8x8's (EGHT) CEO Vik Verma on Q3 2016 Results - Earnings Call Transcript

| About: 8X8 Inc (EGHT)

8x8, Inc. (NASDAQ:EGHT)

Q3 2016 Earnings Conference Call

January 21, 2016 04:30 PM ET

Executives

Joan Citelli - IR

Vik Verma - CEO

Mary Ellen Genovese - CFO

Analysts

Michael Wong - Needham and Company

George Sutton - Craig Hallum

Nandan Amladi - Deutsche Bank

Amir Rozwadowski - Barclays

Dmitry Netis - William Blair

Mike Latimore - Northland Capital Markets

Joyce Yang - Bank of America

Catharine Trebnick - Dougherty & Company

Mike Crawford - B. Riley

Operator

Good day ladies and gentlemen and welcome to the 8x8 third quarter 2016 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 be given at that time. [Operator Instructions]. As a remainder this conference is being recorded.

I would now like to introduce you host for today's conference Ms. Joan Citelli, 8x8's Director of Investor Relations. Miss Citelli, you may begin.

Joan Citelli

Thank you and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma and our Chief Financial Officer, Mary Ellen Genovese, to discuss our results for 8x8's third fiscal quarter of 2016 ended December 31, 2015. If you have not yet seen today's financial results, the press release is available on the Investor's tab of 8x8's Web site 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 and 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 Factors 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.

Vik Verma

Thank you, Joan and welcome, everyone to 8x8's third quarter of fiscal 2016 earnings call. I will begin a high level summary of our accomplishments during the quarter and then turn the call over to our CFO Mary Ellen Genovese who will cover the financial results and metrics in greater detail.

I am pleased to report another very strong quarter for 8x8 where we continued to see meaningful adoption of our cloud communication services by large businesses. A persistent and growing pipeline of enterprise opportunities and the expansion of our international footprint with initial global deployments of some of our recently announced multinational enterprise customer win. Our total revenue in the third quarter of fiscal 2016 grew 29% year-over-year to $53.2 million. For the 23rd consecutive quarter 8x8 remained profitable on a non-GAAP basis, posting healthy non-GAAP net income of $4.3 million or 8% of revenue.

Service revenue from our mid-market and enterprise customers grew 53% year-over-year and now accounts for 50% of our total service revenue compared with 42% of total service revenue one year ago and 48% in the prior quarter. This is a leading indicator of our ability to not only attract but also rapidly onboard the largest most discerning businesses who have decided to abandoned their costly and cumbersome premise based communications infrastructure systems and PSTN dial tone in favor of our cloud based alternative.

By becoming 8x8 customers these businesses experience productivity gains via our feature rich solutions realize operational advantages by working with a single global provider and enjoy significant cost savings which in some cases adds up to millions of dollars per year as compared to the prior communication systems, and they receive a single predictable bill at the end of each month.

There are four key areas of the business I'd like to provide an update on today. First is the continued progress we are making adding larger businesses to our customer base. New monthly recurring revenue or MRR sold to mid-market and enterprise customers and by our channel sales team increased 94% year-over-year and accounted for 58% of total MRR booked in the quarter compared with 43% of new MRR booked through these sources in the same period last year. All of our sales team performed very well during the quarter including our inside sales SNB team which well primarily focused on sub 50 seats opportunities continues to sell efficiently to larger customers with well over 200 seats.

Examples of noteworthy mid-market customer wins during the quarter by our direct sales team include two large aerospace and defense companies, one signing up for over 1,000 virtual office seats and another for a combination of over 400 virtual office and virtual contact center seats. A leading UK based private equity and investment firm with a 900 virtual office seat deployment, a prominent software-as-a-service finance and billing provider with over 750 seats and a major publisher in the education sector with a combined deployment of over 500 virtual office and virtual contact center seats.

Our partner Insight also brought our several key wins including a regional office for McDonnell Douglas Helicopters, a McDonnell Douglas subsidiary that produces helicopters for commercial use and PhoenixNAP a global IT service provider offering cloud dedicated server, cold location and infrastructure, as a service technology solutions. Other channel wins included SR Labs, a provider of enterprise grade market data and trading technology and Robert Home Medical, a healthcare equipment and service provider in the Washington D.C. metropolitan area, Maryland and Virginia.

Of our top 10 deals this quarter, four were sourced through our direct enterprise sales organization, four came through our channel partners and two came from our UK sales team. Our pipeline of enterprise opportunities remains strong with several proof-of-concept deployments underway a new additional prospects of this magnitude emerging. According to Gartner the mid-market and enterprise segments are forecasted to the see the highest growth going forward at 25% and 40% to 45% respectively.

In addition to MRR bookings from new customers we continue to see meaningful revenue contribution from existing customers who are expanding the size and/or composition of their deployment. For example online lending leaders, Social Finance added 178 virtual office and 135 virtual contact center seats to their existing deployment of 340 seats.

Enterprise, virtualization and storage company Nutanix is also building upon the initial deployment as is Regus who has just put it in order for an additional 357 new locations on top of the original 140 locations announced last quarter. These are all great businesses that are thriving in today's economy and I'm pleased that our services are enabling them to optimize their productivity and growth by giving employees the technology and tools to communicate and collaborate whenever and wherever they are working.

The second key business area I'd like to highlight is the continued effectiveness of our rapid and comprehensive global deployment methodologies. During the quarter we successfully completed a large proof-of-concept deployment of our combined UC and contact center solution for the large multinational aerospace and defense corporation I mentioned earlier.

We also completed initial global deployment of our services at 58 Regus sites and 16 out of approximately 120 international locations of the 7,000 plus employee customer win we referenced last quarter. These global deployments are extremely challenging as there are many processes, policies and regulations far more complex than in the U.S. that must be considered. A unique deployment methodology which is enabling our enterprise customers to quickly put our services to work on a global basis continues to be a key differentiator for 8x8.

A third initiative we continue to invest in is our technology innovation which extends our track record of delivering the industry's most advanced reliable and integrated global cloud communications platform, 8x8 innovative enterprise Communication as a Service solutions delivers the highest quality global voice in the industry packaged in a powerful continuous communication experience from desktop to mobile. These solutions enable companies of all sizes to solve critical business needs and modernize their infrastructure with world-class business communications, contact center solutions, conferencing, collaboration and advanced analytics. With the issuance of two new patents this quarter for a total of 114 awarded patents 8x8 continues to drive its technology leadership position in the cloud telecommunications industry.

We’re differentiating ourselves through the combination of our virtual office and virtual contact center federated architecture along with analytics and other communication applications that run on top of a globally available platform. Our patented Global Reach geo-routing capabilities are integrated pure cloud unified communications and our internal big data environment allows us to continue to offer what to our knowledge is the industry's only end-to-end SLA for service availability and call quality over any network public or private.

We’re developing some exciting new product offerings planned for introduction in the current quarter and beyond. These include our new virtual office web conferencing solution which features a clean modular user interface along with high-definition video and audio and integrate with popular productivity tools to deliver instant continuous communications.

Virtual office enables customers to seamlessly move from instant messaging to a voice call to a multiparty videoconferencing and collaboration section all in one desktop and one mobile application. Other solutions require two or more applications to enable users to escalate from instant messaging to a phone call to web collaboration.

The fourth and final area I would like to highlight today is our global reach initiative. Our work here remains a high priority for the company with our nine international datacenters serving customers in over 140 countries. We have partnered with several global IT service organizations to assist in the deployment of our customers international locations and are working closely with our partners in Australia to deliver our services to the APAC market. In the United Kingdom, we have integrated the 8x8 solutions and DXI sales teams under one 8x8 UK umbrella and I'm very pleased with the traction we're seeing there.

With that, I'll now turn the call over to Mary Ellen who will provide you additional details on our financial results.

Mary Ellen Genovese

Thank you, Vik, and thank you all for joining us on the call today. In my prepared remarks I'll cover highlights from our income statement, key operating metrics for the quarter and a summary of our balance sheet. Finally, I will end with my prepared remarks with an update to our full-year financial outlook.

As Vik mentioned, financial results for our third quarter of fiscal 2016 were very strong with total revenue of 53.2 million and service revenue of $48.9 million, both represent a year-over-year increase of 29%. 50% of our total service revenue is now derived from our mid-market and enterprise customers, and that portion of our revenue grew 53% year-over-year.

GAAP net loss for the quarter was negative 1.7 million or negative $0.02 per share, non-GAAP net income for the quarter was 4.3 million or $0.05 per share representing 8% of revenue. This compares to 4.1 million $0.04 cents per share and 10% of revenue in the same period a year ago. Our GAAP net loss includes a write-off of $640,000 of intangibles related to our legacy Zerigo business.

8x8 acquired Zerigo in order to extend its legacy managed server business of selling virtual private servers and hosted DNS services on a monthly basis. The company seized selling these services to new customers in the third fiscal quarter and year-to-date revenue from existing Zerigo customers with de minimis. GAAP gross margin was unchanged at 72%, from the year ago quarter. Our GAAP gross margin after a one-time charge of 440,000 related to Zerigo, on a non-GAAP basis gross margin improved a 160 basis points from the year ago quarter to 75%.

GAAP service margin remained unchanged year-over-year at 80%. On a non-GAAP basis service margin was 83%, an increase of 190 basis points year-over-year. This increase is directly attributable to the many active programs we have in place with our carriers and vendors to find efficiencies and cost savings. GAAP sales and marketing expenses increased sequentially in the third quarter of fiscal 2016 by approximately $900,000 primarily due to our planned investment in channel enablement, our enterprise sales team and demand generation.

In addition, we also had a one-time charge of $200,000 related to Zerigo. We expect a higher level of sales and marketing expense in our fourth fiscal quarter given to the additional expenses related to the enterprise connect trade show in March, higher commissioned and deployment expenses related to our recent global customer wins. Our GAAP tax benefit for the quarter was $557,000 and our non-GAAP tax benefit was $231,000.

Turning our attention to key operating metrics from the quarter, new monthly recurring revenue or MRR, sold to mid-market and enterprise customers and by our channel sales teams increased 94% year-over-year and now accounted for 58% of our total new MRR booked during the quarter. This compares with 43% in the year-ago period. As Vik mentioned earlier our SMB sales team continues to see good success selling for larger businesses.

In the December quarter new monthly recurring revenue from 1,000 plus MRR deals sold by the SMB team more than doubled from the year ago period. Our land and expand sales strategy continues to generate significant revenue from existing customers. Our new MRR sold to existing customer represents approximately 50% of our total MRR booked during the quarter.

Average revenue per business customer was $369, an increase of 21% compared with the same period a year ago and $9 sequentially. Gross monthly business service revenue churn on an organic basis which excludes DXI was 1.2% compared with 1% in the same period last year. Historically our third fiscal quarter has the highest churn and we expect this to return to our average of 1% or lower in the fourth fiscal quarter.

Cash, cash equivalents and investments were $155 million at December 31, 2015 compared with a $149 million in the previous quarter. Cash flow from operating activities was $8.3 million in the third fiscal quarter and capitalized expenditures including capitalized software were $1.7 million in the quarter or 3% of revenue. During the quarter 8x8 repurchased approximately 66,000 shares of our common stock at an average price of $8.27 per share, under our approved stock repurchase plan.

Since July 2014, the company has repurchased approximately 3.9 million shares of common stock at an average purchase price of $7.83. With an additional 15 million approved by the Board in October 2015 the remaining authorized repurchase amount at December 31 is approximately 19.6 million.

Turning to our full year outlook, we are once again revising our fiscal 2016 revenue outlook upward to a range of 205 million to 207 million which represents a 26% to 27% increase year-over-year, from our previous outlook of 204 million to 206 million. due to the strong growth in our service revenue we are also increasing our guidance for non-GAAP net income as a percentage of revenue to approximately 6% to 7% for the full fiscal year.

That concludes my prepared remarks and I will now turn the call over to Vik.

Vik Verma

Thank you, Mary Ellen. Let me remind you that we remain in the early stages of a tremendous market opportunity with current adoption rates by mid-size and large organization at just 3% worldwide according to Gartner. Needless to say this is a very exciting time in our industry and many customers and service providers alike will benefit from the technological shift to cloud based communications that is now taking place.

With the strength of our core technology, years of experience operating a secure and reliable network and deep familiarity with the requirements of businesses of all sizes 8x8 is well positioned to continue leading the charge as more and more multinational enterprises transition to our solutions.

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

Absolutely. Ladies and gentlemen [Operator Instructions]. And our first question comes from the line of Michael Wong with Needham and Company. Your line is open.

Michael Wong

Nice quarter, just if it's a quick one for you. Nice to see the additional work that you are doing for Regus. Could you talk about this, when do you expect to deploy kind of Regus in its entirety and maybe just walk us through how to think about the number of seats this could potentially represent?

Vik Verma

As I prefer not to go into great detail I mean the key part is Regus is a phenomenal company and they are growing at a fantastic growth rate and so our hope is we hope to never be fully deployed because they will keep growing. The pace at which they are deploying is accelerating for us, it's as I indicated I think we had an order for initially 140 locations and we had deployed 58 locations of that and that was last quarter and this quarter they’ve already given us an order for 350 locations with more to follow. So, don’t want to get into their specifics but again we love our partnership with them, they are a phenomenal partner.

Michael Wong

Okay. And just to clarify again and apologize if this is something I’ve asked before, but of the new -- none -- of the locations that you haven’t deployed yet over Regus, so none of these are impacting a new MRR right?

Mary Ellen Genovese

So we actually know -- they do, so when we get the orders when we recognize the new MRR. So we haven’t booked any more than their orders than the sites that they had given us to deploy.

Michael Wong

Okay, got you. And then just another question for you. Can you talk about -- I mean since obviously last quarter was great from an Ellison win standpoint. How are some of those wins impacting pipeline formation and sales cycles? I mean have you seen any impact already on some of the deals that you are working on? Thanks.

Vik Verma

Yes. That's a great question Michael. Because it's the analogy, I think I used at your conference is with technology adoption it's almost like a herd of cattle stampeding. First two, three, four cows go and then right after that a whole herd follows and I think we are heading in that direction because it is quite interesting when you look at the type of customer wins we reported.

I think when you started covering us a couple of years ago a thousand customer win was a huge deal in the cloud industry. As you are noticing, this quarter we are reporting some of the most well-known names in the industry that are adopting cloud and they are going cloud first. So I think what's starting to happen is this becoming more and more familiar, it's becoming more and more their go to technology which is causing our pipeline to get bigger and bigger.

Michael Wong

Thanks, so much. Appreciate it guys.

Operator

Thank you. And our next question comes from the line of George Sutton with Craig Hallum. Your line is open.

George Sutton

Thank you. Vik when I first started covering you, a 50 seats deal was very big win, so it's fun to watch this really get going. I wanted to spend a little more time on what you have turned the tip to the iceberg relative to the mid-market in particular, how -- if you had to put a perfect crystal ball out there for the next couple of years, how quickly do you see this developing as you look at sort of the size of your pipeline, how quickly does that develop in your view versus necessarily the deals that we’re hearing about?

Vik Verma

I mean it's developing faster than I though and by the way I wish I had a perfect crystal ball there was a lottery from 1.5 billion that I would have longed to be able to predict. But I think that we have kind of characterized it, I think when we talked about two quarters ago I think I alluded to the fact that there was a pipeline of 10 whale opportunities and my goal over the entire fiscal year was to close one or two.

We closed three in the first quarter alone right after making that statement and we’re in proof concepts with several others as I alluded in my script and so we're starting to see the pipeline definitely expand and there is some an interesting characteristic, global companies are increasingly looking for one vendor to go to because if you think about it, if you have one vendor you get one predicable phone bill for all your international locations, you get four digit dialing, you get the ability to text, chat, do a level of collaboration with video conferencing, document sharing, et cetera and you start to feel like a company and in some of these global multinational companies it could be millions of dollars of saving in hard savings as opposed to just synergist savings.

So I think you're going to see as more and more enterprises adoptive this system you're going to see demand accelerate because it's no longer that risky technology, it becomes, why wouldn't you go cloud. So it's becoming more and more cloud first. I mean it’s just happening now and that's why I hate to predict uptick and stuff like that and tipping points because I’ve always found that they're great when you look at it from the rearview mirror.

But generally I feel pretty good about the fact that the market is now moving much more towards the midmarket enterprise and we're very fortunate due to the luck and due to the hard work of some very-very smart people. Our team help position us for where the puck was going to be not where the puck was and we’re positioned for the mid-market enterprise because of couple years of investment and had work.

George Sutton

That's great and one question for Mary Ellen on -- and I would meet some naivety, so with a large deal like Regus or anyone you're turning over to a third party implementation shop, how is that being booked? Is that being booked, is the implementation work direct with that customer and the partner or does it flow through you? I am just trying to understand when we see scale on your cost structure from these larger deals.

Mary Ellen Genovese

Yes, in this particular case Regus and with the other customer with the 7,000 plus employees, we are contracting directly with third party teams throughout the world to help us deploy. So that's a relationship that we have with those deployment agents. So we get billed and then in many cases we actually invoice our customers for the deployment. So that's something that we're in control of.

Now there maybe cases in the future where the channel partners or other partners actually have a direct relationship with the customer and then they take over and that's a relationship between the customer and third party, but right now its third party. Now Regus will actually start deploying on their own, we're training them, so they'll start deploying on their own. We're doing it now but they'll be trained to do it on their own.

George Sutton

And as that all occurs, that's when your incremental margins starts to pick up more quickly, is that reasonable?

Mary Ellen Genovese

Yes, I think that's reasonable. Remember our deployment services now are in sales and marketing so we'll start to see some leverage on that in the future.

Operator

Thank you. And our next question comes from the line of Nandan Amladi with Deutsche Bank. Your line is open.

Nandan Amladi

So Mary Ellen, you addressed this a little bit in your prepared remarks, what are some of the factors that drive churn both in the SMB and more interestingly in the mid-market and large enterprise and why do they vary so much through the year?

Mary Ellen Genovese

So there is a little bit of seasonality in our business in the third fiscal quarter and the reason being is that we do have a conservative approach to calculating churn. So we look at the revenue generated from the customer last quarter versus the revenue generated for the customer this quarter, not including any add-ons, so it’s just gross.

And in the third fiscal quarter, our usage is down here in the U.S. to a lower extent but in the UK to a larger extent because more of revenue comes from usage in our 8x8 solutions business Voicenet if you will, so churn is a big factor in our third fiscal quarter. In addition to that in the year you might see some small business customers going out of business or involuntary churn as we clean up and make sure that only the paying customers move forward with us into the new fiscal year.

Nandan Amladi

Thank you and one other questions for Vik if I am might, as you start to sell these larger and larger deals, how do you delineate which specific customers you're calling on between you're going direct and/or reseller going perhaps to the same customer?

Vik Verma

I think it comes down to, as you know most of our activity on the direct is still inbound. So if a large enterprise reaches out to us directly and/or a channel brings an enterprise to us, so everything is kind of happening with people approaching us this by the way represented a great opportunity for us because we're only now getting to the point where over the next few months we're going to start focusing on outbound because we think the market is ready for outbound, market demand generation, but so far it depends on how the customer gets to us.

If a customer gets to us through -- directly and contacts us and text us or comes into our Web site and asks for an inquiry that's typically approach by direct sales team, if the customer contacts a channel and then the channel introduces us to them, it supposed through the channel sales team. So that's essentially how it's almost self-selecting and then overtime as I said we're getting ready to start doing more of outbound demand generation because I think we're starting to get the level of traction, we have the case studies, we have the creditability that we can now go out and get to customers on our own.

Operator

Thank you. And our next question comes from the line of Amir Rozwadowski with Barclays, your line is open.

Amir Rozwadowski

Thank you very much. Building on part of the prior question in terms of churn, so it sounds like Mary Ellen there is no real change in terms of how do you see churn to that outside from a seasonal perspective going forward?

Mary Ellen Genovese

That's actually true because what I didn't mentioned before, the holidays in the UK is a significant event, I mean we're pretty much shutdown in the last two weeks in December and since usage is a bigger part of their revenue that hasn't impact on how much revenue we get from that particular customer in our third fiscal quarter. So I think you're going to see that trend if you go back to Q3 of fiscal 2015 or 2014, you'd have seen a churn at 1.5%, last year in the third quarter was our highest, was at 1% and then this 1.2%. So it's more or less, it's more a factor of the usage, especially as it relates to the holiday for us Thanksgiving and Christmas and then UK the last two weeks of December, they're normally shutdown. So I don't see that's as a -- that’s going to happen every third fiscal quarter. So we should see our numbers in our fourth fiscal quarter go back down to 1% or lower. There isn't anything that I'm concerned about as far as churns goes.

Amir Rozwadowski

Excellent and then one follow up if I may, we're continuing to see steady growth in your non-GAAP service gross margins and I know, you had talked on a prior question about how do you think about the leverage in the business model going forward? How should we think about it from non-GAAP service gross margin perspective, I mean it seems as though you're continuing to see that tick up, you're obviously starting to see larger and larger wins, coming through the pipeline and execution on those lines, where can that trajectory ultimately go?

Mary Ellen Genovese

Yes, that's a good question. I mean we're really pleased with the 83%, 190 basis points improvement from our last prior quarter. We've really focused, we have -- at the heart of it we're a frugal [ph] company and we really focused on where we can cut cost and at the same time we want to invest in the areas where we think we're going to get a nice payback. So, I don't know how high that can go and remember that we don't have our larger the whales that we had announced in our second fiscal quarter, really isn't much revenue in this quarter relating to them at all.

For Regus this quarter was mostly planned in quarter if you will and we've just started to deploy, we have 58 sites done, by the end of next quarter, we'll have significantly more sites done. So we'll start to see more of that revenue start to flow through in our fourth fiscal quarter. But I do believe that we have some opportunities still, far since our new acquisition of DXI, their margins are 70%, so we think that when we start working with them, we'll be able to improve them significantly, which will have an impact on our consolidated numbers.

So I can't put a number on it, but I do think that we'll be able to continue to find some leverage.

Amir Rozwadowski

Fantastic. Thank you very much for the incremental color.

Operator

Thank you. Our next question comes from the line of Dmitry Netis with William Blair. Your line is now open.

Dmitry Netis

Great, thank you. Excellent quarter, guys. Couple of technical and then maybe a bigger picture, on the very impressive inorganic 94% new MRR booking number from the mid-market, is there any way to take out DXI and see what the organic number might look like, I'm sure it's pretty impressive too, but you've given it to us last quarter, I'm just curious what it is this quarter as well?

Mary Ellen Genovese

Did you want that for the total service revenue or are you looking at that for --?

Dmitry Netis

For mid-market.

Mary Ellen Genovese

For the mid-market, that was 66% without DXI.

Dmitry Netis

Great, excellent, thank you. And then on the ARPU, it was up $9, what's the bigger play there, is it just the larger customers you bringing in, is it the wider service offering that you have maybe with the attach rates going up on the analytic side and anything you can speak to that as well as maybe that's new Q1 launch you have, where you going to have that web conferencing solution, what should we expect ARPU due at that time frame, it would be helpful too.

Mary Ellen Genovese

Okay. It's hard to predict in the future. We did have -- on an organic basis we did actually have an increase of $13 sequentially, so that's very, very nice and a lot have to do of course with the new customers that we're bringing in and we're able to deploy them quicker and quicker, so we're getting the revenue benefit of that. In addition we're starting to bundle more and more packages, so that enable us to charge more on a monthly recurring revenue basis because it's include in the couple of -- not only the unlimited extension but we're throw in the VO [ph] analytics but then we can charge more. So we're finding more and more customers are opting for those bundle, and suppose to buying on ala card basis.

Vik Verma

And Dmitry one more point on this one, this is the part that I'm most excited about. This quarter I mean as you recall and the way I approach the world, I think in terms of single to doubles, et cetera. which is of course sweet spot, the 1k, to let's just say 50k type MRR deals and then the giant whales are the home runs that you keep hitting every once in a while. This quarter with no whales, as you can see across the board a very-very impressive new MRR growth, very impressive ARPU growth.

So, that's the kind of way we want to build a business, almost this portfolio management, we have our SMB team firing on all cylinders and they are able to close the sub-50 deals, we’re starting to see our sweet spot starting to really grow which now represents 58% of our new MRR growing organically and the 66% to 70% odd range and then on top of that every once in a while you have a whale or two that boosts that growth rate.

So you are building this very broad base portfolio business where each of these things play a role in basically making sure that you have steady growth.

Dmitry Netis

Right. That's a good point actually, that's pretty noticeable that you didn’t have any of the whales but still did quite impressively well this quarter. [Multiple Speakers]. It's the market today. Okay and then the last kind of higher level question, as you have brought up that 25% growth for the entire kind of UKs segment and some of the industry estimates out there, is that how you are guys thinking about your future growth for the next several years and while certainly maybe outperforming the market at this stage, but is that the right number to think about for your growth rate going forward for the next two to three years?

Vik Verma

I mean it's a good starting point, we have not provided any guidance for FY17, but look as you pointed out I think you and I had that conversation, organic growth continues to tick up, which is the right thing from our perspective and we continue to close larger and larger deals. So I think that's a reasonable approximation but we haven’t provided any guidance, so I don’t want to give you forward-looking statements about FY17 or beyond, but we feel good about our growth rates.

Mary Ellen Genovese

And apply the growth rate to service revenue because we really we have a great app for the desktop and a great app to the mobile devices and so we want to encourage our customers to not necessarily have to have a desktop right. So service will apply those percentages to service revenue only, not to old revenue.

Dmitry Netis

Right and then just to kind of follow up on that organic growth it was 22% was it this quarter?

Mary Ellen Genovese

23% on service revenue.

Dmitry Netis

Got it. Very good. Keep up the good work. Thank you.

Mary Ellen Genovese

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore

Great, I think prior year and also F1 [ph] quarter there. I guess just to follow up on the just kind of market outlook 25% rate I guess are you been added as an organic rate or does that put some acquisitions, because that would be the rate?

Vik Verma

Yes. So going back to the first comment that I made to Dmitry. I mean I gave you Garters numbers about the fact. The main point I wanted to get across directionally is that larger enterprises -- mid-market and larger enterprises are going faster than smaller businesses, so a company which is more biased towards larger enterprises is inherently poised the benefit from it.

I'm not giving guidance for next quarter just yet. And so I think we really feel good about where we are I think you are starting to see the traction in the business, but we provide guidance next quarter and as I said we feel very good about our business.

Mike Latimore

Yes, that make sense. And then on the channel any color on what percent of the bookings are coming through the channel and/or how fast this is growing or anything like that.

Vik Verma

Channel is phenomenal, I mean they are growing, right now problem to fastest of all our various go to market strategies. I believe this quarter four out of our top 10 deals were channel, four were direct here and two were UK direct and I guess yes two were UK direct, I believe. So we are starting to see Channel become a more and more appreciable part of our business and as you recall we only have the handful of channel partners, over the last few years we've done addition by subtraction where we had reduced the number of channel partners and then focused on them and we are seeing great traction.

You saw some of the results we had in CDW last quarter and this quarter you start to see some of the results you are having with Insight. So you are starting to see broad based our channel starting to perform and we think it's going to be a huge a growth driver for us.

Mike Latimore

And just a last question on the service gross margin, did you do contact center sales and I guess some of these whales as well, do those help or hurt or are they neutral to gross margin?

Mary Ellen Genovese

Well contact center surely helps, so that more and more contact center that's going to help. But we’re doing pretty good on our virtual office as well again we’re running in really tight shift and we’re very-very efficient in what we do, we love to negotiate with our largest suppliers and the more and more business we pull through the carriers, more and more leverage we have to negotiate price.

So I'm very pleased with what we have accomplished this year-to-date from our cost savings perspective and we are going to continue, that's just kind of who we are right, that's just kind of the skills that we have and it's important to us to generate a profit and in order to invest in sales and marketing and to continue to grow our company we’re saving money elsewhere in the company.

Mike Latimore

Yes, correct. Thanks a lot.

Operator

Thank you. Our next question comes from the line of Nikolai Beloff with Bank of America. Your line is open.

Joyce Yang

Thank you. Hi, this is Joyce Yang for Nikolai. Congratulations on the great quarter guys. I just wanted to ask about the competition in the large deals and what you are seeing there and also if you are seeing anything relating to the Microsoft Skype for business impacting their market fleet?

Vik Verma

Yes some of the large once primarily the people we see is Cisco, Avaya and Legacy on premise vendors, every once in a while we will see different cloud companies, but it's primarily displacement of the legacy vendors. We have not seen Microsoft in at least our target segment, we play in the mid-market and small to mid-enterprise, I think as Microsoft is not playing there per say and our understanding is initially there more of a domestic play versus trying to be an international play and we are much more global and we're increasingly seeing global companies which could be anywhere from 200 people to 7,000, 8,000, 10,000 type people that have multiple offices and our ability to deploy globally and then seamlessly connect together and do it all over the top on a public Internet I think is a huge differentiator for us.

Joyce Yang

Got it and thank you, one more for follow-up, Mary, I want to quickly ask if you quick kind of breakdown for us how the mid-market MRR flows into the mid-market revenue, what are the puts and takes there?

Mary Ellen Genovese

Okay, the mid-market customers so the non-whales, we're starting to deploy very-very quickly. We have a methodology, so we can for the smaller customer -- the smaller mid-market customer we're able to do with no touch or very little touch guided on-boarding. So it's all over the phone. So we can turn our revenue, our book-to-bill in as quick as two weeks, the longest lead time here is really just the porting of numbers, if we have to port numbers. So for the mid-market accounts we're really starting to operate like a machine and we're starting to deploy quicker and quicker and able to recognize revenue quicker and quicker. We like to recognize revenue within 30 days of when we booked that order.

Vik Verma

And then it ranges so the larger accounts could be anywhere from two months to four months and then enterprise can go up to six months. I think it's consistent with what we have said before.

Operator

Thank you. Our next question comes from the line of Catharine Trebnick with Dougherty & Company. Your line is open.

Catharine Trebnick

Vik can you describe a little bit your competitive -- the competition in terms of your global reach? Are you seeing different competitors in different regions and how does that stack up against maybe your smaller wins in the North America regions? Thanks.

Vik Verma

Yes, I know it is different. So the larger -- the global ones we will see different people than we will for just your domestic or even just domestic in UK, so we've got different types of competitors, typically for the larger deals you see on premise people like Cisco, Avaya. And as I said our ability and I think again this is school of hard knocks. Our ability with this geo-locating algorithm so you can get low latency calls around the world, putting together global infrastructure, the ability to get local numbers, the ability to provide local support, that’s starting to be a nontrivial differentiator.

It's a work in progress, but I think that is definitely making us very unique because if you are any company of any size that has more than one or two locations in the U.S. and you're outside the U.S., the ability to stitch everything together in one seamless communications platform that is one-stop shop from call center to videoconferencing to audio, I think becomes extremely compelling and so I think that where we're starting to see nontrivial traction for us.

Catharine Trebnick

My other question is, would you say like if you have a global customer would they maybe perhaps have a different PBX system in the UK versus Australia and is that an advantage then for the fact that they would come to over the top player like yourself?

Vik Verma

Absolutely, you could not have written my script better, that is exactly what is the differentiator. What happens with these companies is they have a PBX with one provider and say Australia or Singapore or UK than a totally different PBX from a different provider here and then 8x8 comes in and says we’ll do the same for you everywhere, right.

One company, one bill, one vendor, one throat to choke, so to speak and that becomes extremely compelling and it opens up the next paradigm of productivity because now you can have a global view and I also want to emphasize this federated architecture we’ve come up with which is truly follow the sun customer support model because in essence you can do the administration at the global corporate level, but you have local media servers all over the world so you can have very optimum call quality and very low latency communication.

So that architecture that we have put in not just for our call center but also for our PBX I think is a huge competitive differentiator. And I think as you’ve heard me say and I apologize if I sound very animated, we're a company of techie geeks and we take pride in our technology. And I think it's starting to be noticed by our customers.

Operator

Thank you. And our next question comes from the line of Greg Burns with Sidoti & Company. Your line is open. Mr. Burns, if can you could check your mute button?

And our next question will come from the line of Mike Crawford with B. Riley. Your line is open.

Mike Crawford

With the large whale and elephant type accounts that you're facing and it sounds like you're pretty happy with the expanding pipeline there, you are in some proofs of concept, and are these largely solo competitions where they are testing you out or are these more like bake offs where they might also be testing Cisco or Avaya something like that as well?

Vik Verma

Both.

Mike Crawford

Combinations?

Vik Verma

Yes, combinations. Let me make sure we are clear. There are some that we've got -- we're in several proof of concepts, some of them are -- they’re basically told us, okay you look like the right one let’s just make sure that this all makes sense and it's kind of a process to kind of finalize the requirements and test, but the solutions make total sense because neither of us wants to proceed forward until we have completed closure on whether it's a right solution. In other it’s a bake off.

So what we have -- it is quite interesting to see how the number of whale opportunities has increased quite dramatically and proof of concept is a part of most of these sale cycle and we actually love it because that becomes a way for us to show -- that's when you get past the hype, that’s when you can actually show what your stuff does and how it is better and so we love and encourage customers to do proof of concepts.

Mike Crawford

Okay. Thank you and then that the next question is in two parts. So when you are moving to this more of outbound demand generation push, how do you think that's going to affect your subscriber acquisition cost and also do you think that's going to enable you to continue this phenomenon growth in MRR, which I think for mid-market enterprise companies has grown from like 700,000 a month to maybe 1.3 million in month now.

Vik Verma

So I'll answer it, I won't comment on specifics on the numbers because we don't comment on new MRR numbers. I do appreciate that comment phenomenon because that is a term I used for our team, I mean we can do better by the way, but I'm very pleased, this is some very good people working really, really hard and lot a of the stuff that they're doing is really making a difference and so we're very pleased with that.

So going back to your -- I think the comment in terms of MRR growth, I think the key thing from our perspective is we believe that right now we're still an inbound company, so if you think about it, we literally sit here, waiting for people to call us or getting into our Web site of our channel, we're the ultimate, we wait for the phone to ring, I mean, so to speak. Sometimes the phone rings electronically, sometime it does through e-mail, sometime a channel partner calls us.

Now we're starting to get a profile of the right kind of customer, we had always anticipated doing outbound marketing, I just held up on it because we didn't want to do it too quickly and then find out we've burned money without the kind of adequate return, but it's starting to feel like we should be able to go out and do that now and it is anticipated in the guidance that we have provided you, that expenses is anticipated in the guidance that we have provided you for the full year

Mary Ellen Genovese

Yes, I think as far as the cost of acquisitions, at first as we're starting up, it will be a little bit higher, but I think over time it's going to be much lower because it's going to be higher quality customer that we're going to find.

Mike Crawford

Great, thank you.

Operator

Thank you. And this does conclude today's Q&A session. I would now like to turn the call back over to Mr. Vik Verma for closing remarks.

Vik Verma

Thank you all for listening in on today's call and we look forward to providing continued updates on our progress at our upcoming investor conferences and meetings. Again, thank you very much.

Operator

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

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