8x8's (EGHT) CEO Vik Verma on Q4 2016 Results - Earnings Call Transcript

| About: 8X8 Inc (EGHT)

8X8 Inc (NASDAQ:EGHT)

Q4 2016 Earnings Conference Call

May 19, 2016 16:30 P.M. ET

Executives

Joan Citelli - Director, IR

Vikram Verma - CEO

Mary Ellen Genovese - CFO

Analysts

Nandan Amladi - Deutsche Bank

George Sutton - Craig-Hallum

Dmitry Netis - William Blair

Amir Rozwadowski - Barclays

Unidentified Analyst - Bank of America

Mike Latimore - Northland Capital Markets

Jack Rohkohl - Dougherty & Company

Mike Crawford - B. Riley & Company

Greg Burns - Sidoti & Company

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2016 8x8, Inc. 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 reminder today's program is being recorded.

I would now like to introduce your host for today's program Joan Citelli, Director of Investor Relations. Please go ahead.

Joan Citelli

Thank you operator 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 8x8's fourth quarter and fiscal 2016 financial results for the period ended March 31, 2016. The earnings press release which was issued today after market closed is available on the Investor's 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 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.

Vikram Verma

Thank you Joan and welcome everyone to 8x8's fourth quarter and fiscal 2016 earnings conference call. 8x8 posted an outstanding fourth quarter of fiscal 2016 with a 32% year-over-year increase in revenue to $57.3 million. Service revenue from mid-market and enterprise customers increased 54% year-over-year. Mid-market and enterprise customers represented over 50% of 8x8's total service revenue. I am happy to report that for the first time in the company’s history revenue from our mid-market and enterprise customers exceeded revenue from our SMB customers.

For the 24th consecutive quarter, 8x8 remained profitable on a non-GAAP basis with non-GAAP net income of $3.2 million or 6% of revenue. These results capped an exceptional and noteworthy year for 8x8. We not only exceeded top line revenue expectations while maintaining profitability, we also demonstrated our ability to make early inroads in the global enterprise cloud communications market. For fiscal 2016 total revenue increased 29% year-over-year to a record 209 million while services revenue grew 30%. Non-GAAP net income was 15 million or 7% of revenue.

Throughout the year we witnessed a growing pipeline of enterprise accounts while simultaneously expanding our SMB and mid-market customer base. We also continued to see increasing contract value of existing accounts with measurable add on service revenue. As larger global organizations with mission critical communication needs begin transitioning to the cloud, we find ourselves optimally positioned to meet the requirements of the selective and complex customers with our differentiated enterprise communications as a service offering. This is a direct result of the core investments we have made in our technology, quality of service, security, reliability, and global capability as part of a multi-year strategic focus to move up market.

We have built a truly global hyper-scalable cloud unified communications and contact center platform that is powering the communications infrastructure worldwide for businesses of all sizes. Whether you are an SMB operating out of one location or a large multinational enterprise, our multitenant services platform which has housed in nine international datacenters, enables businesses to operate as one unified entity while delivering the highest quality of service in the industry.

These capabilities are becoming increasingly important as more and more globally distributed enterprises move their communication infrastructure to the cloud. Unlike many cloud business services, our distributed platform enables users to utilize services from our datacenters worldwide automatically based on their current location without any user intervention.

I’d now like to provide an update on our progress in the fourth fiscal quarter on the key initiatives we had in place to ensure our continued leadership in the enterprise cloud communications industry. These initiatives include; one, increasing the adoption of our solutions by mid-market and enterprise customers; two, advancing our technology and service offerings; three, successfully deploying our global enterprise customers and four, enhancing our global reach capabilities.

First, to give you an idea of the growing adoption we are seeing from mid-market and enterprise segment, the fourth quarter of fiscal 2016 was by far our most successful quarter yet relative to new bookings. Revenues sold to mid-market and enterprise customers and by channel sales teams grew 208% and accounted for 66% of the total new monthly recurring revenues sold in the quarter. Beyond next week, Regus and the 8000 seat customer win from the second quarter of fiscal 2016, we closed some additional so called whale deals in the fourth quarter of fiscal 2016. These included previously announced Movement Mortgage, a fast growing, privately held mortgage bank with an initial deployment of 4500 Virtual Office seats and Auto Europe, an international car rental service provider with a deployment of 600 Virtual Office and 300 Virtual Contact Center seats.

Today I am pleased to announce another major customer win our team brought on board in the fourth quarter fiscal quarter. GameStop, a global multi-channel video game, consumer electronics, and wireless services retailer. GameStop came to 8x8 through our partner Simplify following a very competitive and selective process that included a comprehensive proof of concept. They selected 8x8 for a variety of reasons, including our superior global capabilities, our integrated full featured contact center solution, and our advanced analytics package with a custom 80 hours per use at the retail store level. The combined Virtual Office, Virtual Contact Center deployment for GameStop is being used across 4100 U.S. locations and the company's corporate headquarters. This customer win is an excellent example of the value large enterprises attached to having an integrated contact center solution within their communications infrastructure.

You may recall that earlier in fiscal 2016 I have indicated we had a pipeline of approximately 10 very large global opportunities and that we would be pleased to close two of these by the end of the fiscal year. As it turns out, we actually closed six. Additional smaller enterprise wins from the fourth quarter included a 2000 feet deployment for one of the largest networks of dental care providers in the United States and 1000 plus seat deployment for a global diversified producer of high technology specialty chemical products.

Six of our top 10 deals in the quarter purchased our combined Virtual Office and Virtual Contact Center solution. This technology advantage continues to serve as a strong differentiator for 8x8 and a compelling value proposition for customers looking to simplify their communication infrastructure with best in class cloud based communications, collaboration, and customer engagement capabilities delivered over a single integrated platform. Of the top 10 deals signed during the quarter, five came through our channel partners, four were brought in by our direct sales force, and one came from our 8x8 solutions team in the UK.

Our indirect channel continues to play a significant and growing role in our overall sales strategy and our model of working closely with a select number of partners to provide them with the necessary knowledge, tools, and training is producing increasingly favorable results particularly with larger customers. The fourth fiscal quarter was also strong in expansion revenue from existing customers. We booked and deployed over 1000 additional Virtual Office seats for our customer NetSuite, approximately 500 additional Virtual Office seats for Veracode, over 400 seats for Home Point Financial, and 350 combined Virtual Office and Virtual Contact Center seats for SPS Commerce. This kind of activity is indicative of how our customers are growing with us either by expanding the size of their current deployment or adding new types of services. Of our top 10 expansion deals, five were Virtual Contact Center seats, three were from Virtual Office, and two were for both Virtual Office and Virtual Contact Center.

Moving on to our second priority, the continued expansion and enhancement of our integrated communication software suite, our R&D and engineering teams have been working on some innovative new services and the features that we unveiled in March at Enterprise Connect Conference. But first, our new Virtual Office meetings product is a completely redesigned, high definition video conferencing and collaboration solution that enables secure, continuous communication from any device, anywhere in the world. What this means is that the user can schedule meeting, initiate instant collaboration on the fly, and transition IM conversations into a meeting without having to open a separate application, just a single click from the desktop or mobile app. This latest generation of Virtual Office meeting incorporates industry leading video technology that continuously optimizes video streams for unmatched fidelity over variable networks and devices.

Virtual Office meeting also enables mobile users to collaborate immersively with high definition video and share content from their mobile devices via cloud applications such as Dropbox, Box [ph], iCloud, and Google Drive. We also unveiled next generation capabilities for our Virtual Contact Center solution including innovative cloud native quality management, powerful analytics that monitor and improve the customer journey, and a pre-built CRM integration tool that allows contact center managers to configure and tailor the agent and customer experience without requiring professional services. These enhancements offer a high level of integration and flexibility that enables even the smallest of contact centers to enjoy improved customer engagement and agent productivity benefit that were previously available only to large contact centers at a much higher cost.

Our R&D priorities for fiscal 2017 include further enhancing the business value of our solutions with deeper analytics and line of business application and integrating additional collaboration tools within our platform to provide customers with the most comprehensive and seamless global communications experience available. The third area, I'd like to address is the progress we’ve made with our enterprise customer deployments. NetSuite continues to grow with us and to date we have deployed over 3000 seats in the United States and Canada, nearly 700 in Australia and the Philippines, and over 200 in the UK. Additional deployments are being planned for Canada, the Philippines, Czech Republic, Uruguay, Singapore.

For our 8000 seat customer we have deployed 1450 seats across 29 sites including the United States, Australia, Hong Kong, Japan, and nine counties in EMEA and are planning an additional 97 international locations. We are also installing a Virtual Contact Center solution for this customer's call center agents in the U.S., India, and China. Regus as you may recall has a footprint of 3000 locations in 900 cities and a 120 countries. To date we have deployed 128 locations in the United States and Canada and eight UK locations and are into solution design base for over 200 Virtual Contact Center seats in 18 countries. We’re approximately 20% complete with Auto Europe's deployment of nearly 600 Virtual Office seats and over 300 Virtual Contact Center seats. We expect this initial deployment to be completed over the next 8 to 10 weeks.

I am extremely pleased with the quality and speed of our customer deployment and want to thank our employees for all of their hard work in this area. Our proficiency here is another tangible benefit of our technology ownership. We are constantly improving the performance of our software and not solely relying on horsepower from new hardware. We are developing our own proprietary tools to expedite customer implementations and isolate issues and constructing scalable methodologies to deploy customers quickly and successfully. We have also just appointed Jeff Romano, the seasoned global services executive from companies such as Model N, Birst, Saba, and Navis to the newly created role of SVP of Global Service and Support.

Moving on to our fourth strategic priority, our global reach initiative, we have been broadening our presence in service delivery capabilities to support our customers who are currently operating in 114 countries. We now have 27 international carriers, emergency calling services in 21 countries, local phone numbers in 83 countries, international toll free numbers in 122 countries, and two global and 15 regional end point distributors. We also had launch plans in place for additional datacenters and media hubs in at least three more strategic locations throughout the world.

8x8 has the industry's largest global footprint with local dial-in numbers and nine existing datacenters serving customers on six continents enabling low network latency and the best possible voice and video quality for a truly mobile and distributed workforce. Not only do we provide enterprise cloud communication solutions such as softphone, IM/Chat, global directory presence mobility and video conferencing and international calling services, we also enabled extension to extension dial-in capabilities with a continuous communication experience to effectively collaborate from anywhere in the world.

In summary fiscal 2016 was a very busy and productive year for 8x8. We are not only seeing growing adoption of our solutions by businesses of all sizes, we are also gaining increasing recognition for our achievements by top tier market research firms including Gartner's Magic Quadrant for both unified communications as a service and contact center as a service and IHS Infonetics who recently ranked 8x8 in the number one position in its annual cloud UC service provider North America scorecard report for the third consecutive year.

8x8 is paving the way for the transition of all businesses that we will inevitably be making to cloud communications. We have built a solid and profitable business developing and delivering the industry's most comprehensive suite of secure, reliable, and integrated global cloud communications solutions. Our mission for fiscal 2017 is to continue to execute and build upon this momentum. With that I will turn the call over to Mary Ellen for a more detailed discussion of our financial results and our outlook for fiscal 2017.

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 my prepared remarks with an update to our full-year financial outlook.

As Vik indicated, 8x8 posted excellent fiscal 2016 fourth quarter and full year results with revenue that exceeded expectations, continued profitability for 24 consecutive quarters on a non-GAAP basis, and outstanding performance by our mid-market and center sales team. Total revenue for the revenue for the fourth quarter of fiscal 2016 grew 32% year-over-year, 27% organically, to $57.3 million. Service revenue grew 30% year-over-year, 25% organically compared with 23% organic growth in our fourth fiscal quarter of 2015.

Non-GAAP net income for the fourth fiscal quarter was $3.2 million or $0.03 per share representing 6% of revenue compared with $4.9 million in the same period a year ago. The decline in non-GAAP net income year-over-year is the result of planned investment in sales and marketing to execute on our strategy of moving up market. These investments are accelerating our revenue growth especially in the mid-market and enterprise segments of the market.

For the fourth fiscal quarter, GAAP gross margin was 72% compared with 73% in the same period last year. Our non-GAAP gross margins remained unchanged from the year ago quarter at 74%. GAAP service margins was unchanged year-over-year at 81%. On a non-GAAP basis service margin increased a 100 basis points to 83% compared with 82% in the fourth quarter of fiscal 2015. GAAP sales and marketing expenses increased sequentially in the fourth quarter of fiscal 2016 by approximately $3.7 million primarily due to an increase in benefits as we restart FICA in the new calendar year. And our planned investments in industry conferences such as Enterprise Connect, higher channel and in-house commission due to strong sales performance in the quarter, deployment expenses related to our recent global customer wins, and our continued proof of concepts in the enterprise segment.

For the full year total revenue increased 29% year-over-year to $209.3 million surpassing our guidance of 26% to 27% revenue growth and service revenue grew 30% year-over-year. Organically both total revenue and service revenue for fiscal 2016 grew 23% year-over-year. Fiscal 2016 non-GAAP net income was $15 million or $0.16 per share represented 7% of revenue. This was at the high-end of our non-GAAP net income margin guidance for fiscal 2016 of 6% to 7% of revenue.

Fiscal 2016 GAAP net loss was $5.1 million or negative $0.06 per share. GAAP gross margin for the full year was 73% compared with 72% in fiscal 2015. Non-GAAP gross margin improved to 74% in fiscal 2016 from 73% in fiscal 2015. GAAP service margins in fiscal 2016 was 81% compared with 80% in the same period last year, and non-GAAP service margins grew to 83% compared with 81% in the same year ago period. Product margin was negative 18% compared with 12% in fiscal 2015.

Turning our attention to the key operating metrics for the quarter, as Vik mentioned earlier this was 8x8's best quarter yet in terms of mid-market and enterprise bookings. In the fourth quarter of fiscal 2016 new monthly recurring revenue sold to mid-market and enterprise customers and by channel sales teams grew 208% year-over-year compared with a 94% increase last quarter and a 35% increase in the same period last year. 66% of our new monthly recurring revenue sold in the quarter of fiscal 2016 came from these customers compared with 58% last quarter and 40% in the year ago period.

Our service revenue from mid-market and enterprise customers in our fourth fiscal quarter increased 54% year-over-year compared with a 34% year-over-year increase in the fourth quarter of fiscal 2015. Our mid-market and enterprise customers now represents over 50% of 8x8's total service revenue compared with 43% of service revenue in the year-ago quarter.

To elaborate further on this important metrics, more than half of the company's service revenue and 66% of the company's new multi-recurring revenue is coming from a segment of our customer base which has a lifetime value of approximately 35 times that of an SMB customer. And this portion of our revenue is growing at a rate well above industry forecast. Our land and expand sales strategy continues to generate significant revenue from existing customers with monthly recurring revenues sold to existing customers accounting for roughly 50% of all new monthly recurrent revenue booked during the quarter.

Average revenue per customer across our entire customer base grew 20% year-over-year to $385 and $16 sequentially. Gross monthly business service churn on an organic basis was 0.4% compared with 0.5% in the same period last year. Cash, cash equivalents, and investments were 163 million at March 31, 2016 compared with 177 million at the end of fiscal 2015.

Cash flow from operating activities was $8.2 million in the fourth fiscal quarter and capital expenditures including capitalized software were $2.4 million in the quarter or 4% of revenue. For the full year, cash flow from operating activities was $23.6 million compared with $21.2 million in fiscal 2015. Capital expenditures including capitalized software was $7 million or 3% of revenue in fiscal 2016 compared with $6.6 million or 4% of revenue in fiscal 2015. In fiscal 2016 8x8 lead purchased approximately 1.4 million shares of our common stock at an average price of $8.02 per share under our approved stock repurchase plan. The remaining authorized lead purchase amount at March 31, 2016 is approximately $19.6 million.

Moving onto our guidance for fiscal 2017, we expect full year revenue in the range of $249 million to $253 million which represents a 19% to 21% year-over-year increase. We expect our product revenue to be flat year-over-year and our organic service revenue growth for the year to be comparable with fiscal 2016. We expect our full year non-GAAP net income in the range of $16 million to $20 million which represents non-GAAP net income as a percentage of revenue of 6.5% to 8%.

When building the fiscal 2017 model, I would like you to consider the following factors; first, if you recall we recognized approximately $1.5 million of revenue from an accelerated technology license payment in the first quarter of fiscal 2016 and revenue from that source ceased after that quarter. Two, our product revenue which historically has grown in the high single-digit range, grew more than 20% in fiscal 2016 largely benefiting from some of the large deals we closed during that period. We are expecting an increase in adoption of our mobile and soft clients in fiscal 2017, and therefore projecting flat product revenue year-over-year.

With respect to our non-GAAP net income guidance, we plan to continue to invest in R&D and sales and marketing in fiscal 2017 to maintain the lead we’ve established in our industry and further penetrate the market for cloud communications, focusing on the very attractive mid-market and enterprise segment. We anticipate these investments to be front-end loaded and expect operating margin to improve in the back half of this fiscal year. That concludes my prepared remarks and I will now the turn the call over to Vik.

Vikram Verma

Thank you, Mary Ellen. In closing we had a very strong fiscal 2016, thanks to the diligence and dedication of our U.S., UK, Romania, Canadian, and Australian teams now more than thousand strong and growing. As well as the support and confidence of our customers who are entrusting 8x8 with their mission critical communication requirements. We are excited and energized by the market trends and industry dynamics that have emerged in the cloud communication sector over the past 12 months. And are looking forward to partnering with more and more businesses to provide them with the communications and collaboration tools they will need to succeed in the 21st century. 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 Nandan Amladi from Deutsche Bank, your question please.

Nandan Amladi

Hi, good afternoon. Thanks for taking my question. So Vik, you said the 208% increase in the mid-market also 66% of the -- market, how was the split between the bookings by sales team, I know you gave us the number of large deals that were brought in but if you can give us a sense for how the bookings are actually split up?

Vikram Verma

Yes, so we don’t normally disclose every lump enterprise and channel together but 208% compares to 94% in the previous quarter, because of the year-over-year growth and I think 66% compares to 58% from the previous quarter. Channel grew probably the fastest of all of them because well over triple digits and enterprise sales also. Our UK team is hitting the ball out of the park so this is a quarter that there is nothing I can even complain about. So across the board people did a phenomenal job including SMB.

Nandan Amladi

Thank you and as we look ahead to that segment also coming in parts of these -- how much attention will you continue to devote to the SMB segment?

Vikram Verma

Actually quite a bit because I think one of the trends we’re seeing is that our SMB team which are actually really impressive folks are starting to close bigger and bigger and bigger deals. And so we are creating multiple tiers of folks so that they can start closing deal without getting on an airplane or without any even seeing the customer remotely. And so what it does is what used to be often closed by a mid-market team we are basically moving them up to enterprise level deals. What used to be mid-market, we’re starting to have our SMB start to close. So the core teams stay the same, the overall size of deals keeps increasing across the board.

Mary Ellen Genovese

One other point [Technical Difficulty]. So one of the point to that is that we are in fact as you know investing in enterprise grade capabilities which actually we get not only through our large enterprise customers but we give that same voice quality, that same reliability, that same compliance, that same quality voice to our SMB customers and they love it.

Nandan Amladi

Thank you.

Operator

Thank you. Our next question comes from the line of George Sutton from Craig-Hallum, your question please.

George Sutton

Thank you and great job. So Vik, we’ve talked about the enterprise part of the market sort of being the tip of the iceberg in the past and you had laid out those 10 large opportunities that you saw at that time. I am wondering now that you have seen those come to fruition did you give us a bit of an update in terms of what you’re seeing in terms of those large opportunities?

Vikram Verma

Yeah, no actually George, the interesting thing is I think I have used the phrase don’t ever use me to predict the future because I always note tipping points after the fact. So, if you remember with great trepidation I had laid out our plan that we saw approximately 10 of these so called whale opportunities and we wanted to close one or two. And we closed six in the year. So, that kind of gives you a sense. To the extent we will not be calling them whales anymore because what is happening is they are starting to be more and more common play. The size of deals has just jumped up dramatically across the board and we are seeing greater and greater adoption.

And the thing that is quite interesting is when you start looking at these very complex global companies with their desire to go an in and create this unified communication and collaboration platform, we are uniquely positioned to build up this hyper-scalable platform which allows you to ensure that no matter where you are, you basically had a distributed data center that you can have the employee credit to and have the same level of voice quality, a common directory, a center which I don’t think other people can do. And so, the thing that is happening is that these larger companies which in the past had viewed this as are we ready for cloud are now saying are we ready not to be in cloud because it represents anywhere from 35% to 50% cost savings not to mention significantly enhanced feature functionality. So, we are starting to see that pipeline definitely accelerate.

George Sutton

Okay, great. And just curious what you think about that obviously during the quarter we saw a lot of M&A when you look at inContact and Polycom and Netflow. Lot of broad deals within what we would define as unified communications, could you give us a sense of what your kind of updated thoughts are relative to being a consolidate work in this market, what products might you need?

Vikram Verma

Sure, I mean from our perspective one, we looked in again. I can't take credit for this, but we looked like geniuses. There is absolutely no substitute for owning your own technology. Remember, we own our own contact center which now is approximately 20% or so of our total revenue. So between the -- contractual acquisitions we did in the past and we have spent the time to integrate them together at the start of our core platform is starting to have, particularly the contact center piece, is starting to have complete ownership over the technology. And imagine if you are a competitor of some of the others where you don’t necessarily own the technology and the person you are partnering with just disappears because they are now part of somebody else's company then the strategic priorities may change.

So, we find this concept of building this one stop shop increasingly more important. We make judgment calls as to what technologies we see as either being provided by multiple players that we just need to partner and what technologies we see as critical which we absolutely must dump. Contact center was a key element of our strategy there, quality monitoring was a key element of our strategy. We look at different other things that I probably won't tell you about here but there are different key technologies that we believe we can integrate into our core platforms and provide them as value added services or add-on services to existing customers as well as new customers.

George Sutton

Perfect, thanks guys.

Operator

Thank you. Our next question comes from the line of Dmitry Netis from William Blair. Your question please.

Dmitry Netis

Hey, thank you. Good to see you guys putting substitute revenue piece and the fly world kind of getting to work here. So, that is all good. I have got a lot of questions, on the organic side Mary Ellen, I think you actually called this out but I am not sure I caught it, so just to clarify on the service revenue you said it was up what 25%?

Mary Ellen Genovese

25% in the fourth fiscal quarter compared to last year's fourth fiscal quarter, 25%.

Dmitry Netis

And I think that is also saw 23% last quarter, is that fair?

Mary Ellen Genovese

Correct.

Dmitry Netis

Okay, and then on the organic growth of the MRR mid-market MRR what was that number relative to that 2008 number for the total inorganic revenue?

Mary Ellen Genovese

That was well over 150% on an organic basis.

Dmitry Netis

Okay, I knew it was big but I just wanted to get that number too, so that is appreciated. And then as you talked about the MRR, sorry, the mid-market opportunities in your coming into this fold of 66% of bookings and over 50% in revenue can you define sort of the average MRR per customer in that segment, average amount of seats for that segment something to kind of give us a little bit of visibility into that versus just kind of the total average ARPU that you give out there which improved quite nicely up $16 there and the churn obviously went down and add probably a function of bigger deals that is stickier but yes, just thinking if you could answer the sort of the average MRR per customer in that bucket, the average number of seats per customer in that bucket that would be great?

Mary Ellen Genovese

Okay Dmitry, we don’t break it out on an average ARPU by seats but I can tell you that the mid-market ARPU. So mid-market enterprise customer is the average revenue per customer is about 4100 compared to last year at this time it was 3800. So it is growing very nicely as well.

Dmitry Netis

Okay, very good. Okay, great. And then the GameStop deal, is that your largest deal. I mean 4100 locations maybe a little bit of color there, I mean GameStop is 18,000 employee company so are we going to see 18,000 seats overtime deployed, I don’t think that –

Vikram Verma

No, so its starts with 4100 seats in all of the 4100 locations. Yes so all of GameStop prep for the U.S. and now they are moving to international. So yes, overtime it will be everybody and yet no, it is not our largest deal. So that’s the part that’s so exciting. I think I don’t know if you caught it in my statement but I talked about our smaller enterprise deals, our 2000 plus customers. So GameStop even at the 10 plus thousand seats is not our largest deal anymore.

Dmitry Netis

Excellent, what would be the largest would it be NetSuite or Regus?

Vikram Verma

No, no, Regus is up there, there are others that are getting up there. So, as I said you followed us for a long-time Dmitry so you've seen how this last year the size of the deals has just exploded.

Dmitry Netis

Okay, good. Last question I have on the contact center I think Vik you mentioned 20% give or take now is part of revenue. I think clearly that’s a key differentiation for you that fully integrated into one robust sort of platform, when you go out and source deals, foreign deals, I mean when do you sort of start to think that you got to lead with your contact center as opposed to leading with the Virtual Office and then maybe up-selling the contact center to your enterprise customers?

Vikram Verma

No, I’ll give you the most interesting one. I mean look at Auto Europe, we lead with the contact center and they dragged in 300 contact center seats and they dragged in Virtual Office. We are seeing that we can take in contact and actually in a way this actually represents good things for us because in a sales mode we’ve been growing the company in a very, very steadily and actually at pretty significant levels. And without people noticing 20% or so of our revenue is contact center. And we are leading often with contact center and we are winning and at a time when the market is a little disrupted and we own our own technology. So, VCC as I indicated is totally integrated with our VO. ECN is in the process of being integrated with our core platform, this is a very good position for us to be in.

Dmitry Netis

Any metric you want to put in terms of growth there just specifically focusing on VCC, I am getting very…?

Vikram Verma

By the time I am done you will have each employees salary. We don’t disclose that but it’s growing at market.

Dmitry Netis

You’re happy with that growth and is it growing beyond sort of that 25% organic growth that you…?

Vikram Verma

Let me make a couple of points; one, it brings solidly we don’t break it out but I am never happy with the growth. So unfortunately as a sales team what it gives me I am always focused on more growth. So as long as it is done profitably so we see headroom in our contact center, we see headroom in other parts of our business as well.

Dmitry Netis

Okay, very well on that note. Congrats and keep up the good work.

Mary Ellen Genovese

Thank you.

Vikram Verma

Thank you.

Operator

Thank you. Our next question comes from the line of Amir Rozwadowski from Barclays. Your question please.

Amir Rozwadowski

Thank you very much and good afternoon folks. I wondered if we may talk about a bit about of the competitive landscape. Through the course of last quarter there have been some concerns about the entrance of some larger, well financed company is making a bit more of a push into the unified communications space. But on the flip side if we take a look at your results and particularly the momentum that you’re seeing in the mid-market and the enterprise arena, we’re continuing to see that growth. Perhaps you can kind of bridge the gap between the two, is it sort of a perception of how big this enterprise market is in terms of some of those concerns or particularly the segment within that mid-market enterprise arena that you folks are there or better positioned to target and just would love to hear sort of your thought process around that?

Vikram Verma

Okay, so two key words. I mean so one, $50 billion market and we are one of the early entrants and we have built a complete and comprehensive solution before anybody else kind of look up to this space. I think we have a non-trivial lead and a level of credibility. Two global is truly unique and even bigger -- companies struggle because they have architectural constraints. If you support global customers through a centralized server, you have a fundamental issue with call quality and overall performance of your system. We architected our system to be a distributed system such that you can have people at all parts of the world tied to different datacenters and have the most optimum call quality.

So I think we have some non-trivial advantages and then don’t forget the fact that we have an integrated contact center, the analytics. So the one stop shop now you had video, few other things. So I think there are other companies out there that have portions of it. But as I said between the concept of architecture between the concept of global and the fact that the market is 3% penetrated and $50 billion and we are one of the very, very first if not the first of the party with just complete comprehensive offering, I think we are seeing significant traction because people are not going to wait and I think we are also easier to deal with.

Amir Rozwadowski

That’s very helpful Vik and then if we can take a look at your initial guidance for fiscal year 2017, I recognized that some of the commentary you had made around some of the equipment revenues and how to think about that but if I think about the cadence of some of the business activity that you folks are seeing at the moment particularly this continued migration upstream to larger contracts, faster deployed contracts, there does seem to be an implied tampering of the growth rate in terms of the initial outlook. Wondered if we should read into anything on that or in terms of your expectations for demand or is this more of an initial bar that you’re setting for the course of the year?

Vikram Verma

So I think the way to start with and Mary Ellen can give you more color, I mean the way you think about it is I think you have seen year by year, quarter by quarter acceleration and I think we’re guiding service revenue at a comparable rate to what we ended in FY 2016 at on a base of revenue that is 30% bigger and this is the first quarter. So, read it as this is our best look at what we see and good things are happening and if things get better we’ll tell you.

Amir Rozwadowski

Excellent, thank you so much for the incremental color.

Mary Ellen Genovese

Okay.

Operator

Thank you, our next question from the line of [indiscernible] from Banc of America, your question please.

Unidentified Analyst

Hi, thanks for taking my questions and congrats on the nice performance. Vik, when you came on board about more than three years ago I believe you were talking about accelerating the business and at has that been happening and guiding subscription having the same growth rate as last year imply that you can copy those as acceleration is going to step on quarter one of 2017 and you spoke about some of the business activities you kept underway, it sounds like and sure that deal is going forward, is that acceleration happening, how do you think about the long term sort of growth margin profile of the company and what are the puts and takes here?

Vikram Verma

No, actually you captured it right and so you watched the way the acceleration is being happening and as you said we are starting the year guiding on a 30% bigger base of revenue which included an acquisition. We’re still guiding at a rate that is comparable to what we ended 2016 in. And so I think the part from your point is I see this continuing for a while. I don’t want to -- we only guide for one year this is a 3% penetrated market and I think as you and I have talked, ownership of your own technology and this concept of combining all of this into this one suite and then making sure you architect it properly so you are not tied to a centralized server and you are trying to serve global customers, right which inherently creates problems. I think that concept I think makes us quite differentiated from everybody else. And global is hard, it is literally very easy to put global on a supply.

I mean it is one of the -- its going to take four or five words or letters but doing it, understanding all the regulatory environment, understanding the shipping environment, understanding customs, making sure you understand call quality, latency, etc is very difficult and I think we’ve done a good job of really moving the ball forward there. And if you think about it these global customers forget just enhanced functionality and productivity improvement and all these other things, they see actual operating cost improvement. And so what if we can give you significantly enhanced capability and we can decrease your operating cost that becomes very, very compelling and we can deploy very quickly as you can kind of see with some of the customer wins that we have talked about.

So I see this continuing for a while. I think good things are happening and never kind of looked beyond our headlights but I feel good about where we are and we’ve got some awesome people on our team. We’ve got some people who really know this space we know how to deploy this stuff and there are experts in their field and we are very fortunate.

Unidentified Analyst

Vik, appreciate that and I just wanted to pick up on a previous question and follow them by their names type business. They launched big marketing campaigns about five to six months ago, are you actually seeing them in the marketplace, are you competing with the type of business and new business?

Vikram Verma

I haven't seen them but again I operate always -- I worry about everybody but I think you have to be tied to an exchange server which means you have to have a centralized server to do a global deployment. I think we are much further along in terms of feature functionality, integrated contact center. This is where you and I have talked about ownership of a contact center become the jewel in our crown and we made this decision three four five years ago and the process of integrating it has not been trivial but I think we are there. So I think we have some good stuff going on. So we have not seen them that much. I am sure even if we seen them we are fine particularly for global large distributor enterprises we will take on anybody and we will win.

Unidentified Analyst

Got it, thank you and congrats again.

Operator

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital. Your question please.

Mike Latimore

Yes, that is an impressive list of customers there. On the fair internal [ph] response, what is the kind of number think about going forward here?

Mary Ellen Genovese

You know Mike that’s really hard to predict. I would say definitely model around the 1% mark. The churn as you know is going to be impacted by usage as it was last quarter. In the third fiscal quarter we were a little bit higher than what we normally are. This quarter as the New Year started usage was up. Plus as we continue to move up market we would expect our churn to come down but for now I would say 1% until we start seeing that consistently below 1%. This year from a year perspective we are 0.8%. Now remember this is a gross churn so we don’t include all of our cancellations and we don’t offset that with any up sell. So on a gross churn basis for the full year we are 0.8%. So I would model 1% for the year and expect it to be maybe slightly below that or slightly above that.

Mike Latimore

Okay, and then I know you don’t provide ARPU per individual user or subscriber but with revenue coming out and analytics and maybe some of your margins enhancements on the contact center do you think you could see a upward trend in that kind of revenue per individual user?

Mary Ellen Genovese

Yes, absolutely. Eight out of our top 10 customers have taken analytics, right. Six of our add-on deals are with analytics. So the analytics product is doing extremely well and as you know from what we announced to enterprise connect we’re continuing to invest in our analytics product with the new customer journey and then also what we have now introduced with our new quality management system. So absolutely analytics is going to be a big driver. We just really ended the GA on our new virtual meeting with HD Mobile and HD Video and we believe that’s going to be a big seller as well.

Mike Latimore

And then just last question, you mentioned that more customers you are looking to do mobile only endpoints or at least have a bigger chunk of their infancy mobile only I believe, can you describe a little more color on that as I go attend to that?

Mary Ellen Genovese

We made a significant investment in our virtual desktop product as well as our mobile product and we are encouraging our customers especially our large customers to start to use that because we feel it is more of an intuitive way for people to do business, to typically on their laptop working anywhere when the call comes in. It is easy to answer that call right from your laptop, your desktop, and not have to worry about a hard phone. The quality of our soft client is as -- maybe our quality of our soft client is excellent. So we’re encouraging our customers to at least try a soft client as opposed to investment on the product side. As you know we don’t make money on the product side. Last year we subsidized about 18% of the cost on our hardware. So it’s a win, win from both sides if we can encourage them to do so and the investments that we made I think the customers will be delighted. They won't have to pay for phones and we won't have to subsidize any more.

Vikram Verma

And think about the compelling value proposition for customers, imagine like a large insurance company or a real estate company. Employees will always use their cell phone but if essentially you have an app which has that "office phone" running essentially, has an app on their cell phone so the physical device they’re using is the cell phone but the soul of the cell phone is the same as your Virtual Office app with the Virtual Office phone number which that company owns if there is ever any turnover of the employee that company keeps the number. So it -- and then by the way you can then update the number, you can also any interacting that the employee has with their customers with one click and the updated on salesforce.com or some other CRM. You have the ability to have complete records of all of these things. So this becomes an extension of your CRM tool and just complete ownership end-to-end of the customer by the company as opposed to the individual. This is a phenomenal trend that is happening and I think we are right at the forefront of it.

Mike Latimore

Okay thanks.

Operator

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

Jack Rohkohl

Hi, good afternoon. This is Jack Rohkohl calling in for Catharine. One quick question for Mary Ellen, in your prepared remarks you talked about improving operating margins in the back half of the year. Can you provide more color on the rate at which we should model this change, do you see a gradual improvement in the bottom line leverage or do you foresee an inflection point whether that be in the back half of 2017 or into 2018 where we’re really going to see the top line performance blow down?

Mary Ellen Genovese

Yes, I think in the second half of this year if you look at our guidance we gave 6.5% to 8% for the full year. I am expecting that in the second half of the year we’ll be slightly above 8% maybe in the third fiscal quarter and higher than that in the fourth fiscal quarter. But in the first two quarters of the year where we’re doing most of our investments as I had mentioned front-end loaded it will be less than the 6.5%

Jack Rohkohl

Great, thanks for taking my question.

Mary Ellen Genovese

You’re welcome.

Operator

Thank you. Our next question comes from the line of Mike Crawford from B. Riley & Company. Your question please.

Mike Crawford

Thanks. With VO leading I believe you’re offering that -- customers that select the deal pro add-on bundle, is that still coming in at an attached rate of around 25% on these sales or is that increasing?

Vikram Verma

I think that’s increasing and what we offer right now is we offer the meeting, all the meeting capabilities essentially and all the collaboration capabilities. But then we have the portions of it that are in upsell. So certain things we offer free, certain things are upsell that are in hand features that they did not have before with their earlier virtual meeting product. We have completely and fundamentally redesigned the product but we are starting to see more and more of an attached rate. So, and Mike I know you use our stuff periodically but the main point being where you can go seamlessly to video, chat, or phone with the flick of one button without having to open multiple apps and then you can have a conference call with four, five or six people where your devices your iPhones and you see four or five images on the phone or the ability to document share from your iPad or your iPhone or your android phone to anybody that is part of this conference call. I think we are starting to now get to some seriously cool stuff and so we think we will see increasing attach rate with that early days we just introduced this product but we hope that will have a significant attach rate beyond the numbers that we got in the past.

Mike Crawford

Thanks and then the follow up then will be regarding those add-ons. For example, I believe HD Video is an option that you are listing for around $10 per month per user. And I guess it’s early but is it too early to tell how many people are taking HD Video?

Vikram Verma

Too early to tell but we’re starting to see particularly larger customers love HD video. It’s actually surprised me how much video is starting to become pervasive particularly for the larger customers. Right, because it has become and it shouldn’t surprise us. As you think about it, it is a truly global company. The video people had, video experience with tele presence, few are doing it, few dollars and suddenly it becomes something where it is intuitive, people start using it, then they can kind of see what the person they are talking to looks like in the facial expressions. So, the attachment particularly for the larger customers in the early days we have been kind of hurt by it.

Mike Crawford

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Greg Burns from Sidoti and Company. Your question please.

Greg Burns

Thank you. You mentioned in your remarks for investments in 2017 you are going after a line of business and self service, so I was just wondering what is the roadmap for the time frame of expanding the [indiscernible] that you acquired globally?

Vikram Verma

Yeah, so around Octoberish timeframe, we are starting to bid but we are loving it. I mean, if we are -- I don’t think, we are not showing you the demo because we will just if you have a chance we will show it to you. It is seriously cool because in the sense you can literally go in and you have the ability to have very tight integration in your CRM system. You can have very detailed drill downs on the call you made, who you made it to, when you made it to, did you make it in time, did the customer respond, did you enter the information into your CRM, how long did you take to enter that information into CRM. As I said, the way we are using it which is always we have a philosophy of you drink your own champagne I guess is the best politically correct way to say it. We are trying to use it for monitoring our own sales force and it has been fun. I think our sales managers particularly love it and they have had good feedback on it.

Greg Burns

Great, thank you.

Operator

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to Vik Verma for any further remarks.

Vikram Verma

No, I think from my end thank you all for listening in on today's call. We look forward to provide you continued updates on our progress at our upcoming investor conferences and meeting. Thank you again.

Mary Ellen Genovese

Thank you.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program, you may now disconnect. Good-day.

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