8x8 - Earnings Call - Q2 2017

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Second Quarter twenty seventeen 8x8 Incorporated Earnings Conference Call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Joan Sotelli, Director of Investor Relations.

You may begin.

Speaker 1

Thank you, operator, and welcome, everyone, to our call. Today, I'm joined by 8x8's Chief Executive Officer, Vic Verma and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's 2017 financial results for the period ended September 3036. The earnings press release, which was issued today after market close, is available on the Investors section of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions. Before I turn the call over to Vic, I would like to remind all participants that during this conference call, any forward looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Expressions of future goals, including financial guidance and similar expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward looking statements. These forward looking statements involve a number of risks and uncertainties, including factors discussed in the Risk Factors section of our annual report on Form 10 ks, in our quarterly reports on Form 10 Q, and in our other SEC filings and company releases. Our actual results may differ materially from any forward looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. I would also like to note that during this call, we will provide financial information that has not been prepared in accordance with generally accepted accounting principles, in addition to our GAAP results.

Management uses these non GAAP financial measures internally in analyzing our financial results and believes they are useful to investors as a supplement to GAAP measures in evaluating the company's ongoing operational performance. Investors are encouraged to review the reconciliation of these non GAAP financial measures to their most directly comparable GAAP financial measures. This reconciliation has been provided in the financial statement tables included in our earnings press release. And with that, I'll turn the call over to Vic Verma, Chief Executive Officer of 8x8.

Speaker 2

Thank you, Joan, and thank you everyone for joining us today as we discuss our 2017 results. We will follow the same format as in the past, beginning with a high level summary of our accomplishments, followed by a more detailed discussion of the financial results and metrics by our CFO, Mary Ellen Genovese. 8x8 continued to execute very well in the 2017 with year over year increase of 24% in total revenue to a record $63,200,000 and 23% increase in service revenue to $57,700,000 We also witnessed strong organic growth in service revenue from our mid market and enterprise customers of 36% year over year. Revenue from these larger customers now accounts for over 53% of our total service revenue compared with 40 eight percent one year ago as we continue to see good traction moving up market. A combination of healthy cash flows, strong margins and disciplined financial management led to our twenty sixth consecutive quarter of profitability on a non GAAP basis with non GAAP net income of $5,300,000 or 8.4% of revenue.

With the digital transformation and communications now being embraced by larger businesses, the benefits of our differentiated enterprise communications as a service solutions are becoming even more apparent and compelling beyond the significant cost savings they inherently deliver. Last month at our annual CIO forum, the IT executives at our top global enterprise customers spoke about the tremendous improvements in productivity, customer engagement and overall business performance they're experiencing with our fully integrated stack of cloud communications, contact center and analytics solutions. With our global pure cloud footprint, enterprise class features and industry leading quality, reliability and security, these customers are finally able to focus their attention on improving their core business rather than managing a complex communications infrastructure. 8x8 is taking this value proposition even further by leveraging the power of cloud for global real time communications and actionable analytics to enhance business productivity and performance. Our solution is not just a replacement for legacy premise based PBX and contact center systems.

More importantly, it is a complete data and analytics platform that automatically captures communications data throughout your organization, combines this with rich, relevant context from internal and external sources, and derives actionable insights to accelerate business workflows and improve business outcomes. It is the combination of our technological expertise, the integration of our services on a single platform, our ownership of the underlying technology and data, and the 86,000,000 analytic reports we collect each day that gives us the unique ability to bring this vision to life. Our new line of business sales acceleration product, which I'll discuss in a moment, is a good example of this. Let's review the progress we have made in the key strategic focus areas of our business. Increasing our footprint in the midsize and enterprise market segments, enhancing our global service delivery and support capabilities, and developing innovative new features that enable customers to derive even greater value from our core communication solutions.

First, as I mentioned previously, we continue to see good traction moving upmarket with the addition of over 100 new mid market and enterprise logos, as well as the expansion of our offerings with existing accounts. 65% of the new monthly recurring revenue booked during the quarter came from these larger customers and our channel sales team. While this was derived primarily from mid sized accounts with 500 to 1,000 users, we continue to see a strong pipeline of large enterprise deals are in the proof of concept stage with many of these prospects. Earlier this month, we were awarded a contract with GNC Holdings, a worldwide health and wellness retail chain, calling initially for the deployment of our virtual contact center solution to the help desk contact call centers. Our integration with Zendesk along with our robust reporting and analytics capabilities were key to this high profile win.

The enterprise retail segment is increasingly becoming a strong vertical for 8x8 with other customer wins that include GameStop and the 1,000 plus location national office supply retail chain we announced last quarter. Our growing adoption in this segment has been due in large part to the strength and flexibility of our data analytics platform to provide unique insights into consumer behavior and enable dynamic handling of each call or interaction. The Boyd Group, one of the largest non franchise collision repair centers in North America, chose 8x8 to replace their aging premises based systems with our virtual office, virtual contact center, and virtual office analytics solutions. Initially for over 600 users in corporate headquarters and across 50 US locations, expanding to another 2,500 users in two fifty additional locations. A leading provider of rehabilitation products worldwide selected 8x8 for a 500 seat combined virtual office, virtual contact center deployment with quality management and workforce optimization.

Gerber Scientific, the parent of companies that supply software and hardware systems for a variety of industries chose 8x8 to deploy both virtual office and virtual contact center services to over 500 users in 13 global locations. Our virtual contact center solution was selected by a leading integrated retailer that operates full line and specialty retail stores across The United States for initial 180 seat deployment in two US locations. Another contract with one of the largest independent power producers in The US was finalized during the quarter, calling for over eight fifty virtual office seats in corporate headquarters with expansion potential to 28 additional locations. While some of these larger customers may start off with small initial deployments, historically, continue to grow with us adding seats and services as their needs evolve and they begin to understand the full business potential of our solutions. During the quarter, our account management sales team booked well in excess of $50,000 each in additional monthly recurring revenue with both Regis and AutoEurope.

SPS Commerce and HomePoint Financial each added nearly 500 virtual office, virtual contact center, and VO analytics seats, and Nutanix added nearly 200 additional virtual office and virtual contact center seats. Approximately 50% of our monthly recurring revenue each quarter comes from add on services sold to existing customers. Our integrated virtual office, virtual contact center solution continues to differentiate us from competitors, helping us win and retain these larger accounts. Six of our top 10 deals closed in the second quarter called for both virtual office and virtual contact center deployments. Two of our top 10 deals were for virtual contact center only services, illustrating the tremendous value this offering is bringing us not only just as part of an integrated solution, but as an increasingly competitive standalone service with significantly higher ASPs than voice and UC services.

Revenue from our virtual contact center offering has been accelerating steadily over the past several quarters. Moving on to our second area of focus, ensuring our customers receive the highest quality service and support on a global basis. I am pleased to report that our new customer support center in The Philippines is now live and an additional support center in Cluj, Romania is set to go live by end of the calendar year. These new technical support operations outside of The US will expand our 20 fourseven worldwide support capabilities while favorably impacting our margins through reduced customer support costs. Additionally, all of the three data centers we announced earlier in the quarter, Amsterdam, Brazil and Singapore, have gone live and are supporting customers and end users based in those regions.

I'd like to note that as we continue to deploy our services to increasingly larger businesses with users spread across the globe, we are not simply building a cloud based infrastructure to enable collaboration between various endpoints. That is cloud communications one point zero, which 8x8 has proven to do very well. As I mentioned previously, we're building a powerful real time communications and data analytics platform that gives us the framework to develop a myriad of cloud based applications to help businesses achieve higher levels of business performance. Imagine how much more value a business can derive from its communications when instead of disconnected systems and endpoints, all employees utilize a common app on their desktop or mobile device that is tied to the company's internal data and monitored in real time to unlock and distribute valuable information across the enterprise. On the research and development front, I'm pleased to report that our new cloud native quality management solution, a product developed by a Kluge Romania team, which has expanded to 75 full time employees, is now available as an add on service for a virtual contact center solution.

This tightly integrated offering enables contact centers to maximize agent performance and customer satisfaction in a simple and painless fashion. Unlike legacy quality management products that are still being used by many contact centers today, 8x8's quality management solution leverages cloud technology combined with deep virtual contact center integration to deliver an easy to install, use and manage framework for monitoring and improving the quality of a customer's contact center operation. Customers are already reporting call center improvements such as a 20% reduction in onboarding time, 15% increase in agent performance and a 5% increase in customer satisfaction scores within just the first few weeks of use. We believe our quality management solution offers significant advantages over competitive offerings, delivering simplified setup and management at a fraction of the cost of existing alternatives. I'm also very pleased to announce that our Virtual Office for Sales solution, which I referenced earlier, is now available to 8x8 customers and prospects.

This unique and powerful application doesn't just retrieve CRM records for manual updating, it streamlines the entire sales process with built in UC integration across all virtual office connected devices, including mobile. The solution creates a constantly updated view of communication activities rich with context from salesforce.com, providing detailed analytics on team, individual accounts and individual account performance. With features like automated call logging and correlation of real life sales activity to opportunity value and revenue, this will enable teams to focus more on customer engagement, closing deals and how those functions work together to influence pipeline progression rather than on record keeping and manual reporting. As we've mentioned before, sales is the first line of business we are targeting with a focus on the acceleration and optimization space, and we are currently developing solutions for other functional business areas such as finance, HR, and relevant verticals such as retail. We believe the business value provided by these analytic solutions will enable us to continue driving healthy service margins and further differentiate us from low margin basic communication services providers.

Last but not least, 8x8 was once again honored this past quarter to be named a leader in Gartner's Magic Quadrant for Unified Communications as a Service worldwide for the fifth consecutive year. We were also named a challenger in Gartner's Magic Quadrant for Contact Center as a Service North America for the second consecutive year. These are tremendous endorsements of the strength of our company and products and the continued progress we are making developing and delivering the industry's most advanced enterprise cloud communication solution. I'd like to thank our 1,000 employees worldwide for their dedication and hard work that is keeping us at the forefront of our industry. With that, I'll now turn the call over to our CFO, Mary Ellen Genovese.

Speaker 1

Thank you, Vic, and thank you all for joining us today. Let's begin with some highlights from our income statement. 8x8 posted strong top and bottom line results for the second quarter of fiscal twenty seventeen. All the numbers being reported this quarter are organic, following the June 2016 anniversary of our DXi acquisition. Our total revenue was a record $63,200,000 an increase of 24% year over year, with service revenues at $57,700,000 an increase of 23 year over year.

On a constant currency basis, total revenue increased by 26% and service revenue increased by 25% year over year. On a year to date basis, our total revenue increased 25% year over year and our service revenue increased 24. On a constant currency basis, both total revenue and service revenue increased 26% year over year. Service revenue from our mid market and enterprise customers increased 36% year over year. This is 40% on a constant currency basis.

We continue to see a greater percentage of our revenue coming from larger mid market and enterprise customers each quarter with over 53% of our total service revenue coming from these larger customers compared with 48% in the same period a year ago. Non GAAP net income for the 2017 was $5,300,000 representing 8% of revenue compared with 3,000,000 representing 6% of revenue in the year ago quarter. This is 8x8's twenty sixth consecutive quarter of profitability on a non GAAP net income basis. On a GAAP basis, we posted net income for the quarter of $27,000 or zero zero zero per share. Our GAAP gross margin was 73.7% compared with 72.9% in the same period last year.

On a non GAAP basis, gross margin improved 60 basis points from the year ago quarter to 75.3%. GAAP service margin was 81.2% compared with 80.4% in the same period last year. On a non GAAP basis, service margins improved 63 basis points from the year ago period to 83%. Non GAAP sales and marketing expenses in the quarter were $31,600,000 or 50% of revenue compared with $24,900,000 or 49% of revenue in the same year ago period. The increase in sales and marketing expense was due primarily to additional headcount of deployment engineers and sales professionals, increased marketing and lead gen expense, and consolidation of our worldwide sales and support systems under one unified Salesforce and Service Cloud platform.

Our GAAP tax benefit for the quarter was $15,000 and our non GAAP tax impact was 109,000 Turning our attention to key operating metrics from the quarter, new monthly recurring revenue or MRR sold to mid market and enterprise customers and by our channel sales teams increased 30% year over year and represented 65% of our total MRR booked during the quarter. On a constant currency basis, new MRR sold to mid market and enterprise customers and by our channel sales teams increased 40% year over year and represented 67% of our total MRR booked during the quarter. You may recall that in the year ago quarter, three of the largest enterprise deals in the company's history closed simultaneously, which contributed to exceptionally strong MRR growth that quarter. Our average revenue per business customer was $4.00 $9 compared with $360 in the same period a year ago. Average revenue per mid market and enterprise customer was $4,351 compared with $4,053 in the same period a year ago.

Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 0.6% compared with 0.7% in the same period last year. Cash, cash equivalents and investments were $170,000,000 at September 3036 compared with $149,000,000 in the same period last year. Cash flow from operating activities was 6,900,000 in the second fiscal quarter compared with $2,500,000 in the same period last year. Capital expenditures were 5,400,000.0 representing 8.5% of revenue compared with $1,300,000 or 2.5% of revenue one year ago. The increase in CapEx was due to the capitalization of software expenses related to our ongoing investments in R and D, development of our back office systems, the launch of our service platform in three additional data centers, an upgrade to our contact center infrastructure for our next generation analytics, and the implementation of our EasyContactNow infrastructure in The United States.

Effective this quarter, we are discontinuing the non core voice message broadcasting segment of our DXi operations due largely to the emergence of a more challenging regulatory environment in The UK for customers using these services. Voice message broadcasting was a standalone legacy DXi business operated separately from our EasyContactNow business, which is our simple to use solution for outbound and blended call centers. We had anticipated a gradual wind down of our voice message broadcasting business over several years. By accelerating the wind down, we anticipate $1,500,000 of impact on our revenue in the second half of the fiscal year. Additionally, the British pound continues to depreciate against the U.

S. Dollar and we now anticipate an additional $1,100,000 impact on our revenue. Despite these headwinds of approximately $4,400,000 for the full year, we are increasing our fiscal twenty seventeen annual revenue guidance to a range of $251,000,000 to $254,000,000 from our previous revenue outlook in the range of $249,000,000 to $253,000,000 We are maintaining our full year non GAAP net income guidance in the range of 16,000,000 to 20,000,000 representing non GAAP net income as a percent of revenue of 6.5% to 8%. This concludes my prepared remarks. And I will now turn the call back over to Vic.

Speaker 2

Thank you, Mary Ellen. I am very proud of the pioneering role 8x8 continues to play in the development, adoption and deployment of digital communications worldwide. As more and more eager new market participants are beginning to realize, delivering real time communications globally in a reliable, secure, high quality manner is no easy task. And we are very fortunate to have made the necessary investments over the years to be in the position we are in today. However, I'm even more excited about 8x8's role ushering in the next generation of integrated cloud communications and data analytics technology, which will further enhance the value businesses derive from our solution.

With that, we will be happy to take on any questions you may have for us today. Operator, please open the line for any questions.

Speaker 0

And our first question comes from George Sutton of Craig Hallum. Your line is now open.

Speaker 3

Thank you. Nice results guys. So Vic you spent a fair amount of time on the analytics service and I want to make sure we put it into context. If we look forward a few years, how large might that represent an opportunity? For example, your current ARPU for a customer is just over $400 a month.

Can you give us a sense of how that might get expanded through this service?

Speaker 2

Sounds good, George. I mean, is something, I mean, we've been hinting at and been working at for several years. Here is what we've realized or we've had our customers helped us realize that we should give them the credit, we can't take it. But if you are talking about an enterprise today, the one thing that every person that is an employee of the enterprise has is typically a mobile phone. And one of the biggest things that we provide is you can have an app on the mobile phone, which where the company provided phone number is resident, which gives them access to the company's directory, as well as any relevant CRM and ERP system.

What that tells you is we are at the nexus. So think about a global company. Every real time interaction, every outbound call, every inbound call, every text message, every video conference, along with the relevant CRM or back office system or LinkedIn or whatever context is available to us. How valuable is that? Increasingly, we are seeing that over time, we will become more and more focused on these specialty apps.

I mean, the one that we just talked about for Salesforce Analytics is quite fascinating. It takes away I mean, so anytime a salesperson calls a prospect, it'll immediately update salesforce.com on whether how long the call was, who was called, whether it was a commit, a pipeline, or a best case category. Automatically and this person can be on their cell phone, they don't even have to log into Salesforce in order to do that, but when they log in, the information is automatically updated. So increasingly, we see that as becoming more and more critical because we literally are at the hub of any type of real time communication. More and more, I think you'll start to see us leading with those apps.

It's early days. We have released the first two or three of those type of apps. We released Analytics one point zero about a year ago, which gave our customers a chance to play with stuff. And candidly, this is what they suggested. We kept hearing from our customers, Hey, if you can take our sales team and tell me on a daily basis, which of my salespeople how long are my salespeople on the phone?

Who are they calling? When are they calling? This person that they're claiming that they're going to commit and close this quarter, when was the last time they called them? At the same time, is that person that they are talking to to try and close a deal this quarter calling support because they're unhappy about something. We want that integrated view, so it's a dashboard that we can come in every day and look at and help prioritize our activity.

So we basically piloted it initially with our Salesforce. We then beta tested it with several customers and we will be releasing it to customers this quarter. And that one will be in the $75 per seat. Again, we are evolving the company to be able to sell more and more of high end value added applications and the communications increasingly will become the drag along. So it'll take two, three, four years, but increasingly, we see communication as tightly integrated with these kinds of capabilities.

Because if you think about it, who has that, how valuable is information about every person that called into your company? Let's use an HR application. If suddenly a lot of competitors are calling in to poach your employees and you can kind of track that down, they can be directed to the nearest police station or whatever else is relevant. I'm joking, by the way, on that one. But we have that ability today.

But that kind of tells you how this whole market is going to evolve, because as I said, all that data comes to us first.

Speaker 3

That's fascinating potential. Just one other question for Mary Ellen. Relative to your outperformance on non GAAP income this quarter, you suggested and you did guide for the numbers to be unchanged for the year. So clearly you're taking that excess and you're investing it somewhere. Can you be somewhat specific as to where you're investing the incremental profitability?

Speaker 1

Yes, absolutely. One of the areas that we want to continue to invest that we started to invest was in modernizing our systems. So we've gone live on a new cloud ERP system this past quarter. As we mentioned, we went live on the Phase one of our service cloud. We've unified the entire all of our global sales teams and service teams under one Salesforce instance and one Service Cloud instance.

We want to continue to develop and continue to move forward on these types of modernizations over back office systems. Originally, back office systems were built for an SMB business, but now 53% of our revenue is enterprise and we need to do things differently. So there's a big focus on that. So that's where some of our dollars are going. And certainly we want to continue to develop our team on the mid market size.

We're seeing great traction on the channel. We're going to bring in some additional channel salespeople and we're going to be investing in modernizing and continuing to increase our lead gen engine. There's a lot of business out there and we believe that we're at the forefront for the enterprise accounts especially the global accounts. We believe that we're uniquely qualified to capture that market. So we're going to continue to invest.

Speaker 3

Super. Thanks for the detail. Good job.

Speaker 1

Thank you.

Speaker 0

Thank you. And our next question comes from Dmitry Netis from William Blair and Company. Your line is now open.

Speaker 4

Thank you very much guys. Very nice quarter.

Speaker 5

Thank you. Thank you, Dmitry.

Speaker 6

Okay. I got a couple of sort of

Speaker 4

metrics questions. One is on the channel side. I think Mary Ellen, you just mentioned sort of the traction there. Can you qualify as far as the growth in that segment in terms of the amount of revenue that the channel is bringing in? And then secondarily, if you could talk about the international as a percent of revenue, where it is today, where it was last quarter potentially or a year ago?

Have we seen sort of improvement on that front as you kind of went out globally with your platform?

Speaker 1

Okay, good. Let me take that second part of the question first, the international part of our revenue. Last quarter was roughly about 12% of our revenue came from our international operations. About a year ago, it was approximately 10% of our revenue came from international operations. Today, we're looking at 10%.

This most current fiscal quarter was 10%. But that's mostly due to the significant decrease year over year in the pound versus The U. S. Dollar. If you actually look in constant currencies of our 8x8 Solutions business that we acquired in December, that company has been growing well over 30% year over year in constant currencies.

So we're doing very well in The UK operation. Unfortunately, with the significant decrease a year ago, the average exchange rate between the pound and the US dollar was $1.55 compared to an average exchange rate in this past quarter of $1.31 So you're seeing a significant decrease there on exchange rates. But the core businesses are growing very, very well in local currencies. Now on the channel side, as you know, we don't break out our channel revenue separately. But as we have said, it's the fastest growing segment of our sales teams.

Our channel business is growing very, very nicely. And we don't break that out separately, but it is growing very nicely.

Speaker 4

Okay. I think the numbers I recall you guys talked about last couple of quarters was in triple digits. Are we still there or close to that number? Anything you could talk about that?

Speaker 2

Mean, it fluctuates up and down depending on the they tend to build some of our largest deals. It will fluctuate up and down.

Speaker 1

Exactly.

Speaker 2

But look, increasingly, are finding that channel is becoming a bigger and bigger portion of our focus because we really do think we have a differentiated offering. And the fact that we can now start to offer analytics as part of our communication solution is something our channel partners are very excited by. We've had a couple of channel partners, particularly in retail, they're better than our no disrespect to our direct sales team, which is fantastic. But in some instances, because of the relationships that they have, they are actually acting almost like surrogate direct salespeople. So we see more and more focus on channel going forward.

Speaker 4

Okay. Very good. And then, if I may, one other question I had was on the mid market MRR growth, which decelerated somewhat. Can you sort of qualify that? It sounds, Mary Ellen, you mentioned that this could have been a tough comp with the three big deals booked a year ago.

So I guess I'm referring to that 30% MRR growth in terms of bookings as a percent of total bookings. Could that number essentially spike up going forward because of the easier comps? Or is that sort of the steady state we should be expecting here going forward?

Speaker 1

Yes. So again, that was 30% is what I had announced in our mid market new monthly recurring revenue bookings. However, again, a large piece of our revenue is coming from The UK. And again, they're doing very well. In constant currencies, that was 40%.

So that 40% actually compares very nicely to last quarter on an organic basis which was 36%. So we're in the ballpark. Certainly a year ago quarter that number on an organic basis was much higher. But again, had closed significantly. We had announced three big deals

We had announced the Regis. We had announced NetSuite. That was a year ago quarter, excuse me. And the one customer that has 7,000 employees, global employees. So I would suspect in the mid-30s to 40% is a reasonable organic growth rate in the mid market.

And you're going see that fluctuate up and down because we are. We have a very nice pipeline. We're going to close big deals. And they can be a little we're focused on the mid market, of course. But when those big deals come up, that's going to increase the numbers.

And then the next quarter, you may not get a big deal. But I think, comparably speaking, we're doing great compared to the large comps that we had last quarter, a year ago quarter.

Speaker 4

Fair enough. And maybe, Vic, one last one for you. Just competitively speaking, what are you seeing just sort of if you could qualify your take on the competitive environment as far as maybe Microsoft Skype for Business and sort of changes that we had seen there over the past quarter. Have you seen any traction there? Have the competitive environment against Microsoft East potentially?

And on the contact I center was just going to say there's been a fair amount of consolidation there as well. And just whether that's impacting you positively or not, I'm just curious.

Speaker 2

Actually, yes and yes on both. So the comment on Microsoft is quite interesting because it does seem like and again, I don't speak for competitors. I mean, Microsoft is an amazing company led by an amazing CEO. But we don't see them Skype for Business. And it seems like the press from Skype for Business also seems to have gone down.

We were at a recent Gartner event, and I don't think they were present. Or if they were, it was a very small presence. So, again, you know, I stay paranoid, but I haven't seen much Skype for Business. And they are not the ones that we typically face. Going back to your comment on contact center, we're thrilled about that.

Because as I said, little by little, I think I very deliberately inserted that statement about that contact center is starting to grow very steadily. I mean, growth numbers for a contact center are comparable to right around, they're faster than our revenue growth rate. So that's the very good news, right? So they're high 20s, low 30s, which is starting to feel good because we're being able to sell it now as a standalone product. And we now have this integrated contact center offering on one platform.

So we have global tenants. So basically the follow the sun contact center, We have the fact that our virtual office and virtual contact center is fully integrated. And now we've got this quality monitoring software that is delivered purely on the cloud on a per seat basis with no or very little professional services. So that's something that we think is now starting to give us something that is truly differentiated. And it also helps that a lot of the folks that we compete with are being acquired.

So we appreciate that.

Speaker 4

Excellent. Keep up the good work, guys. Thank you.

Speaker 1

Thank you. Thank you.

Speaker 0

And our next question comes from Catharine Trebnick from Dougherty and Company. Your line is now open.

Speaker 7

Thank you. This is Jack Rockel on the line for Catharine. One quick question for Vic. Can you give us some additional color on the upcoming release of, EZ Contact in North America? How does this further shape, your contact center opportunity in the region?

And assuming this is a lower ASP than VCC, does this impact margins at all?

Speaker 2

No. I mean, don't anticipate it impacting margins materially. But here's the part that it's a significantly higher ASP than our virtual office. So keep that in mind because virtual office represents approximately 80% of our revenue, 20% of our revenue is contact center. This EasyContactNow solution, I mean, that's the reason we bought DXi.

It's an awesome product because we're now starting we always start with we, drink our own bathwater or drink our own champagne or there's some analogy like that, but we've been piloting it with our own sales team. And it's essentially a nontraditional contact center with the ability to do outbound calling as well as inbound calling. It enables our customers to be TCPA compliant. And the efficiency that they're getting is phenomenal. I mean, literally the ability to get an entire lead list and you go out and you start dialing them and then the right lead gets connected with the right agent with the right context and the efficiency is significant.

And so we are on track to release it in January. And again, the intent is you start out with that and then you can couple it over time with our Salesforce analytics function where you can then tie into every activity of every salesperson on an aggregated basis so you can get supervisory level looks as well as individual agent looks of performance of inside sales agents and how what they're doing is correlated to customers by category of customers and by amount of revenue each generates and by the time that you anticipate closing them. So we'll be able to provide this entire complete and comprehensive solution that will optimize the operations of inside sales teams. And so we view this as a I don't anticipate it having a negative impact on our margins. I anticipate it helping our margins going forward.

Speaker 7

Okay, great. Thank you for taking my question.

Speaker 1

And just by the way, we're using it internally as well and with great performance. Great performance.

Speaker 7

Got it. Congrats on the strong results, guys.

Speaker 2

Thank you.

Speaker 0

Thank you. And our next question comes from from Barclays. Your line is now open.

Speaker 8

Thank you very much and very much appreciate the color on sort of the Microsoft front. There has been some, you know, at least some concerns that came up several quarters ago as well as some of the premise larger premise based companies out there making a bigger push in the marketplace. I was wondering if you could give us a little bit of an update on the competitive front from that side. And then in thinking about the competitive landscape, you folks have done a remarkable job with expanding your product suite organically in terms of developing additional applications and additional functionality into your product base in order to upsell into your customers and have also been selective about inorganic applications in order to improve the product suite. As this market continues to mature and we've seen still a fragmentation in the marketplace, is there an opportunity to sort of vault ahead of your competition thinking about things inorganically in order to do so?

Thanks very much.

Speaker 2

Yeah, no, thank you, Amir. So I mean, we see competition from different folks. We have not seen a concerted push into this market from any of the big names. We've seen announcements, but we haven't seen it really impact any of the customers that we are in on a day to day basis. Having said that, I just always operate on paranoia.

I respect everybody. There are good people out there. I like to think what we have is frankly significantly better, and it's stuff that we have spent a lot of time and energy and some amazing engineering talent to build. Global communications where you have high quality, high reliability, you know, the ability to recover anytime that there is a fault, local number dialing capability, toll free numbers, the ability to do emergency calling, and then tie all of the stuff so you have one unified view of all the data flow and all information globally in an enterprise is pretty difficult to do. We've got 12 data centers out there.

So I like to think we have something unique. And then the fact that we architected it in such a way that every endpoint is collecting data and sending that data to a big data environment or a big Hadoop environment out here, so you've got 86,000,000 interactions that we are actually logging every day. So we think those things help differentiate us. And the fact that we're now providing these very niche applications that basically leverage the fact that we have the first access to the real time communication interactions both inside and outside the company starts to really provide greater and greater value to our customers. So we think that's a pretty sustainable thing.

The other thing I'm very proud of, and I apologize if I sound like a proud papa, our engineering team is awesome. I mean, those guys are freaking amazing, and I'm sure there's probably not the right choice of words, but they're great people. And so the thing that we've been able to do is we've architected our platform in such a way that it really is. We have a very efficient engineering team. I think you look at what we spend on engineering versus what some of our competitors have to spend to even do half of the kind of products that we have, and it tells you what we have here.

And so the ability to do bolt on acquisitions and keep adding to that platform through this architecture, we think, is a huge opportunity. I think you're seeing it in quality monitoring, which is the company in Romania that we bought that I would personally tell you is probably the best acquisition I've ever done in my career. They were six people. They're now 75 people. They have become a core engineering function in Kluge Romania.

And the people we are getting are on par with anybody we would get in Silicon Valley, if not better. And they are very cost effective. And so we're very pleased with that, and we've basically built out a very significant facility in Kluge, Romania, to kind of keep evolving that. So what I think we've got is we've got such a low engineering cost compared to everybody. We've got such a robust platform that the more applications we can keep adding to our platform that leverage our real time data, the greater value we can provide to our customers.

So we think that's a very sustainable and very core advantage. And we think we can build a very big company on the basis of that.

Speaker 8

It seems like the way we should think about it then is really sticking to sort of your knitting of organic development and bolt on acquisitions is really the primary focus of the strategy at this point?

Speaker 2

Right. That is the primary focus. From time to time, we may be opportunistic if the right opportunity presents itself. But ultimately, I think that strategy is working and the goal is to keep doing these bolt on acquisitions, which either enhance our global footprint or add key functionality to our core platform that we can then turn into an integrated product offering for our customers.

Speaker 8

Thanks very much for the incremental color. Again, on the results.

Speaker 1

Thank you.

Speaker 0

Thank you. And our next question comes from Nikolay Believ of Bank of America. Your line is now open.

Speaker 9

Hi. Thanks for taking my questions. Mary Ellen, I missed the constant currency subscription revenue growth. I think on a reported basis was 23%. What was it, FX adjusted?

Speaker 1

Oh, for the revenue, subscription revenue?

Speaker 9

Yes, subscription revenue, correct.

Speaker 1

So for the second quarter, it was 25%.

Speaker 9

So it looks like the trend of subscription revenue acceleration is continuing. And the reason I'm asking is last quarter for the year, you said subscription revenues organically is going to be flat in terms of growth rate versus last year and product revenues is going to be flat too. Maybe you can update us on these numbers for the second half of the year, that would be great.

Speaker 1

Yes. No, we did give guidance. As you said, we increased our guidance. Certainly, we have some headwinds and we have that one discontinued piece of our business that we're going to be winding down. But if you look at us from apples to apples comparison, we would expect certainly to continue in the 23% to 25% to 26% range from a subscription revenue perspective.

We don't see any deceleration as we continue to move up market. Some of these big customers that we acquire are going to take longer to deploy. But we're still continuing to focus again on mid market and our SMB is still going strong and those deploy that revenue deploys very quickly. So the only thing I'm afraid of quite honestly is the deterioration of the pound to the US dollars. Hopefully, it won't get much worse than where it is today.

Speaker 9

Got it. And one question for you, Vic. What is your strategy in collaboration, especially persistent collaboration? I think you had an update on the product maybe early in the summer. What do you think of like are you going to be offering select like functionality at some point in the future?

Speaker 2

Great question. Dmitry will have something to show you in the not too distant future.

Speaker 9

Okay. Thank you.

Speaker 1

Stay tuned. Yes,

Speaker 2

stay tuned. I think the phrase I've used in the past is stay tuned.

Speaker 0

Thank you. And our next question comes from Mike Crawford from B. Riley. Your line is now open.

Speaker 5

Thanks. It's nice to see the application integration and the analytics you're providing. What do you do for customers that want to integrate communications into their own application platforms?

Speaker 2

Yes. I mean we have the APIs to enable people to do that. That's part of the reason so this is one of the things. Our APIs that we have developed are intended to control your entire PBX. It's not supposed to be simple widgets that, you know, I allow Mike to call Dimitri or Mike to call Mary Ellen and it's just a simple thing like an Uber driver calling another customer or something like that.

Our thing is you control the entire PBX. So examples of what we do with our APIs that some of our customers actually, retail customers are now leveraging is, so example, if you have a high value customer and they call the core line, not even just the customer service line, and this is not one where there's a contact center sitting there, it can be based on a number, it can be directed to different things. So if it's, I'm using this more as an analogy, but high value customers can be directed to a totally different line than, for example, somebody that may go to a general line. So that's one part. And then as part of that, you have to integrate to somebody's back office system so you can get that context and that data.

Because, again, the platform we have provided, and we've done this over time, is every call inbound and outbound, every message inbound and outbound, every video conference inbound and outbound, including how long, who, what was the number, and that, you know, we have resonant in our, you know, cloud based system. Now we just need context, and it's easy to get context. We integrate to LinkedIn, which gives you complete context. By the way, now I understand why LinkedIn was so valuable, because you get that context with, okay, this person is ABCDE. You can then hook into somebody else's database system that says customer ABCDE, if they call, they are a big spender, therefore send them here.

Or this customer calls a lot, send them here. So those are the kinds of things that you can start to do because now it's no longer communications one point zero, which is we're not just going in and saying, rip out PBX, we'll provide you a phone system that is cheaper, better, etcetera, etcetera, and has more functionality. We're saying, we will provide you all of that, but what we're providing you is data that allows you to look at buying patterns and behavior. One of the fascinating things one of our retail customer discovered, actually in this particular case it was a restaurant chain, is that reservations were being made between a certain amount of time. I can't remember, was six to nine, which was apparently or sorry, five to seven, which was also the time when they had a whole influx of customers, so the phone would keep ringing.

And so when they started to see those patterns, they were able to kind of go in and staff differently and make sure that there was a dedicated person taking reservations at those times. And then at different times, you're seeing no calls come in. So those patterns, so now you've got all of this data, particularly when you tie it to the context of the customer's back office systems. So increasingly, that's our focus.

Speaker 5

So what is it that like a Twilio could do that perhaps you couldn't do, or is that not the case?

Speaker 2

So one, I have tremendous respect for Twilio. What they have done is go after very simple messaging. So, hey, I want to send a broadcast message. I'm the football coach. I want to let everybody on my football team know that there's practices or something.

So you can program that. And what they've done, the elegance of what that company has done, is make it very easy for nontechnical people or people who don't have necessarily all the relevant skill sets to be able to go in and do that. That's why they tout their large developer communities, etcetera. For global communications where high reliability, quality, compliance, security, etcetera, is critical, I think we do that better than everybody else. We can do what Twilio does.

We don't have that developer community, but we are not targeting a developer community. We are targeting professional services organizations that can go in and control your entire PBX so that they can derive business value. Imagine a large global hotel chain. And let's just say in The Philippines, you get a nine 11 call that is made out of your hotel. It would be good for the security office and corporate headquarters to be alerted, right?

You may not rely on the local employees to do that. You could set those kinds of rules up with our system. So basically imagine any inbound and outbound call with regard to how it's dispositioned, where it goes to, how it's recorded, how it's tabulated. We give people APIs to control. So think of us as focused on professional services and enterprise and not focused on the casual high volume developer community.

We are focused on the complex systems where we think we can provide very differentiated high margin business.

Speaker 5

Okay, great, thank you.

Speaker 0

Thank you. And our next question comes from Jonathan Kees from Summit, Redstone. Your line is now open.

Speaker 10

Great. Thanks for taking my question and my congrats also on the quarter. I wanted to, I guess, ask a higher level question. In regards to the traction that you've had with the mid market and enterprise, certainly it's a larger part of your revenues now. Usually they have a bidding process.

And I guess if I can ask them, can you give some color in terms of your win rates in terms of these bids? Has it gone up over time?

Speaker 2

Yes. So yes, more often than not, it's competitive. One of the things we need to get better at is being able to which we are finally starting to invest. Pretty much all our demand generation has been very simple. I mean, it's all inbound.

We get called by somebody and then we participate. I would say there are a lot of things we do well as a company, but I would tell you we can do a lot better in our demand generation and marketing area where we can get more recognized. Having said that, as you can see from our revenue, we have great upside if we could start to get that part of our business better and we're starting to invest in that area. So typically, I would say our win rate, and I don't have the exact numbers in front of me, but I think if we are in the process, I would tell you more often than not, it's definitely more than 50%, I would say it's significantly higher than we very rarely lose if we're in a very competitive bidding process, but I don't have the exact number with me right now.

Speaker 10

Okay. So it sounds like not only is there room to grow there in terms of the rate, but it has already been pretty high to begin with. So I also know she didn't talk about any of those big seven big 10 in which you've already had seven and there was like three more that could still be announced or talked about later. So I guess that's still something to be to stay tuned for. Let me ask you in regards to the competition and not so much from Microsoft and I'm sure it's the same thing where winning a lot of this from legacy and from those who can't have the global services the cloud solutions that you're providing.

More, what is your how are you faring against your pure cloud peers? And how has that been going against ex Microsoft?

Speaker 2

No. And I think, again, I feel pretty good about that. If it is a global deal, if there is an integrated platform, if it is on the larger side, I think we will win significantly more than we will lose. So I feel pretty comfortable that if we are in the mix, I think several of our competitors doubt the fact that they get deals where they're uncompeted. God love them, that's great.

That's one of the things that we aspire to, in other words. But I think if we compete it, we'll be in a very good position. And as part of our investment in demand generation, I want to make sure I start to get some of those deals and or make sure I'm at least in the mix. I actually don't mind the competition. I just want to make sure that we are there so that all the uncompeted deals step by step go away.

Because if they are competed deals, we feel very good about our chances.

Speaker 10

Okay. It sounds like if you just show up, have a high chance of winning. So good luck with that and yes, hope more of that to come.

Speaker 1

Thank you. Thank you.

Speaker 0

Thank you. And our next question comes from Will Power from R. W. Baird. Your line is now open.

Speaker 6

Great. Thanks. Yes, just a couple of follow-up questions. You all, I guess, again, Mariel, the book talked about some of the contact center traction. It sounds like some very nice trends on that front.

I guess I'm just wondering, as you think about the higher ASPs, what that actually means for the margin profile of the company going forward, thinking about gross margin impacts and operating margins?

Speaker 1

That's a good question, Will. So as you know, out of our top 10 deals, six of the top 10 deals this quarter was channel was I'm sorry, was contact center as well as virtual office. And we've been averaging about that same number, around five or six for the last couple of quarters. So we are definitely moving up. In many cases, we used to lead with virtual office and then bring the contact center in.

Now we're able to actually lead with contact center and bring the virtual office in. Obviously, the more and more contact center, the higher service revenue is because it's a pure software. So we're doing I don't know exactly what it's going

Speaker 2

to be

Speaker 1

moving into future years, but I would suspect that we've done a very, very nice job on our service margins and improving our service margins. And I would expect that we will continue to do that. And part of that success will come from more and more contact center revenue, including the EasyContact Now that we bring here to The U. S. That will be available in January.

Speaker 2

And don't forget some of the newer decision support analytic engines that we're bringing to the market such as the Salesforce analytics, such as quality monitoring, etcetera. I think we started this process of transforming the company about two to three years ago. And it is amazing. In order to sell a core telephony service, particularly selling a core telephony service to SMB, going upmarket where you're selling a complete comprehensive solution with analytics and decision support software and the ability for business process improvement and productivity enhancement. It's a very different skill set.

And we have been moving our sales team. I think we brought in a whole slew of very amazing direct salespeople that we've been augmenting our channel team. We've been augmenting by bringing on board a comprehensive professional services team that knows how to go in and do business process consulting. So that process we have been doing and we've been kind of evolving to it. And now you're starting to see that the products are kind of heading in that direction also.

So it'll take us a few quarters to kind of just continue this evolution. But I think we feel good about where we are.

Speaker 6

Okay. And Vic, maybe just a follow-up just quickly on the previous API commentary, the opportunity there. It sounds like you think you're well positioned there. I guess I'm just curious, is there a bigger opportunity to push that more aggressively, have more dedicated folks there? Or is that more of a one off in bound professional services work for customers that are looking for a particular solution?

I'm just trying to understand how It's important it strategically to very

Speaker 2

valuable strategically. And the key there, but but again, we're going at it slightly differently. Again, I'm not trying to get 10¢ for every message or anything like that. That's not us. Right?

That we're much more about we wanna be able to charge high ASPs for customers and provide them very significant value on a per seat basis. Our model is either subscription or we were adding elements of pay as you go, but generally it's a subscription based model. So we see APIs as very core to that. And on the one hand, APIs are very critical because they've been critical for winning some of our larger retail customers because you have to integrate with their back office systems. And they also want every one of them wants customization of various business rules and could you do it in such a way that if the CFO calls, it gets routed immediately to these seven people.

All those start, they all start to be very custom rules. And so we've developed a language called script date that has been in process for some time and we'll demonstrate it to you guys. We'll not release it formally for probably a quarter or two, but we'll show it to you guys in the next few months. But we are now finding that that push is going to increase. And so we're looking for we'll unveil a lot more on this in the next quarter or two.

But APIs is a very significant portion of our strategy. But the target is around enterprises as opposed to the developer community. Got it.

Speaker 6

Okay. That sounds great. Thanks.

Speaker 0

Thank you. And our next question comes from Mike Latimore from Northern Capital Markets. Your line is now open.

Speaker 11

Great, thanks. Just on the enterprise market, can you talk a little bit about the pipeline there? Maybe how much it's changed since the start of the fiscal year?

Speaker 2

No, the pipeline looks very strong. As a matter of fact, we are continuing to see it increase. We've got a few things going that I'm sure we'll be in a position to talk about a little bit later on. But the part that has changed, and it is quite dramatic, and I think, Mike, you have followed us for a long time, you've followed the space for a long time, you can just see it just in the logos that we're announcing. And it starts with people almost having a cloud first mentality, which I'm very grateful for.

I just wasn't used to it for the last year to two years. So we are increasingly starting with people who actually want to talk about cloud. And then the part that has been fascinating is the level of communication, particularly at our CIO levels that we are starting to now interact with, has changed with this concept of being able to have hardcore communication data on a global basis with all the relevant context and what can I do to make business decisions? And I think increasingly that's becoming our focus. So we see that becoming something that legacy PBX have no hope in hell of doing.

And so because of that, we think that the cloud trend for enterprises will continue to accelerate. So we feel good about that space, which is why I think you see it. You're seeing now that that's what, 65% or 70%, depending on 6567%

Speaker 1

on constant currency.

Speaker 2

Constant currency of our new bookings. So we're increasingly seeing that the larger customers are adopting. And the other part that we're seeing is that channel is starting to become comfortable with selling cloud to the extent you're not having to do the same level of handholding you used to do previously. And then the ability to sell these value add services through the channel becomes even more valuable to us. So I think from that perspective, we see good things happening at the enterprise level.

Speaker 11

And just on the deployment of the enterprise deals you have won, were there any major sort of tranches of deployment in the quarter and maybe give a quick update on deployments of these bigger deals?

Speaker 2

No, actually all moving forward, I mean, across the board, I mean, good. So some moving very fast and pushing us. I mean, was one customer where 4,500 seats were deployed. I think that was actually one of the CIOs made that comment to me. He said 4,500 seats were deployed over, I think, a two, three day period.

Speaker 1

Over the weekend.

Speaker 2

Over the weekend is the phrase he used. Yeah, no team. I mean, look, I'm very fortunate. We've got some amazing employees. I mean, have about 1,000 people, which I think tends to be smaller than most.

But we have some amazing people here. And the fact that you can get 4,500 seats deployed over a weekend is pretty amazing. And so I think we are continuing to see deployment steadily. And then we brought on board a global services person in Jeff Romano. And he's just added another layer where he's building this whole global model with support centers in different parts of the world and just kind of continuing to add greater program management capabilities, etcetera.

So far so good.

Speaker 0

Thank you. This does conclude our question and answer session. I would now like to turn the conference over to CEO, Vic Bremer for closing remarks.

Speaker 2

Thank you all for listening in to today's call. We look forward to meeting with you over the coming weeks and updating you on the current quarter results in January. In the meantime, have a very happy holiday season. Thank you very much.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.