8x8's (EGHT) CEO Vik Verma on Q1 2017 Results - Earnings Call Transcript

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8x8 Inc (NASDAQ:EGHT) Q1 2017 Earnings Conference Call July 21, 2016 4:30 PM ET

Executives

Joan Citelli – Director-Investor Relations

Vik Verma – Chief Executive Officer

Mary Ellen Genovese – Chief Financial Officer

Analysts

George Sutton – Craig-Hallum

Nandan Amladi – Deutsche Bank

Dmitry Netis – William Blair

Rich Valera – Needham and Company

Nikolay Beliov – Bank of America

Catharine Trebnick – Dougherty

Mike Crawford – Riley and Company

Mike Latimore – Northland Capital

Jonathan Kees – Summit Redstone

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2017 8x8 Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to Director of Investor Relations, Joan Citelli. Ma’am, you may begin.

Joan Citelli

Thank you, Sabrina, 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 first fiscal quarter of 2017 financial results for the period ended June 30, 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.

Vik Verma

Thank you, Joan, and thank you everyone for joining us today as we discuss 8x8’s first quarter of fiscal 2017 financial results. I will begin with a high level summary of 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.

We’re off to a great start in fiscal 2017 as the transition to cloud for business communications and collaboration solutions is well underway and a strategic focus on broadening our capabilities to serve globally distributed mid-market and enterprise customers continues to bear fruit. Our total revenue in the first quarter of fiscal 2017 grew 25% year-over-year to $60 million. Service revenue of $55.3 million also grew 25% year-over-year, both on an organic and inorganic basis. For the 25th consecutive quarter, 8x8 remains profitable on a non-GAAP basis with non-GAAP net income of $5.4 million.

Service revenue from our midmarket and enterprise customers grew 44% year-over-year and now accounts for 52% of our total service revenue. While our direct enterprise field sales force and channel sales teams are driving the majority of this revenue, I would like to note that in general we are signing up larger customers across the board with our inside sales team continuing to book midmarket deals without ever visiting the customer on sites.

As you know, we are focused on three key strategic initiatives: one, increasing the adoption of our solutions by midmarket and enterprise customers; two, expanding our global service delivery capabilities; and three, advancing our technology and service offerings. I’d like to touch upon each of these with a brief update on our progress this quarter.

We continue to execute well in the first quarter of fiscal 2017 on our first strategic initiative with new monthly recurring revenues sold to midmarket and enterprise customers and by channel sales teams increasing 62% year-over-year, accounting for 58% of total monthly recurring revenue booked in the quarter. Today, I am pleased to announce a new contract with a major office supply retail chain that was just awarded earlier this month.

It was brought in by our enterprise sales team following the successful completion of a proof of concept trial last quarter. The initial 50 store Virtual Office deployment has already begun and we are planning to rollout our services in over 1,000 locations nationwide. I would like to also mention a few new enterprise and midmarket customers that were brought on during the quarter by our channel sales team, which continues to perform exceptionally well.

The first is a major workforce solutions provider with offices throughout North America. Following the successful completion of an initial proof of concept deployment, 8x8 was selected to replace their premise based solution with over 2,000 Virtual Office and Virtual Office analytic seats across 500 locations. The second noteworthy win is a 1,200 Virtual Office and Virtual Office analytic seat deployment for one of the largest dental providers in the U.S. with over 180 locations.

Third is a rapidly growing mortgage lending company with over 60 offices in 26 states for whom we will be deploying more than 500 Virtual Office and Virtual Office analytic seats. And finally from our UK team is a combined Virtual Office easy contact now deployment of over 300 seats for one of the world’s leading commercial suppliers of water treatment services.

Our second area of focus is building the industries highest quality, most reliable global communication network while maintaining industry leading service margins. As we announced earlier this week, we are in the process of adding three new datacenters in Singapore, the Netherlands and Brazil, which will broaden our international footprint to 12 datacenters in 8 regions of the world.

Coupled with our patented global media routing technology and localized telephony services, this expanded network enables us to serve our many multinational customers with high availability, high quality, low latency, voice capabilities throughout their organizations. By the end of the calendar year, we will support a total of 30 languages in addition to English for core services. Plus we will be supplementing our global customer success network in the United States and United Kingdom with new support centers in the Philippines and Romania, bringing the total number of centers to seven.

Our global expertise is a key differentiator that consistently positions us favorably with prospects that maintain multiple international locations, particularly when proof of concept trials are involved. Third, on the service innovation and technology front, I am pleased to report that we have rolled out our new completely redesigned Virtual Office meeting solution, which delivers audio, web and high definition video conferencing at a single click and from a single client. This enables instant seamless collaboration with the ability to share content from cloud applications such as Dropbox, Box, iCloud, and Google Drive.

Studies have shown that over a third of an employee’s time, each day he spent looking for information versus being productive. Virtual Office meetings help to solve this problem by delivering integrated communications and workflows from a single platform. Our customer deployment and success teams continue to make solid progress, rolling out our services for new customers like GameStop and Movement Mortgage as well as existing customers like NetSuite, SPS Commerce, OFX and Regus.

For NetSuite, we deployed another 200 Virtual Office seats this quarter for SPS Commerce over 500 combined Virtual Office and Virtual Contact Center seat, and for Sydney Australia based OFX over 300 combined Virtual Office and Virtual Contact Center seat. We are also in the process of rolling out our Virtual Contact Center solutions for Regus in the UK, Spain, Cyprus, Denmark, Finland, Greece, Italy, Norway, Portugal, Sweden and Malta. I believe we are well ahead of our competition, in our ability to quickly transition customers over to our services. Thanks to our elite touch methodology, our extensive global presence and the fundamentally solid nature of our core network architecture.

One year after the acquisitions of DXI and QFE, I’m pleased to report that we have fully integrated our two UK entities under common leadership and a combined sales team now selling our full portfolio of products. QFE has been integrated with our global engineering DevOps and customer support team. We now have approximately 250 employees in the UK and Romania including an awesome UI/UX design team in London and our research and innovation center includes Romania, where we – which we expect we will be staffed by roughly 100 employees, the vast majority of them software engineers by the end of this fiscal year. These sales, operations, global customer support and R&D resources are contributing greatly to the growth of our international customer base as well as the speed at which we can deploy and deliver new enterprise grade features and capabilities.

With that I’ll now turn the call over to our CFO, Mary Ellen Genovese. Mary Ellen?

Mary Ellen Genovese

Thank you, Vik, and thank you all for joining us on the call today. In my prepared remarks, I will cover highlights from our income statement, key operating metrics for the quarter and a summary of our balance sheet. Financial results for our first quarter of fiscal 2017 were very strong with total revenue of $60 million and service revenue of $55.3 million, both representing a year-over-year increase of 25%.

On an organic basis, adjusting for approximately $1.5 million of revenue received from a technology license payment in the first quarter of fiscal 2016 and two months of inorganic revenue from our DXI acquisition in the first fiscal quarter of 2017, total revenue grew by 26% and service revenue grew by 25%. 52% of our total service revenue is now derived from our midmarket and enterprise customers and that portion of our revenue grew 44% year-over-year.

Our revenue growth was driven by both new subscriptions sold to larger customers and expansion revenue from existing customers. Expansion revenue generated by customers increased in the size and/or scope of their deployments typically accounts for approximately 50% of new monthly recurring revenue booked each quarter. GAAP net loss for the quarter was negative $0.5 million or negative $0.01 per share.

Non-GAAP net income for the quarter was $5.4 million, or $0.06 per share, represent a 9% of revenue compared with $4.5 million, or $0.05 per share, also represent a 9% of revenue in the same period a year ago. GAAP gross margin was 73.8% compared with 73.2% in the same period last year. On a non-GAAP basis, gross margin improved 130 basis points from the year ago quarter to 75.4%. GAAP service margin was 81.5% compared with 80.8% in the same period last year. On a non-GAAP basis, service margin improved 140 basis points from the year ago period to 83.2%.

GAAP sales and marketing expenses increased year-over-year by approximately $8 million to $31.7 million, due primarily to additional headcount of deployment engineers and additional headcount for sales professionals across all segments of our sales force as well as the acquisition of DXI and commission related expenses stemming from the success and growth of our channel partners. Our GAAP tax expense for the quarter was $37,000 and non-GAAP tax benefit was $44,000.

Turning our attention to key operating metrics for the quarter. New monthly recurring revenue, or MRR, sold to midmarket and enterprise customers and by our channel sales teams increased 62% year-over-year, compared with an increase of 38% in the same period last year. This new MRR accounted for 58% of our total new MRR booked during the quarter, compared with 46% in the same period last year.

Average revenue per business customer was $399, compared with $353 in the same period a year ago. Average revenue per midmarket and enterprise customer was $4,230, compared with $3,846 in the same year ago period. Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 0.5% compared with 1% in the same period last year.

Cash, cash equivalents and investments were $167 million at June 30, 2016, compared with $157 million in the same period last year. Cash flow from operating activities was $6.5 million in the first fiscal quarter and capital expenditures including capitalized software were $2.3 million in the quarter, or 3.8% of revenue.

I like to note that as a result of the recent weakening of the British pound, we are estimating a potential impact to our consolidated revenue of approximately $600,000 per quarter for the remainder of fiscal 2017 due to the conversion of our UK revenue at a lower rate. Despite this, we are reaffirming our fiscal 2017 guidance of annual revenue of $249 million to $253 million and full-year non-GAAP net income in the range of $16 million to $20 million, represent a non-GAAP net income as a percent of revenue of 6.5% to 8%.

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

Vik Verma

Thank you, Mary Ellen. 8x8 continues to make great progress across all of our strategic initiatives, while building a coveted reputation as the only provider capable of delivering enterprise grade cloud communications across the globe. We have established a solid foundation for continued growth and are well positioned with a competitive differentiation and successful track record to capture an increasing share of the demand for cloud that is yet to come.

With that, we’ll 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

Thank you. [Operator Instructions] And our first question comes from line of George Sutton from Craig-Hallum. Your line is now open.

George Sutton

Thank you very much. Again, nice results guys. Vik you specifically referred to proof-of-concepts being an area where – if you get into a proof-of-concept, particularly in your global situations, you come away as the winner. Could you give a little more perspective on what is happening with other vendors? Why are you winning in those cases?

Vik Verma

I mean, look, I believe we have a comprehensive solution that works in tough network environments. And I think as you know, we’re a company of techie geeks and we have built a really solid technology. I think you probably notice we don’t use the term, but the terminology that was formally known as whale, we announced our seventh one today, which game after a pretty extensive proof-of-concept and a few things that they were going through internally. But we seem to have a very good track record that once we can go in deploy our technology, show the customers the value of our solutions, show the fact that we take our commitments to customers very seriously, good things happen.

George Sutton

Now one of the other reasons I know you’ve been winning relates to the call center or you’re integrated call center capability and our contact center capability. Can you talk about with all the M&A that’s been going on in the space? Has that changed your go to market plans, your pipeline, your close rates, anything like that?

Vik Verma

No, actually, I mean, the strategy is working in the sense that – I’m actually increasingly pleased. I think if you think back towards over the last couple of years, we have fundamentally transformed the business from essentially an SMB business to a midmarket business, where midmarket is now the vast majority or the majority of our revenue and it represents the fastest growing segment of our revenue. And a key element of that is the fact that we are the one stop shop communications platform.

Part of the reason we are going out and really investing in building out this global network and by the way all the expenditure that we are talking about is all planned in part of our guidance is we want to build the premier real-time global communications network platform. And for us, a network platform means is voice, video, SMS plus the integrated call center plus over time – your contact center and plus over time the ability to do line of business applications, et cetera.

For example of our top 10 deals, once again 5 out of our top 10 deals bought both our Virtual Office and Virtual Contact Center. And you’re also seeing, I think, 6 out of our top 10 deals also bought our analytic solution. So I think this is the thing that we have been able to kind of do is build this out and continue to build this low latency global communications network and keep building on top of that and that’s why I think we win.

George Sutton

Super. Thanks guys.

Operator

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

Nandan Amladi

Hi, good afternoon. Thanks for taking my question. So, first question is for Mary Ellen. I think the question will get tomorrow is about the guidance in spite of a significant beat over to $1 million from consensus. You’re not raising guidance. Obviously, you’ve said the FX impact plays a big part of that. Where there any other factors that you considered?

Mary Ellen Genovese

No, not really. Nandan, its first quarter, so it still early days winning the year, we’re seeing strong demand. However, we want to be cautious as it relates to have the pound and the U.S. dollar trade. We expect that that might be a 600k as I had mentioned in this script per quarter impact. We don’t know for sure. Of course, the pound has been suggested that it might goes down as low as 120, but it seems to be holding pretty well at the 132, 133 mark. So, I think, we’re just being – we’re just same with our guidance. We think its strong guidance. And again, the demand is strong and this is early days.

Nandan Amladi

Thanks. And a follow up for Vik, with all of these global proof-of-concepts that appear to be getting larger in size, do you feel like you have enough services staff appropriately placed in those geographies? And do you really need to have many people on site when you do these proof-of-concepts and eventually deployments?

Vik Verma

No, actually, I mean, we don’t. And that we brought on board as you know a new Head of Global Support and Global Delivery, Jeff Romano, with a track record. Larger customers require a different level of service than SMB customers. We have built up a lot of various tools et cetera. So I don’t expect to have a lot of people on site and then we are leveraging our localized partners, where we can to basically provide support. And then now you’re seeing that we have now seven data centers around the world.

The part I’m proudest off and I think as you reflect back, because I think you have followed us for a couple of years when we started on this journey. Our company was essentially an SMB, which was primarily domestic. And over two years with very few people really noticing, we managed to build a global company focused on midmarket and enterprise. And now as you look at it, we keep announcing bigger and bigger deals and it’s now like a consistent metronome to the extent. I think last quarter I indicated I would not be highlighting whales anymore because that whales’ becomes ordinary course of business. Now getting bigger and bigger deal is part and partial of our daily operating rhythm.

And I think, we’ll continue to mature as a company. The goal is to be able to provide as personalized service as you can with the least amount of touch. And that’s one of the secret sources that we are trying to develop, which is bringing tools where you can have automated ways to test our people’s networks, different things that we can do, different tiers of people that can provide different levels of support. That’s part and parcel of growing up as a company and I think we’re making good inroads into that.

Nandan Amladi

Thank you.

Operator

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

Dmitry Netis

Great, thank you, very nice quarter.

Mary Ellen Genovese

Thank you.

Dmitry Netis

Okay. So, Mary Ellen, I have a kind of…

Vik Verma

Dmitry, the term you’re looking for is awesome.

Dmitry Netis

I’ll let you say that Vik. All right, the kind of ties to the question about the full-year guide. I’ve get the currency effect, which sort of explains the thought process there. But also if I look at the service versus product revenue split, Mary Ellen, it seems like product came a little bit ahead of expectations this quarter. And if so, what are you thinking kind of as we go through the year? How should we be modeling this and maybe that sort of plays into the full-year guidance that that kind of ramps down as we go through the year, but help us to understand that a little bit?

Mary Ellen Genovese

That’s very true, Dmitry. As we had mentioned last quarter, we don’t expect our product revenue to be as significant this year as it was last year. In this particular quarter, we did have some of the – well, we’re not supposed to call whales anymore, but some of the whales that we did book in our fourth fiscal quarter did roll into shipments this quarter. So we shipped product to Regus. We shipped product to Movement Mortgage. We shipped product to GameStop. So we had quite a few larger customers that we shipped product revenue too.

I think again, you know, our focus is to try to again really work with our customers and potentially get more and more of our customers using our virtual desktop, which we have spent a lot of engineering dollars focused on and we really believe it’s a high quality product. And so, we’d like to see that shift because as you know we don’t make a profit from our product revenue. So I think [indiscernible] do it, but – and so I think that our guidance for the full-year on product will be very similar to what we show our product last year, but as a percent of overall revenue is lower.

Dmitry Netis

Well, what do you think that percentage is on a year-over-year basis?

Mary Ellen Genovese

So, we’re forecasting that that’s going to be flat year-over-year on a product basis. And then the service revenue, as we had said last quarter, we’ll continue to grow on the same average as last year, which was 23% on a service year-over-year growth.

Dmitry Netis

Okay, that’s helpful. All right, very good. And then my next question on the sort of just as big deal, the whale deal Vik that you guys won. It was nice to see that come in, in the quarter. Can you talk about maybe the number of seats? I mean I know you mentioned 1,000 locations, 50 stores, how many seats approximately that entails? And also whether this was a competitive bid and if so who you are up against?

Vik Verma

Competitive bid, we don’t typically talk about who we were up against. This we just close this. And so, let you know the company. And so at the right time, we’ll give a lot more information on it, but it’s one that has been in the works for – this is one of my original 10 whale pipeline and they did a little detour where they were involved in something and then they came back. And we think this is a great opportunity and a great opportunity to really go in and deploy, but also opportunities for strategic alliance. But beyond that, I don’t want to give you too much more details on the seats, because I think you’ll figure out who they are right after that.

Dmitry Netis

Okay. All right, and then last question real quick on the balance sheet. You have $167 million now. What do you plan to do with that cash? Vik just kind of give us an overview of your thought process there?

Vik Verma

So, again, my views on acquisitions, I’d like to do them very carefully because we need to make sure that they get integrated very tightly into the company and add value. I feel like we’ve spent a good amount of time digesting both the QSC and DXI and I’m feeling good about both. And I think one in particular the QSC has been an absolute homerun for us. And so, we are seeing a lot of other opportunities in various technologies as well as in geographies.

And so we have an active M&A pipeline of tuck-in acquisitions of the term I use, which is relatively small acquisition that either integrate with your platform and provide additional capabilities and/or give you a bigger geographic footprint. And that’s where we’re continuing to focus. And I’d like to do them at a certain rhythm, I don’t want to get ahead of our headlights because again the goal of an acquisition is it sounds great going out and doing deals, but you want to make sure you tightly integrate them and you get success out of them. And so far, I think, we’ve been doing a good job of that.

Dmitry Netis

And what’s your view on the CPaaS and UCaaS colliding? I mean certainly Vonage had executed a deal here and Twilio came out. And there is a big cone around – the two markets may be kind of merging. What do you think? Is that the case – has it hurt the UCaaS side of the market just yet or if not maybe this is an adjacent?

Vik Verma

Not even close.

Dmitry Netis

Okay.

Vik Verma

Not even close. Think about what we are trying to do and I think that makes us truly different. We are building a global communications and collaboration capability. So think about it. We’re going to have one of the premier platforms and networks for global communication and collaboration. It’s a very – for full PBX and contact center functionality. And then little by little we are exposing all the APIs except our APIs and not just as simple as making telephone calls were two factor authentication. Our APIs will give you the ability to access right at the end point and also the ability to modify call flow. So it gets very sophisticated because we’re able to do all of this on a global basis.

And one more thing to that access to all of the data that flows and the ability to do analytics with it once you get the right API. So that’s our vision. We think that’s very different than a simple cloud telephony type application. We do peer-to-peer type communication. So, we’re going after a very different type of market. We think it’s a much more lucrative market. And the complexity of this market, the ability to have local dial plans, the ability to have toll free number capability in different countries, the ability to do emergency services in different countries. And then as I side expose all of that as APIs becomes truly differentiated. So, we think we’re in an awesome position and we feel comfortable with our strategy.

Dmitry Netis

Okay, thank you very much. I’d like to understand that vision over the course of the quarter a little better, but it sounds like you’re on the right track. Thank you very much.

Operator

Thank you. And our next question comes from Rich Valera with Needham and Company. Your line is now open.

Rich Valera

Thanks very much. Vik first question for you on where you stand with your channel strategy? As I understood you kind of took a plan to kind of pare down your channel partners to sort of higher quality more strategic ones and you’re in the process now I think of adding some – gradually adding some strategic channel partners. Can you give us a sense of where you stand on that and how that’s sort of progressed relative to expectations?

Vik Verma

Phenomenal, those guys are absolutely phenomenal. And I’ve never quite understood that addition from – addition by subtraction can prove that effective. Channel is by far the fastest growing segment and channel is truly global for us. For example, some of these Australian deals are coming from CSG, which is Australian channel partner. So, we’re seeing global success with all the channels and the goal is to step and repeat. But the key here for all of us is, we want a limited number of channel partners, but then hug them tight, provide them all the support that they need, make sure that their customers’ customers are successful.

So we don’t want this approach where we are going out and signing thousands of channel partners just so you can have a notch on your belt, what we’re trying to do is pick targeted number of channel partners and then give them tremendous amount of attention. And again early – not early indications, but channel has been by far the fastest growing segment of our business and we are more and more bullish about channel.

Rich Valera

Do you have any planned additions not that you can necessarily mention them now, but in the relatively near future to sort of bolster that further?

Vik Verma

Yes.

Rich Valera

Got it, that’s great. And then just one for Mary Ellen, if I could, again on the guidance, but I wanted to just ask you about your net income guidance. You outperformed there pretty dramatically by roughly $2 million, I would say versus the consensus yet you maintained the $18 million to $20 million of net income for the year. Can you talk about one, how much currency impact – currency has impacted that net income or how much you estimate currency to impact that for the course of the year, and if there are any other factors that would cause us to be substantially lower than the first quarter as we move through the year?

Mary Ellen Genovese

No, actually currency in this particular case is going to help us just a little bit, because as you know, we’re naturally hedged in our UK operations and even in the Romanian operations. So, we’re naturally hedged and we have a slight loss over in the UK operation, so now we have less of a loss if you will.

Rich Valera

Got it.

Mary Ellen Genovese

But the real reason for the same guidance on the non-GAAP net income, Rich is that we truly believe that we’re the leaders in this market, this market is very large, it’s under penetrated and it’s growing very nicely. We find ourselves very nicely positioned, I would say uniquely positioned to capture more than our fair share of the market. And so, we are going to reinvest into our R&D and into our sales and marketing. But we’re still going to maintain the profitability that we committed to The Street. We’re good stewards of the shareholders’ money. We have been profitable now for 25 consecutive quarters. We still intend to be profitable, but there’s a large opportunity out there for us and we need to invest and we’re going to continue to invest because we think that’s going to continue to help us grow our revenue.

Vik Verma

And Rich, I can add a little more color to it. I gave our team a challenge because we gave our guidance as you know of 6.5% to 8% of non-GAAP net income as a percentage of revenue at the beginning or at the end of last year, which actually was about two months ago. And the challenge I gave our team is because there was 50 projects or more that they felt were worthy and they were all on the chopping block outside Mary Ellen’s office. And we said great outperform and any extra money will find a way to fund and that’s generally the tack we’re taking. We want to be good stewards of the shareholders’ money, so we made commitments about 6.5% to 8%. We’re going to honor that commitment and any excess over that what we’re trying to do is plough into the business, so we can continue to grow faster and faster.

Rich Valera

That’s helpful color. Thank you, both.

Operator

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

Nikolay Beliov

Thank you for taking my questions and I think my congratulations on nice results in the quarter. Vik, from a competitive standpoint what are you seeing in the marketplace and you can specifically comment on what Skype Business is doing out there and maybe Cisco and Avaya?

Vik Verma

Yes, so look the good news is as I think you and I talked Nikolay, I actually find the fact that we have bigger people entering this space heartening because too many times I have heard people keep describing a market as huge, but if large competitors are not paying attention to it then is it really real. This tells me this market is real, because one of the largest on premise vendors, Cisco, is now talking about moving into the cloud and they are the incumbent. So when the incumbent says the future is along the lines of what 8x8 does, I view that as massive validation.

Skype Business is interesting, I mean, if you think about it, they’re going through some of the challenges that we predicted, which is the idea that they have to now go evolve from a peer to peer network to cloud, they got to build datacenters, they cannot be tied to Ajure platform because it’s not necessarily a peer real-time platform, they got to have localized datacenters, they’ve got some work to do. We like to think we are ahead, and we like to think what we have is pretty differentiated for everybody and we’re building out this global communications platform that we think is going to be second to none. So we haven’t seen them yet, but I always operate on paranoia that others will come, but I like to think we have a lead and our intent is to keep – grab that and keep driving.

Nikolay Beliov

What about other players in the marketplace, any changes there?

Vik Verma

No, I mean, look good. There are different competitors and I like to think our strategy is working. I wish everybody well until they compete with us in which case I wish them ill. But I want everybody to do well, because it’s a big market. There’s a lot of – if you add up all the players in this industry that are providing cloud based service and getting revenue from cloud, it probably adds up to a little over a billion something dollars in a market that is $50 billion. So from that perspective, there’s room for a lot of different players. My goal is to ensure that we’re the top and so we keep driving. And again, our target focus is midmarket and enterprise. And I think, Nikolay, you have known us for a while. My management team has a general view that I can only see all the things that we are doing wrong and never what we have done right. So, we almost had a séance a few weeks ago, where they were telling me to reflect on how far we have come. We came from basically being essentially an SMB domestic play to having 52% of our revenue now coming from mid-market and enterprise and that is growing 44% a year.

So some very good things are happening and I think that’s the market. The mid-market enterprise being able to provide that globally and the fact that we’re building out is differentiated communications platform that we will then start to expose all the APIs on. We think is the winning formula.

Nikolay Beliov

Thank you. And my last question is around analytics. If you can give us maybe a little bit more color, what percentage of the installed base do you think analytics will be applicable to in the long run. What type of ASP uplift you’re seeing and may be if you just give us a sense of what are the most widely used use cases right now on the product?

Vik Verma

So we’re seeing it particularly for the larger customers and they use them in different ways. The IT may use it to basically have you know a global IT that can look at the global health of the network and you know performance of Voice over IP all over and set the appropriate SLAs to local IT network or global IT networks like that so that when somebody calls and says hey, something is not working they’re able to point out aging network versus something out, that’s one.

We’re seeing an increasing trend and this is what I think is a killer app. And we had version 1.2 of that, which is people using it to look at how many calls did I get, who called, when did they call, how long did it take my people to respond, how much time did this spend on the phone, how many – how long did – how many voice mails were left, all of that kind of call detail record and the ability to do that for individuals, spread globally by managers offsite is starting to become an increasingly part of the operations of our system.

And as part of that we’ll be introducing this line of business product in our Q3 timeframe, which basically, fiscal Q3 which is before between the October, December timeframe, which allows, for example, a sales manager to get an idea of what their best-in-class sales person is doing, what their worst-in-class sales person is doing, how many times are they updating CRM, is every interaction be updated on CRM. So it takes essentially analytics and then ties it very tightly to CRM. And basically then allows you to be not just a monitoring function, but also a compliance function. So we see that evolution happening next.

As an ASP, we see that probably 5% or so to the larger customers, it’s not widespread for our smaller customers, because I think they don’t necessarily need the analytics per se, but the larger customers tend to kind of want the analytics and they need the analytics. And from that perspective we’re seeing good uplift for our mid-market and enterprise customers. And as they become a bigger and bigger part of it, over time, I think, it’s going to become table stakes.

And then as I told you this line of business I believe is going to be the killer app, because that becomes not just a monitoring function, which is important, but a compliance function where you can ensure that every sales person updates CRM in a certain amount of time and if they don’t you get paid. Those are the kinds of applications we start see coming out.

Mary Ellen Genovese

And Nikolay are you seeing that in our ARPU as well. Total ARPU moving from 385 last quarter is 399 this quarter, year-over-year 352 to 399, so significant increases in our ARPU. And then looking at the mid-market ARPU going from 3.8000 first quarter of fiscal 2016, versus 4.2000 in the first quarter – of this past quarter. So significant increases in ARPU and a lot of that has been driven by analytics and now we think that will continue to be driven higher with our new virtual mean and then video conferencing system, as well.

Nikolay Beliov

That was all very helpful. Thank you.

Operator

Thank you. And our next question comes from the line of Catharine Trebnick from Dougherty. Your line is now open.

Catharine Trebnick

Thank you for taking my question. I have two, one is on, towards January, February time, there was a lot of concern on Microsoft Skype for business, et cetera. Are you seeing in the marketplace are they at all competitive threat and if they are do you see them more on the large mid-market or more in the SMB side.

Vik Verma

I mean we haven’t seen them yet. I would have thought we – they’ll definitely go after some of the really giant deals, is my sense. And I think they’ll go after these smaller deals, because in essence it can become essentially a bundled offering along with Office 365, et cetera. So in our sweet spot we have not seen them.

Catharine Trebnick

So have you seen competitively would you say do you see still on the mid-market are you still may be replacing more legacy IP PBXs or would you say when you go to the deal is it some of the Cloud providers still you see at the table.

Vik Verma

Yes, we will see different people on the table, but more often than not the incumbent is the legacy PBX. It’s amazing how much legacy PBX is out there, including – I think you know some of the common folks, we have been dealing with, but you see legacy PBX across the board and that opportunity to replace them is a great – it’s wide open, because I don’t think, legacy PBX can compete anymore.

Catharine Trebnick

Yes, and then one question just I’d like to get your opinion, this whole UCaaS and contact centers seems to – we’ve had a renaissance back in the 80s and 90s, I guess I’m updating myself I was around in the 80s but in the 90s. But it was everything was sold, integrated and then you had IP, and then SIP trunking [ph] and then UC. And now you see this renaissance where it’s more integrated. And I guess I’d like to kind of get – I’d like to get your thoughts on, the direction and how well you feel comfortable competing against more some of the peer plays with your contact center solutions?

Vik Verma

I mean we’re getting there. I mean, the part that is interesting is, keep in mind – I think the classic example is Microsoft, I mean if you were to look at it Microsoft Office has individual items probably did not compete that favorably I think WordPerfect will still maintain. WordPerfect is a better word processor than Microsoft Word. But I think if you look at the two relative market caps of those two companies you can kind of tell whether the sweet one or whether the best of breed solution one.

I see the exact same thing happening in communications. In essence people, first and foremost, okay, give me an integrated solution then they look at the contact centers say that’s good enough. And then the more bells and whistles you can add, that gives you gravy. But they look for the fact that it’s an integrated solution more than they look at, I want the absolute best-of-breed. That’s the best we’ve made, and we are seeing it pay off in spades as you can see with our results over the last year and so.

Catharine Trebnick

Yes, what percent of your business is now would you say related to the contact center?

Vik Verma

About 20% give or take.

Catharine Trebnick

All right. Yes, thanks.

Operator

Thank you. And our next question comes from the line of Mike Crawford from Riley and Company. Your line is now open.

Mike Crawford

Thanks. Regarding the analytics that you’re going to come out to help to differentiate lines of business, are you organizing your own enterprise sales channels along geographies or lines of business yourself?

Vik Verma

No, we’re going to sell, what we are finding is if that same concept that Catharine just talked about, this concept of an integrated platform. So we can provide you with global telephony, we can provide your contact center, business unit with our contact center software. And by the way, if your sales team is out there, we can help provide this line-of-business application for your sales team that basically can monitor your sales teams’ performance, as well as help them comply with the directive that management has and/or other compliance elements that are necessary.

So for us it’s going to be the exact same team, exact same channel, and that’s a fundamental element of the way we run our business. I think what – I think we’ve talked about I’m not a big fan of this, you have three different sales teams to sell three different products to three different players, you have essentially a consolidated sales team and if there’s specialization required you do overlays. And that’s the same thing that you do with channel. Certain channel need domain expertise to help contact center, great you provide them with specialists. But the core sales team, the core channel should be the same and they should be able to sell the same product, because otherwise you have very little synergy. And that’s essentially the way we run the business and that’s what we intend to do with line-of-business application.

Mike Crawford

Okay. And then just Mary Ellen, back to the model. So with the additional engineers being hired, and Romania, and then the expansions in Brazil, and Philippines and Romania. Are we seeing then, sales and marketing bump up a couple million a quarter from where you are now and then R&D, as well? Is that kind of the delta in the model to bridge your guidance?

Mary Ellen Genovese

That’s correct. I mean we will, in fact continue to invest in R&D we’re having very nice success with our Romanian team. It’s an agile team and we’re having very, very good success in our Romanian team. As well as, as Vik had mentioned in his scripts, we’re having very nice success in the UK with our DXI team. They are focused on the UI/UX and we have a strong design team there. So, we will continue to invest where we see the programs working.

So from a model perspective, I think, you can look at the same model that we provided last quarter. On a non-GAAP basis, we would grow our R&D to – right now we’re a little bit below 10% and we’d like to see that at least at 11%. I would expect that our sales and marketing would – right now, it’s 49% on a non-GAAP basis, but 50-ish percent, 50%, 49% to 50% in that category. And then the G&A, I would still say, would be about 9 percent point.

So certainly R&D and maybe we bump up the sales and marketing, it all depends with – we look at each and every project we do in ROI, we decide here we want to spend our money. We know how much we want to deliver to the shareholders and then we make our decisions on the projects, some of them will be R&D projects, some of them will be sales and marketing, maybe sales and marketing moves up to 51%. But I think we’re still staying pretty consistent where we are from a model perspective.

Mike Crawford

Okay, thanks. And just final question is, are there any thoughts about ever trying to bring network as well to be a network provider as well as these suite of services?

Vik Verma

No. I mean, when all is said and done, we are essentially an application. We run on top of the net, the core Internet infrastructure. We are much more around the ability to have – even though we’ve got essentially – think of us as a communications app or communications platform running on an overlay of somebody else’s third-party Internet connection, we don’t ever want to basically be providing the network itself. I think, even our SIC Code is being changed to reflect that, I think we’re now classified as a software and a service…

Mary Ellen Genovese

Application company.

Vik Verma

Yes, software applications company I think that will go into effect on July 29th as opposed to a telco or something to effect. Increasingly, we are becoming reliant or not reliant, but I think it’s one of the greatest advantages we have is third-party network, network coverage is ubiquitous, broadband is ubiquitous, our app runs on top of it and all by the way you not know hardware per se with the exception of the phone.

Mike Crawford

Great, thank you.

Operator

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

Mike Latimore

Hi, great. Thanks a lot. Great quarter, guys.

Vik Verma

Thank you, Michael.

Mary Ellen Genovese

Thank you.

Mike Latimore

In terms of the suits that you offer – in terms of video conferencing and web conferencing, are you seeing kind of consistent growth there? Are there accelerating growth? I mean, how much of that to you…

Vik Verma

Interesting, yes, we’re seeing more. I mean in the sense, video conferencing has been almost there for – I can’t remember how long, right. So, it always starts, but we are starting to see adoption. It’s not hockey stick. First people want initially the whole unified communication, the mobile application and then – so we’re seeing increasingly mobile is now becoming ubiquitous, everybody wants this one number to reach you all, no matter the device, that’s turned to be huge. We are seeing a decrease in telephones, desk phones are definitely going down.

And we’re seeing particularly with the larger customers video is starting to become more and more interesting, which is why we’re making this one-stop shop. And even for us as a company every Monday morning staff meeting I have with all our global team is on video conference and normally would have just been an audio conference call. So, we are definitely seeing the beginnings of video becoming more and more ubiquitous as a business tool as opposed to just hey I’m downloading this YouTube video… So I think that we’re at the right stage for video to really become much more ubiquitous.

Mike Latimore

Just in terms of the sales headcount, what in terms of – your absolute numbers, is there a percent of increase. How much do you think you increase your sort of midmarket and enterprise sales…

Mary Ellen Genovese

We’d actually don’t release that information as far as what are headcount is, but we are - as you know, we’re investing in our channel team and we’re investing in our enterprise team. We see that there is a large opportunity. And we’re going to invest where it makes sense. We’re not going to necessarily put a stake in the ground as they were going to go out and hire X number of people and stick to it. We’re going to add people as we need them, as we need them…

Mike Latimore

Got you.

Mary Ellen Genovese

But as long as they’re bringing in revenue and hitting their quota, we’re going to keep adding folks, because the market…

Mike Latimore

Got it. And then in terms of office-supply deal, are they going to – and now they are going to do internally, will they also be a channel for you guys or is it more of an internal…

Vik Verma

Stay tuned.

Mike Latimore

Okay, thanks. Thanks a lot.

Mary Ellen Genovese

You’re welcome.

Operator

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

Jonathan Kees

Great, thanks for taking my question, and congrats on the quarter. I want to add to that. I want to start with a follow-up first. Vik, you’re saying that the large customer was one of the original ten. So if my count is correct that seven out of the 10, the original 10 you just talked about that you’ve won, which is great ratio. Just out of curiosity and looking at the flipside there, the one that you didn’t win, when you did a deal review, why you just not win it, was it pricing where they just not impressive that global platform or that one-stop shopping, just curious about that.

Vik Verma

No, I think, one kind of changed their mind and we ended up no bidding and the other two are still in place, so who knows.

Mary Ellen Genovese

Stay tuned.

Jonathan Kees

Okay, all right, stay tuned, used again. All right, and then second you talked about the currency impact. Is the international revenue still less than 10% for the quarter? And you just expect that to be the case for the fiscal year?

Mary Ellen Genovese

Our international revenues are approximately 12% for the quarter. So – yes, 12%. There was no currency impact in the first fiscal quarter, remember Brexit just happened very recently. So, the average pound to U.S. dollar was about 1.43, which was the same as what it was in our fourth fiscal quarter, so no impact this quarter. What we’re looking at going forward if we look at 1.4 versus 1.32 that’s less than 1%. So the impact will be less than 1%.

Jonathan Kees

Okay. And I know you had said that you’re still seeing strong demand, especially since it’s over 10% now on your international revenues. For UK and for Continental Europe, you haven’t noticed any hesitation or any pause in terms of their buying or their interest in buying?

Mary Ellen Genovese

No, no. Actually, we have not seen that yet. Now, the good thing is with business communications systems is that everybody needs one, right. And in times of slowdown, if in fact if some people say that UK may in fact go into a recession. If they do and if they’re looking for cost savings, our business communication systems are a good way to save some cost, but right now we haven’t seen any slowdown.

Vik Verma

And by the way anytime people do campaign that’s good for us because in UK, for example, we have the outbound calling capability, which is somewhat seasonal. So whenever people want to do outbound reach out campaigns, they can leverage people like us. So, I think, we see – UK is solid. The biggest surprise to us is the pound, which – again I’m sure different people had different prognostication, Brexit surprised me a little bit, so we had anticipated pound would be in the 1.4…

Mary Ellen Genovese

Yes, 1.4...

Vik Verma

Or something and I think we’re now modeling it to be a little bit lower than that.

Jonathan Kees

Okay, great. Glad you had taken that into account. Yes, Brexit surprised a lot of people. And then last question if I may here, your Virtual Office meeting and I’m saying it’s not going be a hockey stick, but I guess do you envision it to be something where it’s going to be like a VCC, where it’s going to pull in sales of Virtual Office and vice versa where Virtual Office will pull in sales of video and that kind of dynamics?

Vik Verma

Yes, we see Virtual Office – typically, we see Virtual Office as the core, which is basically the core telephony PBX type functionality and then you can kind of add on the Virtual Meeting, high definition video, et cetera on top of it. We see increasingly more people asking for the high-definition video, and the video conferencing, and document sharing et cetera to be included as part of it. So, we see a steady uptick, which then results in higher ARPU. And so that’s essentially how we see the market evolving.

My big thing is I want to make sure people start to use it because I think once you start to use it and you use it for a month or two, you are hooked because virtual meetings suddenly knowing somebody’s facial expression actually matters in every communication, but the problem has always been is using the legacy system, you have to futz with this and bring in an IT guy and then he has to stand on his head and connect this cable. That makes – if you can do it with one click, where with one click you can go from a voice call to essentially a video call, we can have four, five, six people and it can mobile or it can be desktop or it could be your TV in your office that starts to become really attractive.

And I think the more we can get this in people’s hands, the more I think over time people will get hooked. That’s what I think is the – I think the biggest impediment to video which has almost taken off for the last I don’t know 10, 15 years has been the amount that you have to almost have a 10 minute overhead in every meeting to setup the video conferencing, right. If you can make it, so if idiot proof and even somebody like me or a CEO can set it up without calling up an IT guy that makes a huge difference and I think that’s where we evolving to.

Jonathan Kees

Okay. Yes, it sounds very convincing. I hope that’s the case. Good luck for that. Thanks a lot for taking my questions.

Mary Ellen Genovese

Okay, thank you.

Operator

At this time, I’m showing no further questions. I would like to turn the call back over to Mr. Vik Verma for closing remarks.

Vik Verma

Thank you. 8x8 – again, we appreciate all of you taking the time to listen in on today’s call. And we look forward to providing updates on our progress at our various upcoming investor conferences. Thanks again.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference.

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