Samuel Wilson: No, no, we’re not saying that.
Michael Funk: Okay.
Samuel Wilson: To be clear, look, CPaaS is going to be a little bit below what we maybe had expected 90 days ago. And that’s driven by the fact that we are seeing some of the customers a little, what’s the right word? More reluctant to run marketing campaigns during the lunar New Year and Ramadan. That’s what they’re forecasting to us right now. And also we are seeing a little bit more, I don’t know what the right word is, pressure, whatever. But as these contracts come due, we have customers that say, hi, look, I don’t need 100 seats anymore, I need 92 seats.
Kevin Kraus: The other thing, I’d like to add also, and this is important in terms of total revenue, we’re seeing a trend toward more, soft phone usage and less hardware. So, if you look at our other revenue, it’s a component obviously of the total that has a bit of pressure, as the customers are focusing.
Samuel Wilson: And it’s dropped, I mean, to be fair – it’s dropped a heck of a lot more than anything else.
Kevin Kraus: Yes, so that’s baked in there as well.
Michael Funk: Okay. That’s all very helpful. Sorry I worked the site on my own modeling guy, that’s all I’m trying to do. I know it’s reluctant to provide too much detail, secret sauce from the metrics, but the more we have, the better we can forecast and…?
Samuel Wilson: Michael, it’s completely fair. It’s not that, it’s just we don’t, I mean, I don’t – like two years ago, it was easy to track Fuze as a separate thing, because we just bought them. But two years in, we have hundreds of customers that have upgraded, the billing systems are merged. There’s all kinds of things happening. It’s just no longer that easy, unless we sort of, unless I stick a team of people going line-by-line, and it’s just kind of not worth doing that, I got, my team’s doing other things right now.
Michael Funk: No, of course, thank you guys for the questions.
Samuel Wilson: Thank you.
Kevin Kraus: Thank you.
Operator: Please stand by for our next question. Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.
Meta Marshall: Great, thanks. I just wanted to go into, you have a lot of initiatives on kind of selling customers initially. But just what are kind of the initiatives, or sales motions you guys are having, to kind of add some of these additional solutions to existing customers? And then maybe piggybacking on that, you guys have talked a little bit about the Fuze upgrades that are happening, but is there like an end of life date? Like, is there any point where we should kind of consider that, you know, the Fuze platform will all be kind of transitioned or upgraded to kind of the XCaaS t platform? Thanks.
Samuel Wilson: Okay. So, Marshall, completely fair question. I mean Marshall, Meta, completely fair question. So, let me dig this in reverse order. On the Fuze end of life, there’s not a set end of life date. We’re busy moving hundreds of customers over right now. A lot of them are in flight. We’ve got kind of the top 400. They’re a little bit more special. We’re taking care of them. And so, there’s not a defined date. And we also, and with the top 400 customers, we’re really doing it in conjunction with them. So, I don’t want to use that EOL term, because that has a tendency that has unintended consequences for us. So it’s really, we work with them on that migration. The first part of your question is, to me a really insightful question, which is around how do we have to change our motions as a company?
As a company, historically, we’ve been, kind of a, sell most of the, you know, sell most of the wallet share on the first deal. And that’s kind of it. Maybe a few add-on seats here or there as we add employees and those kinds of things. That’s really changing. And so, if you look at how we’ve evolved, for example, and I don’t – won’t know the exact number. We’ve probably doubled the number of CSMs we have at the company over the last year. And that’s really allowing us to then further expand. We’ve really restructured how we do some of our account management. And some of those things around making sure that, we can land and then further expand those customers. I think what’s interesting is a lot of the technologies, the secure pay, or workforce management, or intelligent customer assistant, are generally not sold on the initial transaction.
Most of the time, the initial transaction is typically UC and CC only. And then over the next three, six, 12, 18 months, there’s further add-ons that are done. I recently hired, and it’s in the press release, Mike McCarron from Gladly. And he and I worked together at MobileIron. He’s just a phenomenal executive. But he’s really coming in to help us further expand, our motions around that land and expand and further add-on sales. And then the other thing we’re doing, and this is great for me. I don’t know if you guys are excited as I get about this stuff, but we’ve got product-led growth now. So, if you go into our product today, our contact center product, we can do things like, and I know all you people have been around for a while – like said everyone does.
It existed for 20 years. Yes, we’re there now, we’re caught up. Which is, we can do admin notifications, we can do PLG product-led growth directly in the platform where people can sign up for feature functionality, automatically add it to their invoice and drive further add-on sales. And so, those are all things that we’ve developed under the notion of innovation and retooling over the last year.
Meta Marshall: Okay. Perfect, thanks.
Samuel Wilson: Thanks, Meta.
Operator: Please stand by for our next question. Our next question comes from the line of Josh Nichols with B. Riley. Your line is open.
Josh Nichols: Yes, thanks for taking my question. Just wanted to check in. I mean, so congrats on paying back the $63 million of debt. You’re still going to have north of $100 million of cash on the balance sheet. I know that there’s going to be some additional paydowns from the higher interest term loan, at least later this year, after the repayment penalty is gone. But I would think that now with the company’s balance sheet, much better profitability on the upswing, that there’s also potential opportunities for the company to do like a potential refi. Is that something that you’re actively exploring, or what’s the company doing in terms of looking to potentially reduce its debt cost outside of repayment?
Kevin Kraus: So absolutely, great question, Josh. We do have the opportunity to look at refinancing that expensive term loan debt and we are. So more to come on that later. We’ll see the timing on that. We also have an opportunity potentially to look at, potentially opportunistic buybacks, in the future. No commitment on that yet, but that’s an opportunity for us as well. We’re generating plenty of cash flow and we have options.
Samuel Wilson: So, I’ll make the pitch, like our leverage ratios have dropped in half, basically over the last year, if you look at some sort of adjusted EBITDA to net debt kind of ratios. So any commercial bankers out there, call me, because we’ve already got people at our front door. So, more can come to the table at any moment.
Kevin Kraus: So, we’ll take them. Call them directly. But no, it’s nice to be in the position we’re in now because we’re, as a credit risk per se, we’re way better now than we’ve been for quite some time. So it’s a good position for us to be in.
Josh Nichols: Well, it’s good to hear. And hopefully there’s some news over the next few months potentially. And then just looking here, so the company’s operating margin for the third quarter came in, you’re materially better than the guy – 140 bps or so. I know there’s some taxes and employee stock costs and whatnot that are going to be starting up this year with the new calendar year that are going to pressure operating margins in the beginning of the quarter. Could you give a little bit more detail on just like the 300 or so bps sequential decline and like how would we kind of break out that attribution given that gross margins are kind of going to be flat and service revenue at least is only down like a couple million bucks, I think, sequentially?
Kevin Kraus: Yes, good question. So just to point out, as I mentioned in my prepared remarks, we had some one-time goodness in Q3 that helped us about a point, a couple of things there. So normalized is more like 200 or so basis points down 240 or whatever to the 10%. So a couple of things that go on in our fiscal Q4, which is January through March, we have the reset of the social security taxes, the FICA and the 401(k) match in the company. So that’s a few million dollars right there. And that really impacts us, that’s really most of the change from a quarter-over-quarter perspective, say in the $5 million or so range. That’s really driving it.
