ShoreTel, Inc. (NASDAQ:SHOR) Q4 2016 Earnings Conference Call August 4, 2016 5:00 PM ET
Barry Hutton - Director, IR
Don Joos - President & CEO
Mike Healy - SVP & CFO
Dmitry Natis - William Blair
Barry McCarver - Stephens Increases
Greg Burns - Sidoti & Company
Mike Latimore - Northland Capital Markets
Good afternoon and welcome to the ShoreTel Fourth Quarter Fiscal Year 2016 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note that this event is being recorded. May I also add that we at Chorus Call use ShoreTel telephones. In fact, I am speaking to you right now on a ShoreTel telephone.
I would now like to turn the conference over to Barry Hutton, ShoreTel’s Director of Investor Relations. Please go ahead sir.
Hello, and thanks for joining us today as we report the financial results for our fiscal fourth quarter and fiscal year end 2016. Joining me on the call today are ShoreTel's President and Chief Executive Officer, Don Joos, and ShoreTel's Chief Financial Officer, Mike Healy.
Before we begin, I will remind you that during today's call, management will make forward-looking statements within the meaning of the Safe Harbor provision of federal securities laws regarding the company's anticipated future revenue, gross margins, operating expenses and other financial and business-related information. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Additional information concerning the risk factors that could cause actual results to differ materially from those in the forward-looking statements can be found in the company's most recent Form 10-K and 10-Q and the current report on Form 8-K furnished today. The information in this conference call related to projections and other forward-looking statements is based on management's current expectations. The company does not intend to update its forward-looking statements should circumstances change.
As a matter of policy, ShoreTel does not comment on financial guidance during the quarter, unless it is done in a public forum. Additionally, ShoreTel maintains a presence on Facebook, Twitter, LinkedIn and Google Circles that it uses from time to time to republish company news.
We will be discussing both GAAP and non-GAAP results throughout this call and I ask that you refer to our press release issued today for the reconciliation between these amounts. Our non-GAAP numbers exclude stock-based compensation charges, amortization of acquisition-related intangibles acquisition relating cost other adjustments and their related tax impacts. We ask that you please keep your questions to the operational and financial results announced today.
And now, I'll turn the call over to Don.
Thanks, Barry. As we close fiscal 2016, I want to recognize a number of key milestones that we achieved during the year, all tied to my prior comments when I had originally outlined the acceleration phase of our strategic transformation. We completed the rollout of ShoreTel Connect for cloud, onsite, and hybrid environments. We expanded our cloud services by launching in the U.K., Australia and Canada. We completed two acquisitions and we launched our premise to cloud migration program to monetize our premises installed base.
As we begin fiscal 2017, I continue to be energized by the broad global demand for communication services. This fiscal year we will cross an important inflection point where our hosted revenue will exceed product revenue, driven in part by the introduction of our premise to cloud migration program. More than ever before, we are well positioned to accelerate our hosted revenue growth. Our transition to being a cloud based solutions company is evidenced by two key factors. The first is the value of our existing cloud install base. Our 5,500 cloud customers pay an average of $2,100 per month. If I take this installed base and do not make any assumptions for future growth, it still represents a lifetime revenue of opportunity of nearly $1 billion.
The second is the value of migrating our premise customers to our cloud services. To date, nearly all of our cloud customers have come from net new logos. On April call, we announced our premise to cloud migration program targeting our large promise customer installed base. In the June quarter, the customers that made the decision to switch to cloud represented 11% of the Q4 cloud bookings. These specific customers will generate annualized hosted revenues that is close to twenty times greater than their previous support revenue recognized by ShoreTel.
Furthermore, using the actual results we saw in Q4 and assuming a 10% migration, this would represent $135 million in incremental annualized hosted revenue, and if you assume a 50% migration overtime, this would yield approximately $675 million dollars in incremental annualized hosted revenue, granted a conversion of the scale would take more than three years to achieve.
To recap our fiscal fourth quarter, let me provide some brief financial highlights. Total revenue in Q4 was $94.6 million, including a 20% year-over-year increase in hosted revenue and our cloud bookings growth was 23% year-over-year. Our non-GAAP operating income in Q4 was $4.2 million resulting in an operating margin of 4.5%. This reflects the execution of our growth initiatives, effective cost controls, the ongoing integration of our two acquisitions and seasonally strong product revenue.
In the quarter we generated $9.8 million in cash flow from operations binging the full year total to $35 million and an ending cash balance of $108 million. We ended fiscal 2016 with a solid cloud business and we expect the hosted revenue for fiscal 2017 to outpace last year's results. To achieve these outcomes, we will continue to execute against our five catalysts for growth. Before I provide an update on the progress in each area, I'll remind you that the five catalysts are; the rollout of the ShoreTel Connect offering; two, the global expansion of our cloud offering; three, the scale of our channel partner community; four, our success with mid-market and enterprise customers; and five, our ability to leverage our premises installed base to drive cloud services.
ShoreTel Connect is our first growth catalyst; one benefit of rolling out ShoreTel Connect which is our integrated offering based on a single software code is the creation of a hybrid solution, one that services both cloud and on-site environments. The power of our hybrid offering is shown by a recent customer win with a non-governmental organization. As an international organization, the customers migrating its ShoreTel premises phone system and its multiple U.S. locations to a ShoreTel Connect cloud solution driving more than $10,000 in monthly hosted revenue. Meanwhile, they will retain their current connect on-site system at their international locations outside the U.S. In total, the on-site and cloud solution will be linked to a single system across all global locations.
The second catalyst is the global expansion of our cloud offering which has gained momentum in Q4. Our actions in fiscal 2016 to expand our cloud services in the U.K., Australia and Canada are matching our operational and go-to-market expectations as the technology integrations are completed and local channel partners are actively selling. In Q4, I was pleased to see cloud booking contributions from each of these markets.
Our third catalyst, channel partner scale, continues to be the driving force behind our cloud sales efforts as our partners continue to contribute over 90% of new customer wins. In total, we signed 550 new cloud customers in the quarter which is a new high for the company. We continue to show momentum in the fourth catalyst which is serving mid-market and enterprise customers. The number of 50-plus seat new customers signed in Q4 was 36% higher than a year ago. And we booked six customers that will each generate over $10,000 in monthly hosted revenue.
The Connect cloud offering with its bundled application options, continued attracting larger customers; for example, a law firm based in Miami replaced its incumbent PBX with Connect cloud to serve 850 seats with a bundled profile and application package that also accommodated a disaster recovery solution.
Finally, let me highlight our fifth catalyst; premise to cloud migration. Until this point the vast majority of our cloud growth has come from new customers we've won through competitive displacements. As a reminder, we previously announced that our premise to cloud migration program was launched in the latter part of the March quarter and was designed to monetize our premise installed base of over 4 million seats.
I'm pleased to report that in fiscal Q4. The first full quarter of the premise to cloud migration program, it represented 11% of total cloud bookings in the quarter. This is an attractive program because early results indicate several key points. First it is more cost effective to sell to existing customers as we estimate the customer acquisition cost to be 20% to 40% lower. Second, migration customers have a larger average seat size compared to net new customer bookings. Third, the average total monthly revenue from these customers is larger. Fourth, of our ten largest cloud deals in the quarter 4 of them came via premise to cloud migrations.
Because the customers are migrating from premise to cloud they will not renew their support agreement but we gain new hosted revenue. So as a result of this program it equates to an annualized revenue increase of nearly 20 times for these customers a very lucrative and compelling return on these migrations at this early stage. As I look back fiscal 2016, I am pleased with our execution against our five catalysts for growth. We've seen success in a number of areas which will drive accelerated bookings and hosted revenue in the coming year.
As we enter fiscal 2017, I want to share additional focus point that is aligned support our growth initiatives and leverage what we've accomplished so far. This focus is the introduction of ShoreTel summit, our communications platform as a service commonly called the Seapast. In January our acquisition of Corvisa included an open communications technology platform built to encourage innovation by third party developers, partners and customers. This allows companies to build and integrate voice and SMS communications into any workflow or application. An example of features could include automated appointment reminders, self-service I.D.Rs, or mobile marketing promotions. Capabilities far beyond simply exposing A.P.I. within to Youcast solution. The unique combination of ShoreTel connect and ShoreTel summit enables the flexibility to customize and deeply integrate communications with back end systems.
Providing our growing customer base and new customers with a complete solution as they migrate to the cloud. It gives customers the ability to evolve their communication needs and promotes the freedom to get exactly what they're looking for from one provider. Whether that's a complete solution out of the box or flexible tools to create a custom solution or both. We are also excited about the Corvisa acquisition. Was the communication platform was an existing technology offering that just required some greater business focus and discipline. Because of this we already have ShoreTel summit in the marketplace today. I’d like to share some examples of early wins. First a large dental insurance company had an existing ShoreTel on site solution with our contact center application and then used the summit platform to create highly customized IVRs to convert 50% of our calls to self-service making the customer experience more convenient and giving them a single source and to end solution.
Second an automotive retailer company used summit to build custom call routing between their 80 store locations and present callers with customized messages about store hours and site specific promotions and third we recently signed a music equipment company that is using summit to build an automated phone based customer survey. Our current ShoreTel partner who is expanding their business model by leveraging the summit platform will be helping the customer build this application.
As you can see ShoreTel summit is well suited to engage with new kinds of customers and partners such as companies looking to build communications into their applications or are looking for easy ways to plug communication features into custom workflows. Our introduction of the summit platform as a C pass offering is consistent with our long term strategy of making interactions simple. Currently the summit platform is generating a small part of our hosted revenues. The ShoreTel summit business model differs from our cloud offering because the revenue is driven primarily by customer usage which is simply the volume of minutes utilized on the platform.
As our platform business model evolves and the summit platform becomes a larger part of hosted revenues, we will look for new ways to communicate the business progress to you. For me the summit platform along with the great technically skilled employees that came with it is a strategic gem in the core of these acquisitions. How does it relate to fiscal 2017? Let me summarize a couple of key points. We will cross an inflection point in our business model when our hosted revenue will exceed product revenue and right now we expect that to be in the December 2016 quarter.
We are also committed to take the necessary actions that ensure a continued operating profit for the fiscal year. Before I ask Mike to review the financials, I want to make a few comments regarding today's press release which stated the board of directors had previously formed a strategic advisory committee to explore alternative pass. Despite the momentum we've built our stock price has come under pressure and we operate in an environment that is experiencing market consolidation.
It's important that our management and board undertake a thorough evaluation of a range of options to further scale and grow hosted revenue and maximize shareholder value. We enter fiscal 2017 in a position of strength and confidence in our current strategic execution. In the summer of 2013 when we started a three phase corporate transformation to become a cloud based communications provider, strategically and operationally we have built the critical infrastructure rolled out ShoreTel connect, introduced our cloud offering new geographic markets outside the U.S. and most recently expanded our solution portfolio to include a communication platform as a service offering. Over the same time, our financial success includes almost doubling our hosted revenues generating $112 million in cumulative cash flow from operations and expanding our non-GAAP operating margin significantly. Also during this time our stock price has outperformed the S&P, Russell 2000 and NASDAQ. The timeline and outcome of such a process is uncertain, so we do not plan to issue any updates on the process. But I do want to reconfirm our commitment to serving our customers with innovative solutions and delivering value to our shareholders.
In summary as the world shifts towards cloud services we are seeing more opportunities than ever before. To continue to ensure we are well positioned to maximize this opportunity ahead of us, we believe this is the right time to review the options for the next phase of the company's growth. I can assure our shareholders, employees, customers and partners that we will only embark on a new course if it offers superior value for our shareholders while continuing to deliver innovative solutions and an excellent experience to our customers.
At this point, I will ask Mike to review the financials and business outlook.
Good afternoon, everyone. In fiscal 2016 we achieved a number of important milestones. We rolled out ShoreTel connect to the marketplace. We expanded our cloud offering into key international theatres. And we completed two acquisitions that enhanced our geographic presence and technology capabilities. We accomplished all of this swap transforming our business model and strengthening our financial position. The financial results from fiscal 2016 have improved our solid balance sheet even more and provide the financial flexibility to continue to execute and adapt our strategic plan as needed.
Now if I can detail it for our Q4 financial results. I will remind you that all the results from our two acquisitions in fiscal 2016 are reported into our filed business metrics. Our total revenue Q4 was $94.6 million which was our highest quarter ever and represents a small increase from a year ago while we continue to transition our revenue from a onetime product sale model to a recurring monthly hosted revenue model. In Q4 our cloud bookings that are all time high in absolute dollars and grew twenty 23% year-over-year. As John mentioned this result includes bookings from our premise installed customers who converted to cloud during the quarter and a 20 times improvement over the support revenue we were receiving. The booking result also include a few large deals from our recent Corvisa acquisition.
We also had increased booking contributions from the U.K., Australia and Canada. All of geographic theaters in which we introduced our hosted offering during the year. Hosted revenue was $34 million in the quarter up 20% percent year-over-year and represents 36% of our total revenue. We recall that in May we communicated it changed to our expectations for fiscal 2017 hosted revenue growth. Mostly due to operational issues related to our recent acquisition. In Q4 of the same types of issues impacted are posted revenue negatively as we process some 1 time customer credits. With that situation now behind us we do expect posted revenue to accelerate next quarter, we ended the June quarter with 5,500 solid cloud customers totaling 231,000 seats.
Year-over-year increases of 36% and 29% respectively. the metrics for our entire cloud installed base of change somewhat to reflect customers from our recent geographic expansion and acquisitions that initially have smaller size customers and smaller ARPU than our organic customer base, our cloud metrics continue to show strong position within market enterprise customers are cloud installed base has an average seat size of 43. Our average revenue per seat or ARPU is $51. Our average cloud customer billing is $2135 per month. And in Q4 have an annualized posted revenue churn of 5.8%.
Now let's turn to the product revenue which was $41.7 million in Q4 down 12% year-over-year has a mention in prior call calls this decline is primarily due to our sheet focus on hosted revenue growth as well as the general trend in the primus business. However on a sequential business phases we saw product revenue increase by 23%. Reflecting our typical year end seasonal strength in the quarter. Q4 included three large deals which together told close to $4 million. Two of those deals were 4,000 plus the school districts, who typically order in the June quarter.
In Q4 we shipped 147,000 licenses to our Primus customers. Our support services revenue in Q4 was $80.8 million up 1% year-over-year. This amount includes a 3% increase in support revenue with $16.8 million reflecting our consumer high attach rates for the remaining $2 million of services revenue decline by $300,000 a year-over-year as that revenue line tends to fall flat of revenue trends.
Our recurring revenue comprised of hosted revenue plus support revenues I just mentioned total of $50.8 million in the quarter or 54% of total revenues. This represents an annualized recurring revenue run rate of $203 million
In Q4 our international revenue was $7.6 million which was down 3% compared to the prior year but up 11% sequentially, directionally the trends are consistent with our overall product revenue results. International represented 8% of our total revenues in Q4.
And they turn a discussion to gross margin operate spent in operating margins. I will refer to non-GAAP analysis unless otherwise noted and reconciliation to the related GAAP numbers is attached to the earnings press release we issued this afternoon. In the fourth quarter our total gross margins were 64.4% up 50 basis points over last year and up 120 basis points sequentially, on the strength of both our hosted and product gross margin.
Specifically our host of gross margins were 54.3% up 240 basis points from a year ago and we continue streamline our operations and obtain leverage through scale. On a sequential basis gross margins of proved by 100 basis points just as well as expected, the product gross margins were especially strong this quarter at 67.6% up 170 basis points year-over-year due to lower operators lower operational costs in the freight and inventory areas. Sequentially we gained 50 basis points on a seasonally strong revenue and lower operating costs.
The support and services gross margins were 75.7% in the period. Down 160 basis points year-over-year due to increased labor costs against relatively flat revenues. However sequentially we added 220 basis point improvement. The Q4 operating expenses were $56.7 million up - point $1 million from a year ago in line with our expectations as employee related costs increased following our two mid-year acquisitions, which included over 100 new employees. The increased revenue and bookings in the quarter also lead to higher variables spending in areas like commissions for ourselves team partners.
As we have committed to we return to non-GAAP operating profit in Q4 a $4.2 million for 4.5% non-GAAP net income for $3.5 million or $0.05 per share. We had a GAAP net loss of $744,000 or $0.01 per share which includes charges for stock compensation of $2 million $1.9 million for amortization of acquisition related intangibles and $600,000 for other adjustments.
From profitability and improvements in working capital throughout the year has enabled us to continue to invest in growth and innovation especially in our cloud business. We ended the fiscal year with an improved cast position of $108 million in cash and short term investments and no debt and our $100 million line of credit is available to us our cash flow from operations in the quarter was $9.8 million. Speaking to full year quarter $35.1 million.
Our capital expenditures in Q4 were $2.7 million. And $10.8 million for the year as we continue to invest in our growing business in ongoing technology innovation. The same time our depreciation amortization in the quarter was $5.4 million. Accounts receivable end of the quarter at $32.9 million an increase of $7.7 million due to the seasonal increase in revenue. Our sales outstanding declined to or a mark of all 28 days, on the liability side of the balance sheet our preferred revenue increase to $77.7 million as our support contract continue to grow and renew at a very high rate over 70% of those revenue will be recognized in the next twelve months.
And finally we finished Q4 with 1194 employees up six since last quarter. At this point of take a few minutes to point out some of the highlights for our fiscal year 2016. Our total revenue for the year was $360 million a slight increase over last year. Our hosted revenue grew by 20% to $127 million driven by an increase of our installed base of 1450 new customers representing 55,000 new C.
Product revenue end of the year at $158 million a decline of 30% for the year reflecting the mature marketplace in our increased received focus on growing posted revenue, and finally our support services revenue grew 3% to $75 million is that and is a very attractive piece of our business given its high gross margins. The gross margins for fiscal 2016 were 64.8% and the 200 basis of proven from a year ago. As we had a strong improvements in both. HOST the end product gross margins. In particular the host to gross margins increased by 770 basis points. And the product gross margins increased by 140 forty basis points despite lower revenue.
The operate expenses increased by $50 million in fiscal 2016 to 60% of total revenues driven mostly by increased expenses related to our two acquisitions during the year. Also with our ongoing shift to hosted recurring revenue model operating expenses are higher as we incur certain costs to advance from revenue.
In total the improvements in gross margin and there will have to absorb two acquisitions and execute our five halves for growth while stir still earning and not operating profit in 2016 a $50.9 million or 4.4% operating margin. The non GAAP net income of $20.4 million resulted in would be the $0.8.
Now turn our discussion towards our business outlook for the next quarter and our fiscal 201. Next year we will continue to invest in hosted revenue growth and execute the catalyst for growth at the same time our newest cloud offerings tell summit and subtracting to grow as a part of our revenue mix. Given these growth drivers will see an inflection point in our financials of the next few quarters a point were posted revenue exceeds product revenue.
At the same time will continue to evolve our cost structure so it better aligned with our strategic priorities. We have and we will continue to take action to ensure a small non GAAP operating profit for the year as we manage through our transition from product revenue to host the revenue, these actions may include reevaluating vendor relationships, leveraging lower cost regions for the work activities and that are aligning our organizational structure and resources where appropriate. These actions reflect our commitment to maintaining our profitability
With that background we have the following expectations for the first quarter of fiscal 2017. We expect total revenues to be in the range of $86 million $92 million we expect to Q1 non GAAP gross margins be in the range of 63% to 64% while the GAAP gross margins will be roughly 2% points lower due to charges for stock based compensation. Amortization of acquired intangibles and other adjustments.
And non GAAP operating expenses are expected to be in the range of $56.5 to $57.5 million in Q1 the GAAP operates expenses will be approximately $4.5 million higher partly due to an expected increase in stock compensation expenses. Which is common for us to Q1 has that been a previously issued shares and for her to read adjustments both impact that expense in Q1. The midpoint of the guidance implies it will be around breakeven for non GAAP Operating profit for Q1.
Now let me provide some expectations for the full year of fiscal 2017. We will continue our practice of guiding total revenue 1 quarter at a time. The good news is that during fiscal year 2017 hosted revenue will become our largest revenue source and together with our stable support revenue, will provide good visibility to approximately 60% of our revenue.
As we communicated in May we expect our hosted revenue in fiscal 2017 to grow between 21% and 24%. Given our strategic focus and a view of them our - market conditions we do expect our product revenue. If you continue to decline during fiscal 2017 causing the services support revenue to be down slightly for the year to support, to our cloud growth and technology roadmap in 2017 we expect having capital expenditures of $12 million to $14 million for the year.
The non-GAAP cash tax rate for 2017 will be roughly 20%. I will wrap up my comments by welcoming the Brisbane Lions of the Australian Football League, as I knew a sports customer. With that all on the call up for Q&A game. But first we recognized that you may be a sit in today's announcement regarding our strategic review process. However we do ask that you focus today Q&A Just on the operational and financial results of short tell. Thank you.
[Operator instruction] The first question comes today from Dmitry Natis from William Blair. Please go ahead.
Great thanks, good quarter guys. OK to come a question on the financial as well strategic side of things. The 23 % you would be a bookings number you provided you said there was some in fact from these Corsiva I was just curious if you can kind of explain I don't know what exactly you maybe excluding what the number would have looked like or how does that also compare to your annual guidance for the year of 21% and 24%. Sounds like it could be Corsiva kind of get back on track and you said that you do expect the acceleration of this bookings number in Q1, should you be you know above that target or do so is that just conservatism just trying to sort engage that a little bit.
Hi it’s Don. So the comment as relates to the impact from a Corvisa was actually on the hosted revenue more than the cloud bookings as Michael highlighted there was some onetime credit those credits tied back to for those who remember some of my previous comments back in the main June timeframe. This was just related to some of the operational issues that we had to finalize within the - within the acquisitions were created a one-time impact to be hosted revenue relatively small but a one time and then with that behind us we would expect that then to move back in to be acceleration in the Q1 timeframe.
And bookings Dmitry which is the other part of your question. So cloud bookings probably was 23% and I did say we had a couple large deal Corvisa so there was there was to deal 10-K. that came through over Corvisa platform which was a good sign right, to get that start that revenue ramp. So who are very encouraged by those large fields come in.
We did with the Corvisa and just to add on. I mean those two large 1s was coming from the from the shortfall some of the platform offering we also saw office of the contacts and it was a shortfall flex weasel opportunities coming through there, but I would say the 2 large deals was definitely tied to the introduction of the short platforms.
And then the 23 of these either 20% or 23 % booking to be the 21%, 24 % kind of outlook for the year. Given that it's accelerating why would you raise that number I guess just sort of trying to gauge the conservative.
Yes of the media and I think as we talked in the past. Right the Bookings are a small piece of the overall revenue achievement for cloud revenue right. Usage goes in there, it’s the sort of platform or usage. There's ad-on you know there's changes there's price changes all of that impacts the cloud revenue that project is on our 21%, 24% growth. So the bookings of 23% for this quarter that start installing a quarter from now that has some impact of all those other things. So there's not always a direct correlation between the services of booking and what the revenue will be in the future.
Understood. And acceleration in Q1, is that booking acceleration, is that fair. Was that the revenue you're talking about?
Thanks for that clarification. And then I guess the other question I would have is on the 11% number you gave I thought that was an interesting metric that you provided the 11% of the total fourth quarter bookings, cloud bookings that came from the premise to cloud migration, here just remind us maybe what exactly you're doing far as the channel incentives, sales compensation to drive that forward and that something that we should expect to continue to step-up as we go through the year. And finally maybe how much how many customers a how many seen whichever way you want to slice and dice it wasn't better than that eleven % bookings number. Just so we really heard 5 that first 4th quarter of that 11% bookings number.
So we are really encouraged by that first quarter that booking come on post migration program that was the exciting part. We're not going to gain seats side outs or anything and that's just one quarter data and it doesn't produce a trend or anything yet. And it will keep you guys updated as the information comes in. But we are really encouraged by the first quarter activity and you know that 11% just to be clear when we added up the bookings we got from those clouds because we got from those customers last to support revenue and that was going to stop coming in. That was a 20 times influence on our cloud revenue. Now we have you know the first quarter and we thought that was pretty good but we also would have that transition through the rest of the year. Don an anything else.
I mean the other point is we do have you know incentives in place in regards to helping with the you know looking to accelerate some of that decision making process by customers some there's some criteria obviously of where it applies. Those are in place and we do expect to continue those as we go into fiscal 2017. I think as Mike It said we have one data point right now which is Q4. 1 of things we're looking for is over the subsequent quarters as will develop a trend, trend just in regards to what's the pace of this migration, trend in regards to what's the profile and size of customer and how many applications they have and so forth. So one data point we were pleased with the results. I think we got a couple data points we start to get some cumulative results that will be able to share. I think will then be able to start to get a better some better indication of that this longer term based migration looks like but just on the simple math of using Q4 results to pretty big number, whether you use 10% or 50% of base migration as the potential to our hosted revenue.
Thank you. Our next question comes from Barry McCarver with Stephens Inc. Please go ahead.
Hi good after noon, guys, good quarter and thanks for thanks for taking my questions, I guess as a relates to Corvisa the summit solution and trucking it sounds like you've turned a corner with that development. And at least part of the revenue ramp in the next fiscal year is going to be coming directly from those solutions is that is it fair to say.
Yes. I'm expecting them to be some of the platform as well as the step offering and those folk’s offerings coming from there. I do expect that they start to continue become a larger contribution to our overall bookings.
But correct me if I'm wrong. We were when we were talking about guidance for the quarter reported, I think you were a little bit disappointed in Corvisa which is why we were targeting revenue growth from the house that side of 21% to 24%. So I'm now. A little bit puzzled why you wouldn't expect a little bit better than that if Corvisa is ramping up.
Well, I mean we know we've had the platform for a while and we just get it out in the marketplace. So that's always been embedded in our internal projections of what we were going to do next year. Really it was bringing down expectations of some of the other elements of the Corvisa of the platform that caused us to bring down the guidance to 21$ to 24% for fiscal year 2017, and this quarter it was just a one-time just a customer credit so we had to do some operational issues, but those are behind us now. So we do expect you know we're kind of at our low point now in revenue and should be ramping from here and now.
Barry you referenced to turning the corner sales as it relates to the operational issues we definitely feel like we turned the corner there. Now we're beginning that ramp but I think the guidance that we have provided on 21, 24 flex what we have you back contribution. It is ramping but going back to some of our prior you know earlier assumptions it's not at that level of so. That’s what it.
That's helpful. And I know that both acquisition came with some expense. We're still seeing elevated operating expenses, the expect to kind of maintain the level you're assuming for 1Q. Or do you think you have a chance to trim that are you know as we as we see those solutions develop.
I mean not my modeling of expense to growth slightly after Q1 revenue ramps up there's some variable then like course Commission things like that we're going to manage to profitability as Don mentation a little hard to predict exactly what our expense will do, because the product revenue and that we do expect - Can you get healthy gross margins for all three of lines product hosted and service support.
So that it's a combination variable on the OpEx as well as from the cogs like it said we do expect to see resolve this particular quarter on a quarter over quarter basis we did see an improvement in our overall gross margins as well as our host - hosted gross margins and through a range of programs that we have focused on revenue, but also internal operational efficiencies that if we continue to see a steady improvement there.
And then just one last one if I can, I know you don't want to talk specifically about the Pfizer committee announcement but a little puzzled about why the timing now you just had a great quarter, sounds like your expectations for next year are pretty good.
We're not going to comment as a relates to the process itself but as I had said in my prepared remarks this is about where we are coming off of a good quarter, we are pleased with strategic execution. This is more of operating from a position of strength, there is a lot of things going on in the marketplace. I think this is a perfect time for us to take a step back to look at alternate past, as what is the best way for us to execute this strategy recognizing that a part of our strategic execution is to drive shareholder value while we scale and grow our host - host of revenue. So we're going to management board will take a step back and look at all those alternatives to best assess what is the right path for us to execute this strategy.
Thank you. The next question comes from [indiscernible]. Please go ahead.
Thank you. First really appreciate the Sea Pass examples you provide and I thought that was very helpful. Relative to the migration of the customers from premise you had talked about going after customers that were no longer under maintenance contracts, and I'm wondering if that part of the strategy was successful and exact count for some of the 20-X. return that you're seeing overall. And if we get beyond these customers off contract is that a normal expectation that that 20-X. number.
I would say that I think there's two parts in to your question. So let me just clarify both parts for the premise the cloud migration the customers - the customers that did migrate over to cloud all of those were under support. So it was easy math for us to then say you know the transition for every dollar support that didn't renew we were getting about $20 of analyze hosted revenue, separately we have a program within the business where we do go after the customers of our premises install base who are no longer under a support agreement and we look to bring them under an agreement. We do that on a regular basis and every quarter contributing into our support revenue is not only new customers going on me but it's also previous customers who fell off and we're bringing him back on. So that's where that's a different program that helps drive that support revenue for us.
But that isn't a very small percentage of the total customer base those customers are not some form of support. Either way mining for opportunities install they go for revenue.
Relative to the thee large deals that you mentioned were those I couldn't tell from the from what you presented whether that was Primus or cloud and I wondered if you could just give a little bit more competitive details to those winds.
That was in the product revenue sections so those were all Primus deals. All over 1.1 million total of about $4 million in total two of them were school districts 4,000 seats so you know it was usually get one or two of those a quarter, that large but in this case it was yearend and selling team did an excellent job bringing in these is quite large gold-ish and one was the other one was a well-known grocery store.
Okay, thanks guys.
The next question is from Greg Burns from Sidoti & Company. Please go ahead.
Back to the examples you were giving the summit five for us wondering If maybe he's give us a little bit more detail about how you're going to be positioning that product that, are you going to be going after like the types of solutions or customers like Toloy or Vonage is doing with next mile or is it going to be different market positioning for that service and then you know what. The go to market there is going to be the rack there for the channel for that.
Yes. You know other is as it relates to the shortfall summit and the platform is really there's two primary customers I would say that we're going after and there is an enterprise customer who needs aspects of the communication solution that short tail, provide but they also need the flexibility to create deep integration into their workflow within their organization so they have their own internal development organization that needs an environment to do this in the for prior carry development but they want it all integrated together and that's one type of customer I would say the second type is the developer who has a great idea in regards to an application. And they need an environment but I think we're short tail offers is they offer it's a very simple and fast way to get them developing but it also for those developers to give them access to a market, because we have a large and small base that they could be positioning this application to and we also have a distribution into that market through our channel.
So that's what the offering I think that we have I do see from industry evolution more and more and more enterprise customers looking to operate this way, I do see that the u-cast and c-past actually starting to come together, and when you marry in the short tail connect capabilities you really are creating a great a bundle solution that creates a lot of flexibility of how they can deeply imbedded integrate communications and S.M.S. into the work place. So, yes, the people that you were mentioning I see it very complementary to what they are also talking about right now, I think we have a large installed base that we're also going to be able to leverage as well as attract new people into that space.
The next question comes from Mike Latimore from Northland Capital Markets. Please go ahead.
Thanks, the cash flow was really good there. Mike, you made the comment did the SEC cloud acceleration in the first quarter and then simply mean that the year over year growth rate should be better than port quarter year-over-year growth rate.
I got it and then the service gross margin you know there's gross margin. It was a pretty strong this quarter after sort having trended down for a while. Is that I sustainable or like what we think of on service gross margin?
Yes, I mean we're pretty happy with the level in the mid-70, Mike on the server not gaps serving as book gross margins. We do have some hiring to do in the support area. So it's really about how much labor we've put into it in any one quarter really was the margin for you know the revenues pretty stable, you know you kind of predict it would be relatively flat slightly down this year, so I think you can expect the market is relatively consistent in the low to mid-70 range for the rest of the year.
And I think in the past few year in a involved part of you know how much new incremental cloud revenue comes from you know bookings getting implemented to verse usage growth in what we - can kind of update on what the relative makes it is there in fact that their contribution incremental or class revenue every quarter.
I mean I don't have in front of me I think if you still around 15% to 20% comes in through the usage and forms doesn't show up in the MR bookings.
Yes and its last and what we in the latest amount of NOL you guys have at this point?
Over $70 million.
Okay, great. Thank you.
Ladies and gentlemen, that concludes our question-and-answer session and this concludes today's call. We thank you so much for joining today's presentation. At this time you may disconnect your lines. Take care.
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