8X8's (EGHT) CEO Vikram Verma On Q4 2014 Results - Earnings Call Transcript

May.21.14 | About: 8X8 Inc (EGHT)

8X8 Inc (NASDAQ:EGHT)

Q4 2014 Earnings Conference Call

May 21, 2014, 04:30 PM ET

Executives

Joan Citelli - Director, Corporate Communications

Vikram Verma - Chief Executive Officer

Daniel Weirich - Chief Financial Officer

Analysts

Michael Turrin - Needham & Company

Amir Rozwadowski - Barclays

Nandan Amladi - Deutsche Bank

Greg Burns - Sidoti and Company

Ragh Sarathy - Dougherty & Company

Dmitry Netis - William Blair

Nikolay Beliov - Bank of America

Mike Latimore - Northland Capital

George Sutton - Craig-Hallum

Operator

Good day, ladies and gentlemen, and welcome to the 8x8 Incorporated fourth quarter 2014 earnings conference call. (Operator Instructions) I would like to hand the conference over to, Joan Citelli, Director of Corporate Communications. Ma'am, 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 fourth fiscal quarter of 2014 ended March 31, 2014. 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 limitations, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions, which reflect something other than historical fact are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor sections of our Annual Report on Form 10-K, in our Quarterly Reports on Form 10-Q and in our other SEC filings and company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you.

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

Vikram Verma

Thanks, Joan, and welcome everyone to 8x8's fourth quarter and fiscal 2014 yearend earnings call. I'd like to begin by reviewing some of our high level financial results and business activities for the quarter. Following my remarks, our CFO, Dan Weirich, will discuss the results and metrics in much greater detail. We will then be happy to answer any questions that you may have for us today.

As you can see from our Q4 results, this has been another strong quarter for 8x8. Total revenue for the fourth quarter of fiscal 2014 grew 29% year-over-year to a record $35.8 million and non-GAAP net income for the quarter was $3.3 million or 9% of revenue.

This is the 16th consecutive quarter in which 8x8 has generated non-GAAP net income alongside increasing revenue. The number of new services sold during the quarter as well as the percentage of new monthly recurring revenue sold by our channel and mid-market teams were also record setting, as they have been throughout fiscal 2014.

This record fourth quarter capped a very productive and eventful year for the company, as we posted both strong revenue growth and non-GAAP net income quarter after quarter, while successfully executing the strategic initiatives that further solidified our leadership position in this rapidly growing market.

First, we have made great strides expanding into the mid-market, as illustrated by our growth in the segment over the previous four quarters. While others target the mid-market segment, 8x8 has proven to be a leader in this space and a provider of choice for these customers. In Q4, our channel and mid-market sales grew approximately 47% from a year ago and comprised 39% of our new monthly recurring revenue.

We continue to see very good traction moving up market as more and more mid-sized and distributed enterprise businesses are transitioning to cloud-based communication services and recognizing the importance of the reliability, security, international scalability and breadth of service 8x8 provides.

Second, we delivered several product innovations to better service our mid-market customers, including branch office and web switchboard capabilities for distributed enterprise customers, and out-of-the-box integration with complementary service providers such as Zendesk, NetSuite, Teleopti and KnoahSoft.

We continue to see more mid-market customers looking for a single provider to deliver a broad range of communication capabilities that include cloud-based telephony, contact center, mobile apps and web conferencing. 8x8's comprehensive offering is ideally targeted to meet these needs, and we believe this is one of the primary competitive advantages 8x8 holds in the market.

Third, we established global capabilities in Europe and Asia and completed our first acquisition of an overseas cloud services provider. After completing our London data center build out in the December quarter, we went live with our Hong Kong data center in the March quarter.

We also established a complete operational footprint in Europe with the acquisition of Voicenet Solutions, now rebranded as 8x8 Solutions. The integration of Voicenet is largely complete, and we began selling the full range of our unified communication and collaboration service this past February.

Earlier this year, we announced a significant win, Belfast City Airport that was brought on by our U.K. channel partner and we're looking forward to further extending the strong channel operations already in place in the U.K.

Fourth, in fiscal 2014, we successfully raised $126 million of capital through a secondary stock offering. Our cash, cash equivalent and investments now totaled a $178 million, up from $52 million at the end of the prior year. Together with our history of positive cash flow, we have a solid financial footing from which we can continue to scale and expand.

With substantial progress on these four strategic initiatives over the past year, our mid-market expansion, product innovation, global expansion and capital raise, I am confident that 8x8 is better positioned than ever to take full advantage of the evolution we see in the market with our combined Virtual Office Unified Communications and Virtual Contact Center solutions.

As we continue to expand, both domestically and internationally in fiscal 2015, we plan to increase revenue by approximately 25% and maintain our non-GAAP net income as a percentage of revenue in the high single-digit range, which we have previously defined as 6% to 9%.

As Infonetics Research recently declared in its 2014 North American Business VoIP Services Scorecard, and I quote, 8x8 is the decisive leader in the hosted VoIP market, building on its solid financial position over the past two-plus years and on its continued focus on service enhancements and geographic expansion.

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.

Daniel Weirich

Thank you, Vik. We reported a 29% increase in revenue for the fourth quarter of fiscal 2014. Revenue from business customers increased 31% year-over-year and represented more than 99% of total revenue. Service and gross margins were strong, with service margin at 79% and gross margin at 70%.

Fiscal 2014 revenue increased 24% compared to fiscal 2013 with gross margin increasing 71% in fiscal 2014 from 69% in fiscal 2013. Contribution margin from business customers, defined as service margin less billing and customer service expense, was strong at 64% in the March quarter compared with 64% in the same period last year.

Non-GAAP net income for the quarter was $3.3 million compared with $3.8 million in the same period a year ago. Non-GAAP net income per diluted share was $0.04 for the quarter and non-GAAP net income as a percentage of revenue was 9% in the quarter. Full year fiscal 2014 non-GAAP net income was $14.1 million or $0.17 per share compared to $14.7 million or $0.20 per share in fiscal 2013.

Monthly business service revenue churn in the quarter was 1.2% compared with 1.2% in the same period a year ago and 1.5% in the prior quarter. Full year revenue churn declined to 1.3% in fiscal 2014 compared to 1.7% in fiscal 2013. Business customer average monthly revenue per customer was $287, a $31 increase over the same period a year ago.

The average number of subscribed services for new business customer increased to 19.6 from 18.1, an 8% year-over-year increase. This trend is occurring due to the increased adoption of our cloud-based services by larger customers. This figure increased to 18.9 for all of fiscal 2014 compared with 15.9 at fiscal 2013.

Channel and mid-market sales comprised a record 39% of new monthly recurring service revenue sold in the fourth quarter. For the full year, we saw new monthly recurring revenue sold by our channel and mid-market sales team increase to 34% of total sales in fiscal 2014 compared to 25% in the prior year.

As we have become more successful moving up market, our time to install these larger customers is increasing. While our small business customers install in less than 30 days with service revenue recognition beginning within a month of the sale, our mid-market and distributed enterprise customers take between two and six months to install on average.

As an example, there are currently approximately 75 signed customers, totaling roughly $3 million in annualized recurring revenue that we are not yet billing, as their deployment have not been completed.

Capital expenditures for the year were $772,000, 2.2% of revenue and $2.9 million for the full year, also 2.2% of revenue. Our cash, cash equivalents and investments increased to $178 million during the March quarter from $174 million in the prior quarter and $52 million at March 31, 2013.

Cash, cash equivalents and investments, excluding our November 2013 financing and our acquisition in the U.K., increased $19 million in fiscal 2014. As Vik indicated, we remain committed to profitable growth of approximately 25%, and anticipate full year 2015 non-GAAP net income as a percentage of revenue will remain in the high single-digit range, which we define as 6% to 9% of revenue.

Beginning in the first quarter of fiscal 2015, we will only be providing the following business customer selected operating statistics. Total business customers, average monthly service revenue per business customer and monthly business service revenue churn.

We believe these are the most important statistics in our model by which our progress should be measured, as we move our market statistics such as growth, business customer addition and monthly business customer churn, are no longer relevant, because they place equal weight on a customer that subscribes to one service and a customer that subscribes to 500 services.

In addition, we began bundling our services in the fourth quarter, and number of services will become less relevant metric to monitor our progress in the future.

That concludes my prepared remarks. And I now turn the call back over to Vik.

Vikram Verma

Thank you, Dan. In summary, our record fourth quarter capped a very eventful year for the company. We continue to have strong revenue growth in earnings, while successfully executing strategic growth initiatives, such as the expansion of our mid-market customer base, the establishment of our global footprint in Europe and Asia, and acquisition in the United Kingdom and a $126 million capital raise.

We have all the elements in place, including compelling service differentiation, an international presence and a financial war chest to further capture increasing worldwide market share for cloud communications and collaboration services.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Huang from Needham & Company.

Michael Turrin - Needham & Company

This is Michael Turrin sitting in for Michael Huang. Hope you're doing well. Obviously, you're seeing great growth in the mid-market here. I just want to ask, is there anything one-time or seasonal in nature driving that growth or should we expect this level of growth to continue?

Daniel Weirich

No. There is nothing in our model that is one-time or seasonal.

Michael Turrin - Needham & Company

And then, it'd be great, if you could provide an update on virtual desktop, how that might be trending versus expectations?

Vikram Verma

As you know, VDI is not core. I mean our primary product offering is Virtual Contact Center and Virtual Office. We are doing VDI through selected strategic partners. We are reselling our services and white labeling our services. So we are not modeling any and anticipating any appreciable revenue from that for the foreseeable future.

Michael Turrin - Needham & Company

Just one more. Can you provide an update on the competitive environment you're seeing in some of the pricing?

Vikram Verma

We do see competition, but our pricing has generally remained unchanged, and we feel very confident. I think as you can see, we are now actually providing forward guidance on revenue of approximately 25% for the year. And this is despite the fact that a significant percentage of our mid-market customers or a significant percentage of our revenue is now coming from mid-market customers. So for us, I think we are feeling pretty good about the competitive environment and we have not seen any appreciable pricing pressure.

Operator

Our next question comes from the line of Amir Rozwadowski from Barclays.

Amir Rozwadowski - Barclays

Vik, I just wanted to dovetail on that last comment you made in terms of the 25% year-over-year growth, expected in fiscal 2015. If we think about the trajectory of that sort of through the course of the year, it seems as though you folks have been gaining sort of or at least adoption has been improving, as sort of receptivity for cloud-based systems has picked up. Should we expect that to be fairly linear in terms of our growth or do you expect sort of a much more a back-half weighted year? I mean how should we think about that progression?

Daniel Weirich

We expect more of it is weighted to the back half. We've made the initial investments beginning in the October, November timeframe, when we communicated to investors of bringing our estimates down to the 6% to 9% of revenue from a non-GAAP perspective. And we're starting to see kind of a fruit to that investment in very strong sales, very strong pipeline.

And as we've noted for the first time, we're beginning to accumulate a bit of a backlog and these customers just install in a month or a week, they install in two to six months. And so this is tremendous visibility, and as Vik mentioned, this is the first time we're providing forward-looking guidance regarding revenue, and we've got a tremendous amount of confidence behind that, but it's more second half where more of the acceleration will occur.

Amir Rozwadowski - Barclays

And thinking about the acceleration, I mean you folks had spoken about the fact that you know you're investing in the business to help drive some of that acceleration going forward. Just trying to understand the thought process around that sort of high single-digit non-GAAP net income margin? And when we should start to think about some possibilities of returning to sort of prior net margin levels and generating leverage off of some of those investments?

Vikram Verma

I mean our contribution margin, which we define as service margin less customer service and billing expenses, so you could think of it as free cash flow on a customer, 64% of revenue. So there is enormous leverage in the model. Frankly, we were a little bit ahead of our expectations from a non-GAAP perspective this quarter, at the 9% figure primarily, because we kind of exceeded our internal expectations on gross margin in the period.

We have, as we stated in the past, an aggressive sales and marketing and product headcount investments as well as R&D investments predominantly in personnel. And so just the only guidance we're providing is throughout this fiscal year is continued in the 6% to 9% range. Most likely we'll not be linear throughout the year, and the main driver on that is our ability to achieve our internal hiring plans, and with things such as R&D, it doesn't always go as planned on some of the more difficult hire.

So there could be some kind of up and down in the margin throughout the year, but the primary thing that we view is are the core metrics of the business, which would service margin, gross margin, contribution margin, are those items kind of increasing or kind of maintaining the levels that could result in meaningful free cash flow at kind of later stages in the business model. But we look at the model with 10%-ish market penetration and our pipeline is enormous, it's never been better. And it's just not at a point today that we're going to target exactly a date that we will be back to kind of historical profitability level.

Operator

Our next question comes from the line of Nandan Amladi from Deutsche Bank.

Nandan Amladi - Deutsche Bank

So Vik, you embarked on a more aggressive growth strategy late last year. Dan mentioned that you have a pretty strong backlog of about $3 million in recurring revenue that's waiting to be deployed. Are you happy with the pace of additions, since you kept this new approach and how does that 75 customer, $3 million a year, compared to say the year-ago period?

Vikram Verma

So let's address it in two steps. One, Dan, do you want to just give him a little bit how much the backlog has changed on that 75 customer?

Daniel Weirich

Yes. So Nandan, I'll give you the figure from six months ago, because one year ago we frankly had none. So six months ago, it was in the neighborhood of $0.75 million of backlog. So it's gone from $0.75 million to $3 million of backlog. And if you look, the customer size is 75 customers, and so we're at $3,500 in recurring revenue on average each. So these are very nice size kind of smack dab in the mid-market type customers.

Vikram Verma

And then and just generally, I mean I think Dan said it quite well. We are seeing the pace of adoption in the mid-market definitely be as strong as we've ever seen in the history of the company. In Q4, 39% of new monthly recurring revenue came from the mid-market in general. So that's pretty significant. That number has gone 47% from a year-ago period. And so as you continue to look at what we are seeing, larger and larger customers, and we are talking about older-guard type customers, customers that you wouldn't traditionally see as migrating to the cloud, starting to migrate to the cloud.

You'll see mid-western companies that maybe doing chemicals or something else like that, that basically will come onboard and say, okay, we are looking for technology that can help us outsource all of our telephony, all of our contact center solutions, because we don't want to deal with the day-to-day problems. And we have issues with disaster recovery and all of the other things. So we're trying to see the overall cloud market for telephony and contact centers become main stream. And just the time from the original enquiry to the time of sale, it has definitely started to shrink quite materially for us.

Nandan Amladi - Deutsche Bank

And a quick follow-up, the emphasis on channel sales versus international expansion and way that you've allocated the sales and marketing dollars for fiscal '15?

Vikram Verma

So twofolds, I mean we are continuing to -- so, as you know, we invest in direct as well as channel. Our international subsidiary, this is the U.K. solutions, 8x8 Solutions in the U.K., they sell both direct and through channel. We try to be evenhanded, because we never want to be a hostage to a particular sales avenue. And again, we're seeing a significant growth in all, I mean both our direct sales for mid-market and channel sales for mid-market are growing very, very significantly.

Operator

Our next question comes from the line of Greg Burns from Sidoti and Company.

Greg Burns - Sidoti and Company

Just a question on the last comment in your prepared remarks about bundling services beginning in the fourth quarter. Can you just give us a little bit more color on what that refers to? And how that changes, how you're going to market with your services going forward?

Daniel Weirich

We sell a wide variety of different services and it could be services from a seat in our Virtual Office product or contact center seat to toll free numbers to fax numbers to buy communication solution. So what we've done is started to roll some of these into a one service plan, whereas prior to this most recent quarter they were all line item, kind of on an invoice, and they were bought all a la carte.

And this is just a bundling element to our solution that you can go deeper than what I just mentioned where it could be bundled with a contact center seat, just bundled totally into a Virtual Office or PBX seat. And it's not really changing so much like the go-to-market, but it's changing just some of the communication from our sales force to perspective customers.

And so what it's done is the figure of a service is over time will start to become kind of less relevant. And many of the metrics that we have provided for years and years and years kind of started at a times when the business was being invented. And we've just gotten to where there is just a few metrics that are the primary drivers of business and those are the metrics that we're going to be disclosing on a go-forward basis, which will begin in the first quarter of fiscal 2015, which we announced in July.

Greg Burns - Sidoti and Company

So going forward a little different, I guess, definition of whether service becomes less meaningful as new definitions. So does that apply that ARPUs go higher, if you're bundling more into one each, we see ARPUs peak the higher per customer going forward?

Daniel Weirich

You mean the ARPU figure, which we have in the quarter we just reported is $287 million, whether we're doing bundling or not doing bundling, the ARPU would still be the $287 million, because the definition of that is like what is the average subscription-based invoice of a customer, the $287 million.

And our mid-market customers on average pay in the neighborhood of $4,000 a month on average, represents 39% of the total service revenue of the company. It's growing at a much faster rate than our SMB base. And it's been the primary driver of our, that kind of the delta in the $287 million from the prior year period.

Greg Burns - Sidoti and Company

And lastly, the acquisition cost in the quarter I think was the lowest I've see since I've been covering the company. Is there anything in particular driving that? And should we expect that to get back to, I guess normal levels in the coming quarters?

Daniel Weirich

I mean we're extremely efficient in a quarter every time with collecting. Typically, our strongest quarter is always the March quarter. Almost all the cost are variable, so its not like there is fixed cost, that bigger quarters kind of drive the leverage, but everything was kind of firing on all cylinders in the quarter and as you can see performed a little bit better. The subsidy which you can see on the product margin was little bit better and we are just kind of more effective across the board.

Operator

And our next question comes from the line of Ragh Sarathy from Dougherty & Company.

Ragh Sarathy - Dougherty & Company

So two questions from my end. And so Dan, from the ARPU side, in the first three quarters we have seen about $5 to $7 sequential increase at this last quarter, clearly twice that amount. I was wondering if you could give us some color around that that you have a larger customer growing wide or what drove nearly twice the sequential increase we saw. And then second part of the question is the 25% revenue growth, how should you think about ARPU growth in that overall growth rate that you're projecting?

Daniel Weirich

We increased ARPU $13 sequential between $5 to $7 of that increase is related to incorporating a full quarter of the U.K. acquisition, though we picked up December in the prior quarter and picked a full quarter in this most recent period. The average customer in the U.K. is $500 to $600 a month, so little bit in the range of double what kind of legacy 8x8 customer base is. So that was a bit of the driver.

On the go-forward basis, we definitely think that it's a metric we're going to continue to report. It's a very important metric and historically been in kind of $5-ish range. And it's a metric that we're not going to give much guidance on. One, it's just hard for us to tell you on like a quarterly basis, on an annual basis, it's a little bit easier to tell.

And I mean you can just see that we've got sitting in backlog right now, 75 customers that are $35,000 each. And kind of how we do in mid-market sales is going to be the big driver on that. But we think we've got a long, long ways to go on this on that kind of a multi-year period.

Ragh Sarathy - Dougherty & Company

So on an annual basis, is there a reason why you shouldn't increase at least $20, $25 scheme when you move top market?

Daniel Weirich

I mean, we've been consistently putting up roughly the $5 on an, just organic basis, and we don't see any reason that that would be changing.

Ragh Sarathy - Dougherty & Company

And then my second question is on the average number of services subscribed from a new customer, you had very strong growth, 20% in the first three quarters. There is a bit of a deceleration in the current quarter of about 8%. Can you give us some color on whether that that's kind of what you're referring to the backlog? So I was wondering why those have got a deceleration there.

Daniel Weirich

Are you referring to the average number of subscribed services for new business customer?

Ragh Sarathy - Dougherty & Company

Yes.

Daniel Weirich

I mean one of that is what I just mentioned, we started rolling out bundling this quarter. So that is one component of it. But this has nothing to do with this backlog I am mentioning. So for example, some of these customers that we haven't installed yet and are not live, all of them are represented in our sales figure, so the number of services sold, the average number of services that businesses booked in the quarter.

Ragh Sarathy - Dougherty & Company

So the backlog is reflected in that figure 19.6 that you referred to?

Daniel Weirich

Yes. Some of that, yes. Some of the backlog is represented by deals that were sold in the quarter.

Vikram Verma

And Raghavan, I want to emphasize that as Dan said that the change has more to do with bundling than anything else.

Ragh Sarathy - Dougherty & Company

And then final question is on, a lot of this statistics of the metrics you disclosed are geared towards the new customers. So Vik, maybe you can give us some color around in the cross-sell or maybe upsell into the existing customers, as you move into mid-market. For instance, what percentage of the MRR is actually coming from existing customers and how is that trending? How is that an opportunity?

Vikram Verma

I think you've picked up on a lot of interesting things, Rag. As you pointed out, this is the first time that we have provided forward guidance on revenue. And you've also picked up on I think one key thing, which is despite the fact that we are mid-market and channel represents a significant percentage of our new monthly recurring revenue, we are still confident in forecasting a 25% revenue growth rate. And so this is literally from the time of deployment it's changing for one month to two to six months and despite that we're able to show you a 25% or predict approximately a 25% growth rate.

The second element of that is mid-market customers tend to, and I think we have shared this before, they tend to buy, upsell the significant portion, more than our smaller business customers. So we see that the overall upsell opportunity will be increasing.

So there are opportunities to mind that existing base, particularly as we keep increasing the overall mid-market customer base. And so the opportunity to upsell, provide additional services, is a key element of our strategy, which is why we are creating this comprehensive suite of products, because we want to insure that we can get more and more wallet share.

One interesting trend that we re seeing, which I think is pretty classic when early market start to become more mainstream is more and more of our customers, mid-market, in particular, are looking for one throat to choke for a whole suite of communication and collaboration services.

They will come to us and say, we want cloud telephony, then they will come back and say, hey, you guys do also this contact center stuff on the cloud. Then they will come back and say, do you do Virtual Meeting on the cloud, can we do web conferencing, can we do mobile. And it's an opportunity to keep upselling to the extent that we now have a dedicated team that goes after our mid-market customers to make sure that we solve all of their respected problems, make sure that they have a single point of contact and then come up with an opportunity to upsell all additional services to them.

Operator

Our next question comes from the line of Dmitry Netis from William Blair.

Dmitry Netis - William Blair

The question, I guess just a clarification, backward looking clarification, and I am trying to reconcile the growth numbers you put up, there is a lot of 29% and 31% numbers given out. But I look at the topline it was 24% growth, kind of hard-coded numbers. So can you explain where the 29% is coming from, I might have just missed it so?

Daniel Weirich

Dmitry, so 29% is quarterly. So fourth quarter '14 over fourth quarter '13 and 24% is full year.

Dmitry Netis - William Blair

On a year-over-year basis you grew 24% topline?

Daniel Weirich

For the entire year. And then 29% is Q4 to Q4, it's just three months period.

Dmitry Netis - William Blair

I'm not seeing that for some reasons, but I'll follow-up with you offline.

Vikram Verma

I mean just to make sure we're on the same page. March quarter of 2013 to March quarter of 2014 grew 29%. All of 2013 to all of 2014 grew 24%. So the fourth quarter grew 29% compared to the fourth quarter of the previous year. The overall year grew 24% compared to the overall full previous year.

Dmitry Netis - William Blair

I see what you mean. I'm just not seeing that in my model for some reason. I'll follow-up with you offline, maybe there is problem there. But anyhow, I guess, I wanted to dig in more on the Voicenet part of the business. Just how much of that was in the revenue this quarter? And whether that exceeded or met your expectations, if you could comment on that?

Daniel Weirich

So on the U.K. acquisitions we mentioned last quarter we're not going to break that out on a go forward basis. The business performed well. It was pretty much just in line with expectations. Integrations are going pretty well. And we're extremely positive on it and we've got many multi-country deployments and having that asset is very, very, very good for us.

Dmitry Netis - William Blair

Are you kind of growing this sort of the run rate that you had seen when you picked up that assets, which if I do the math, it's about $2.2 million a quarter or so. Is that sort of the run rate you're seeing today or have you exceeded that run rate?

Daniel Weirich

The U.K. business as we disclosed in December when we acquired the company, we had a conference call and disclosed about 13% growth rate, this is what the U.K. was growing at. And so the growth rate doesn't accelerate like overnight. But we are definitely working to get that growth rate up. We've got essentially everything in place to get that moving and started marketing on 8x8's platform that we have in London in February. So it's looking very good there.

Dmitry Netis - William Blair

So does that mean then you've swapped out the BroadSoft call controller with or SoftSwitch with 8x8 ones and onboarding customers on your own organic platform. Is that what that basically means?

Daniel Weirich

The existing customers or I guess the legacy Voicenet customers, unfortunately it's not as simple as swapping them out overnight. But new customers that are procured in the U.K. or kind of U.S. sales force sell something that have that U.K. deployment, it's going on the 8x8 platform that we have in London, existing customers kind of pre-February this year on the Voicenet business or in the legacy BroadSoft platform that we effectively -- from our perspective, is end of life. But we will continue to service them on our platform.

Vikram Verma

And starting February, as Dan said, all our new sales are on the 8x8 platform and that's fully operational down there.

Dmitry Netis - William Blair

And it's the same feature said as you have here in the U.S. or they have some sort of limits in terms of features you're providing there?

Vikram Verma

Similar features. That was whole idea. If you remember the strategic rationale, we were looking for a highly confident sales and support organization with the ability to basically leverage our infrastructure that we have previously put in the U.K. And so it's identical. They use pounds. By the way, their idea of pound is actually the money as opposed to that hash symbol, but short of that it's pretty similar.

Dmitry Netis - William Blair

And then as I dig in on the gross margin side, when you picked it up it was somewhere in the 40s, how has that progressed? Have that gross margin been improving? Has it helped the results in this quarter since you had a full quarter of that now or hurt? I mean how do I see the gross margin trajectory there?

Daniel Weirich

Yes. I mean the business in the U.K., as we disclosed last quarter, in the month of December generated 39% gross margin compared to the total company, that quarter was 71%. We have moved it up a bit very quickly. We definitely have got a lot of work to do, to get it up to kind of 8x8's combined consolidated average, but we definitely think that we got a path to have comparable margins in each location.

Dmitry Netis - William Blair

Do you guys have a target where you want to be by at the end of the year for example?

Vikram Verma

No. I mean as we mentioned we're not breaking our figures on this. It's something that we see no reason why anyone in the world we can't be operating the business at comparable margins.

Dmitry Netis - William Blair

And then last question would be on these smashups you guys talked about the, Zendesk, NetSuite. I would imagine these relationships have been -- and KnoahSoft being another one. These relationships has been probably not over this past quarter, but you've had for sometime. And how do we quantify what percentage of the new customers maybe coming off of these relationships. Is there a way to do something like that or are you willing to provide us some metric to kind of track that mashup refill go-to-market scheme?

Daniel Weirich

We don't break that out. As you know Zendesk, we started during the December quarter and NetSuite is more recent, we've got our recent press release of KnoahSoft, et cetera. The key part I think you should get is it helps us get more and more of a comprehensive offering where we're able to go to mid-market customers in particular that have Zendesk platform, but then can have ours, and we both help each other, same thing with NetSuite, same thing with KnoahSoft, et cetera. So across the board, we're finding a lot more stickiness as we get more and more combined with these back-office business productivity tools.

Ultimately, what you think about our system, particularly for the mid-market, we're about business productivity enhancements. And so the more you tightly integrate it to other peoples comparable and complementary back-office systems, the more value you provide to your customer, and the more value you provide to your customer, the more opportunities you have to upsell your systems as well as maintain stickiness and lower churn. So that's part of the key reasons why we're doing these.

Dmitry Netis - William Blair

And then you're getting a lot of leads out of these relationships, I would assume, is that a fair assumption that's helping your mid-market growth?

Vikram Verma

It's a fair assumption, that we would not have done that without the fact that we anticipate and are getting a reasonable amount of leads from these guys.

Operator

Our next question comes from the line of Nikolay Beliov from Bank of America.

Nikolay Beliov - Bank of America

The first question I had is I might have missed that, but can you give us a sense, some color around the guidance of 25%, the revenue growth for next year, in terms of are you expecting subscription revenues to grow faster than product revenues, which has accelerated last quarter? And also in terms of subscription revenues, is it more of a unit growth story or we should see some uptick in ASP per subscriber?

Daniel Weirich

The revenue growth of approximately 25% is total revenue growth. We actually have to allocate some revenue between [ph] plum service over to product. So we just look at it as a whole, because just from a GAAP basis it's kind of match together. So we frankly had never talked about kind of the delta in the two. But overall in a perfect world, we wouldn't even be providing product.

We're starting to see some customers that use their iPhone or android phone with our applications and not even purchasing product. I wish that everyone would do that, but that's not happening today. But I would just think of it as overall revenue growth of approximately 25%.

And on the ASP question, I mean we're seeing a good traction on our contact center product. The ASP on the contact center product is roughly 5x what it is on our Virtual Office product and presuming that we have greater and greater success with that product, it will be a big driver in ASP expansion. And the way that we really differentiate is mid-market customers that are purchasing both our Virtual Office and our Virtual Contact Center product together.

Nikolay Beliov - Bank of America

And staying on this line of product, on the contact center is that business growing faster than the voice business?

Vikram Verma

We don't break that out, but I guess all our businesses are growing at very nice clip.

Nikolay Beliov - Bank of America

And my last question is around your international strategy and expansion, obviously you bought Voicenet in the U.K., you've been talking about data centers in Latin America and Asia. Are those on the ground yet? And do you have feet on the street of those geographies yet or it's too early?

Vikram Verma

So in Asia we have our data center installed, operational, et cetera. On Latin America, we found a way to support some of our near-term needs leveraging our East Coast data centers, so waiting on that one. But yes, international strategy is working well for us. As you can see we managed to get a data center operational in London, brought Voicenet over to our data center and do that all essentially in one quarter. And Voicenet, which is now a 8x8 Solution is doing very well for us.

And so you can expect to see a similar type of strategy evolved in Asia-Pacific, where we got the data center fully operational and we are looking for the right partner. But again, I think as you've kind of gotten to know me, I'm very much about making sure that when you do an acquisition you really have a plan and you have tight way to integrate it, so that happens without a hit.

So that I think in essence, you're able to continue to maintain your trajectory of growth, you're able to maintain your non-GAAP net income projections and you're able to swallow the right acquisition and then turn them into a very high performing asset. So we've got a pretty significant pipeline, but we always make a list, we check it twice, and we then make sure we have a plan.

Operator

Our next question comes from the line of Mike Latimore from Northland Capital.

Mike Latimore - Northland Capital

The channel and mid-market that you kind of report that group together. How is the channel doing relative to that group, is it faster or slower than the overall mid-market?

Vikram Verma

So we don't break it up, but channel has grown very, very significantly for us. And we're seeing -- we don't break it out, but we are quite pleased with the pace that the channel is growing.

Mike Latimore - Northland Capital

And then in terms of new services sold, did that metric grow on an organic basis sequentially?

Daniel Weirich

Yes.

Mike Latimore - Northland Capital

And then you mentioned, a lot of interest, in say mobile endpoints, I guess any clarity on where are we in term of percent of endpoints that are mobile or software notice?

Vikram Verma

About 25%.

Mike Latimore - Northland Capital

And then just curious, you're moving up market. I was wondering, where was the largest customer you won in the quarter in terms of seats?

Daniel Weirich

I think we disclosed it. But its north of -- I mean the seat wins that we're having now are used to be like a Bluebird, if we had a 500 seat win, and now it's like they are quite common. But we didn't have -- to an earlier question, I think there was a question that we have like a gigantic deal that kind of skewed some numbers, and no, we don't have like 10,000 seat wins that are skewing any numbers.

Vikram Verma

And what you're seeing is just a consistently larger and larger number of deals that are from the mid-market segment. And so as you can -- mid-market and channel comprise 39% of new monthly recurring revenue for Q4.

Operator

And our final question for today comes from the line of George Sutton from Craig-Hallum.

George Sutton - Craig-Hallum

Just two questions and I don't think were really addressed. What are the gating factors to the growth that you see, so you talk 25%, what keeps that from being 30%? What keeps that from being an even a higher rate? You did mentioned the deployment from a mid-market perspective, is there anything else we should be aware of?

Vikram Verma

That's a great question. I actually am a big fan of balanced and profitability growth. I think from the day we kind of first started to know each other, I keep using words like profitable growth. So you could always grow more I think. But I like the idea, it's going to maintaining a non-GAAP net income in the 6% to 9% range and still having very, very solid growth, because than that almost makes it the Goldilocks, right. 25% growth, while maintaining solid profitability.

I think this is a good environment for us, because we are seeing several of our competitors that have basically had a strategy of losing a ridiculous amount of money in pursuit of growth at all cost. Well, they have to kind of rethink some of those strategies. And so from our perspective, I think what we are doing is very, very solid in sense we can continue to grow well. We can maintain our non-GAAP net income in the 6% to 9% and keep on doing this, and little by little I think we continue to distance ourselves from everybody else.

George Sutton - Craig-Hallum

And one other curiosity I had, when I think of your mid-market distribution capabilities today versus say six months and 12 months ago, how have those changed specifically? And then when I think of the SMB specific focus, my sense is that really hasn't changed. Is that a fair assumption?

Vikram Verma

What do you mean by distribution?

George Sutton - Craig-Hallum

Number of sales people, touch-points from channel partners. However, you think of your ability to get to the potential customers?

Vikram Verma

So I mean our mid-market, one, we don't breakout the number of sales people. We said that we are obviously growing our mid-market sales people, but what we are seeing is the overall productivity of our sales people in the mid-market has definitely increased.

SMB, we continue to see good growth in SMB. And I think Dan said it very well, we're in a very interesting position. All our segments are growing at a pretty healthy rate. Some are growing obviously faster than others. Mid-market and channel are showing the most growth, but SMB is continuing to grow at a reasonable rate as well.

Operator

And now, I would like to turn the conference back to Vik Verma for any concluding comments.

Vikram Verma

Dan has one more comment. Go ahead, Dan.

Daniel Weirich

There was a question earlier on the growth rate to the prior year. I'd just like to remind everyone, we disposed off a business on September 30, 2013. We filed an 8-K on October 4, 2013, that has all of the detailed financial statements of the disposed business.

And possibly the question on the growth rate is, is that the disposed revenues, are they included in the figures on some peoples models. And so you can pull up that 8-K, but I'll just give you the figures. A year ago there was $835,000 in revenue in the fourth quarter that we had disposed off, so it's been removed from the financial statements. And on a full year basis, in fiscal 2013 it's $3,828,000, and that's potentially the confusion from earlier on the call.

Vikram Verma

Thank you, Dan. Well, folks, in summary, our record fourth quarter capped a very eventful year for the company. We feel very, very pleased with what we've been able to accomplish and we look forward to a very strong 2015.

Thank you again, everybody, for listening to our presentation today. I look forward to seeing you all in coming months at upcoming financial conferences and other industry events. Thank you very much.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a good day.

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