8x8 - Earnings Call - Q3 2018

Transcript

Speaker 0

Good day, and gentlemen, and welcome to the 8x8 Third Quarter Fiscal twenty eighteen 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 call is being recorded. Would now like to turn the conference over to Ms.

Victoria Hyde Dunn, Senior Director of Investor Relations. Ma'am, you may begin.

Speaker 1

Thank you, operator. Good afternoon, and welcome to 8x8's third quarter fiscal twenty eighteen earnings conference call. With me today are Vic Verma, Chief Executive Officer and Mary Ellen Genovese, Chief Financial Officer. Our format today will include prepared remarks followed by Q and A. The earnings press release, prepared remarks and slide presentation that accompany this call are available in the Investor Relations section of our website at www.8x8.com.

A replay of this call will be posted on our website for thirty days. 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. These statements are not guarantees of future performance, and our actual results could materially differ as a result of a variety of factors. Additional information concerning those risk factors is available in our most recent reports on Forms 10 ks and 10 Q, which you can find on the SEC's website and the Investor Relations section of our website. With that, I'd like to now turn the call over to Vic.

Speaker 2

Thank you, Victoria. Good afternoon, and thank you all for joining us on our third quarter earnings conference call. This has been another very busy and productive quarter for 8x8. We have made significant progress executing against the strategic initiatives we laid out earlier this fiscal year. Our service revenue increased 20% year over year to 71,900,000.0 and total revenue grew 19% year over year to $75,600,000 Adjusting for constant currency and the discontinued non core DXI business segment, service revenue grew 19% and total revenue grew 18%.

Our non GAAP pretax income was $1,600,000 or 2% of total revenue and non GAAP service margins remained strong exceeding 84%. Mary Ellen will provide a more comprehensive review of the financial performance in her prepared remarks. Before I turn the call over to her, I'd like to discuss our progress fiscal year to date and why we believe 8x8 is a disruptor in the marketplace today and enable for success in the future. At our core, we are a technology company. Through foresight and years of hard work, 8x8 has built an integrated UCaaS and CCaaS platform that operates on a global basis, offering business communications and business intelligence to companies sizes around the world.

There is a $50,000,000,000 market opportunity in the enterprise communications and contact center space that is only about 10% penetrated by cloud providers today. We have seen this market evolve over many years through multiple stages or waves, and we believe the market is now entering a third wave. The first wave of enterprise communication solutions is circa 1990s. It is the classic on premise telephony, video conferencing and contact center market. These on premise point solutions provided features and localized control previously unavailable at that time, but they are expensive to implement, often require heavy customization and ongoing maintenance and offer minimal flexibility and scalability.

Dozens of providers play in this arena. The second wave of enterprise communication solutions began about a decade ago, taking on premise point solutions to the cloud. UCaaS, CCaaS, cloud conferencing and cloud collaboration solutions offer true scalability and increased efficiencies and cost savings, and we continue to see strong market adoption and upside. 8x8 was one of the early pioneers in this market and continues as a leader. However, standalone point solutions in the cloud, while a large and growing market, are unable to provide unified employee and customer engagement nor can they provide insights across all interactions throughout the organization.

This prevents organizations from reaching the next level of customer engagement excellence and meeting the strategic imperatives of today's CIOs. According to Deloitte's Global CIO survey, 57% of CIOs now identify customers as their top business priority. As a result, the third wave in the enterprise communications market is now underway and leading companies are starting to see communication and engagement experiences coming together. CIOs are looking for one seamless cloud communication solutions for the enterprise, everything from contact center, telephony, video, conferencing and collaboration, all from a single vendor. The outcome is a positive customer and employee engagement experience by any channel and with real time access to systems of record and subject matter experts throughout the organization.

With one shared communications infrastructure and one set of data, analytics, workflows and applications, enterprise CIOs can now move beyond basic cost savings and start to drive real business change within their organizations to increase customer satisfaction and accelerate revenue. 8x8 is uniquely qualified to offer this service to customers. Through strategic development and acquisitions, we have assembled an integrated platform across telephony, contact center, conferencing, collaboration and analytics, all powered by 8x1 technology and validated by 150 patents awarded to date. Our differentiation in the market is evident in our customer wins increasing strength in the mid market and enterprise segments. Today, some of our largest enterprise customers are using our integrated contact center and UCaaS solutions as they migrate to the third wave of enterprise communication solutions.

We have put together very well defined go to market strategies to allow all customers to reach this third wave of value, and you'll see an increasing market push from us going forward. We were very pleased to see that 49 of new monthly recurring revenue booked from mid market and enterprise customers came from combination CCaaS and UCaaS deals. As we watch the growing momentum within our customer base and the emergence of Wave three in the market, we concluded three quarters ago that we had significant opportunity to align our sales and marketing strategy to this opportunity to drive our revenue growth. To seize this opportunity, we executed a number of initiatives over the past three quarters. First, we aligned our global business into two units around our core market segments, one for small business and e commerce and one for mid market and enterprise.

Second, we hired top industry talent in product, marketing and sales leadership. And third, we are transforming our product packaging and pricing through 8x8 additions to streamline customer acquisition and leverage our integrated communications platform. While we are in the early stages of seeing the fruits of this investment, we are encouraged by this quarter's results and are excited by our current trajectory. To this end, I'd like to spend a few minutes reviewing specific progress in the quarter around three key topics. First, we had strong growth in revenues and bookings for mid market and enterprise.

Second, we made significant progress in our channel initiatives. And third, we successfully introduced our 8x8 editions product line with an initial launch in our small business segment in The U. S. First, let me start with our mid market and enterprise segments, which saw great momentum in the quarter. Service revenue from mid market and enterprise customers, defined as those billing greater than $1,000 in monthly recurring revenue, now represents 59% of total service revenue and grew 28% year over year.

New monthly recurring revenue booked from mid market and enterprise customers increased 40% year over year and comprised 65% of total bookings in the third fiscal quarter. During the quarter, our global sales teams closed a record 22 enterprise deals, defined as customers with MRR of $10,000 or greater. Seven of our top 10 enterprise deals chose our unified platform, which includes UCaaS and CCaaS. What is particularly noteworthy is that we are seeing broad adoption of our mid market and enterprise solutions across multiple verticals, including healthcare, retail, public sector, manufacturing and transportation. A few select examples of our mid market and enterprise wins include: a medical equipment provider that will deploy approximately 1,500 virtual office seats and 74 virtual contact center seats an international container shipping firm, which will be deploying approximately 600 virtual office seats and 300 virtual contact center seats in four locations.

A privately held electronic manufacturer that will deploy more than 900 virtual office seats as well as virtual contact center seats and analytics solutions. Another Fortune 50 healthcare solutions provider, which will be initially deploying 2,200 virtual office seats globally. A large New York public sector entity that will deploy more than six fifty virtual office seats in two locations. A UK based utility agency, which will deploy nearly 1,000 virtual office seats and 70 virtual contact center seats. And last but not least, luxury retailer, Christian Louboutin.

As further validation, Synergy Research Group named 8x8 as the global leader subscriber seats in the combined mid market and enterprise segment of the UCaaS market, which is defined as cloud telephony, conferencing, collaboration and messaging. According to Synergy, had 32.3% more mid market and enterprise subscriber seats than the second ranked vendor in the category. Second, our channel partners continue to be important stakeholders in our success. 8x8's active engagement with our channel partners has grown rapidly within the last year. In the third quarter, we signed 25 additional partners to participate in our new channel enablement program.

Since August, we have approximately 45 channel partners participating. In The U. S, six of our top 10 deals in the December were brought in by our channel partners and overall channel bookings in the quarter increased 50% year over year. We also recently expanded our relationship with Ingram MicroCloud to deliver 8x8's unified platform for cloud communications to channel partners in The UK and Ireland. A recent win in which a key channel partner played an instrumental role is a leading global commerce website for home improvement.

This company is rapidly growing and had been experiencing poor call quality in its legacy infrastructure consisting of three disparate phone systems. 8x8 won this deal following a competitive RFP process that involves several other UCaaS and CCaaS providers. We ultimately chose 8x8 for a superior call quality and our integrated solution as a single provider for more than 800 virtual office and analytics seats and over 600 virtual contact center seats. We anticipate that they will be live in three countries by the end of the quarter. Third, in early October, we introduced our new 8x8 Editions product suite, including our groundbreaking X8 Edition.

This new offering enables companies to connect everyone throughout the organization, including both contact center agents and employees with a single unified solution. We are taking a phased approach to launch 8x8 Editions, starting with small business in The U. S. UK small business has already launched and will be followed by new mid market and enterprise customers by the end of Q4. While early days, performance looks promising and this integrated and simplified packaging is an important further step towards enabling mix and match functionality throughout the enterprise, full service and e commerce.

In summary, our third fiscal quarter results were solid. The execution of our strategic initiatives is starting to bear fruit, and I remain confident the investments we have made this year will benefit our growth next year and beyond. With that, I'll turn the call over to Mary Ellen for a more detailed discussion of our financial results.

Speaker 1

Thank you, Vic, and thank you all for joining us on the call today. My commentary will cover financial highlights along with key operating metrics from the quarter. These measures will be based on non GAAP results unless otherwise noted. And I remind you to refer to the tables in today's earnings press release for a reconciliation of GAAP to non GAAP results. Adjusted results are based on constant currency and exclude the discontinuation of the non core voice broadcasting segment of DXi.

Our fiscal results for the first our results for the fiscal third quarter included two special GAAP items, which are non cash non recurring items. First, recorded $71,000,000 of non cash, non recurring tax charges as a result of first, the reduction of the federal corporate tax rate under the Tax Cuts and Jobs Act. And second, our decision to record a valuation allowance against our deferred tax assets. This decision was based in large part on our recent historical trend of GAAP net losses as well as forecast of future GAAP net losses, given management's intent to continue to invest in growing our business, particularly engineering and sales and marketing. Second, we reduced our goodwill and other assets by $9,000,000 related to The UK EZ Contact Now product.

As we announced during our Q2 earnings call, management made the strategic decision to integrate the core technology into our virtual office and virtual contact center suite of products and deemphasize selling the standalone product. The underlying technology is strong and has tremendous value to the business as part of our integrated platform. These two one time charges were approximately $80,000,000 combined. We have adjusted non GAAP measures for these items along with the reoccurring charges for stock based compensation, amortization and other non reoccurring items. Now moving on to our financial results.

Foreign exchange rate fluctuations had a favorable revenue impact on the comparative results this quarter by approximately 70 basis points. Total revenue in the 2018 grew 19% year over year and 4% sequentially to 75,600,000.0 Total revenue grew 18% from the year ago period on an adjusted basis. Our service revenue increased 20% year over year to 71,900,000.0 On an adjusted basis, service revenue grew 19%. Product revenue was 5% of total revenue in the quarter. This compares to 6% in our previous quarter.

Service revenue from mid market and enterprise customers grew 28% year over year and now represents 59% of total service revenue compared to 55% in the year ago quarter. Gross margin for the quarter was 79%. Service margin is 84%, a slight improvement over the year ago period and a sequential improvement of approximately 150 basis points. We expect service margins to trend down in Q4 by approximately 150 basis points due to the increase of amortization of previously capitalized software as we release new products to market. Product margin was negative 27% compared with negative 20% last year.

Moving to operating expenses. Sales and marketing expense in the quarter, which includes customer service, product management and deployment costs, were $45,000,000 or 59% of revenue. This is up seven percentage points as a percentage of revenue versus the same year ago period. As we have mentioned previously, 8x8 has been investing for future growth. The increase in spend is primarily attributable to global headcount as we continue to build out our sales and marketing team, our lead generation, brand initiatives and increased channel commissions tied to strong performance from our channel partners.

R and D expense was $7,000,000 or 9% of revenue and increased 12% year over year as we continue to invest to support the development of our unified solutions and cross platform real time analytics. G and A expense was $7,000,000 or 10% of revenue. Non GAAP net income before tax was $1,600,000 or $02 per share and 2% of revenue. And year to date, we generated $9,100,000 in pretax profits. We saw solid improvements in key operating metrics for the quarter.

The average revenue per mid market and enterprise business customer grew to $4,765 an increase 8% compared to the $4,412 in the same year ago period. Average revenue per business customer across all segments was $454 compared with $414 in the same period a year ago, a 10% increase. Gross monthly service revenue churn on an organic basis excluding DXI was 0.4% compared to 1% in the same period last year and flat sequentially. Cash, cash equivalents and investments were $161,000,000 at December 3137 compared with $173,000,000 one year ago. Cash flow from operating activities was $8,200,000 in the third fiscal quarter compared with $8,800,000 the same period last year.

Capital expenditures, including capitalized software, were $6,000,000 in the quarter or 8 percent of revenue. During the quarter, we repurchased approximately 300,000 shares at an average price of $12.81 for a total of $3,800,000 We currently have about $7,000,000 available per share repurchase under current authorization. Based on year to date results, we are increasing our fiscal full year 2018 outlook. We are increasing our guidance for service revenue for the year and now expect to be in the range of $278,000,000 to $279,000,000 representing approximately 18% year over year increase. We expect total revenue for the year in the range of $293,000,000 to $294,000,000 representing approximately 16% year over year increase.

We expect product revenue for the full year to be approximately $15,000,000 Adjusting for the discontinued revenue from the non core voice broadcasting segment of DXi, service revenue growth is expected to be approximately 19% and total revenue growth in the range of 16% to 17%. We continue to expect non GAAP pretax income to be approximately $9,000,000 or 3% of revenue. We expect fourth fiscal quarter pretax income to be approximately breakeven. Due to the full valuation allowance against deferred tax assets, our tax expense reflects the current cash taxes in certain U. S.

State and foreign jurisdictions. The estimated non GAAP effective tax rate is approximately 3% for fiscal year twenty eighteen and excludes the one time impact of recording the valuation allowance. We continue to believe that service revenue growth will begin to accelerate in fiscal twenty nineteen, and we are targeting an exit growth rate of approximately 25% in the fourth quarter of fiscal twenty nineteen. Lastly, we issued a press release yesterday announcing the expansion of our corporate headquarters in San Jose to a new state of the art facility next year. Employees are our greatest assets and we are fortunate to have some of the very best.

We will continue to hire top talent into this already strong employee base. And our new headquarters demonstrates our commitment to grow our operations and deliver a world class experience for our employees, partners and customers. With that, operator, we are ready for questions.

Speaker 0

Thank you. Session. Our first question comes from the line of Meta Marshall from Morgan Stanley. Your line is now open.

Speaker 3

Great, thank you. I just wanted to ask a question about, you know, now that you've had early days of having additions out and you think about moving that product upmarket, just kind of describe the typical customer for X8 versus virtual contact center and just whether it's kind of changed your opinion in early days of who that customer is? And then on the second point, obviously you rolled out a lot of stuff in the last year. So just kind of what are R and D priorities for the upcoming year? Thanks.

Speaker 2

Okay, great. Thanks, Meta. So a couple of things. So let's start with one of our discoveries, and you'll start to see more and more of this, is this X series of product, which is what we're calling it, actually applies to pretty much all customers. So what's starting to happen is pretty much everybody that we have talked to knowingly or unknowingly is a little bit of a contact center.

And so what X is intended to do is start to basically bridge the gap between essentially telephony contact center and then combine it with our collaboration products. So what we are starting to see is people using our X product, which essentially you're going to now fold VCC into our X product as well, depending on the level of sophistication of the contact center. But what it allows you to do is imagine if your contact center is now essentially tightly integrated with your telephony, so your entire corporate directory is available to your entire customer support staff. So in real time, you can figure out even though somebody is not a contact center person or not have a contact center license, they can be accessed to solve a particular question. So if there is a particular technical question in real time, the person can go and figure out where the top few people that are assigned to solve that kind of problem, even though they're not part of contact center.

And they will basically be able to transfer all the information, bring them into the same call so you can get to one call resolution. It applies for as simple a customer as a bill collector, where in essence, even though they may be using a telephony solution and making outbound calls, the ability to contact center functionality, where you can get a little checkbox that said, did you read the compliance sentence? You get a little checkbox, which basically says was did you make sure that you said this call is being recorded for quality purposes, etcetera, etcetera, which is, again, very simple contact center 101 functionality. We're not just going to bundle it as part of our telephony solution, as part of this whole X8 type offering. So early, early days.

We've just started launching the X product, and you'll see much more of that at Enterprise Connect. And I think you'll start to get a sense of how it starts to basically tie in also all the various systems of records. You're able to go and pull data from all the various systems of record so they're available to essentially the contact center agent. And then in addition to that, all the resources of the company are available to the contact center agent, which means you're basically improving your customer experience dramatically. Consider it almost the uberification of an enterprise, where the contact center person is able to, on a shared basis, get access to all the resources in a company.

And I think that's why we consider it to be an absolute game changer. Why does there need to be a telephony solution and a contact center solution and a collaboration solution and a conferencing solution when all of these can essentially be a continuum of products from X1 through X8? That's what we think we've been doing and that's what we've been building towards. With regard to I think the second question you had is around R and D. This is and I think we telegraphed this in terms of the type of people we've been bringing on board.

I'll use an interesting term. It's basically the data, stupid. Ultimately, think about what we are able to do. 8x8 sits at the nexus where any real time interaction that happens in a company, whether it's a voice, video, text essentially is going to go through and be resident in our platform. It's not our data.

It's our customers' data. But having this aggregated data together and the ability to tie it with the right level of systems of record gives you an ability to create dashboards and provide insights to your customers that didn't exist today, which is why we're investing very significantly in data and analytics and machine learning because if you look at the most recent hires, Dan Deklek came from Splunk, and he's brought in a lot of folks with that kind of background. Rainey Hublard, Head of Marketing. She's come from a very strong analytics background and has been a category creator in her last few companies as CMO. And then most recently, our Head of Mid Market and Enterprise Sales, Scott Sampson, was formerly Head of, I think, Worldwide Analytics Sales for IBM and then most recently, the CRO for NewVoiceMedia.

So more and more, we're starting to show that communications can be a continuum, but most importantly, that data that that communication generates gives you the ability to provide a level of insight and transformation into a company that can have significant benefits beyond just pure efficiency.

Speaker 3

Got it. Just back on the first question, I mean, I think I'm just trying to get a sense of will X8 kind of be adopted by more people than virtual contact center because it's more integrated within the system versus kind of having to have two separate systems? Like, is that the end goal of just, you know, broader integration, versus kind of having a separate product previously?

Speaker 2

Fair enough. So what you will find is over the next few quarters, it will happen probably two to four quarters, VO, VCC as categories are going to go away and they'll all be a continuum of X products. As a matter of fact, we are going to beef up X8 because what we are finding is that people want X8 to have even more functionality, including the outbound dialer. So X8 will become our signature product, which will have a lot of core functionality also from VCC brought in, all the way from speech analytics, quality monitoring, etcetera, will all be part of X8. There will be an X5, which will be essentially an introductory contact center, all the way to essentially an X1.

You'll see a complete launch over this, but over the next two to four quarters, all these various categories of VO, VCC, ContactNow, etcetera, all going to go away and it will all be replaced by X.

Speaker 3

Okay, great. Thank you.

Speaker 0

Our next question comes from the line of Nandan Amladi from Deutsche Bank. Your line is now open.

Speaker 4

Thank you. Good afternoon. Thanks for taking my question. So Vic, you hired a whole bunch of new sales executives over the last six months or so. Are they fully up to speed now as you approach fiscal year twenty nineteen?

And what's your confidence level getting back to that 25% growth trajectory?

Speaker 2

Yes. No, let's just put it this way. I think, one, I always like to say we're a work in progress, but you're starting to see some of the results of bringing on board that next generation of talent. We made a couple of very strategic moves as you think about it. And they're not easy moves to make as a company.

One is we brought on board this Head of Engineering and we basically told him, stop worrying about what is VCC, what is VO, what is ContactNow, what is SameRoom, what is this, slam them all together and create this entire new product line, which is 8x8, period. No, none of these other categories. You then brought on board a marketing person who knows how to create categories and start to sell value. So we avoid the commoditization that is going to happen at the low end of the market by providing clear differentiation. And third, we split our business and go to market strategies where you bring on board somebody who knows how to sell to mid market and enterprise and has done it at huge scale and very successfully.

And then you brought on board somebody who basically knows how to go after the very small end of the business and really create high velocity e commerce efficiency. And so generally, I'm feeling better and better because we have then brought in that next layer of talent. It's amazing how as you keep bringing on board people with these kinds of skill sets, we have brought in that next layer of people. And I'm sure you monitor LinkedIn and some of the other stuff, The best and brightest are joining us because they see this as a category creator. They see an opportunity to disrupt a market.

They see a technology centric company, which in the past was not great in marketing and sales, and that's something that can be fixed relatively easily. And then all the ability to combine all of these various categories into one combined product offering, we think, is going to be huge. So generally, I'm starting to feel like we're on the right track. A lot of the heavy lifting has been done. We're starting to see early fruits, But I don't want to sit there and declare victory because there'll be the normal inevitable soaking in of stuff.

But as far as I'm concerned, we're ahead of schedule.

Speaker 5

Thank you.

Speaker 0

And our next question comes from the line of Rich Valera from Needham and Company. Your line is now open.

Speaker 6

Thank you. Vic I wanted to follow-up on that. Obviously you've made some good progress in terms of the first layer of hires, the kind of management layer in the sales and marketing and even R and D. And it sounds like you've made some progress on the second layer of hires, probably with rank and file sales. What should we look for in terms of other milestones or things you're looking to do over the next two, three quarters to keep that sales and marketing ramp going?

Is there what kind of metrics should we look for or anecdotal feedback will you able to provide us?

Speaker 2

We'll get back to you on the specific metric. But the next layer as we were talking, the first layer of folks we started bringing in from February, March and then most recently October. The second layer, pretty much the next layer of VPs, by and large, we've been able to bring on board the vast majority. The next rank and file is actually joining at a pretty accelerating rate. I think the key thing for us, candidly, if you look at what keeps me up, last three, four quarters, you're kind of reimagining the business, you're kind of structuring it the right way, you're doing a lot of changes in a business and trying to make sure that the business continues to perform while you're making these massive transformation.

Now from my perspective, I'm actually feeling great about the market. I'm feeling great about the product portfolio that we have. And I feel very, very good about the management team. Now it's a question of executing. Could I see us doing tuck in acquisitions?

Possibly. But do I have to do any big acquisitions? No. Do I need to do major hires? No.

It's essentially turning us into a machine that continues to execute. And as I said, I think this X product is a game changer because it's something we've built over time. I mean, it's basically think about it, we went and bought properties that basically were core contact center, dialer, collaboration engines, team to team collaboration engines. And basically, over the last few years, we've been kind of integrating all this stuff together and then now we're able to put in that layer of analytics on top of it. And you're starting to see the customer wins.

As I indicated, of our mid market and enterprise, approximately 50% were people buying our combo deals, which tells you the market is starting to understand more and more that these traditional categories that were invented by on premise systems no longer apply in the cloud and you can combine all of this data these systems together and get one common layer of data.

Speaker 6

Got it. That's helpful. Thanks Vic.

Speaker 0

And our next question comes from the line of George Sutton from Craig Hallum. Sir, your line

Speaker 6

is Thank you. I want to congratulate you on the strong bookings growth this quarter, middle market enterprise bookings. Can you help us understand because looking back a couple of quarters where you had some challenging bookings numbers, you were talking about tougher comparisons. How do we read this number as a single point? Is it something you feel you can replicate?

Is it indicative of easier comparisons? I just want a little bit more read into the bookings numbers you had and then the future that you see.

Speaker 2

Yes. So at a macro level, consider us, as I said, a work in progress. I feel very good about it in the sense that you're starting to see that shift where, in essence, you're starting to see more and more large enterprises, which often buy against master service agreements and then do purchase orders. But the interesting thing is, I think you have been tracking the number of large enterprise wins we have had. We had 22 large enterprise wins from a broad based category of verticals.

That's actually very interesting, right? It's the best. Yes, it's the best we've ever had, I believe. And then across the board, think mid market, enterprise bookings are all trending in the right direction. Actually, business bookings are picking up also, which is starting to be good.

So I don't want to sit here. Look, I think, hopefully, you guys have gotten to know us. We don't hype the company. We don't hype our stock. We don't do any of the stuff.

We try to be very transparent with you about what's good and what's bad. I think a lot of the heavy lifting is done. I don't want to tell you that everything is hunky dory, but I see the trend positive and I see us continuing to build on it. And so we'll continue to get better over time. But I think as I said, the long term trajectory of this company, it's the most excited I've ever been about this company.

Speaker 6

As a follow-up, I wondered if you could bifurcate the middle market versus the enterprise segments and just give us a picture of what you're seeing on both sides? Thanks.

Speaker 2

Yes, the interesting thing is both are very strong, but there was one fascinating thing that I noticed. So enterprise has figured out that combo deals are critical. So I don't know if you picked up on the fact that when you look at enterprise bookings, seven out of 10 enterprise deals did combo solutions, where we have a clear advantage. And then if you look at mid market enterprise as a category, approximately 49% did combo deals. So even mid market is figuring out that combo deals are very important and is heading in that direction.

Bookings probably for enterprise were the growth rate was significantly stronger. The bookings rate for mid market is starting to trend up. Win rates actually for both enterprise and mid market is well north of 50% against all competitors. And so we're starting to feel, as I said, long way to go. Don't want to sit here and tell you everything's hunky dory.

But I think step by step, we've built the company the right way. We control our own destiny because we own all technology. We're not doing this from borrowed technology. We're not a hype machine. You can also see channels in early stages, great progress.

Six, I think, of our top 10 deals or seven out of six out of our top 10 deals came from the channel. Channel is and again, we don't have thousands of channel partners. We're investing in the channel. We're seeing channel, particularly in mid market is doing a phenomenal job for us. And we see a lot of headroom there as well.

Speaker 6

Perfect. Thank you.

Speaker 0

Our next question comes from the line of Kathryn Chubbinic from Dougherty and Company. Your line is now open.

Speaker 1

Hi. Thank you for taking my question. Excellent frontier team. I just wanted to ask a question on the 45 partners that you discussed since the reorganization and a real big focus on partners. How many of the 45 are actually contributing to revenue?

And do you think some of this is the reason why you had a really good acceleration from 15% year over year growth in Q2 to 18% year over year growth in Q3? Thanks.

Speaker 2

Great question, Catherine. So early days, but we're seeing actually channel partners are ramping up faster. And again, different people focus on channel different ways. I'm a big fan that in the end, partners, you have to invest in them and you want to make sure they invest in you. You don't want to be one of thousands.

We want to be very that's why this new enablement program where we go through a detailed training on both sides. Ultimately, our goal is to have a select few channel partners and make sure we really give them the help support they deserve so that they can provide value to their customers. And again, it's never going to be about a volume for us. It's going to be much more about making sure we can make our channel partners successful. Quite a few of the 25 actually, I think there was one instance where a channel partner literally got ramped up and brought in, I think, two of our relatively large deals within probably three months of signing So and again, early days, I don't want to give you a sense that everything is hunky dory.

But generally, I feel like we've got the right strategy, the market is inflecting in the right way, the combo solution is going to be a differentiator, increasingly channel is the key. But the goal with the channel is you don't want to treat them as a commodity or fungible. You want to really invest in the right channel partners, make sure you make them successful. And we are building and investing to do all the things necessary to dominate this particular part of the segment.

Speaker 1

All right. Thank you.

Speaker 0

Our next question comes from the line of Will Power from Baird. Your line is now open.

Speaker 7

Yes, great. Thank you. Yes, just I guess a couple of questions. So first, it looked like good services revenue growth and I guess just as noted a nice acceleration from last quarter. I guess I wonder as you thought about guidance has been laid out last quarter for this quarter and for the year, perhaps that was just some conservatism with the new sales and marketing hires.

I wonder if there are any positive surprises. Mean, did you see a bigger influx of enterprise deals than might have been expected? So just trying to understand the source of upside, I guess, in the quarter. And then the second question, just thinking strategically, Vic, you talked about the different products you have in your arsenal from contact center, UCaaS collaboration, etcetera. One of your competitors has talked about the advantage of having CPaaS in their portfolio as well.

I just wonder if any of your customers are asking for that, if that's something you see as something you'd like to add as well. Thanks.

Speaker 2

Yes. No, so great question. So let's start. Positive surprises all around. I mean, look, we if you think about what we did as a company and credit to the amazing group of people we have here, we basically brought on board a new Head of Engineering, a new Head of Marketing, a new two new heads of sales, a new head of HR, and we managed to do this over the last six, nine months, and we managed to do it where they have all now brought in that next layer and some amazing, amazing talent from literally all over, and then augmented a team here that is already very strong.

And so that gelling of people is, for those of you who've been from practical point of view, you bring in that level of influx, you have always inevitable issues. But the way people have gelled, think about it, I brought on board my new Head of Enterprise Sales and Midmarket October, I believe, October 22 or '23, right? So midway through the quarter. My Head of Small Business Sales joined, I think, literally September, October timeframe. So from that perspective, the positive surprise is how well the team has kind of gelled and how there's been no surprises.

I mean, I'm thrilled with the people we've got. I mean, you've got people that actually make me look like I'm stupid. And that's the right thing. You keep hiring people that are significantly better than you. So that's the positive surprise.

And you're seeing a level of focus and drive in the company to take this company to that next level, which is don't be just a communications telephony company, don't sit here and just talk because in the end, you can be so much more. You can provide those core replacement communication solutions, but you can integrate data. You can do all kinds of things where people make it part and parcel of communications, and we can help redefine that from every aspect. And I think I've got the team to help do that. That's the positive surprise.

The second positive surprise is how many customers actually reacted to that. It was quite interesting that we're now starting to get to the CIO level because it's a differentiated message. It's no longer, I'm a utility, you got a phone, I got a phone, let me give you a phone, right? Or, hey, you got a contact center, I'm dealing with your contact center agent. It literally becomes strategic.

And that helped us because the interesting thing is win rates go up and also the predictability of when the deal closes when you're dealing with a higher, more strategic manager obviously gets better. So I think those two have been positive surprises on that end. I mean, look, we're still, from my perspective, a work in progress. There's a tremendous amount that we did as a company. There's a tremendous amount we're in the process of doing.

I think this category is going to be huge. The fact that we bought all of these technologies together over the last few years and integrated them together is huge. We just have to continue to execute. So I don't want to, as I said, get into some false euphoria, but the issue is I feel good about where we are. Long way to go.

Step by step, we will get there.

Speaker 7

Okay. And then I guess just the second piece was as you think about those different products you have in the arsenal, are there other pieces that you think you still would like to add? And where might CPaaS fit in that?

Speaker 2

So CPaaS actually, you're right, sorry. We have something called ScriptDate. We made a conscious choice that what we want to do is we want to make our entire stack essentially configurable, programmable for the right type of professional partners. So we're aiming for a different type of developer. We're looking for somebody who's more of a professional services organization as opposed to creating very simple widgets, etcetera.

So we're not again aiming for the mass market. Analytics is a particularly key element of that. And so this is something called ScriptDate that we've been introducing. Initially, we introduced it with our professional services team. We most recently had a flagship customer start to use ScriptDate to do a very significant portion of their inbound business.

So we don't see us having to buy anybody, but we see Script eight, which is essentially a CPaaS like language, except it's much bigger. It allows you to control the entire stack and entire PBX functionality corporate wide globally. And so we see that and also do everything from rule based, when stuff should come in, who should the call be routed to, who should be alerted, intelligence, all of that machine learning, we see all of that being bundled into Script eight. It's going to be a bigger and bigger piece of our business. I don't need to buy anybody.

I will be making some announcements of some very amazing people that we have been able to get on board who know this stuff very well because and they're also looking at it. They're coming from some of the best and brightest companies around. And they're looking at the fact that all this aggregated data is now available to them so it can provide disproportionate value to the enterprise.

Speaker 8

Okay, great. Thank you.

Speaker 0

Our next question comes from the line of Nikolay Belial from Bank of America. Your line is now open.

Speaker 8

Hi. Thanks for taking my question. And just wanted to add my congratulations on the bounce back in new monthly recurring revenues. Mary Ellen, to get to 25% total revenue growth exiting fiscal year 'nineteen, what revenue growth rate what growth rate do we need to see in new monthly recurring revenues for you guys to get there?

Speaker 1

Good question. So certainly, the fourth fiscal quarter is going to be a little bit more difficult comp because we had some very strong bookings last quarter at this time. However, moving into the fiscal year twenty nineteen, we have the salespeople on board. We have our lead gen engine going, and we would expect that we would be achieving some very nice growth rates. I don't want to give you a number right now.

I think it's more prudent to wait until we give you our fiscal 'nineteen guidance and give you a number. But we are putting the team in place, the lead generation engine in place, the brand awareness in place so that we can achieve the 25% exit rate. We have a very solid plan. We've achieved in that plan for Q3. We're on track in Q4, and we would expect the same moving into fiscal twenty nineteen.

But you will definitely be seeing accelerated service revenue growth throughout the fiscal twenty nineteen. So you'll start to see us each and every quarter march towards that 25%.

Speaker 8

And what underlying trends in the pipeline you're seeing to give you that confidence, whether it's by vertical or type of business?

Speaker 1

Yes, very good. So again, we're really focused on the mid market and enterprise space. We're doing extremely well in both. The mid market is the channel partners are doing an amazing job. We saw some really strong performance in this fiscal quarter from our channel partners, particularly in the mid market space.

And that's a great space to be in because it's the sales cycle is not as long and the time to deployment is not as long. So we are building pipeline. We're seeing signs of increased pipeline. We're seeing signs again from our marketing engine where we're growing the number of sales qualified leads. We have more feet on the street.

We have now hired a number of new business development managers for our channel teams, and they are focused on recruiting new partners. And by the way, we're the only ones out in the marketplace that are able to do these really truly integrated combo deals. And as Vic had mentioned earlier, 51% or I'm sorry, 49% of our new monthly recurring bookings just from combo deals from the mid market, it came from combo deals. So our new messaging is resonating and it's something that's really unique in where 8x8 plays. And oh, by the way, as Dick also said, our win rate continues to improve.

So you start to build more pipeline, increase your win rate and then have a differentiated product that no one else can compete on, it's a win win situation all the way around.

Speaker 8

And lastly, at last earnings call, were talking about a large customer that delayed their rollout of your product. If you can give us an update on that, that would be fantastic. Thank you.

Speaker 1

Yes. No, that customer is continuing So it's steady as you go. They're continuing to add more and more seats. Right now, there are over 30,000 seats from a virtual office perspective and over 800 seats from a virtual contact center perspective.

So we're in our forecast, we're just assuming the normal run rate of additions. We haven't assumed any acceleration yet. So if they do accelerate, that will be upside. But for right now, we're just forecasting the normal growth rate that they have that we've been marching to for the last quarter or two.

Speaker 0

Thank you.

Speaker 1

You're welcome.

Speaker 0

Our next question comes from the line of Dmitry Netiz from William Blair. Your line is now open.

Speaker 9

Thank you. I can appreciate strong numbers in light of sales reorg so kudos to you. I have a couple of questions. Just to follow-up on the prior major workforce provider rollout, obviously you're calling for that to be kind of a normal run rate. There was a couple of deliverables that needed to happen.

Have those deliverables been satisfied?

Speaker 2

You're just

Speaker 9

waiting for the customer to turn up the heat?

Speaker 2

Yes, yes. No, I think everything is moving in the right direction in a sense. The rollout has started in the sense, from a migration perspective. They're moving up, each I mean, literally, the reason we can't tell you the seeds is it's now become literally ordinary of business. Every few days to a week, new seats keep getting added, keep getting added, same thing on contact center.

So but one of the lessons we learned after the last one was we went with our gut as to what will be the rollout as opposed to the schedule they provided. And it's methodical, steady as she goes, keep going, keep going, keep going and not counting on any acts of heroism and that's how we're modeling it.

Speaker 9

Okay, great. And then maybe on the DXI side of things, I know you guys excluded that. What was the contribution of DXI this quarter? Was it zero? Was it something more than that?

And what are you assuming for the March and maybe for 2019? When does it actually go down to nothing as you kind of close that business out?

Speaker 1

Yes. So Dmitry, just to be clear, it's the past business that the legacy broadcasting business that we have been excluding all year from DXi. We are deemphasizing the EasyContact Now product as a standalone product.

Speaker 7

That's the one I was referring to. Sorry. Yes. Thank you very much.

Speaker 9

It's a standalone.

Speaker 1

It's a stand alone product. So that is continuing to be in our numbers. It's in it and that continues to be a couple million dollars per quarter. And we're continuing to service our existing customers, but we are no longer chasing or spending marketing dollars for new customers. We truly believe that the true value of that technology is to be integrated into our virtual office product as well as our virtual contact center product in those X editions that Vic had talked about earlier.

And that's where we see where the market is going, that new wave. And so we believe that the technology has tremendous value, and it's far more value as a fully integrated product than it is as a standalone product. So we would expect that it will decline slowly, right? And next year fiscal twenty nineteen, we'll be able to give you next earnings call, be able to give you much better guidance as far as what we expect that business unit to do.

Speaker 9

So in the March, you were assuming a couple of million dollars for that still?

Speaker 2

Yes, that I

Speaker 1

don't see it changing significantly. It might be down a little bit, but not significantly.

Speaker 2

Add one more, so just a little more color on it. More and more we are finding, and you'll see this happen over time everywhere, DXi, EasyContact now. There's some amazing sales talent out there, some very cool people. More importantly, they've got a great customer base.

What we're finding is that we will transition them more and more towards the X series of products, where you'll start to see Contact Now, EasyContact Now functionality as part and parcel of our EasyContact Now product. As I said, over time, you're going to see virtual office also go away, you'll start to see virtual contact center also go away, you'll only see X. And it'll be a continuum from everything from a simple cheap replacement phone in the cloud, which a lot of our competitors do, all the way to a fully integrated contact center with built in telephony as well as analytics and quality monitoring, which pretty much nobody else can replicate easily. And so from that perspective, you'll see an easy way to move customers up and down. So there will be some inevitable churn of the EasyContact now, but the intent is to migrate as many of them as possible to the X series of products over time.

I

Speaker 9

guess my question is just kind of a follow-up on this discussion. As I look into March, I sort of assume that this goes out of the model. Now that you have that in the model, the way you guide it and that's something that sort of raised the question in my mind is your guidance sort of implies sequentially about 1,000,000 point dollars kind of if you take the midpoint of that service revenue guidance of incremental revenue on the service line. You obviously did better than this in Q3. Not going to go and say why you did this, but you've obviously provided a nice guidance so that you can upside that.

But here 1.5 kind of looks a little weak relative to your current Q3 upside that you've put out. So just give us a sense if this is a conservatism or something else that's going on? Is it you've been expecting more than what you're actually guiding for. I'm just trying to reconcile a few things. Can't understand why the service revenue guidance is up only $1,000,000 $1,500,000 including the DSI business in there.

Speaker 1

Yes. Okay. So basically, we have been spoken as you know, we've been moving up market. Now 59% of our revenue is coming from mid market and enterprise accounts. 65% so 65% of our new monthly recurring bookings is coming from mid market and enterprise accounts.

And as you know, that is lumpier business. And by the way, enterprise accounts take a little bit longer to deploy. Mid market accounts also take typically about three months to deploy as well. So yes, maybe there's some conservative in there conservatism in there. But as we continue to move up market, you should expect to see some lumpiness quarter over quarter.

Speaker 2

And then, Dmitry, going back to your

Speaker 1

comments By the way, although the DXi product is still in our numbers, right, it is starting to trend down. And it's not we're not getting any growth out of it, certainly.

Speaker 2

Yes. So DXi, you'll see some inevitable churn. And you'll see some inevitable churn at the very low micro end of our business as we transition more and more towards mid market and enterprise and that's all baked into our guidance.

Speaker 3

Right. All

Speaker 9

right. So it's just timing a bigger deal so and then lumpiness around it. I appreciate that color. Thank you.

Speaker 8

You're welcome.

Speaker 0

And our next question comes from the line of Mike Latimore from Northland Capital Markets. Your line is now open.

Speaker 5

Great, thanks.

Speaker 10

Yes, very nice quarter. It seems like every quarter you're announcing more multi 100 seat contact center deals. Guess, your deal sizes in contact center growing faster than the office side of things?

Speaker 2

Yes, actually they are. I mean, particularly combo is the key. And as I said, over time you're going to find combo deals are growing the fastest of everything we've seen, which kind of then validates the strategy. And this builds on the conversation, which Dmitry is having, where in essence, I'm looking for a certain quality of revenue. In the end, ultimately, we want to be the dominant player in this particular category where you're looking for people who need something more than just a replacement phone in the cloud, right, or very simple low end type solutions.

Over time, we will continue to service the low end of the market and we will be competitive. And our intent is we will make sure that we are able to provide value. But increasingly that is not our focus. The micro one to nine person business is not our focus. The very low end dialer business is not our focus.

More and more you're starting to see mid market enterprise as our focus. And so you'll see as that little portion of that revenue at the very low end of our business starts to slough off, you won't see as much sequential revenue growth quarter over quarter as you would if we had continued to invest in the small and or the dialer end of our business and stuff like that. So that's why you're seeing the guidance that you're seeing. But as I indicated, more and more we're finding this X part of the business, which is the combo deals, is starting to stretch all the way to even the low end of mid market, which is very because it says people didn't know a help desk that was looking for us for a simple phone system suddenly finds out that they need contact center functionality and by the way, they also need some quality monitoring, they just didn't call it that. And that to me is the really exciting thing.

And as I said, you'll see some lumpiness in our revenue. That's why I'm being cautiously optimistic. I'm telling you from a trajectory point of view, I'm thrilled. You'll see the inevitable change as the business rotates into the higher and higher order mid market enterprise. And increasingly, you'll start to see us being able to sell all of these combo products over time.

And hopefully, over time, you'll see that becomes a very significant portion of our business.

Speaker 10

Got it. And then for new hire new sales hires in the mid market enterprise category, what's your expectation in terms of how long it takes them to become sort of fully productive? And then what is sort of the average blended sales cycle across mid market enterprise now?

Speaker 2

So it's getting smaller, which was actually good. Mean, but we always use obligatory six to nine months, but we are seeing that it's starting to trend down. And ramping salespeople depending on it's typically a six month process, but we are finding that some salespeople have come and hit the ground running. Again, I'm finding we can get some of the best and brightest out there. And so we have a differentiated product.

That's why I want to make sure that it's the quality of revenue that counts. We have a differentiated product. We have and we're starting to get people who know how to sell that differentiated product so that they can get value. And so as I said, we are a work in progress, but good things are happening.

Speaker 7

Great.

Speaker 8

Thanks.

Speaker 0

And our next question comes from the line of Jonathan Kees from Summit. Your line is now open.

Speaker 11

Great. Thanks for taking my questions. I'm glad to squeeze in my questions here. Wanted to ask specifically a derivative on the competitive picture question here. Avaya has come out of bankruptcy.

And if you listen to them, they're talking about combo package of UCaaS and CCaaS and also AI and even analytics thrown in there. Now I understand that this could be talk. There's still vast majority of premise and very little cloud and you guys are all cloud and you guys are the disruptors here. You've been in the past picking up some deals from Avaya picking up some of the Avaya customers. And you talked about during this call that your win rate is north of 50% here.

Just curious, you still seeing a steady stream of leads from Avaya customers?

Speaker 2

Yes. I mean, we're seeing them across. I mean, by the way, one kudos to Avaya for getting out of bankruptcy. I think it's a credible company that's built up a business over a long period of time, and we wish them well. I like to think we've got something very differentiated, and I think we'll continue to execute.

There will be lots of players in this space. I do think what we have is differentiated. But fundamentally, you'll hear me say the same thing. I'm playing my game. I mean, I think we've been we did contact center before it was fashionable, right?

We then kind of started to integrate it with virtual office before it was fashionable. We integrated in the dialer function before it was fashionable. We are seeing a very differentiated category. You'll start to see us do a lot of stuff on data analytics. You'll see do a lot of stuff on integration that I think will be very interesting and we're already doing it for some key pilots.

And so as I said, from our perspective, we encourage and wish most of our competitors well, unless they're competing with us, in which case I'd like to win.

Speaker 11

Okay. All right. And I'll follow-up with financial question. My last question here, headquarters, how should we think in terms of that of CapEx? I know you're probably not giving guidance for next year, next fiscal year yet or is this more growing like a sales leaseback and impact on the G and A line?

Mary Ellen?

Speaker 3

Yes.

Speaker 1

It's a lease. It's eleven year lease. We would expect to move into the property right around 01/01/2019. Of course, we have a number of months free, ten months free and another four months after that where we pay 50%. We won't actually start seeing the cash impact until fiscal twenty twenty.

However, as you know, from a GAAP accounting perspective, we're going to have to start taking the lease expense and the amortization of not intangible, excuse me, the amortization of our leasehold improvements once we take possession of the building. And we don't know whether that when that will be, whether that will be 01/01/2019 or whether it will be sooner than that. But that will be a noncash hit that we will take once we take possession of that building. But we're excited about the new building. And certainly, when we give our guidance for fiscal twenty nineteen, it won't impact anything in this fiscal quarter.

So for fiscal twenty eighteen, as we finish up our fourth quarter, but it will certainly add to expenses in our new fiscal year fiscal twenty nineteen. And we'll give guidance for that in May so that you can model it appropriately.

Speaker 11

Okay, great. That would be helpful. Thanks a lot. Good luck, guys.

Speaker 1

Okay.

Speaker 0

Our next question comes from the line of Mike Crawford from B. Riley. Your line is now open.

Speaker 5

Thank you. With small business bookings starting to pick up, can you talk about the trajectory you see for your small office, home office business overall given MER and churn?

Speaker 2

Yes. No, actually both are and it's amazing. When you get focused attention to an area, how much better it can get relatively quickly. We are starting to see small business definitely pick up in terms of bookings. I think there was an acceleration just in one quarter in terms of bookings.

The other part that is interesting is the lower end of our small business, I'm heading more and more towards e commerce and self-service. I mean, we're making some very significant investments there, where in the end, we're going to really simplify the experience and kind of try and get as much as possible the person out of the loop. And then for the mid market for the lower end of the small business, I think we'll continue to invest in it with, as I said, a hard core group of very competent salespeople as well as an implementation team that can continue to provide value. So I don't see any major change, but now you've essentially the big change we made was we split into two business units and those two business units have very different go to market strategies. And the small business now has a guy who knows that part and his strategy is the lower end of small business.

We're heading towards self-service e commerce, higher end of that small business, we're heading much more we will continue to do what we're doing, just increase the efficiency. No dramatic change on what we're doing there from what we have previously suggested.

Speaker 5

Okay. So maybe that part of your service revenue that still comprises around 40% can grow low single digits, but certainly not enter any slow decline at any time in the near future?

Speaker 2

Yes, yes. I mean, look, the good news is you

Speaker 7

have two

Speaker 2

very strong executives who actually are compensated on growing their respective business units. So as I said, we've got to a certain point where we that was our revelation. We were increasingly focused on mid market enterprise and small business was increasingly dragging us because we're not putting the attention in it. But we had some amazing assets, and particularly the investments we're making on mid market enterprise has value down to our small business as well. Now you got a focused guy.

And at the right time, I think we'll start to expose him to some of you guys. You'll get a sense. This is and I'm sure you can look at LinkedIn profiles. I think you'll start to get a sense. I'll put my team up against anybody in any industry and you got some real winners out here and they are now fit for purpose.

So you don't have one size fits all mentality.

Speaker 5

All right, great. Thank you.

Speaker 1

Welcome.

Speaker 0

And I'm showing no further questions. I would now like to turn the call back to Vic Verma, Chief Executive Officer for closing remarks.

Speaker 2

To wrap up, once again, we are very pleased with our earnings result. We look forward to seeing our customers and investors at Enterprise Connect and other events in the upcoming months. Thank you again.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program and you may all disconnect.

Speaker 7

Everyone have

Speaker 8

a

Speaker 2

great

Speaker 0

day.