as we're reaching economies of scale.

And secondly, it's a driver then to add AI products layered in. The vast majority of our business is still -- on the usage side is still what you would consider CPaaS, kind of that traditional sense, let's say, 3, 4 years ago, just because the volumes are so high. But the AI stuff is also growing well in excess of 100% and the two are tied very closely together because when you combine them, you get the customer outcome you're looking for. Okay. On the second part of your question, can you rephrase it for me so I can understand exactly what you're trying to get at?

So as AI products are becoming more of a strong revenue lever rather than a commoditized product really, how is that affecting seat-based pricing? Are you seeing any pressure there as people are trying to drive down seat-based pricing to get the AI add-on?

Now, I get it. No. The pricing in seat-based pricing is because of competitors just pricing lower and trying to grab seats. We see some start-ups that are desperate to do something in this industry now who are sometimes can be aggressive with pricing. We obviously -- we see some of the stuff around others who are just doing that. But I would say, in general, AI is an add-on. And since it's usage-based, we're seeing it as purely as an add-on. And a lot of our customers that run AI run a hybrid model. So they're paying on a per seat basis for the UC and CC and then they're adding in these usage-based items on top of it.

Got it. And then if I could just sneak one more in here. How are the AI deployments changing relationships with your channel? And how effective is your channel at really selling the full platform now? I would assume that they really only have a solid grasp on a percentage of your current portfolio and that continues to get smaller as you continue to release more advanced AI products. So just any idea there would be great.

Yes, it's a great question. I think I tried to cover a little bit of this on my prepared remarks, right? So I think I said in my prepared remarks, when I meet with customers and partners around the world, I often hear some version of the comment. I didn't know you did that. So I want to be clear in how I answer this because I think the channel is very important. I think it's the primary route to market for our products and technology. And I think it's the primary route for technology in general globally.

I think the channel is more than confident at using our AI Studio to drive custom-made products for individual customers, et cetera. And we've got some phenomenal global channel partners running AI Studio and other products doing just amazing things for customers. That being said, I think the biggest issue is just we've got to educate and enable our channel base better on our full range of products. We are a business communications company.

We come from a small business UC background, but we are a full business communications company, whether it's CPaaS, Engage, AI Studio, contact center, workforce management, all these things, and I can go on, by the way. It's really just enabling them to understand our full product portfolio and using our product portfolio to solve customer problems. When we achieve that, I absolutely believe our revenues will significantly accelerate.

Our next question comes from Siti Panigrahi from Mizuho.

This is Chad here on for Siti. Sam, I wanted to ask about the usage revenue growth. I mean your earlier comments suggest most of that growth is still being driven by traditional CPaaS and heavy exposure in the APAC region. But just wanted to get a little bit more color as to why you believe that, that traditional CPaaS growth has been so strong over the last couple of quarters, 63%, 70% last quarter. And then why that might be moderating into Q2 on the tougher comps as you called out in your earlier remarks.

Okay. So I want to be careful that we don't draw too big of conclusions, Chad. So yes, CPaaS overall is a bigger piece of it and Southeast Asia is obviously important, but we sell CPaaS globally. So for example, when you talk about growth rates, our CPaaS is growing very nicely in Europe, very nicely in Europe. And our AI is growing well in excess of 100% year-over-year throughout the platform. As to why it's doing it, look, I think the single biggest thing is over the last 18 months, 2 years, we've really integrated the products together.

So it's super easy, for example, Engage has full digital channel capability, which drives then corresponding CPaaS business or contact center or Contact Center Engage have AI Studio deeply built in or Pulse or any of these types of things. And we've released -- just this last summer, we released Resolve, which is a really phenomenal product that's based on CPaaS, if you will, but really, it's on top of that for employee engagement.

And so I want to be careful that we don't put these in buckets and we shut the buckets together. CPaaS by its size is growing slower than AI, but it adds a lot of dollars because it starts with a much bigger number. AI is a smaller number, but growing significantly faster than CPaaS, and they blend together. Does that make sense?

Yes, it does. That's very helpful. And then just a follow-up for Kevin. You talked about actively working to expand margins in the usage portfolio. Any more color you could provide there maybe on magnitude or timing expectations?

I mean that's a continuous work in process in our company. Look, Sam mentioned the AI usage. The AI margins are pretty good, much higher than the basic wholesale type margins. But one thing that I will point out is we're balancing inside the company our ability to do certain volumes in, like, more wholesale areas to gain better advantage elsewhere enterprise business for usage. So it's a continuous ongoing process of optimizing our margins through careful measurement over the volumes that we do for certain specific products that we sell. So definitely a balance there. And, again, as we get scale doing that, the margin should come up over time.

The only thing I'll mention is, I think we mentioned this in our prepared remarks, we're looking at doing a bit of a webinar style thing in early September, and we'll lay out some of this in that meeting because the part to realize is it's easiest for a customer to start with us on our lower-margin, more basic products, if you will. And I'll just use the universe most simple example. We send, I don't know, 5 billion, 6 billion, 7 billion SMS messages a year. We're really good at it. We've got 200-plus carrier connections, et cetera.

A customer comes to us and they're like, "Great, you guys can send SMS messages for me." That's where they start. And then they add on. "Oh, wait a minute, we can look back to AI Studio. Oh, wait a minute, you're a top-tier partner of Meta. Hey, let's add WhatsApp into the mix. Hey, can you do Signal and Viber? Yes, you can do those two." And that's how the margins start to expand over time. It doesn't happen overnight. I know Wall Street terms, everything should happen overnight, but it just takes us a little longer than that. Thanks, Chad.

I'm showing no further questions at this time. I'd like to turn it back to management for closing remarks.

Thank you, everyone, for joining us. See you again in 90 days.

No, sooner than that in September.

See you again in September.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.

Good day, and thank you for standing by. Welcome to the 8x8 Q4 2026 Earnings Conference Call. Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to today, [ Kate Patterson ], Head of Investor Relations.

Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the fourth 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 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, 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 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 Investor Relations website at investors.8x8.com.

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

Good afternoon, everyone, and thank you for joining us. Fiscal 2026 marked a turning point for 8x8. Our Q4 results demonstrated improving execution, operating discipline and a growing momentum across the business. We've delivered 4 consecutive quarters of year-over-year revenue growth, generated our first GAAP profitable full fiscal year since 2015, increased net income and earnings per share and strengthened our balance sheet. Most importantly, I believe this year validated the strategy we've been building towards for several years. It is clear the business communications market is changing rapidly.

The driver is straightforward. AI is beginning to handle low-level repetitive work that used to require people, routine inquiries, transactions, first-line support. We're still early, but the trajectory is clear. and customers are making architectural decisions today based on where this is going. As the market evolves, what customers buy and how they pay for it changes. Per se pricing made sense when every interaction needed a human. As AI takes on more of the interactions, pricing needs to shift towards usage and outcomes. These shifts also change how customers buy.

AI needs unified context to deliver real results. It doesn't work well in fragments. That's what's accelerating demand for integrated platforms, not as a preference, but as a prerequisite. We built 8x8 for this transition. Today, our platform combines carrier-grade, global voice infrastructure, programmable communications APIs, UCaaS, CCaaS, digital engagement and embedded AI into a single architecture designed to support both human and AI-driven interactions at enterprise scale. And that matters more than ever in an AI era.

Voice is not a legacy channel in an AI-driven world. In many ways, it becomes more important. Voice is the bridge between automated execution and human judgment. As enterprises move towards human to agent and agent to agent interactions, communications infrastructure stops being utility and starts becoming a strategic control layer Reliability, security, trust and orchestration matter more than ever. The challenge is no longer leveraging AI to generate responses or drive engagement, it's already happening.

We are seeing both generative and genic AI drive a surge in communications APIs across voice, messaging and digital channels, and it is evident in our numbers. usage-based revenue, including CPaaS communications APIs, AI solutions, digital channels, telecom usage grew more than 70% year-over-year and represented approximately 23% of service revenue. up from 14% a year ago. The real challenge is delivering interactions that feel seamless, secure, intelligent and trustworthy.

AI agents must be able to hear clearly, understand intent accurately, authenticate securely and know exactly when to hand interactions to a human. That requires more than another AI voice model. It requires a highly reliable communications infrastructure and a platform capable of orchestrating interactions seamlessly across both human and agentic layers. This requirement is redefining where value accrues in enterprise communications.

Customers do not want another closed ecosystem or another AI model that needs to be tested and integrated them. They want platforms that can evolve as the AI landscape evolves. The new winners will be companies that combine carrier-grade infrastructure with orchestration across communications, workflows, APIs, analytics and customer engagement and do it at scale.

Our approach has been different from many of our peers. Instead of building around a single AI model or a closed ecosystem, we have focused on building an open integration and orchestration layer directly into the platform itself. This allows customers to adopt a new AI capabilities quickly and deploy AI across voice, messaging and customer engagement workflows without infrastructure.

Today more at this approach carrier grade simplifying and programmable toward reducing operational friction, accelerating deployment and allowing them to adopt mission without constantly rebuilding infrastructure. That philosophy has shaped our innovation strategy, and we hit some important milestones in Q4.

In March, we announced general availability of 8x8 Engage extended customer engagement beyond the traditional contact center to frontline sales and offers teams. Customer adoption has been strong with partners now fully enabled demand is building. We also added native genetic AI to our platform for CX with AI studio. AI studio allows customers to build and deploy AI-powered voice and digital agents directly on the AFA platform for CX using natural language problems. It could not be easier. Check out the video demo on our website.

During the quarter, we expanded platform capabilities across analytics, authentication, CRM integrations and orchestration workflows designed to simplify deployment and improve how AI-powered interactions move across human and digital engagement channels. Our outcome-focused platform strategy also shapes how we approach partnerships and technology acquisitions.

Our partnership with Synthflow AI expands our capabilities for SMBs and strengthens our position in AI-powered in genetic engagement. Maven Labs expanded our messaging and automation capabilities, while CallRoute strengthens our Microsoft Teams integration strategy, and will simplify platform-to-platform migrations. Most importantly, our customer wins reinforced that our platform strategy is aligned with where the market is going.

In the U.S., an insurance company replaced 2 competitors with a full UCaaS, CCaaS deployment after evaluating 6 competing vendors. A health care organization operating more than 100 locations implemented an omnichannel engagement solution, integrating voice, SMS, webchat and Salesforce to modernize patient communications. Internationally, a U.K. automotive retailer selected 8x8 to replace a legacy environment that combined UC and contact center deployment and a bank in the Philippines selected 8x8 to strengthen authentication and fraud prevention capabilities ahead of new anti-fraud compliance requirements. Yes, we are a security company in places.

Across these wins, customers constantly prioritize integrated workflows, trusted infrastructure, AI-ready engagement capabilities and flexible deployment models and securing over disconnected point solutions. As our markets evolve, we are sharpening our go-to-market strategies, adapting our pricing models and improving our processes. Partners have always played a central role in the communications and customer experience markets because they maintain trusted customer relationships and expanded geographic and commercial reach.

We believe 8x8 remains significantly underdistributed relative to the size of the opportunity. As a result, we are increasing our investment in partner recruitment, enablement, on-boarding, automation and deployment tools that make it easier to business with 8x8 and easier for partners to deliver solutions to their customers. At the same time, we are exploring new consumption-based pricing and deployment models that reduced decision risk and traditionally associated with enterprise software purchases and simplifying trial and activation. By reducing decision risk and removing traditional barriers to adoption we can accelerate time to value and better align our go-to-market motions and sales cycles with product innovation cycles.

Fiscal 2026 was also a year of operational discipline. We completed the Fuze migration process, integrated several financially immaterial but strategic acquisitions, reduce debt meaningfully and maintain disciplined operating expense management while continuing to invest in innovation, infrastructure and AI capabilities. The past several years has required focus, restructuring and hard operational decisions. This year, we begin to see the benefits of that work show up across the business.

As we enter fiscal 2027, our overarching objective remains straightforward: drive sustainable growth, profitability and cash flow. Our priorities remain clear: expand our global communications infrastructure for AI-driven customer engagement, deliver innovation that enables seamless interactions that build trust at every stage of a customer journey, scale our partner and distribution ecosystems globally and continue to drive operational discipline and efficiency.

Let me finish by saying that I believe 8x8 is operating from a position of strength. With a clear strategy, solid financial fundamentals and a growing confidence in our ability to compete aggressively in a rapidly evolving market. Thank you again to our customers, our partners, our employees, and our shareholders for your continued support.

And with that, let me turn it over to Kevin.

Thanks, Sam. Good afternoon, everyone, and thank you for joining us for our fiscal Q4 2016 earnings call. In addition to our shareholder letter, detailed financial results are available in our press release and 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.

Q4 was our fourth consecutive quarter of year-over-year revenue growth, capping a fiscal year that returned 8x8 to growth. achieved healthy operating profit and meaningfully strengthened our balance sheet. We exceeded our guidance ranges for service revenue, total revenue, operating profit, earnings per share and cash flow from operations.

We had another record quarter for service revenue, and we have had positive operating profit and cash flow from operations in every quarter for over 5 years. Total revenue was $185.2 million, and service revenue was $180.2 million, growing 4.6% and 5% year-over-year, respectively. These results reflect the continued strength in our usage-based offerings. Our usage-based offerings, which include our CPaaS communication APIs, digital channels and AI solutions set another all-time record and accounted for approximately 23% of service revenue in the quarter. compared to approximately 14% in Q4 '25.

Gross profit was approximately $118.9 million, approximately $2 million above the gross profit implied by the midpoint of our Q4 guidance. Gross margin as a percent of revenue was 64.2%, modestly below Q3 due to the continued mix shift toward our usage-based offerings, which, in aggregate, carry a lower margin profile but can add meaningful profit dollars as the business scales.

As we have noted in prior quarters, our usage-based offerings can fluctuate, which may introduce some quarter-to-quarter variability in gross margin. 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.

As we have articulated over the past few years, we managed the business to operating income, and we have consistently demonstrated the ability to offset gross margin mix impacts with disciplined operating expense management. Operating income came in at $19.8 million, resulting in a 10.7% operating margin, well above the high end of our guidance range and demonstrating our commitment to operating discipline.

Operating expenses were favorable to expectations and down 5% year-over-year. For the full fiscal year, total operating expenses declined approximately 3%, reflecting our continued focus on cost structure. We have meaningfully reduced our debt service cost through significant paydowns of debt principal over the past 2 years. Trailing 12-month cash interest paid declined approximately 51% and from fiscal 2024 to fiscal 2026 from approximately $35.6 million to approximately $17.3 million.

The combination of higher revenue, lower operating expenses and lower interest expense resulted in net income of $16.6 million and fully diluted EPS of $0.11 per share, $0.03 above the high end of our guidance range. Cash flow from operations was $14.4 million for the quarter, significantly above the high end of our guidance range. The strong Q4 result reflects both operating overperformance and favorable timing of collections and payments. And as a reminder, that cash flow from operations can vary meaningfully quarter-to-quarter based on timing.

We ended the quarter with $93.3 million in cash and cash equivalents excluding restricted cash, an increase of approximately $6.4 million sequentially. We ended Q4 '26 with $323.9 million of principal debt outstanding. In early April, we made a $14.5 million principal payment on the term loan, bringing the principal balance down to approximately $309.4 million as we entered fiscal Q1 '27. This represents a reduction of approximately 43% from the August 2022 peak of $548 million.

Turning to guidance. We are providing both first quarter and 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 to where the market is growing fastest while protecting profitability through the operating discipline we have demonstrated quarter after quarter.

For fiscal Q1 '27, we are providing the following guidance. Service revenue is expected to be between $175 million and $180 million. Total revenue is anticipated to be between $180 million and $185 million. We anticipate gross margin between 63.5% and 64.5%, reflecting the ongoing mix shift towards usage-based revenue.

We anticipate operating margin between 8.5% and 9.5%. This results in a range for fully diluted non-GAAP earnings per share of $0.08 to $0.09 per share based upon approximately 147 million fully diluted shares outstanding. In fiscal Q1, we expect to make cash interest payments of approximately $1.8 million which reflects the term loan interest payment. The next semiannual interest payment, our 2028 convertible notes occurs in fiscal Q2. We anticipate cash flow from operations to be between $10 million and $12 million.

For fiscal 2027 full year, we are providing the following guidance. Service revenue is anticipated to be between $707 million and $727 million. Total revenue is anticipated to be between $727 million and $747 million. We anticipate gross margin to be between 62.5% and 63.5%, noting the increasing amount of usage-based revenue in our revenue mix and potential variability in the proportion of usage-based revenue.

Full year operating margin is projected between 9% and 10%. And translating to non-GAAP operating income of approximately $70 million at the guidance midpoint. We expect fully diluted non-GAAP earnings per share to be in the range of $0.33 to $0.38 per share assuming approximately 150 million average diluted shares outstanding.

For the full year fiscal 2027, we anticipate cash flow from operations of approximately $45 million to $52 million. Our fiscal 2027 cash flow outlook reflects the timing of certain nonrecurring items. We expect to make $39.5 million of principal payments on the term loan during fiscal 2027 and in line with the loan amortization schedule.

Looking back, fiscal 2026 was a year of meaningful progress on the financial fundamentals of the business. We returned 8x8 to year-over-year revenue growth, expanded our usage-based offerings and delivered positive operating margins in every quarter, meeting or exceeding our guidance each time. We also significantly reduced our debt and cash interest costs, driving net income growth to over 19% for the year.

The discipline we apply to managing the business gave us the flexibility to invest where the business needed it most, while still expanding profitability. Our forward planning reflects continued focus on the same priorities. We view the work ahead as a multiyear journey and the foundation we built in fiscal 2026 positions us well for what comes next.

With that, I will turn the call over for Q&A.

[Operator Instructions] Our first question comes from Siti Panigrahi with Mizuho.

This is [ Chad Teva ] on here for Siti. Good quarter. I just wanted to start on sort of the fiscal year '27 service revenue guidance. You're obviously coming off 4 consecutive quarters of good growth. Could you sort of walk us through the guidance range? And any puts and takes you're thinking about as you're entering the year, obviously, with the low end, implying slight slowdown in growth versus 2% growth at the high end?

All right. So I'm going to just start by giving you some context and then I'll let Kevin fill in the details. I think the thing that you need to realize in sort of generically the Street and our investors need to realize is that usage is now 23% of our revenue. And we don't have as good a visibility in usage when we go out 3, 4 quarters. And so we are naturally conservative in how we forecast usage revenue out that far because it's not contracted. And so what you'll see from us over time, and we've tried to highlight this this last couple of years as usage has been growing steadily, is that we naturally will be slightly more and serve in our guidance because of those things.

Sure. I think additionally, we -- look, our revenue geography is change to -- we have about 40% international revenue there's a geopolitical environment that's a little bit unpredictable at times. So there's no reason for us to lean forward, as Sam said. And I just want to point out that with respect to the revenue mix, we've been navigating through this for quite some time, and we're fairly agile company, we can manage our business to continue to deliver the operating income and the cash flows that are healthy for us.

Got it. Super helpful. And then just one follow-up here on the gross margin guidance. I understand there's a lot more usage revenue that's coming in and increasing as a percent of the mix. But wondering if you could break that down a bit for us. How much of that is driven by sort of more traditional CPaaS and messaging versus some of your newer AI solutions? And anything you can say on the gross margin profile of those newer solutions would be super helpful.

Okay. So I'll start with this one. So let me break it into a couple of buckets. If you look at our traditional UCC business, those gross margins have been incredibly steady over the last couple of years with really no changes, except for a little bit of quarter-to-quarter variability. If you look at SMS messaging, I think it's kind of the question you're getting at, at the bottom of the stack, that commodity messaging.

On a year-over-year basis, I would say the number of SMS messages we sent was not substantially larger. What's been changing is the mix of all the things in between. So we've done in our CPaaS business a higher percentage of more margin-rich products over the last years. That's been a positive, and that's offset by the new AI products.

The new AI products when they launch, for example, AI studio for our new customers, we're giving us some credits to get them started. Those kinds of things, AI costs are very hard to predict. As you guys read the news as well as I do, Anthropic and OpenAI and others change pricing on a regular basis and those kinds of things. And so those products themselves as they start -- and I find this with any really new product. As the new product starts, it starts at a lower gross margin. And then as we scale it and get economies of scale out of it, we'll grow the gross margins over time.

One thing I'd like to add on to the usage, we do have a variety of margin profiles for the variety of usage products that we have. I think that over time, that will also change perhaps a little bit as we expand some of our usage products geographic and not just focus in certain regions where maybe the pricing might be a little bit more competitive.

The other thing I'll say about usage revenue is that it is very -- it is much lower cost from an OpEx perspective. And while you see the gross margin percentage might decline, we're focused on the dollars. And so the gross profit dollars is something that we look at, obviously, very closely and more can fall to the bottom line. So we're interested very much in scaling that part of the business. And that's actually where the market is moving. So we're going towards where the market is moving, and we're not focused on a particular gross margin profile at a given point in time.

Our next question comes from Peter Levine with Evercore.

Congrats guys on the kind of close to the year. Maybe just a follow-up to the prior question. Sam, I know you said it's hard to get visibility, but maybe help us understand how these contracts are structured. In your prepared remarks, you kind of talked about outcome-based pricing, it's more usage-based, but are there kind of thresholds that these customers agree to in terms of usage? Maybe just help us understand like how -- I know visibility is light, but just help us understand how these contracts are structured and as we're actually committing to.

Peter, no problem at all. Look, let me just -- let me take the back and I swear to I'll answer your question in a second. But if you think about new and emerging technologies, right, I think it's completely fair on our part and we really think about the customer and put it at the center of our universe, going to a customer today and saying, "Hey, I need you to forecast how many voice AI interactions you're going to do a year from now or 2 years from now," is I believe, fundamental lunacy. And they think it's fundamental lunacy, too.

So the way we structure the contract is this. we charge a reasonable rate on a per usage basis with 0 commitment. And then as you raise your level of commitment, we will put a discount in to your rates on a per interaction basis, per outcome, per transaction per credit or however you want to think about it. So at a very basic level, if you give us a commitment for a year or even month-to-month, we will give you a 5% or a 10% discount. If you give it to us for a year, we'll give you a bigger discount those kinds of things.

But what we find is even when we get commitments that customers just don't know a lot on the AI products and even on some of the messaging products, how many marketing campaigns are you going to run, how many authentications are going to come in, how much OTP is going to happen, those kinds of things. And so they always want to commit at a number that they is substantially below what they think they're going to actually use. And so they're willing to capture some discount, but they always want to really get away from this concept of shelfware or unused commitment.

And it's why we've embraced the usage-based business model because it was obvious years ago to us, the CFOs were getting incredibly frustrated with unused seats and unused software. Trust me, my CIO is incredibly frustrated about it. And so that was why we were going to see more and more of this consumption-based pricing driven by credits or dollars or however you want to do it. But really, it's that notion. And so long-winded answer, Peter, to say, a fair price on a per interaction basis and a discount when you're willing to commit.

No. I appreciate the detail. And then maybe for Kevin, maybe help us understand like what's the threshold then on gross margins? And then when can we see that kind of start to tick up? I know, again, to my prior question, it's hard to get the visibility and we're still trying to figure out the seasonality. But where is -- like what's the threshold for gross margin? Similar question on the OpEx side, where op margins, call it, sub -- call it, 9.5% this year. You talked about cutting costs out of the model. Just kind of help us the pull and take between the gross margin impact? And where is the cost coming out on the operating side?

Sure, sure. Look, we don't have a precise answer on the gross margin threshold. This is about mix, right? And we talked about it being a little bit more difficult to predict. What I would focus on, on the cost side is cheaper routes to market, okay? So we're deploying AI internally to generate pipeline to have customer interactions and sales processes that are much cheaper than they were in the past.

So we focus there on not only increasing the revenue from that, but doing it in a much cheaper way. other areas internally where we're deploying AI operational efficiencies across the entire org. We're covering more customers through the support systems that we have in place, and we're doing that more cheaply. So cost of delivery, cost to deliver should come down naturally over time as we deploy these operational agencies.

And again, from my perspective, we have a multiyear track record of being agile enough to adapt to any margin percentage change to have an operating income and cash flow that delivers what we need to delever and strengthen our balance sheet. So it's difficult for me to have thresholds for you, Peter. But it's something we're constantly looking at, and I'd like to see us over the long term. Again, if the usage goes up at a lower OpEx cost, double-digit non-GAAP operating income percentages is really the target I have in mind, and I'd like for it to stay there and grow.

Peter, one other thing I want to just add on kind of riffing on what Kevin is saying, I need you to kind of keep this in mind is forecasting token usage and cost is really hard right now, even for us as a software company, right? So we have our developers running on one of the coding by coding engines we have, our marketing department using automation for content delivery and all those kinds of things. And the costs associated with tokenization and what's happening is really hard. And I think we're still not even -- maybe even started the game yet or the top of the first inning around token optimization.

I'm sure there will be some start-up companies that come about over the next few years that help demise token usage, but it's still early. And so it is really hard to sort of have these notional thresholds because something that's a low-margin product, that to rinse and repeat it through AI a bit can become a pretty nice margin product. once you get it up that curve.

Yes. And I think some of the things that companies do and that we did Sam alluded to it earlier on the call, where you're seeing your customers with some free usage and so forth, that can really, really grow very, very rapidly and drive a whole lot of top line revenue with not a lot of operational costs. So I look forward to that happening for us at some point.

Our next question comes from Catharine Trebnick with Rosenblat Securities.

I have a question more on debt and free cash flow and capital allocation. So you reduced the debt 43% from 2022 peak, and consistently, you've done a good job of generating operating cash flow. So my question is, how do we look at '27? Are you prioritizing cash flow, further deleveraging investment in AI usage-based products? What do you -- anyway, can you help me out there? And then I have a follow on.

I got it, Catharine. So look, I would say what's changed slightly for us is we did 2 acquisitions with 3 acquisitions last quarter. So the acquisition engine is sort of back in at 8x8, and we're really proud of the acquisitions we did. So we did 1 last year, and we did -- I think we did a total of 4 last year, sorry. We did 1 year ago and then we did 3 last quarter. So we're tucking in some really interesting technologies that we can use to sort of round out the portfolio and offer better solutions into our customers.

So the base use of capital, we delevered another $14.5 million in April, that's the use of capital. And we did buy back shares a couple of quarters ago. Share buybacks were a little tougher because I got to work around covenants and bank things and other things. And so my preference is sort of a rank order, acquired things that help us improve our customer outcomes, pay off debt and then buy back stock number 3.

And Catharine, we do -- we have like $30.5 million, $40 million of debt payback in this year's plan, including the $14.5 million.

Okay. And then just a little bit but you had a good quarter, Sam. So congratulations on that. And we do like your new color scheme, so you upsell your marketing like that. On the platform differentiation versus peers. So you've been -- your open orchestration centric platform versus more calls ecosystems occurs. Can you kind of explain to me why on a competitive takeaway today at how these win rates or average deal sizes for AI-enabled CX deployment, I mean how are they coming together? I'm kind of curious on that aspect?

Sure. So 2 things. First off, outside of stat, right? 67% of CFOs and CIOs want to go to consolidate the number of vendors they have. And so first and -- and why, lower total cost of ownership. So what you're getting from us is if you consolidate your spending dollars with 8x8, you're getting a business communications platforms. I believe the walls are coming down with these categories of UC and CC and CPaaS, right? Our Engage product interactions was up 300% year-on-year. Is that a CC product? Is that a UC product as somewhere in the middle between those 2, right? And so the walls are coming down between these segments.

Corporate America and corporate world wants to consolidate on the vendors and they want to pick a vendor where they can get economies of scale in terms of spending and discounts, contract simplification, worldwide support, single throat to choke, all the things that you've heard over the past, right? So when we -- I would say when we pitch that story 5 years ago, there was a pretty big technology discount you had to get from 8x8 to get that story. Today, I think that technology discount doesn't really exist. We have world-class CPaaS. I think we're #11 or #10 in the world in terms of CPaaS volumes, right? So we're way in front of most of our normal competitors.

We've got great contact center. We've got Engage, which completely is differentiated from others. We've got UC and now on top of everything else, we've got AI Studio, which is absolutely amazing in the sense that it's prompted, et cetera, and you see it. And so I think when we go into a company -- sorry, when we go into a company, what we're trying to do is have a bus communications platform discussion and not have a UC, CC let me dive on pricing because that's what my competitors like to do conversation.

Thank you. I would now like to turn the call back over to Sam Wilson for any closing remarks. .

Thank you, everyone. Thank you for joining us today. I'd just like to sort of end with this concept, right? We're operating from a position of strength. We have a clear strategy, which after 4 quarters of growth, which some of you doubted clearly in solid financial fundamentals and growing confidence in our ability to compete aggressively in a rapidly evolving market let's not forget, is somewhere between $70 billion, $80 billion, $90 billion in size depending on which third-party analysts use as a reference point. I think we're in a great position as a company to move forward. I thank you for a chance to sort of give you an update on where we are, and I look forward to talking to you again after the end of next quarter.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Good day, everyone, and welcome to 8x8, Inc.'s Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Head of Investor Relations, Kate Patterson.

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 -- 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 multiproduct strategy is gaining traction. All of our top 20 customers now have multiple products and most have 3 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 3 or more products generate more than 3x the revenue of customers with 2 products.

We are seeing a reacceleration in sales of new products, reflecting our investments in innovation, 4 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 health care, 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 3 examples that bring the momentum we're seeing across the business to life. First, a regional health care 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 road map priorities and demonstrating how our solutions supported their evolving initiatives.

This is land and expand done right. These wins reflect the 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 customers' 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 '27 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. Multiproduct 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 '25. 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 31, 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% to 10%. Additionally, year-to-date operating expenses are down approximately $8 million compared to the first 9 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 '25 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 31 end of life of the Fuze legacy platform. For fiscal Q4 '26, 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 '25 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 the seasonal uptick in operating expenses associated with the January 1 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 to $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 to $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 4 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 '22, 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 entered 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.

[Operator Instructions] Our first question comes from the line of Josh Nichols with B. Riley Securities.

Congratulations on the exceptionally strong quarter, but also getting Fuze across the finish line. I know that was a big undertaking for the company as a whole. Just want to touch on -- I think you talked about it a little bit, but backing out some of the numbers for fiscal 4Q, I think you said Fuze was like a $4.5 million service headwind in fiscal 4Q.

So if you adjust for that, it kind of implies that service revenue guidance in the fourth quarter ex Fuze is up like 5% plus year-over-year, which is kind of in line with the last couple of quarters. Is that right?

Yes, that's a fair assessment of it. And as we go into next year, you can think about it as like a $4 million, $3 million, $3 million kind of headwind from Q1 to Q3, Josh, and then we anniversary it in Q4.

And Josh, for the large number of people that had to shut down Fuze, they may appreciate you, thanks.

Yes. Then I wanted to touch on this, so the gross margin has been trending lower as expected with higher growth in the service revenue component. But the operating margin performance was a real standout. I think that kind of shows that while the gross margin is lower, there's a lot of operating leverage as you continue to scale this usage-based business model.

And what needs to happen or what type of levels do you need to get to so that the company is going to get to like a sustainable level where the operating margins are back into like the double-digit category like you did for this quarter? Is that something that you're targeting for '27?

All right. So let me break this up because you raised a number of good points. And I think sometimes no matter how many times I repeat myself, it's not quite understood. So I'm going to use this as a bit of a soapbox to answer, Josh, and thank you for asking it because I get to do this.

Okay. Gross margins on our usage-based business are probably structurally slightly lower than on our SaaS business because you don't have shelfware and you don't have a bunch of other things that lead to sort of higher structural gross margins. But on an operating margin side, they're perfectly fine. And I think we've tried to say this over and over and over again, but it seems to get lost in the noise. And if you look at a pure usage-based business of like Twilio or somebody like that, one of our competitors, you see that they have structurally lower gross margin. And I'm not saying we're heading for 52%, 53%, wherever they're at on a non-GAAP basis.

But what I am saying is their operating margins are just fine. And so as we get more scale in this usage-based business, I think you'll continue to see this. You'll continue to see a slight downward trend in gross margins. And I don't know where it's going to bottom because I don't know yet where usage is going to peak. And then offsetting that is we'll get scale over time, and we're working very diligently on that. And so when exactly we'll get back to double-digit sustained operating margins? I don't know. Is it a target? Absolutely.

Our next question comes from the line of Siti Panigrahi with Mizuho.

I just want to dig into one of your commentary about voice AI. I guess the interaction, you talked about how it grew now 200% and now 80% of all interaction. Wondering what are you seeing from customer, their adoption of voice AI, are you seeing like lately any kind of increased adoption there? Any color would be helpful there.

Yes, absolutely. So what I would say is, and I think we commented on this in the past is we're starting to see all the AI products start to move out of the first phase prototyping, beta sites, et cetera, and really move into production. I think the idea 2 years ago that you would have a voice bot at the front end answering every support question to triage or these kinds of things was a little boring born. And today, we're seeing that run of the mill.

Our voice technology is so fantastic and our voice AI technology is awesome. And I'm not talking about just the stuff we resell from Cognigy. There's other voice AI technologies we have in-house that are doing absolutely fantastic. And so what we're seeing is as those move from that prototyping beta stage to production, we're seeing that they're working. And then once they're working, the customer comes back and starts adding more and more use cases. And this further validates the usage-based model because it doesn't require a whole new sales cycle and everything else. They just slap down another use case on it, usage goes up and they pay the bill because they're getting the ROI.

And so I think it shows not only that people still want to focus on voice. I'm a big believer in that. We as human beings, type in bullets and speak in paragraphs. Number two is the usage-based business model is absolutely the right way to go for these technologies, and it's working. And I've been signaling this for a while that we'll do more and more of this. And number three is AI is the real deal, and we are getting positive ROI out of the AI we sell.

Great. And a quick housekeeping question. Did you see any kind of FX impact on this quarter on the revenue? And how should we think about any revenue contribution from Maven Lab?

No, Maven Lab closed in January, so there was 0 contribution for the quarter. And I believe...

I'm sorry, for the guidance.

Yes. No, no, no.

Too small.

It's too small to move the needle. It's very -- it's just a little teeny technology tuck-in. And Kevin, can you speak on...

Yes. We had -- relative to the beginning of quarter guidance, we had a little bit of a headwind, well under $1 million. And on a year-over-year basis, we had a bit of a tailwind, $1 million-ish plus, so pretty small.

And then do you want to speak on the natural hedge?

Yes. The other thing is -- thanks, Kate. This is important for the analysts to know. We have basically a natural hedge built into our company operationally. So we may incur headwinds or tailwinds on revenue, but the opposite effect occurs on the expense base. So our net profit is neutralized.

And Kevin, it'd be nice to say it, but I'll say it, like we beat by $5 million and $1 million of that plus/minus on a year-over-year basis actually was a headwind for the quarter relative to last quarter. So the beat was clean.

Our next question comes from Peter Levine with Evercore.

Maybe to piggyback off, Sam, the comment you made earlier on the usage base, but a comment you made on the call, you kind of called out some customers moving from pilot projects to like larger scale deployments. Can you maybe just be a little bit more specific on what kind of projects and how these customers are using it in terms of just the...

Yes. I'm more than happy to, Peter. And we may have to go back and forth a little bit depending on what level of detail you want. So what we're seeing right now with the AI stuff is a lot of it is very use case-based centric. And I can -- we can talk about this extensively. But when we first went into market a couple of years ago, we tried to sell like an AI platform that customers could build their use cases on top of. And that really struggled. And we sort of switched to taking the platform and going in and targeting customers on a more use case-based type thing.

So what's the use case? Having a person say their serial number at the front end of a call and routing the call differently based on that or answering simple questions that are out of the FAQ or doing the biometric identification so that they can be passed to the proper agent, financial service firms pulling -- doing the biometric security check and pulling the balances. We also have a lot of self-service capabilities. So if you want to pay your bill, let's say, you call and you say, I just want to pay my bill, you don't need an agent. We'll just pull it -- we'll authenticate you, pull it, send you an SMS message, let you pay with Apple Pay via your phone and take care of that stuff.

And so I know you're asking me like what's happening? What I'll tell you is right now, we're still at the phase that these are micro use cases. Each individual customer is seeing a land and maybe it's their second one or their third use case, but we're still at the micro use case stage. What I believe we'll start to see out several years is those all come together in more macro use cases. right? So what do I mean by micro? Micro, as I said, self-service payments, right? Very simple use case. Macro will be, hey, you can come in, you can authenticate a user, you can interact with them extensively, you can do different things with them on the phone and those kinds of things, that will be, I think, still several years out.

So we're seeing those first case use cases. We got a big health care deal, and all it does is book appointments, but it books at 7x24, and that took 4 agents and move those agents into more productive roles. A question you're not asking, but I do want to address on the call upfront is our total number of contact center seats was up quarter-on-quarter and year-on-year. So one of the questions we've gotten with all this AI stuff is, oh my God, all the agents are going away. Well, if they're going away for some reason, our customers are buying more seats. So total seats, I'm going to repeat this, total seats for Contact Center up quarter-on-quarter and year-on-year.

Maybe to that point, Sam, is you're not seeing seats compressing now, but if you look out 12, 24, 36 months, is this a different conversation?

Maybe. I mean I'm not opposed to seat counts coming down if they're not being used. That's why we're moving more and more to usage-based capabilities to make sure that ROI has options there. As long as I'm -- as long as my total revenue per customer is going up and my stickiness is going up, I sort of don't care if they buy it via seats or buy it versus digital messaging or buy it versus AI bot interactions or any of those other things.

As long as we're sort of solving customer problems, they'll pay us. But I think this notion that Contact Center seats are going to go off a cliff any quarter is just a misnomer. And so far, we don't see it. What we see is total number of cases being handled by agents going down, handle times going up and customer satisfaction trying to catch up to where people want it to be.

Maybe just the last question, the comment you made new partner programs starting to see some real momentum building. Maybe just talk about what you're seeing, what's working? And then if you look out over the next 12 months, any additional changes to your go-to-market? Or are you just kind of doubling down on the strategy that you've deployed?

Look, we're seeing quarter-on-quarter increases in pipeline. We're seeing quarter-on increase, especially around the new products. And we're seeing really the channel -- but the channel is also on a journey a la the customer about understanding AI. And now that we're moving out of this phase of prototyping and experimentation, more into production, the channel is getting a lot more comfortable selling AI-based products.

And we're starting to see that show up in the pipeline, the experience, et cetera. And so that's what I was trying to hint at is we're seeing growth, for a while, our channel business was a bit behind our direct business, and now we're seeing our channel business to do better than our direct business.

[Operator Instructions] As I see no further questions in the queue, I will pass it back to Mr. Wilson for closing comments.

All right. Thank you to all the people listening to the call today. We appreciate it. We'll talk to you again in 3 months. We -- as you heard from the commentary and the Q&A, we feel pretty comfortable where the company is right now. We're seeing our usage-based business grow nearly 60% and is now 21% of service revenue. So I just want to highlight that we expect that trend to continue. And we think the company is on the right track and where it's going right now. Thanks very much, and feel free to call us in our Investor Relations team or myself or whatever the case may be, if you have any questions.

This concludes our conference. Thank you for participating, and you may now disconnect.

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" BofA Securities

" B. Riley Securities

" Evercore ISI

" Rosenblatt Securities Inc.

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Good day, and thank you for standing by. Welcome to the 8x8 Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Patterson, Vice President of Finance. Please go ahead.

Thank you, operator, and good afternoon, everyone. Today's agenda will include a review of our results for the second 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. 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, 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 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 Executive Officer, Samuel Wilson.

Thank you all for joining us today. As we mentioned last quarter, we are transitioning our conference call format. We're moving away from reading lengthy prepared remarks and instead are posting a detailed quarterly letter complete with business and financial highlights to the Investor Relations website in the Quarterly Results section. This quarter, Kevin and I will share brief remarks highlighting a few important points. Q2 was another strong quarter for 8x8, and the results reflect the progress we're making in the business. We are continuing to execute against our priorities for the year, returning to growth, expanding our use of AI to improve both customer and employee outcomes, completing the Fuze platform shutdown and driving stronger retention through cross-sell and multiproduct adoption.

But the real story this quarter is innovation. It is transforming how customers experience 8x8 and what is powering our growth. We've embedded AI throughout our platform to make communications smarter, faster and more personal from real-time call summarization and contact center to AI-powered transcription work and 8x8 work to new agentless payment capabilities to digital channels like Viber and RCS in 8x8 Engage. Engage is our AI-powered CX solution that extends contact center capabilities to all customer-facing employees. Internally, we're using AI to work smarter, automating processes, improving forecasting and helping our teams deliver faster, higher-quality customer experiences.

We view AI as elevating and enhancing the work of our employees, making us more efficient. We are also transforming how we take our innovation to market, aligning our sales, marketing and partner motions around customer outcomes. And I'm excited to share that Stephen Hamil has stepped into the role of Chief Revenue Officer to lead this next phase. Stephen successfully drove our CPaaS API usage in the Asia-Pacific region and around the world. So, some key points. Today, we announced 8x8 Workforce Management available starting next week to all contact center customers at no additional cost through our new 8x8 App Store. Yes, you heard that right.

We're making Workforce Management available free of charge to all of our contact center customers, existing and new ones. We already have customers running it in production. This is a big moment for 2 reasons. First, this is our first product-led growth or PLG launch. We've introduced a high-value solution designed to drive adoption with a premium version planned for future release. Workforce Management is available to everyone. Second, it marks the beginning of a broader expansion. We'll be adding more applications to the 8x8 App Store shortly, giving customers a modern, flexible, self-service way to activate new capabilities.

We're expecting strong demand for 8x8 Workforce Management, so we've begun a progressive rollout starting next week. The 8x8 App Store and PLG strategy was implemented to better support the accelerating pace of AI-native product innovation, and it reflects our commitment to delivering outcomes that matters. We have new apps teed up for both UC and CC in the near future.

Switching gears, I want to highlight how we're changing the lives of our customers. One example is one of the largest automotive dealerships in the U.K. Before working with 8x8, they were juggling 9 different communication systems across its dealerships, creating complexity and slow response times. By moving to 8x8, they consolidated everything, voice, video, contact center analytics to one integrated platform. The impact has been transformational. The dealer group now uses 8x8 contact center, video elevation, Conversational IQ with a strong adoption of web chat and digital engagement. They're also piloting smart assistant and intelligent customer assistant to automate quality assurance and bring real-time AI analytics to their service teams. Their IT leader summed it up well when he said, 8x8 helps us focus on what matters most, providing the best experience to our customers. In short, we went from 9 vendors down to 1, unlocking better visibility, faster response times and stronger connection with every customer.

Across the Atlantic, a multi-hundred-million-dollar software company uses 8x8 is another powerful example of how our innovation drives measurable business outcomes. They are using multiple 8x8 products, including UCaaS and CCaaS as well as Engage, Secure Pay and Conversational IQ to deliver a seamless data-driven customer experience across their network. Their team has fully embraced 8x8 as a strategic platform, not just for communication, but for business transformation. They're leveraging analytics and engagement insights from 8x8 Engage to refine the sales and service workflows to connect all customer-facing employees in and out of the contact center. They're also piloting Smart Assist to improve mystery shopper scores and coach their frontline teams in real time.

It's a deep collaborative relationship from executive leadership to frontline users built on trust, measurable outcomes and shared success. This software vendor exemplifies what we mean when we talk about long-term customer partnerships built on a comprehensive portfolio of products. These are the kinds of outcomes that define our innovation story, outcomes that are measurable, transformationable and rooted in customer success. They show what makes 8x8 different. We're not just delivering new features or chasing trends. We're helping organizations simplify their technology, empower their employees and create experiences their customers remember. Whether it's a service provider and an auto dealership resolving an issue in one interaction or a software team using analytics and automation to raise customer satisfaction scores, these are real examples of 8x8 innovation in action. That's what makes this journey so exciting, innovation that creates lasting impact for our customers, our people and ultimately, our shareholders.

With that, I turn it over to Kevin to share a few highlights from the quarter.

Thanks, Sam. Good afternoon, everyone, and I also want to thank you for joining us for our fiscal Q2 2026 earnings call. Detailed financial results are available in our press release and in the trended financials on our Investor Relations site. As Sam mentioned, we're introducing a slightly different format this quarter, and I have also posted a shareholder letter and financial highlights alongside our quarterly materials. With that information already available, 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.

Q2 marked our second consecutive quarter of year-over-year revenue growth, reflecting healthy usage trends and disciplined execution. Total revenue was $184.1 million, and service revenue was $179.1 million, with both exceeding the high end of guidance by roughly $4 million and growing 1.7% and 2.3% year-over-year, respectively, driven by continued strength in our usage-based offerings. Excluding revenue from Fuze customers, whether on the 8x8 platform or not, service revenue grew nearly 6% year-over-year, higher growth than we achieved last quarter and our fourth quarter of acceleration.

Service revenue remaining on the Fuze platform declined to approximately 3% of total service revenue, down from approximately 7% in Q2 '25. We are on track to move the remaining Fuze customers onto the 8x8 platform by calendar year-end. Usage revenue, which includes our CPaaS communication API, saw another record performance totaling approximately 19% of service revenue compared to approximately 13% in Q2 '25. Gross profit for the quarter was $120.9 million, about $2 million above our implied guidance midpoint, reflecting strong execution and revenue outperformance.

Gross margin was 65.7%, down sequentially due to the continued mix shift toward our usage revenue, which carries a lower margin profile, but will add meaningful profit dollars as usage revenue continues to scale. Operating income came in at $17.3 million, exceeding expectations and resulting in a 9.4% operating margin, above the high-end of guidance. Fully diluted EPS landed at $0.09 per share, $0.01 above the high-end of our guidance range. Cash flow from operations was $8.8 million for the quarter, above the high-end of guidance. We ended the quarter with $76.7 million in cash, cash equivalents and restricted cash. We continue to allocate capital to debt reduction.

During the quarter, we made a $10 million term loan prepayment. And subsequent to quarter end, we made an additional $5 million term loan payment. With these actions, we have reduced our debt principal by $224 million or 41% since the August 2022 peak debt of $548 million. Our next required term loan payment of $2 million isn't due until June 30, 2026. These proactive delevering actions demonstrate our continued commitment to disciplined capital management.

Stock-based compensation as a percentage of revenue was 2.9%, another multiyear low for the company. This continues a clear downward trend, reflecting our ongoing focus on prudent equity management. While our diluted share count has grown, the year-over-year increase declined notably versus the prior quarter's growth for the second quarter in a row. We are committed to minimizing dilution over time and managing compensation costs in a thoughtful and sustainable manner.

Looking to Q3, our revenue guidance reflects a sequential decline following record usage revenue in Q2 and the ongoing wind down of Fuze-related revenue. Customer engagement remains healthy, but we are forecasting usage-based revenue growth more cautiously given potential variability in consumption patterns. As usage continues to represent a larger share of total revenue, we have incorporated this dynamic into our outlook with an appropriately measured approach.

Given the rapid growth of our usage revenue, we are guiding to lower gross margins for the remainder of the year. Importantly, this mix shift reflects increasing engagement with our platform and expanding use cases across our customer base. We are actively managing this evolution through disciplined execution and targeted go-to-market initiatives, and we remain confident in our ability to deliver durable long-term growth and profitability.

For fiscal Q3 '26, we are providing the following guidance. Service revenue is expected to be between $172 million and $177 million. Total revenue is anticipated to be between $177 million and $182 million. We anticipate gross margin between 64% and 66%, and we anticipate operating margin between 9% and 10%. In fiscal Q3, we expect contractual interest expense, which excludes amortization of debt issuance costs, to be approximately $4.2 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 $2.2 million, which reflects only the term loan interest payment as the semiannual interest on our 2028 convertible notes is payable during Q2 and Q4 only. Our term loan interest rate assumption is approximately 7%, reflecting SOFR plus 3% -- we anticipate fully diluted non-GAAP earnings per share in the range of $0.08 to $0.09 per share based on approximately 143.5 million fully diluted shares outstanding. We anticipate cash flow from operations to be between $10 million and $14 million, driven by the timing of cash interest payments and other payments we make in the normal course of business.

For full fiscal year 2026, we are updating our guidance as follows: Service revenue is anticipated to be between $692 million and $706 million. Total revenue is anticipated to be between $712 million and $726 million. We anticipate gross margin to be between 65% and 66%. Full year operating margin is projected between 8.5% and 9.5%, translating to non-GAAP operating income of approximately $65 million at the midpoint of our full year revenue and operating margin guidance. Although operating margin is expected to decline year-over-year due to mix-related gross margin pressure, we expect non-GAAP net income to remain relatively stable, supported by significantly lower interest expense compared to fiscal 2025. We expect fully diluted non-GAAP earnings per share to be in the range of $0.31 to $0.33 for the year, assuming approximately 143 million average diluted shares outstanding, and we anticipate cash flow from operations to be between $38 million and $42 million for the full year.

In summary, Q2 reflected 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 second half of the fiscal year with strong momentum and confidence in our ability to deliver sustained shareholder value.

With that, I will turn the call over for Q&A.

[Operator Instructions] Our first question comes from Michael Funk with Bank of America.

I have 3, if I could. So, first on the service margin comments that you had. I understand you're saying more usage-based revenue. But maybe help us think about the P times the Q there, how much of that driven by volume versus change in price?

Right now, it's mostly -- Michael, this is Kevin. Mostly right now, it's volume because of the absolute usage volume that we're seeing. So, our margins on the, say, the application side are very stable and consistent right now and have been for years. it's a pure mix issue for the usage-based portion of the service revenue. So right now, not as much price, although we are seeing some pricing pressures in some deals, it's not -- in totality, it's not a price driver right now.

Then just thinking about the revenue trajectory, thank you for the revenue ex-Fuze. But is ex-Fuze, that the right way to think about the revenue trajectory exiting the year as you end of life remain Fuze customers?

Yes. But remember, as we end of life -- and it's not end of life, we're upgrading the Fuze customers, just for any lawyers listening. We're upgrading Fuze customers on the 8x8 platform. Michael, we still have a bit of a comp. So, it's gone from the numerator and denominator to just the denominator. So, I think we'll have maybe a2 point, maybe slightly lower, slightly less, whatever headwind in next year's growth rate as we roll off these Fuze customers, and then we'll be back to normalized sort of growth rates ex any other things we do.

Do you anticipate you'll give us a pro forma ex-Fuze next year for more comparability?

That's like 2 quarters away, Michael, I haven't thought that far in advance yet. Probably, like we'll give you numbers if it makes your life easier.

And then last one for me, and then I'll hand it off. So, a number of comments in the letter about the go-to-market changes that you're making. And one of the comments was the improvement in pipeline quality. So, I'd love to know how you're measuring the pipeline quality and maybe some of the improvement you've seen there?

So we measure pipeline quality as deals that get to Stage 3. So, we run a 7-stage sales process, and we consider anything that's Stage 3 plus to be high quality. That means there's been a first meeting, there's been discovery. There's a vetting process that's been done, et cetera. And so that's where we're seeing the improvements in quality.

And how have you improved the quality, Sam? Are there more guardrails around what allows a salesperson to enter something into the funnel? What's contributing to the improvement in the quality?

Look, I'd love to give you a simple answer, but yes, we're using more SDRs. So, they're having ability to weed out some of the stuff. The use of AI in our sales process, I cannot understate how important the use of artificial intelligence has been in improving our GTM efficiency and processes and those things. So, it's a number of contributing factors. It's not death by 1,000 cuts; it's improved quality by 1,000 paper clips.

Our next question comes from Josh Nichols with B. Riley.

Good to see revenue coming in at the top end or above the top end of the range. I was just looking at the guidance breakdown. And with Fuze transitioning at calendar year-end, I think the guidance kind of implies that maybe service revenue troughs out in like 4Q, but is the expectation that going from there, since you don't have those comps into fiscal '27, you start to see improvements on a sequential basis without the Fuze overhang?

So, Josh, your question is completely appropriate. It's just really hard to answer now that usage is 19% of our revenue, right? So, we try to be very conservative with our usage-based modeling. I mean, we're still early in this transition to usage-based revenue. And I'd like to get a little bit bigger pool that -- so mathematically, 1 customer can't swing it, or 3 customers can't swing it or a change in economic can swing it. So, I'm not ready to yet predict exactly when you're going to see that. It will depend a little bit on some renewals coming up. It will depend on our usage, and it will depend on new bookings that we put into the mix, right? So, it's a lot of moving pieces. I do feel confident that with that 2 quarters of accelerating growth, we are sort of on the track to continue to grow, and we can put in the rearview mirror these year-over-year declines perpetually. But I'm not ready to say where and when yet, if that's okay with you.

I guess just to flip the question a little bit, like you said, that you've been taking a pretty conservative approach to the usage-based revenue. And yes, I think that that makes sense. If you could talk about how you're kind of handicapping what you're seeing versus how you're guiding or how you're --

So, what we do is we basically take the exit run rate for a quarter, and we run that forward in perpetuity, right? So, we're not assuming -- even though the business is growing, we're not necessarily assuming it's going to grow. And then we add in known growth businesses, right? So, we know we've got a big deal coming or we know we've got Christmas coming or the holidays, we'll adjust accordingly. But our baseline is always on usages. Whatever we're running on the exit quarter, that's what we're going to run in perpetuity. And so, when it's growing and it's growing nicely right now, especially with all the AI stuff and the CPaaS stuff, it's just has a tendency a beat and then we try to flow that through.

Yes. Sam's comment about seasonality in the usage portion of our business is something that can have an impact and that, again, could really.

It's a great point, Kevin. I was to state that. But like I mean we are entering the holiday season. So, we see more marketing campaigns. We see, in general, more phone calls, particularly in our retail vertical, our hospitality vertical, those kinds of things. And then we generally see in the March quarter, our fourth quarter, a little bit more seasonal, less usage on the holidays.

Lunar New Year.

China Asia shuts down a little bit, right? So, we are starting to see a little bit more seasonality in the business.

And then last question for me, usage-based up to like close to 20% of revenue. We're seeing very nice acceleration there. I know you talked about the margin outlook, right, and how that's impacting the margin, still really healthy margins, but 65% to 66% non-GAAP. Any idea maybe it's hard to ask or pumps on, but exactly like where that kind of winds up leveling out at as we think a few quarters ahead?

It really depends on the mix. Like I mentioned on from Michael's question about our margins being relatively stable for different portions of the business. It really will boil down to mix. The point I want to make, though, on this is that we look at absolute dollar profitability. And so, if gross margin is positive, for that piece of the business, great. And it is a light OpEx model. So more of that flows to the bottom line. So, as we scale, we may see the gross margin deteriorate a little bit, but the bottom line and the cash flow are what we're looking at as well, and that's looking like it could be even improving over time based upon the cost base of that particular portion of the business.

I just have to step in. I can't stress enough what Kevin is saying for our investors, right? We said this numerous times in the past. We would not be surprised if we saw gross margin come down a little bit as we scale the business while gross profit dollars increase. It's just a mix. It's how customers are adding on AI products or messaging products or these kinds of things. But we know the more products we sell customers, the stickier they are, the higher the LTV, the higher the average revenue per customer. It's the right thing to do for the long-term value of the customer, and therefore, it's the long-term value of the shareholders.

Our next question comes from Peter Levine with Evercore.

Congrats on the deleveraging. I think that was obviously part of the plan for a while. So good to see that. Maybe to go back to a prior question around the pricing pressure that you're seeing. I've heard from some of your competitors that during COVID, prices were high, and now that 2, 3 years as renewals come up, pricing becomes part of the conversation. And you've seen a bit of not a commoditization, but pricing used as a lever. How much of that are you seeing as part of renewals where you're going to have to go through a period of time whereas these renewals that you've had over the past 3 years come due, like is that part of the equation? Is that some of the headwinds that you guys are dealing with or seeing today?

Yes, of course. I mean, I think look, during the pandemic, you saw rush buying, especially from the on-prem to cloud type of systems. And as those reach 2 and 3 renewals, they're being rightsized. So, it's not just -- I want to be clear, pricing pressure is certainly happening, mainly led by a certain video conferencing company who seems to sort of be price-agnostic sometimes. But also, we are seeing some rationalization of seats driven by the economic situation, et cetera. What's offsetting that is our AI products, our messaging products, our digital products, et cetera, right?

So, I mean, I can't stress this enough. Like the idea that we're surprised this is happening is completely false. We completely know it was happening. We're managing it accordingly. And this is one of the reasons we've added more products to the mix, right? So, what we're seeing is customers may reduce the number of UC seats but add RCS, which we now offer globally into the mix. And that's offsetting the average revenue per customer. And this is why we're seeing average revenue per customer increase on a year-over-year basis, particularly as we get more 3, 4, 5 product customers. And our retention rates are going up as we get more multiproduct customers. So, in the end, this post-COVID transition is certainly one we have to deal with. It's one we're very aware of, and we're managing, but it's not one that scares us.

Maybe WFM, obviously, it's a free offering. Maybe walk us through the strategy there. And then I guess if there's a way to handicap what percentage of your customers are actually using you guys today for WFM versus like a point solution. Curious to know what the strategy was behind offering that. Obviously, I think we know some of the drivers, but curious to know what the strategy is and what you do in the next 4 quarters.

So, we saw an opportunity with WFM market. So contrary to probably what you've heard -- and Peter, I know you know this like the back of your hand, right? Contrary to what people sometimes say is the most popular WFM product in the world is Excel, right, by far. And with the average contact center in the United States being 73 seats and probably 50 -- 40 to 50 seats in international markets, Excel sort of works. And so what we wanted to do was build a product that's better than Excel for managing WFM and giving a way to our customers to provide value and really start to enter the world of product-led growth with a Pro version, which will offer probably enhanced analytics or better forecasting or multisite. There's a couple of different ways we can take it in the future. But just simply having a product to replace Excel adds tremendous more value to our customers, which is what we care about, right? We're in a game of renewal and those kinds of things.

And it just drives the multiproduct, LTV, the ability to add product-led growth through our new App Store, which we're super excited about, all these kinds of things. And it's just -- we really want to drive value into our customers, and it was a way, given how software and expenses work, it was a way to drive a lot of value into our contact center seats very quickly. We see our competitors charging $20 and $30 a month for arguably something that isn't that hard. And so we really wanted to drive that cost curve down and drive more to a freemium model for it to really meet our customers where they're at.

In terms of -- now what our product is it isn't designed for a big contact center. We're not trying to compete with Calabrio and Verint and those guys, right? They offer gamification and other things that we're not sort of up to yet, and most of our basic customers don't really want. And so we saw the market need for a replacement for spreadsheets, not a replacement for collaborate or Verint. If you want to -- if you're running 1,000 -- we have many customers running 1,000 or more contact center seats, you're going to use one of those higher-end products because they're just designed differently and they work differently.

And maybe just squeeze the last one. Obviously, I talked about some of the deleveraging you guys have had. How do you think about M&A, smaller tuck-ins versus organic, right? Obviously, there's a cost to both sides of that. But how do you think about it? And maybe help us understand, are there still any covenants that you have to manage through with the debt levels that you have today? Just help us understand how you're thinking about organic versus kind of tuck-in M&A to kind of accelerate some of the product development.

Sure. So, we did an acquisition last -- in the March quarter. It was a small tuck-in acquisition. It's not material, so we didn't make a big deal out of it, but we've done one. We're looking at others. We're active in the market, so we're looking. Debt retirement is still a primary route that we think to drive stakeholder value over time. So we're definitely focused on that. We are in a term loan A, so there are some covenants. They're very manageable. They're fully disclosed in our filings. There's nothing to worry about from them. I wouldn't want to do anything outrageous. Like I see people who want -- who advocate these large AI acquisitions that bring on losses and those kinds of things. We are a cash flow-driven company, and we do work on cash flow and focus on cash flow, and that's what we're focused on.

So, I would say we are looking at M&A. We think it definitely is part of our capital allocation strategy to acquire tuck-ins to drive geographic expansion, product portfolio expansion or customer expansion. Those are the big 3 that we look at. And when one comes, we have no problem pulling the trigger.

Yes, the amendment we did also created a basket for tuck-ins as well, which we articulated last quarter, if you remember. So, we have that freedom in our term loan.

Our next question comes from Catharine Trebnick with Rosenblatt Securities.

Sam, how are you seeing the buying pattern change now that AI seems to be more part of the discussion? And what are you seeing the difference with like the traditional brokers versus like the professional service guys? It seems to me from -- well, I'll tell you what I think afterward. Let me get your opinion first.

So first off, look, I want to break this into 2 parts. There's AI itself, the technology AI itself. I think what we're seeing is customers are driving really to the first core use case adoptions and adopting those. So, Agent Assist or we call Smart Assist or our AI receptionists, those kinds of things, very specific targeted use cases. We're obviously, most of us in the industry are spreading it across things like summarization or those kinds of analysis. And so, there's a lot of those first use cases are getting adopted. So, what's changing, I would say, is the buyer doesn't come in and say, "Hey, what do you guys sell for AI?" The buyer comes in he or she comes in and says, "Look, we're looking for an Agent Assist solution. Can you tell me about the ones that you offer?" And through our SaaS partnership, we always get to offer great things.

The second one is much more subtle, and I think we were in front of it and will remain in front of it for an extended period of time, is that AI is sold on a consumption-based model. the whole notion of Assist of AI. And I know that Gartner and others have tried to bend old SaaS metrics into the world of AI. They don't work. What works is usage. The customer wants to pay, and we're even seeing it -- and I know this is going to -- people overreact to this comment, so please don't. But we're even seeing it spill back into our subscription-based services where people want to try to morph them more into a consumption-based service. So, what do they want? They want a right to adjust the number of seats after 1 year, 2 year, 3 years because they just don't know how many employees they're going to have. And I just -- I absolutely believe that our industry, our SaaS industry is going towards that consumption usage-based model. It is an unstoppable force. And you can argue by yourself, as much as you want, but the reality is that's where we're going. And so, what we see is usage-based specific use cases are what's driving our business right now.

Because I've been -- well, we can deal with it more on the post call. But I've been hearing that because it's more complex that the traditional telco guys aren't really set up to do a more complex sale. And so that --

I mean that's true. Look, our professional services team is booked constantly, right? Our professional team is like we're booked all the time. I mean, we can get into the nuance here for investors, but there is like we're starting to see the whole concept of deployment change. It's a lot more -- we're selling more continuous services because these models require constant fine-tuning and there's no use cases and whatever. And customers would rather just buy a flat x number of hours per month every month contracted, let's go than one big lump sum purchase upfront.

Our next question comes from Siti Panigrahi with Mizuho.

It's Chad on for Siti. Just first, I'd be curious if you could expand on any actions you're taking on sort of the cost side as sort of this lower margin revenue comes through the P&L and sort of what you're looking at to expand operating margins from here?

Yes. I mean we're aggressively deploying AI technologies in-house. We don't just sell it for our customers. We use it ourselves, and we're seeing ROI benefits. I mean, obviously, there's -- this is a little bit of that margin issue that you guys like to obsess about. But when you first buy AI, it actually drives down your margin because you're running the old process and the new process side by side until you get the new one fully ramped. So, some of those issues that we see going on. Obviously, as we grow in size and we return to growth, we're putting pressure on our suppliers to give us good unit pricing. And eventually, that stuff flows through. But a lot of this is just mix. I mean I've tried to warn Wall Street for years that I believe over time, as we move more to a usage-based model, what you would see is increasing revenue growth, decreasing gross margin, increasing gross profit dollars and over time, an increase in operating margins because you're more aligned with your customers and the more aligned you get with your customers, the higher LTV you drive over time.

A little color on what Sam just said, which was excellently stated. I'll give you an example of we're using AI internally. We are able to use AI to right-size a lot of our, say, software purchases. I'll give an example, where we're able to actually get great insight to the use of AI as to the use of each of the seats or whatever, so we don't overbuy upon renewal. So that's one example of using AI of many that we're doing right now to have cost control without removing the ability to work efficiently internally in the company. So, we're seeing -- we're starting to see good signs there.

Really appreciate the color. And then just one follow-up from us. If you could talk about sort of how the revenue trends were in the quarter from a domestic U.S. standpoint versus international and how that relates to sort of the better revenue outlook from here?

I mean it's no surprise, and Kevin can give you more details. But like our U.S. business isn't doing as well as our international business, right? I think our business outside the U.K. is almost 40% of our -- I'm sorry, the U.K. and international is almost 40% of our business, and it's growing substantially faster than our U.S. business. I mean the U.S. is kind of the center of price compression and gamesmanship and some of those kinds of things relative to what we're seeing in international markets where we're doing much better.

Also, the customer base is largely U.S.

Yes, customer base is largely U.S., as Kate just said.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Sam for any further remarks.

All right. Thank you, everyone. Thank you for the earnings call. Any feedback you want to give the super positive on our new format, please send those to me at [email protected]. Any negative feedback you want to give, those go to Kate Patterson. I say that jokingly. But any feedback you want to give us on the new format around a shortened script and a letter and those kinds of things is much appreciated. And with that, we look forward to meeting with all our investors again in 90 days with how we'll do over the next quarter. Thank you, everyone. And if I don't talk to you before then, happy holidays.

Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.