8x8 (EGHT) Q2 2026: Usage-Based Revenue Jumps to 19%, Reshaping Margin Mix

2025-11-04 | By EarningsIQ Research

8x8’s usage-based revenue surged to 19% of service revenue, underscoring a rapid pivot toward scalable, consumption-driven growth but intensifying gross margin pressure. The company’s AI-led product innovation and App Store launch signal a shift to product-led growth and deeper customer integration. Investors should watch for evolving profitability dynamics as the legacy FUSE migration wraps and usage-based economics reshape both top and bottom lines.

Summary

• Usage-Based Model Accelerates: Nearly one-fifth of service revenue now comes from usage, driving growth but lowering gross margin.
• AI Innovation Drives Product Expansion: Free workforce management and new App Store launch mark a strategic shift to product-led growth.
• Margin Structure in Transition: Mix shift toward lower-margin, high-volume usage revenue will pressure gross margin but expand gross profit dollars.

Performance Analysis

8x8 delivered its second consecutive quarter of year-over-year revenue growth, with total revenue and service revenue both exceeding the high end of guidance. Service revenue, excluding FUSE, grew nearly 6% year-over-year, marking the fourth quarter of accelerating growth. The FUSE platform, a legacy unified communications offering, now represents only 3% of service revenue, down from 7% a year ago, with full migration to the 8x8 platform expected by year-end. Usage-based revenue, which includes CPaaS (communications platform as a service) APIs, hit a record 19% of service revenue, up from 13% in the prior year.

Gross margin declined sequentially to 65.7%, reflecting the growing share of lower-margin usage revenue, though gross profit dollars increased. Operating income and operating margin both exceeded expectations, and cash flow from operations was strong at $8.8 million. Disciplined capital allocation was evident, with $10 million in debt repaid during the quarter and an additional $5 million after quarter-end, reducing total debt principal by 41% since 2022. Stock-based compensation hit a multi-year low as a percentage of revenue, and management signaled ongoing efforts to minimize dilution.

• Revenue Outperformance: Both total and service revenue beat guidance, driven by robust usage-based growth and healthy customer engagement.
• Margin Compression: Gross margin dropped as usage-based revenue scaled, but absolute profit dollars rose, reflecting a deliberate shift in revenue mix.
• Balance Sheet Strengthening: Accelerated debt repayment and lower stock-based compensation underscore a disciplined approach to capital management.

Management’s guidance for Q3 and the full year anticipates continued margin pressure from the usage mix, but stable non-GAAP net income and positive cash flow, as interest expense declines. The focus is on sustaining growth and profitability while absorbing the final impacts of the FUSE migration and evolving product economics.

Executive Commentary

Strategic Positioning

1. Usage-Based Revenue Model Scaling

8x8 is rapidly evolving from a traditional subscription SaaS model to a hybrid consumption-based revenue model, with usage-based offerings now accounting for 19% of service revenue. This mix shift is strategic, as usage revenue offers scalability and aligns pricing with customer value, but it also introduces margin volatility and greater sensitivity to customer consumption patterns.

2. AI-Driven Product Innovation and App Store Launch

The company’s aggressive embedding of AI across its platform is translating into tangible customer outcomes—such as real-time call summarization, smart assistants, and agentless payment. The launch of the 8x8 App Store, with free workforce management (WFM) for all contact center customers, marks a shift to product-led growth (PLG), aiming to drive adoption and expand wallet share through a self-service, freemium approach.

3. FUSE Platform Migration Nears Completion

The legacy FUSE platform wind-down is nearly complete, with remaining revenue contribution shrinking to 3%. This transition removes a multi-year drag on growth rates and will enable cleaner comparability and a focus on core, modernized offerings. Management expects a lingering but diminishing headwind in growth rates as FUSE exits the base.

4. International Growth Outpaces U.S.

International operations, especially in the U.K., now comprise nearly 40% of business and are growing faster than the U.S., where price compression and seat rationalization are more pronounced. The company is leaning into global expansion, leveraging CPaaS and digital channel innovation to capture new markets.

5. Capital Allocation Discipline and M&A Readiness

Debt reduction remains a top priority, but management is open to strategic tuck-in acquisitions to expand product capabilities or geographic reach. Recent amendments to debt covenants have created flexibility for targeted M&A, though the focus remains on cash flow and sustainable growth rather than large, loss-driven bets.

Key Considerations

This quarter marks an inflection point as 8x8’s business model and product strategy shift decisively toward scalable, usage-driven economics and AI-enabled differentiation.

Key Considerations:

• Mix Shift to Usage Revenue: The pivot toward usage-based models will drive top-line growth but pressure gross margins, requiring investors to focus on gross profit dollars and cash flow rather than margin percentages.
• AI as a Competitive Moat: Embedded AI features are driving both internal efficiency and customer adoption, positioning 8x8 to capture higher-value, multi-product relationships and improve retention.
• Product-Led Growth (PLG) Initiatives: The App Store and free WFM launch are designed to accelerate adoption, cross-sell, and expand average revenue per customer, especially among smaller and mid-market contact centers.
• International Expansion: Faster growth outside the U.S. highlights both a strategic opportunity and a hedge against domestic pricing pressure and seat rationalization.
• Balance Sheet Flexibility: Accelerated deleveraging and covenant amendments enable disciplined capital allocation, including selective M&A to fill product or geographic gaps.

Risks

Margin pressure from the rapid growth of lower-margin, usage-based revenue is likely to persist, potentially masking underlying profitability improvements at the gross profit dollar level. The transition away from FUSE introduces short-term growth headwinds and complicates year-over-year comparisons. Competitive pricing, especially in the U.S., and customer seat rationalization post-pandemic remain ongoing challenges. Seasonality and customer concentration in usage revenue could introduce additional volatility.

Forward Outlook

For Q3 2026, 8x8 guided to:

• Service revenue of $172 million to $177 million
• Total revenue of $177 million to $182 million
• Gross margin of 64% to 66%
• Operating margin of 9% to 10%
• Non-GAAP EPS of $0.08 to $0.09
• Cash flow from operations of $10 million to $14 million

For full-year 2026, management updated guidance:

• Service revenue of $692 million to $706 million
• Total revenue of $712 million to $726 million
• Gross margin of 65% to 66%
• Operating margin of 8.5% to 9.5%
• Non-GAAP EPS of $0.31 to $0.33
• Cash flow from operations of $38 million to $42 million

Management emphasized a measured outlook for usage-based growth due to consumption variability and anticipated continued gross margin pressure from mix shift, but expects stable net income as interest expense declines and FUSE migration concludes.

• Usage-based revenue seasonality and customer renewal timing will impact quarter-to-quarter variability.
• Multi-product adoption and international momentum are expected to offset domestic pricing headwinds over time.

Takeaways

8x8’s strategic pivot toward usage-based revenue and AI-powered product innovation is reshaping its growth and profitability profile, with gross margin pressure offset by expanding gross profit dollars and stronger customer retention. The near-complete FUSE migration will soon remove a legacy drag on reported growth, and international expansion offers a meaningful tailwind. Investors should watch for continued execution on PLG initiatives and margin management as usage-based economics take center stage.

• Usage Revenue Inflection: The rapid rise of usage-based revenue is transforming both growth potential and margin structure, requiring a new lens on profitability and valuation.
• AI and PLG Execution: Successful rollout of AI features and the App Store will be critical to driving adoption, retention, and cross-sell in a competitive market.
• Post-FUSE Transition: Clean comparability and normalized growth rates are on the horizon as FUSE exits, but short-term headwinds remain as the mix shift plays out.

Conclusion

8x8’s Q2 2026 results highlight a decisive transition to a usage-based, AI-enabled business model. While gross margin will remain under pressure, the company’s disciplined execution, product innovation, and focus on profitable growth position it for long-term value creation as legacy headwinds recede.

Industry Read-Through

8x8’s accelerating shift to usage-based revenue and AI-driven product expansion signals a broader trend in the communications and contact center industry: scalable consumption models are supplanting traditional seat-based SaaS, and embedded AI is becoming table stakes for customer engagement platforms. Competitors will face similar margin mix challenges as usage revenue grows, and those lacking robust AI capabilities or PLG strategies risk falling behind. Investors should expect further consolidation and innovation as vendors race to capture share in a rapidly evolving, usage-driven market.

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