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Executives

Joan Citelli - Director, Corporate Communications

Vikram Verma - Chief Executive Officer

Dan Weirich - Chief Financial Officer

Analysts

Amir Rozwadowski - Barclays Capital

Michael Huang - Needham & Company

Kash G. Rangan - BofA Merrill Lynch

Dmitry Netis - William Blair & Company

Raghavan Sarathy - Dougherty & Company

George Sutton - Craig Hallum Capital Group

Greg Burns - Sidoti & Company

Mike Latimore - Northland Capital Markets

Mike Crawford - B. Riley & Company

8X8, Inc. (EGHT) Q3 2014 Earnings Conference Call January 22, 2014 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the 8x8 Third Quarter 2014 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. (Operator Instructions) As a reminder, this call needs to be recorded.

I would now like to introduce your host for today's conference, Joan Citelli, Director of Corporate Communications. Please go ahead.

Joan Citelli

Thank you and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma and 8x8's Chief Financial Officer, Dan Weirich to discuss our results for 8x8's third fiscal quarter of 2014 ended December 31, 2013. If you have not yet seen today's financial results, the press release is available on the Investors tab 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 Vik, 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, including without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions, which reflect something other than historical facts are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor sections of our Annual Report on Form 10-K, and 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. Thank you.

And with that, I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Vikram Verma

Thanks, Joan. Welcome everyone to our earnings call for the third quarter ending December 31, 2013. I would like to review some of our high level financial results and business activities for the quarter.

Following my remarks, Dan Weirich our CFO will discuss the results and metrics in much greater detail. We'll then obviously be happy to answer any questions you may have for us today.

This has been a very eventful and productive quarter. We had record revenue and record number of new services sold. Total revenue for the third quarter of fiscal 2014 grew 24% year-over-year to a record $32.7 million. Gross margin came in at 71% with service margins at 81%. Our non-GAAP net income was $2.5 million representing 8% of revenue.

Five noteworthy points about this quarter that I would like to cover for you, first, as I mentioned we sold a record 61,286 new services in the December quarter, which is a 38% increase from the 44,366 new services sold in the same period last year. Second, the average number of services purchased by new customers during the December quarter was also a record, increasing 20% to 20.4% from 17% in the same period last year. This progress reflects our success selling to larger customers as well as the channel. Collectively, the mid-market contributed 35% of new monthly recurring revenue sold during the quarter, a 57% increase compared with the same period last year.

Two examples of recent mid-market customer wins included financial services provider, merchant warehouse and cloud-based time tracking software provider Replicon, both of which subscribe to our cloud telephony and our contact center services and have upwards of 300 users each, distributed across multiple locations in the U.S. and abroad.

Third, we're very pleased with the acquisition of UK-based Voicenet Solutions, which closed at the end of November 2013. The integration is proceeding on plan and we're on schedule to begin selling the full range of our unified communication and collaboration services there, starting early February. This will enable us to broaden our mid-market and distributed enterprise customer base within the U.K. and Europe.

Fourth, we continue to build on our global reach initiative. After completing our London datacenter built out in September, we went live this month with a Hong Kong datacenter and are on-track to open our datacenter in South America in March 2014 timeframe. As mentioned before, we intend to extend our services to existing customers and also pursue new customers leveraging this global platform.

Finally, we raised approximately 126 million in a well oversubscribed stock offering during the December quarter. This along with our previous cash position and strong cash flow provides us with a very, very solid balance sheet. It's not only -- when competing for large mid-market deals, but also gives us significant firepower to pursue complimentary businesses and technology assets around the globe.

As I've stated before, we remain committed to profitable growth and anticipate that we will maintain non-GAAP net income as a percentage of revenue in the high single-digit range.

With the progress that has been made in all of these funds, 8x8 has the right elements in place for sustained growth. 1) A full suite of unified cloud communication and collaboration applications. 2) An internally developed software platform, which incorporates the highest levels of security redundancy and reliability and is protected by 92 issued patents. 3) A profitable and capital allocation business model. And last, but not least the management team that collectively offers the broadest and most expensive expertise in the industry.

With that, I will now turn the call over to Dan Weirich, the company's Chief Financial Officer, who will walk you through a detailed financial result and provide additional information regarding our business.

Dan Weirich

Thank you, Vik. We reported a 24% increase in revenue for the third quarter of fiscal 2014. Revenue from business customers increased 26% year-over-year and represented 99% of total revenue.

Service and gross margins were strong, with service margin at 81% and gross margin at 71%. Contribution margin defined a service margin less billing and customer service expense were strong at 63% in the December quarter compared with 53% in the same period last year.

Payback, defined as the number of months of contribution margin to pay back the customer acquisition cost was 6.7 months. Non-GAAP net income for the quarter was $2.5 million compared with $3.8 million in the same period a year ago. Non-GAAP net income for diluted share was $0.3 for the quarter and non-GAAP net income as the percentage of revenue was 8% of revenue in the quarter.

Business subscriber acquisition cost was $92 per service compared with $97 in the same period a year ago and $94 in the second quarter of fiscal 2014. Monthly business service revenue churn in the quarter was 1.5% compared with 2.3% in the same period a year ago and 1.2% in the first two quarters of fiscal 2014. Revenue churn in the December quarter generally tends to be higher, and we expect this metric to return to the levels reported in the first half of fiscal 2014 in the March quarter. Monthly business customer churn was 1.6% compared with 1.6% in the same period a year ago.

Business customer average monthly service revenue per customer was $274, a $22 increase over the same period a year ago. The average number of subscribed services for new business customer increased from -- increased to 20.4 from 17, a 20% year-over-year increase. This trend is occurring due to the increased adoption of our cloud-based services by larger customers.

Revenue from our mid-market customer base, which we define as companies with 50 or more users selling more than $1000 in monthly recurring revenue represented approximately 37% of our recurring service revenue in the third quarter.

We closed the acquisition of Voicenet on November 29th 2013. Voicenet represented under $800,000 in revenue in the month of December. Voicenet incurred a non-GAAP net loss of approximately $170,000 in the month of December and at gross margin of roughly 39%. With the launch of 8x8 service platform in the U.K., we will not be disclosing Voicenet specific metrics in the future.

CapEx expenditures for the quarter were $636,000 or 1.9% of revenue. The capital investments in our global reach initiative began in the second quarter and will continue through the remainder of the fiscal year.

Our cash, cash equivalents and investments increased by $130 million during the December quarter to $174 million. During the quarter, we raised $126 million in the stock offering. We see $3 million from the sales of our dedicated server hosting business utilized between 18 and $19 million to purchase Voicenet and generated $2.6 million in cash from operations.

Given the market opportunity that exists and the success we've had to-date, we have increased our investment in sales and marketing and research and development with the goal of continuing to drive strong revenue growth.

We remain committed to positive growth and anticipate we will maintain non-GAAP net income as a percentage of revenue in the high single-digit range or between 6% and 9% of revenue.

That concludes my prepared remarks, and I'll now turn the call back over to Vik.

Vikram Verma

Thanks, Dan. As we close our remarks, I'd like to reiterate that we are very pleased with our progress in positioning, and are excited about the opportunities for growth that lie ahead, both domestically and internationally. We believe now is the time to continue to drive upmarket, increase market share and investment growth to extend our lead in this emerging cloud-based unified communication and collaboration industry.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Amir Rozwadowski from Barclays. Please go ahead.

Amir Rozwadowski – Barclays Capital

Thank you very much, and good afternoon folks.

Vikram Verma

Hi, Amir. How are you doing?

Amir Rozwadowski – Barclays Capital

Well, Vik. I wanted to follow a bit more in sort of the market demand environment. I mean clearly if we take a look at the metrics that you folks delivered for the fourth quarter, probably the calendar fourth quarter, we're starting to see pretty healthy sort of adoption amongst the midsized enterprise arena. Can you provide us with a little bit more color in terms of the adoption rates that you are seeing? Are these new customers coming into the market exploring cloud-based solution? Are they sort of competitive wins that you have been sort of looking at in the marketplace? A little bit more color there would be helpful, and I do have a follow-up.

Vikram Verma

Okay. Yes, it's almost -- I think you and I've had this conversation, you almost learned to see the inflection point where more and more customers are coming to us literally saying, "Hey, I was in the CEO's office." And he said, "I need to get into the cloud, and we need to use it to basically save cost because all of these legacy systems that we have are way too expensive to maintain and not flexible. They don't have the feasibility etcetera, etcetera." So then they come to us and more often they will not be spending a lot of time on making sure that the system is compliant, that it's secure and that it's reliable and fault-tolerant, all of those things. But we are seeing that the number of folks coming in there as you can see from the numbers has been up-ticking quite significantly for us. It's too early to tell, but it definitely feels like there is a shift going on where people are viewing cloud more and more as the way to go for services that we provide. And you're starting to see the sales cycles shortened for those types of customers.

Amir Rozwadowski – Barclays Capital

That's very helpful. And clearly, you folks had been vocal about your positioning in terms of investing in the business in order to capture the opportunity on the other side. First and foremost, how you feel about today in terms of that sort of accelerating growth opportunity? And then the second part is we see sort of that 8% net margin, adjusted net margin today. I know you guys have focused on sort of this band of 6% to 9%. How should we think about sort of the investment trajectory over the near term? Is this somewhat of a floor for you folks or is there going to be a pickup in investment sort of in the first half of 2014 without any sort of granularity you might be able to provide?

Vikram Verma

There are two elements. This is a fun job. I mean you are starting to see a massive shift take place where people are going -- we need to go cloud for telephony, we need to go cloud for virtual contact center, we need to go cloud for collaboration system. So it is a very exciting and fun job. So I think the question you asked is how do I feel about it today versus three months ago? I am pretty darn happy that I have this job. This is obviously a buyer's opinion for the best job in America.

Second comment, I think the 6% to 9% that Dan articulated is what we see as the range for non-GAAP net income for the foreseeable future.

Amir Rozwadowski – Barclays Capital

Great, thank you very much for the incremental color.

Vikram Verma

Okay. Thank you, Amir.

Operator

Thank you. And our next question comes from Michael Huang from Needham & Company. Please go ahead.

Michael Huang - Needham & Company

Thanks very much, just a few questions for you. I wanted to ask a question around the contact center, I know that you noted a couple of nice wins with a couple of larger midsized customers in the quarter. I was wondering, generally speaking, what was the tax rate of contact center to the customers that you signed up in the quarter? And how is this trending?

Vikram Verma

Yes. We're not breaking out the exact tax rate of contact center. But collectively, our virtual office product in our contact center, we are seeing a tremendous momentum in selling those together. We are also seeing significant momentum on just selling the contact centers to standalone product. But we really differentiate significantly in the mid-market and distributed enterprise on selling the combined virtual office and virtual contact center on a product.

Michael Huang - Needham & Company

Got you, okay. And maybe let's talk about the pricing environment. What are you seeing in terms of kind of direction of pricing trends, both for hosted PBX and contact center? Especially as you guys push your market, is that favorable for pricing or not?

Vikram Verma

We haven't seen much change in pricing for quite some time on the subscription fees that we charge to our customers. It just depends on the deployment that we are doing on how we price it, specifically kind of in the mid-market and some folks are more sensitive about contact center pricing and some and more sensitive about our virtual office pricing. So, we have the luxury of being able to move one down and one up. But overall, I mean the blended trend is there is little to no change in the pricing environment today.

Michael Huang - Needham & Company

Great, thank you.

Dan Weirich

And Michael, I have some additional color on that. I think as you and I've talked, mid-market seems to be less sensitive to the price because they are basically replacing an existing legacy solution. And as you saw in some of our presentations there is such a dramatic difference, but I think we are finding that there is less sensitivity on the mid-market to the exact price as there is in the SMB market.

Michael Huang - Needham & Company

Okay. And then, last question for you, so I wanted to clarify -- so the ending business customer metric looks pretty strong and it was up notably quarter-on-quarter. I wanted to clarify, did that include Voicenet customers or was that such a really good quarter for kind of the core 8x8 business?

Dan Weirich

Yes. That would include approximately 1000 Voicenet customers that came through the acquisition.

Michael Huang - Needham & Company

Okay.

Dan Weirich

And then the -- like, the new sales metrics included the one month in December of the Voicenet sales force on their marketing and sales efforts.

Michael Huang - Needham & Company

Got you. Okay, great. Thanks, Dan.

Dan Weirich

Thanks, Mike.

Operator

Thank you. And our next question comes from Kash Rangan from Merrill Lynch. Please go ahead.

Kash G. Rangan - BofA Merrill Lynch

Hi, thank you very much. Happy New Year to the 8x8 team. I am curious if you can break out your subscriber base organic that is excluding the Voicenet acquisition? And I have a couple of follow-ups.

Dan Weirich

Yes. So, from the customer base perspective, as we just mentioned about 1000 of the total customers come from our acquired business and --

Kash G. Rangan - BofA Merrill Lynch

I think you said the 38% growth in the number of subscribers. I'm more focused on the subs. I don't know that if you've provided some color on that. I think it was up 38% or such, if you exclude the Voicenet acquisition, what that growth in the subscriber base will affect?

Dan Weirich

Yes. So the number of services pulled by the Voicenet sales force in the month of December was just under a thousand, and so, excluding that 38% would have been a 36% growth rate. So under organic growth rate it's extremely healthy.

Kash G. Rangan - BofA Merrill Lynch

Wow. Okay. So, you reported revenue growth of 24%-25% -- sorry, I don't have the numbers in front of me, but the subscriber base growth rate is accelerating. So, are we too stupid to not expect this to continue that you started to accelerate the pace of subscriber acquisition which you can clearly see reflected in your sales and marketing costs. Some of it is reflective of the acquisition integration, but just any commentary on why this should not continue. And I think you also mentioned that you're getting a six and half month payback on the gross contribution margin. How do you feel that that metric can be sustained especially as you bring in new sales people to accelerate "Your sales efforts, invest and continue," I have to believe that your margin should also start to inflate. Help me understand where I'm wrong here. Thank you very much.

Dan Weirich

Yes. So, on the payback, I mean we've been in the six-seven month pay back for a long, long, long time. And the primary driver of that is our contribution margin has been in the 60%-65% range for a long time. And the cost of acquisition has been just under a $100 per service for all the periods of time as well. And so we don't foresee any material change in any of those metrics. I mean we've got a pretty proven model of how we can go to market and as you notice we've been starting to make much more material investments in the sales and marketing line as you noticed in the reported period. And so, we feel quite comfortable and confident in what we've been doing. And the single biggest driver of it is the adoption of our services by larger, more established businesses and their math are differentiated. We have in the market is our combined virtual office and virtual contact center product, which is -- no one else has the solution to that. And the buyers like to look to one vendor for a combined solution and that's where we were just in the process of investing in R&D and expanding our lead.

Kash G. Rangan - BofA Merrill Lynch

And also, I think one of my questions is also, 36% organic growth in your subscriber base. That is a sign of a revenue growth decline in the future, right?

Dan Weirich

Yes. It's not always like a direct correlation to revenue growth, but I mean -- but then we had the best quarter that we've ever had in the company's history. And I mean if you look back at historical periods on March quarter, historically it's been our strongest quarter of the year. We kind of have, like, a modest little slowdown in the summer, but we're still quite comfortable with where we are today.

Kash G. Rangan - BofA Merrill Lynch

Okay, got it. Vik, any comment on run rate?

Vikram Verma

Hey, Kash, this is Vik and I'll add one thing. I mean, look, the good news is you are starting to see, which is where we've all been focused, right? Mid-market adoption has been the very interesting thing. You saw a 57% increase in the new MRR coming from mid-market customers. The part I want to make sure I temper for you is this nice subscriber growth, which we are very, very proud of does not instantly transform into revenue for mid-markets because the amount of time to turning it into revenue for mid-market is longer than pace you're turning on of a 15 line customer versus a 1000 line customer. So temper that, and then not all services are exactly priced the same. So, those are the two things there. As Dan said, it's an important correlation, but it is correlated. We're very pleased with the subscriber growth.

Operator

Thank you. Our next question --

Kash G. Rangan - BofA Merrill Lynch

Got it. I'd much appreciate the color on win rates. That's it from me. Thank you, against the competition.

Vikram Verma

I think Dan said it. I think you've kind of seen this in our strategy, what makes us really unique is this Microsoft Office analogy where we've basically coupled together and integrated a comprehensive suite, where most of other folks are expected to come and to find solutions. What we're finding is when it is a VO and VCC customer and it is in the mid-market where compliance, security, reliability is important. You seem to win more than half of their shares. So, that's consistent with where we are focused and that's consistent with what we are seeing happen. So we are very pleased with that.

Operator

Thank you. Our next question comes from Dmitry Netis from William & Blair. Please go ahead.

Dmitry Netis – William Blair & Company

Thank you. Good metrics, so I want to focus on couple of housekeeping items. The churn, I wanted to kind of get some puts and takes, I know it picked up both on a revenue and customer side. So, can you just kind of walk us -- I know Dan mentioned there are some seasonality there, but maybe you can provide some more color on what exactly is going on and what gives you some comfort that it will come down in the next quarter or two?

The other one would be sort of on the upsell side of the number of seats and services. It sounds like your product revenue pretty much remained flat, yet your number of customers or number of services and seats had gone up significantly even if you exclude the Voicenet customer. So, just kind of give us some puts and takes there of what's driving some of that service upsell?

And I guess, so the third piece I wanted to -- on the housekeeping side, the (interior) was sort of the Softbank relationship and if you can provide some of the update there, what's the traction there was and what's the dollar amount that you printed in the quarter?

Dan Weirich

Yes. So, on the churn key, we do have some seasonality with our revenue and customer churn related to the SMB factor of our business, which are the smaller customers. Some of those closed down the businesses this time of the year. And we see that the heaviest yet about is in the December timeframe. We experienced something similar last year. You had many moving parts last year that resulted in 2.3% churn rate, but we just kind of look at it on kind of a normalized basis. It was sales noticeably lower than last year. And the reason that we just got a confidence in it is that we got pretty good indicators as to what's happening in our business. And if you look last year, we went from 2.3% in the December quarter down to three consecutive quarters at 1.2%. So that's the primary figure there.

And the customer turn is just a derivative of that. So, we just -- few more customers that kind of shutting the doors at year end. We typically see customers that are extremely small like the three employees or last customers were kind of shutting the doors and things like that -- but unfortunately there is fair number of those.

On the upsell sale side --

Dmitry Netis – William Blair & Company

Dan, just a quick follow-up on -- I think last year you had some kind of abnormal event where you lost about 400 seats, or 400 customers rather that was a single distributor, if I recall that cost some of that up-tick in revenue churn. Was there anything abnormal again this quarter?

Dan Weirich

No. That event that you're referring to is like in the September fiscal '13 quarter. And it was a kind of addressed impacted on customer churn on the revenue churn with this kind of fixed larger customers a year ago that had kind of abnormal issues. Lot of it was related like a one year after the contractual acquisition.

I think excluding those, we are in the kind of the 1.6 - 1.8 range last year, and this year it's 1.5. So listen, I mean it's something that -- we think that 1.2 is not -- 1.2% is actually not acceptable. So it needs to be sold out. So I mean that's kind of where we are shooting for and where we are managing too.

Dmitry Netis – William Blair & Company

Okay. I appreciate the color.

Dan Weirich

On the upsell side, we're continuing to be very strong. Upsell activity is very consistent with what we have in prior period and is predominantly driven by larger customers adopting our solution. So we have, like, a lot of big Fortune 500 distributed enterprises. And they've got new needs and they're becoming larger and larger customers of ours is one component of that, and just continued success of our sales team in selling our services into our install-base.

And then on the Softbank side, we've mentioned that the company has committed to launch for 36-month period to just under $100,000 a month in recurring revenue. And that's kind of where they're running right now. And there is lot of customers working extremely well together, and that's all the comment we have on them.

Dmitry Netis – William Blair & Company

Okay. And that's pretty much right now focused on Japan market, is that correct?

Dan Weirich

Correct. Yes, it is.

Dmitry Netis – William Blair & Company

Okay. It hasn't gone outside Japan. And how many approximately, how many customers is Softbank servicing at this point?

Dan Weirich

Oh, yes. I'm sorry, we can't disclose that information.

Dmitry Netis – William Blair & Company

Okay. All right, fair enough. And then just maybe two more quick ones, on the OpEx side of things, clearly things are kind of moving on a higher end of the equation, and I guess the sales and marketing and how you go into the market and kind of trying to sort of set up the market and sell new products to bigger base. On the R&D side, however, you are making investments too. Could you give us a sense of where you're investing right now, what's driving some of that up-tick in R&D?

Vikram Verma

I mean, look at standard teams, right? Everything from globalization, mid-market features, tighter integration, much more mobile, much more user-friendly, I mean just standard stuff that is normal as you become more and more the de facto standard for the larger and larger customer. So, look, we want to continue to be the market leader. We want to be known as the most comprehensive platform, which is the most secured, the most reliable of anybody else that is in our space. And we want to keep adding to the feature set. So, the mid-market customers in particular, we meet their needs and so we will keep kind of make a list. We'll check it twice and we keep adding more and more to that. So I think that's fundamentally what we've been doing related to the R&D.

Dmitry Netis – William Blair & Company

Is there an opportunity there for R&D to plateau at some point and maybe some of the OpEx move more into S&M line or do you foresee sort of continuing investment on the R&D side?

Vikram Verma

No, I think, look, I am a big fan of making sure that you don't rest on your laurels, right. Fundamentally there are three things that you do in a company. You build exciting product that are cutting edge. You sell them to customers and make sure that they're providing value for the customer and then you make sure you provide excellent support. All the rest of us are overhead. And so, I view us is investing each of them. I don't want to go into a mobile, we are just going to focus on selling that kind of fall behind on adding and innovating and adding new and new features or which one keep continuing to innovate on that area. So, at least for the foreseeable future I think you should kind of think through the 6% to 9% percent range that Dan had said about the non-GAAP net income. And I think we'll be equally spending on sales and marketing as well as R&D.

Dmitry Netis – William Blair & Company

Okay. Well, thanks for that color. And then just kind of fit in one last question, it would be the fourth. As part of the competitive environment I was just wondering if you could comment on the comp and careers and whether you're seeing any increased activity on their part as it relates to the host of UC market. And just a better -- maybe question would be if there is any change in terms of the percentage of new customers coming from the top gear careers that you had seen over the past couple of quarters or maybe this quarter? Thank you.

Vikram Verma

I mean, look, here is what we are seeing. I mean we're seeing the activity, but it seems to be more directed towards the lower end of the marketplace. We're not seeing it quite as focused on the higher end of the marketplace for us. From my perspective, I think, look, we are the market leader, for us what we got to do is play our games, right. Discipline; keep moving forward, keep matriculating the ball down the field, and there will be -- competitors come, competitors go. We've honestly proven off the stand for football analogy, right? Keep running the ball forward, throw short passes, keep on scoring, touch them, like them.

Dan Weirich

But from the -- like the incumbent coming in with a host at UC offering; we don't see anything in the market.

Dmitry Netis – William Blair & Company

Okay. Thanks, Dan. That was my question. Thank you very much.

Operator

Thank you. And our next question comes from Raghavan Sarathy from Dougherty & Company. Please go ahead.

Raghavan Sarathy – Dougherty & Company

Good afternoon, thanks for taking my questions. Congratulations on quarter. There is couple of questions from my end. On the subscriber acquisition cost for service, Dan you touched on this, it was down year-on-year about 5%. I would think that it would gain efficiency as you move up market, particularly you sell PBX and contact centers. So, can you give us some color on whether we should expect to continue the decline or is that we should think of more in the low $9 range?

Dan Weirich

We've always talked about it as being approximately a $100, because they were high as roughly a $110 and the other was approximately $90. But we put up many, many, many consecutive quarters and that's up $100. So, we are doing more and more investments as you can see in this most recent period, and so some of that investment is kind of in advance of sales activity. So, I'm still totally comfortable with the approximately a 100 figure. And you can see our return on these investments is exceptional return. But it's something frankly that at this point is whether we don't have like internal goals to get it down to 90 or something like that. Our goals are, like, growing the revenue as fast as possible. And that is, some of that requires little higher cost acquisition is something that we're more than happy to go after it that way.

Raghavan Sarathy - Dougherty & Company

Okay. And then on the sales and marketing front, I mean you've been clear on that you're going to invest. So, we had seen a material up-tick in looks like on the headcount. Can you give us some color about whether you -- how should we think of the hiring plans or how should we think about deadline in terms of investment in bulk of investments behind you or are you targeting expanded revenue, how should we think about it?

Dan Weirich

Yes. I mean we got down to the high single-digits as the non-GAAP net income as a percentage of revenue very quickly. And we were able to make the sales and marketing investments much faster than the R&D investments. And so, I think that on other periods we still need to increase our R&D as a percentage of revenue to a higher level. And today it's moved from roughly about 8% to about 10%. And we think it needs to be closer to 12% or so. And the sales and marketing is pretty much I would say where it is today is kind of fully invested from the standpoint of a percentage of revenue. But its revenue growth will be continuing investment in that group.

Raghavan Sarathy - Dougherty & Company

Okay. And then, one final question. On the G&A expenses, if I take out the stock-based comps, it was largely flat. So, was there a material up-tick in stock-based comps that drove the G&A expenses or maybe Voicenet or can you give us some color on that?

Dan Weirich

Yes. So, we had an executive depart in the company in October, it represented about $1.1 million of that. And we had two executives, one of those being Vik, who joined the company in September and you can read in his compacted study at six-month RFU investing on a grant. And so we took the full quarter of that this period, we'll have a couple of months in this March period. And so, that's why in the second paragraph of our earnings release we said that approximately half of the stock comp is related to management transition. So, you could think of stock comps maybe on a more normalized basis like a 1.5 million of a quarter.

Raghavan Sarathy - Dougherty & Company

Okay, great. Thank you.

Dan Weirich

Thanks, Rag.

Operator

Thank you. And our next question is from George Sutton from Craig Hallum. Please go ahead.

George Sutton, Craig Hallum Capital Group

Thank you. Guys, I did pop on late, so I apologize if I'm asking anything that's been asked. But I was curious you've got another quarter under your belt relative to looking at the M&A opportunities out there, and I wondered if you could update us in terms of what's your thinking there or what's your seeing how much activity and then opportunity there might be and how much competition for that opportunity?

Dan Weirich

Yes. So we've -- as you know that we closed Voicenet, end of November. And then with regard to additional M&A we're looking at two key areas; one is obviously for geographic diversity. So, finding the right area where we're putting infrastructure and looking to buy the equivalent of additional Voicenet. And then also, key technology that we can use to basically bolt on to a platform. We're not in a hurry to do anything we want to be very disciplined with the money that we've raised, and we've got ongoing activity and beyond that. So we don't comment on that.

George Sutton, Craig Hallum Capital Group

Okay. You also with Voicenet obviously have a little better understanding of the UK market opportunity. Can you give us a sense of how big that opportunity is relative to what you might have expected in that?

Dan Weirich

We did due diligence on Voicenet where I think almost, I can't remember, eight to nine months timeframe. So let's just say there are no surprises and we're feeling good about the U.K. opportunity. We think that was a great acquisition for us. The team there is fantastic. And we see the market is developing exactly as we anticipated.

George Sutton, Craig Hallum Capital Group

Okay, perfect. Thanks, guys.

Dan Weirich

Thanks, George.

Operator

Our next question comes from Greg Burns from Sidoti & Company. Please go ahead.

Greg Burns – Sidoti & Company

I just have a question about the inside sales force and the productivity you're seeing there. You bought in new management a couple of quarters ago. We were looking to put the systems and the processes in place to be able to scale that organization and get more productivity out of the folks. I just wanted to see if the productivity is where you wanted to be in presently, improvements you can make going forward? Thank you.

Dan Weirich

Hi, Greg, thanks. Yes, so the inside sales group you are referring to is what we call our SMB sales group. And it is performing very, very well at a very, very solid quarter. It's got exceptional leadership and the productivity improvement from there. And we perform extremely well compared to prior periods and we expect that there will be further improvements in productivity from that group.

Greg Burns – Sidoti & Company

Okay. I missed it, but the 2100 net new customers, what number of that is coming from Voicenet?

Dan Weirich

Approximately 1000.

Greg Burns – Sidoti & Company

One thousand customers, okay. All right, thank you.

Operator

Thank you. And our next question comes from Mike Latimore from Barclays Capital. Please go ahead.

Mike Latimore – Northland Capital Markets

Yes. Hi, good evening. On the contact center side of things, how many seats on average are your contact center deals, roughly?

Dan Weirich

Approximately in this kind of 40-ish range is the average deployment. But there they span from, like, I mean we've got deployments that are like 200% business and they have a five-seat contact center opportunity up to, like, multiple 100 seat contact center opportunity.

Mike Latimore – Northland Capital Markets

Okay, great. And then the --

Dan Weirich

If you look at -- sorry, Mike, but if you look at like our Replicon press release in December, I believe they were roughly 400 or 500 virtual office seats and 48 contact center seats. It's kind of like a decent representation of what a combined deal looks like.

Mike Latimore – Northland Capital Markets

All right, that makes sense. And then, I assume the sort of the revenue curve new service build has been relatively consistent last couple of quarters that's not changing much of it?

Dan Weirich

Not significantly. I mean, we are having more and more success selling some of our software base solutions like our unified communications product, which encompasses our meeting product and those types of solutions. And so those are definitely installed at lower average revenue per service than like a physical telephone line. But yes, I mean if you just look at it from just how they're doing relative to prior period. I mean that drags it down a little bit as we're more and more successful, but then we are offsetting in that with more and more contact center seats which were sold at roughly five times the average.

Mike Latimore – Northland Capital Markets

All right. Thanks, guys. And then on the -- how was the sales cycle and implementation timeline on the mid-market deals versus the SMB deals, both elements?

Dan Weirich

Yes. So, sales cycle on mid-market distributor enterprise and implementation are longer. We have seen on the sales side more and more anomalies where sales opportunity is closed in less than 60 days. And I wouldn't say it's the trend yet, but we have multiple examples of opportunities like that. Most of them are like six months or so, very roughly kind of speaking on sales cycle compared to the SMB, it's like 30 days.

On the implementation, SMB is anywhere from like one to four weeks and the mid-market and distributor enterprise could be anywhere from like 60 to 90 days, six months or so, depending on the deployment. Some of the deployments are staggered. So they'll do office by office by office, which stretched into many, many, many months. So I mean we do have like an element of what we call delayed billing. So it's monthly recurring revenue that we pull up that the billing extended because the customer is not installed yet. And so that has been growing.

And the change between September and December is roughly about $50,000 in monthly recurring revenue increase quarter-over-quarter that was not huge yet. But I think that over time as that grows it could stagger the revenue growth just a bit as think of it more as backlog.

Mike Latimore – Northland Capital Markets

Thanks.

Operator

Thank you. And our next question comes from Mike Crawford from B. Riley & Co. Please go ahead.

Mike Crawford – B. Riley & Company

Thank you. It seem you experienced a lot of success growing revenue with top customers once you ran into them, upselling them with different products, I think growing from 2000% for your top 25 customers in the last two and a half years or so. And I am wondering if your approach is to use the same sales contact to kind of farm existing customers or do you split your sales group into more hunters than more farmers?

Dan Weirich

Very good question. Yes. I actually like the idea of -- you always have a primary point of contact with the customers so that there is a familiarity as well as the level of trust that gets established and then we have support people that basically help to make sure that you do the care and feeding of the customer and keep bringing the opportunities up. So we have a customer success team as well as a account executive and those two people kind of partner together, very similar to the salesforce.com model.

Mike Crawford – B. Riley & Company

Okay, thank you. And then, also I was hoping you could help a little bit more with the math given that contribution margin remains pretty consistent in and around 65%, yet you have this net target of 6% to 9%. So I don't think that you expect services for the new stream to continue to grow exponentially. Are there more items that are being excluded from that contribution margin or is there any -- do you have any further with that math?

Dan Weirich

Yes. We have 81% service margin. And the way you get from 81 down to 63 is there is roughly 18% in our sales and marketing line that is related to billing and customer service. And so that the calculation for contribution margin is just simply our service margin -- customer service and billing. And so, if you take a look at our sales and marketing line and take like 18 points out of that, that's kind of the folks that are working on kind of maintaining the customers and to some extent working on kind of add-ons and upsells when they extend their business relationship with us.

Mike Crawford – B. Riley & Company

Okay, that helps. Thank you. And then, last question relates to international market as you are going to start driving more revenues out of U.K. and to Europe, Hong Kong, Singapore and eventually South America, do you expect similar economics to what we are seeing domestically or slightly lower levels of profitability there?

Dan Weirich

I mean at a -- when you're outside of kind of the subscale size, we think that the economics are very, very similar to what we're reporting here in the United States. The Voicenet business that we acquired has a gross margin of 39% in the month of December compared to the consolidated company with 71%. So, you can just see there that there are two elements there. One is the business is subscale. And two, it's on a third-party platform and third-party kind of everything. So, we are putting in our technology and we will be marketing the services on our platform beginning in February. And we will begin a necessarily long (inaudible) year's migration onto our platform. And so there will be margin expansion there as well as many other kind of areas to expand margin. But if you just were to go and add a new customer in the month of February onto our platform, the margin profile of that customer will be extremely close to the figures that we reported on a consolidated basis today.

Mike Crawford – B. Riley & Company

Great, thank you very much.

Operator

Thank you. And I'm not showing any further questions. I would now like to turn the call back to Vik Verma for any closing remarks.

Vikram Verma

Great. Well, thank you everybody for listening to us and also for all your questions. For reference and convenience, we have posted a transcript of our remarks in the events and presentation section of our investor website at investors.8x8.com.

I look forward to meeting you all in coming months of the upcoming financial conferences and other investor events. Again, thank you. And operator, you can close the call. Thank you.

Operator

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

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