Good day, ladies and gentlemen. And welcome to the 8x8 Incorporated First Quarter Fiscal 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer, and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today, Ms. Joan Citelli, Director of Corporate Communications. Ma’am, please go ahead.

Thank you and welcome everyone to our call. Today, I’m joined by 8x8’s Chief Executive Officer and Chairman of the Board, Bryan Martin; and 8x8’s Chief Financial Officer, Dan Weirich, to discuss our results for 8x8’s first quarter of fiscal year 2013 ended June 30, 2012. If you have not yet seen today’s financial results, the press release is available on the Investors tab of 8x8’s website at www.8x8.com. Following our comments, there will be an opportunity for questions. Before I turn the call over to Bryan, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts and expressions which reflect something other than historical fact are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor sections of our annual report on Form 10-K, in our quarterly reports on Form 10-Q, and in our other SEC filings and company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you. And with that, I’ll turn the call over to Bryan Martin, Chief Executive Officer and Chairman of the Board of 8x8.

Thank you, Joan, and good afternoon, everyone. I’d like to begin today by providing an overview of our first quarter of fiscal 2013, which will then be followed by Dan’s discussion of the financial details and metrics. We will then open the lines for any questions you may have. 8x8 closed the first fiscal quarter ended June 30th with the achievement of a new milestone, exceeding a run rate of $100 million in annual revenue for the first time. We reported $25.3 million in revenue for the June quarter, a 36% increase in revenue over the same period last year. The trends and metrics regarding the adoption of 8x8 cloud communications services by larger mid-market businesses continued their respective growth in the June quarter. During the quarter, 8x8 added 1,242 net new business customers to its services and we ended the quarter with 29,913 business customers. The average business customer paid $250 in average recurring monthly revenue, compared to $200 a year ago, and they subscribed to 10.1 lines and services, compared to 8.4 services a year ago. The average new customer brought on during the June quarter subscribed to 14 lines and services. The growing adoption of our services in the SMB market was recently substantiated by industry research firm Frost & Sullivan in a newly published report that identified 8x8 as the hosted IP telephony and UC services provider with the largest installed customer base. 8x8 also announced several key customer wins in the quarter including McLarens Young International, a large insurance industry service provider, Irving Materials, the largest privately held construction company in the United States and transportation industry services provider, TMW Systems. Our channel partner program also expanded during the quarter with 94 partners under contract as of June 30, 2012. Product margins modestly declined from…

Thank you, Bryan. Revenue growth was strong in the quarter with revenue from business customers increasing 46%, compared to the first quarter of fiscal 2012. Service revenue from our cloud PBX business, which represented approximately 70% of our total revenue increased 23% year-over-year. This is a new metric we are providing in response to questions we have received about our organic growth since we acquired Contactual on September 15, 2011. Between the fourth quarter of fiscal 2011 and 2012, our year-over-year organic growth rate in our cloud PBX business was 22%. As you can see, we are experiencing acceleration in our growth rate. Non-GAAP net income for the quarter was $3.4 million, a 76% increase compared with $1.9 million in the same period a year ago. Non-GAAP net income per diluted share was $0.05 for the quarter, compared with $0.03 per share in the same period of fiscal 2012. Non-GAAP net income as a percentage of revenue was 13% in the quarter, compared with 10% in the same period a year ago. Service margin was 75%, our 13th consecutive quarter with hosted service margin at or greater than 75%. As noted last quarter, we have made significant infrastructure and personnel investments in our operations team over the past six quarters, which is included in our cost of service to build more redundancy into our network. And throughout calendar 2012, we have experienced increases in our outbound calling cost structure due to the merger of two of our largest vendors. Both of these factors have resulted in a decline in our service margins. We are aggressively working to bring on new outbound calling vendors to reduce our overall direct costs for termination. As I have stated in the past, our goal is to grow service margins to 80% over time and…

Thank you, Dan. For your reference and convenience, we have posted a transcript of our prepared remarks on the Events & Presentations section of 8x8’s Investor website, which you can find at investors.8x8.com. As a reminder, 8x8’s annual meeting of shareholders will take place on Tuesday, July 24 at the company’s headquarters in Sunnyvale, California at 2 o’clock p.m. Pacific Time. We will also be presenting on August 14th at the 15th Annual Oppenheimer Technology, Internet & Communications Conference in Boston, Massachusetts. We look forward to seeing you at one of these events. With that, we will be happy to take any questions you have for us today. Karen, if you could please open the lines for any questions.

(Operator Instructions) Our first question comes from the line of Mike Crawford from B. Riley & Company.

Regarding the reduction in churn down to 1.7%, is that some thing you see as sustainable or was there something that you are doing differently now to achieve that result?

Hi Mike. This is Dan. So we note early this year that we hired an individual named Eric Goffney to run our customer service department. He joined the company in January and his background is with much larger companies in 8x8 running customer support division. So he’s definitely a customer service professional and he has been doing a phenomenal job over the last six months. And it was a massive improvement over last quarter. We’ve always indicated, we think there is definitely room down for churn that we could do better. So I think that we will be, kind of, at or near these levels in the future.

And is that about -- as it gets then or is there some kind of achievable floor in churn?

Well, I mean, Eric has been making a lot of changes in the first six month that he has been with the company and the changes he’s put in place are still in the works. And a lot of it just relates to the way that we handle customers issues when they contact us and primarily customer satisfaction is if they have an issue and they are calling us, we need to resolve it as quickly as possible. And so it’s what we’re working to do is to resolve it on the first call and make the customer happy and satisfied. So they don’t have to call us back. And so there is definitely still lot of work in progress. And so I think that potentially there is definitely some room ahead on improving churn.

Okay. Thanks and then, you could provide cloud data services as a percent of revenue and may be channel as a percent of new monthly recurring revenue and just give some general comments on your general partner’s initiative, where you stand? Appreciate it.

Yes. So the data cloud revenue was 4% of revenue for the quarter. It was consistent with the prior quarter. The channel side has 94 active partners today. As we mentioned a quarter ago, we’ve begun terminating some of the non-productive general partners but the figure as of the end of the quarter was 94 and I’m pulling the figure for the amount of our sales from our channel. The way that we classify this group is we call it a channel in mid market and the channel side is when we’re selling to companies that were introduced to third-party channel and the mid-market side has been our on sale folks are actually selling to typically 100 line and above account. And in this most recent quarter, it represented 9% of our new monthly recurring revenue that we sold and that compares to approximately 6% to 7% in the prior quarter.

Great. Thank you very much.

Thanks Mike.

Thanks Mike.

Thank you. And our next question comes from the line of Mike Latimore from Northland Capital.

Thanks a lot. So, I guess, just back on churn, great results, I guess, what other initiatives could be implemented here to help keep churn where it is or even improve it. What other things are you guys working on?

Mike, this is Bryan. We are hiring some dedicated resources to target support directed at these mid market customers. I think as we deal with larger and larger customers, the support metrics and parameters and kind of the process flow and some of the requirements that they expect to see are little different from what we deal with at the smaller end of the market. And so we are really trying to transform our support into more of a mid-market organization that will have those characteristics. We also continue to embrace automation for customers of all sizes but particularly for our smaller customers, who would rather be able to, from our account manager, which is the administrative counsel that use to control and change settings in your service. We are giving more and more capabilities to those PBX administrators through that web environment. We are finding that, that is vastly improving customer satisfaction metrics as well. So we are pushing on the low end but we are continuing to divest in the, kind of, mid market and what we do with new customers at the higher end of the market.

Great. And then in terms of your compensation structure for your partners, it feels like that is sort of fully vetted out and the structures in place, there are still some tweaking to do on partner comp?

No. I think we haven’t really done any tweaking to it. So I think our program is pretty well set. Customer partners always want to be paid more. So we entertain a constant influx of request for accommodation in that regard. But we’ve pretty much been with the same program now for the past couple of quarters. So I think we are in a good spot there.

On contactual, may be just any qualitative comments on how that’s proceeding as we are preceding to plan performing as expected?

Yeah. The business is doing very well. It’s growing and it’s very consistent to the PBX growth that we’re experiencing. And we are having some pretty good success on selling PBX’s long side, the contact center product and effectively what we said last quarter, which was that everything strong there has just continued throughout this quarter. We rolled out a new version of the software with some additional features that most of our call center customers are now running on and that’s gotten very good reviews. We also made some improvements in the network infrastructure and interconnect that we got, that we had in place when we acquired the company for our U.K. based customers and that shown substantial improvements in customer stat as well. So I think everything has come along really good there, Mike.

Just last question, just kind of a macro question, yes, obviously companies have -- see the value in using a cloud offering over and on premise. How about just kind of the theme of mobility of bringing your own device? How much of that is a driver of some of your newer deals there?

I think it’s especially as you get to the mid market customers and I think you’ve been able to see that as some of the quotes and the content of the press release as we did this quarter with the few of those new customers. Flexibility and mobility in the field to have full access to your communications infrastructure as if you were sitting on premise with a hard phone in front of view is one of the most often sighted, kind of, advantages that these IT managers are enjoying with these services. So if we think it’s a macro trend that plays right into a hosted architecture like what we are providing.

Thanks. Great quarter.

Thank you, Mike.

Thanks.

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

Thank you. Good afternoon. Well, it is a fast Frost & Sullivan numbers, which I think showed a reality of a very large growing market but also one with a lot of competitors. In that context, how are you looking at yourself as a consolidator within the market versus organic growth opportunities?

Yeah. Hi George. This is Bryan. Thanks for joining us. The market overall and I’m not just talking about hosted UC market, but just the business telephony market in the U.S. and it’s probably through worldwide as well as just extremely fragmented. So, if you purchased the Frost & Sullivan report, you will get detailed pie chart data and you will just see there is a number of very, very tiny slices in the pie. And I think that’s reflective of just the way business communications have been delivered historically in the industry and as Voice over IP became a very common methodology or better methodology to deliver the better services at lower prices. You see that same sort of fragmentation occurring in our specific sector. So, the number of players doesn’t really bother us and never has just because the market is so huge and as I mentioned with the FCC data untapped. We continue on a weekly basis to evaluate inorganic growth as part of our strategy but our main trust and certainly for the most part these results that we’ve achieved today have all being organic. And so we continue to focus on that. But Dan and I are very active in talking with our peers and other companies in the space, so that we know what’s out there and those dialogues will continue.

As you bring in new customers, you are obviously bringing in large companies, larger in the sense of 41 versus 10. But can you discuss the upper end of the tail in terms of how large are you starting to see some of these deals becoming and what kind of opportunities do you see at the upper end of the detail?

Yeah. I think the real differentiating aspect if we look forward in a customer doesn’t really matter how many lines they have. We have customers that are anywhere from 200 lines up to 1500 lines. But really where these technologies become extremely attractive and easy to deliver for us is the more number of locations that business has the better all type of solution and approach to the market is going to work and it’s going to cost a lot less. And so I always think we’d like to segment the market by number of locations the customer has rather than number of lines. The sweet spot in the mid market for us is certainly in the kind of 200 to 500 extensions, but again you could have 2000 person office that had hundreds of locations with 20 people in each location and these services are going to work fine for that.

Okay. A quick question for Dan relative to the call center cost increases that you see, explain that in a little more detail and what kind of opportunities do you see for brining that down?

Yeah. So is what as referring to is primarily related to our domestic termination, so it’s when our customers making outbound call to the United States throughout this calendar year. We’ve seen an increase in effectively our cost per minute. It’s primarily been driven by two large vendors of ours merged late last year. And we are actively working to bring on some new vendors, one of them is a very, very, very large big brand name and we are actually in the testing right now. And expect as I said that service margins will start trudging upwards toward 80% and we are very comfortable that they are going to be moving upwards. I’m very cognizant of the fact that it’s the lowest service margin in 13 quarters and we don’t expect this to continue.

Perfect. Okay. Thank you, both.

Great. Thank you.

Thank you. And our next question comes from the line of Greg Burns from Sidoti & Company.

Thanks for taking the questions.

Hi, Greg.

Hi. In regards to the channel and as that grow as a percent of sales, how should we think about that affecting margins?

I think in a macro level, Greg, it such a small component of new sales, it’s not going to affect margin short-term. There is a revenue share arrangement on a residual basis with most of these partners and overtime as that becomes a significant portion of our customer base and we can kind of start talking about how to think about that. But I mean the way I always think about it at a macro level is cost of sales for those types of customers should be lower, because we can -- we should be able to do less direct advertising to get the customer and at the end of the day most of these deals done through the channel, if we didn’t have the channel partner in place, we would never been in front of the customer to pitch them in the first place. So it would have been non-existing revenue. So its margins on that side of things are not a concern for us.

Okay. And in terms of the competitive landscape, if you just maybe address who you are seeing out there, anyone getting address about pricing or anything you give us in terms of what their competitive market looks like?

Yeah. I don’t think, there has been any changes. Again, a typical customer we are taking them off of an incumbent or a competitive local exchange carrier that they had a very long-term relationship usually since they wanted their business and it’s the big service provider that’s providing long distance to their PBX today. I think in the direct head-to-head segment wherein I think the Frost & Sullivan report is probably the most comprehensive study of the universe and they spend a great deal of time talking about difference in the different services, in the technology platforms and how those are delivered to the end customer. So if we get a lead off of the Google search where I need a new business sound system then you are going to -- I think the names of the company you see on that Google search is also a match with the names you see in the Frost report and haven’t seen any pricing pressure in the space. We’ve certainly not raised or lowered our prices in a number of years and we don’t see any pressure to do that.

Okay. And any more color you give around the patent sales in terms of the number of patents involved may be what patents covered and are you looking to monetize or entertaining monetizing any other portion of your patent portfolio?

No. I can’t give you anymore detail. It was a deal term that we agree to is part of the deal. If you are used to our press releases, they are usually quite detailed and long and this one was not for that reason. So there is no more color I can give you there. And yes, we are always looking for opportunities to monetize intellectual property there.

Okay. And lastly, on the last -- in the last quarter, we talked about international opportunity. I was just wondering, how you are looking at that now may be the other infrastructure in place now to expand into certain markets or what investment are necessary to kind of accelerate any kind of a national or international expansion for you?

Yeah. There is new work being done. There is business development work and there is also kind a productization work, but needs to be done in that area. We don’t have anything to announce on the product side. I did reference that we had, put a bunch of investments into our European or U.K. specifically infrastructure and kind of beefed up some network capabilities over there. So but we are not ready today to announce specific products or services, but it is an area we are continuing to work. And we see it as a natural progression. As we get more of these mid market customers, it’s very common for them to have employees in international locations. We want to be able to provide the exact same quality of experience and capability in those international locations so we can provide anywhere in the U.S. today and that’s the general direction we are going. We will have news on that when we are ready to launch it.

Okay. Great. Thank you very much.

All right. Thank you.

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

Nice print, gentlemen.

Thank you, Dmitry. Thank you for initiating coverage yesterday.

Yeah. Glad to be on Board. Thank you. So couple of questions guys. Well, first, since you typically don’t provide or don’t guide quarterly or yearly there is sort of no outlook out there for people who kind a catch on to. So curious to see what if you could kind guide us what the organic potentially growth this year, next year might look like. Give us some indications first to get comfortable and the reason I’m asking if I look at the consensus numbers, street baking in about 23%, that sort of in line where you are right now in your organic PBX business. But then there is a stepdown next year to 16%. So just curious to see whether we are going to see accelerations here or 16 to sort of the right level to be thinking about, if you could provide some commentary there that will be great? Thank you.

When you are saying 16%, you are referring between fiscal 2013 and fiscal 2014?

Yes. That’s right. Yeah.

Okay.

Yeah. Yeah. Yeah.

Yeah. So we disclose the organic growth rate of our core PBX business, which I mentioned 70% of our total revenue and so there is another derivative of that is our product sales which are derivative to the PBX component and that’s another like 8% or 9%. So we are talking about almost 80% of our business is growing at 23%. So I think that the consensus numbers out there for this current fiscal year 2013 are pretty good. I think that it’s pretty reasonable figures. On years outside of that, we are just not commenting on it. It our opinion for long ways from now and we can’t provide you any kind of visibility into that period of time.

Okay. That’s fair. So we expect you guys to give guidance for maybe full year at some point or even quarterly, so we can sort of gage, maybe how to think about the numbers or maybe even seasonality in your business? Is that something we could expect to see going forward?

Yeah. I think -- this is Bryan, Dmitry. It’s certainly something we discuss regularly around here. I think the may issue we have is most of our new monthly recurring revenue that we are adding is in a very short, these small businesses that form the majority of our business customer base are sold in a kind of two to four week sales cycle start to finish and that doesn’t give us very much visibility going forward on topline. But I think at a macro level, as we move more into the mid market which has more like a 90 or 180 days sale cycle and I can start getting visibility of the funnel out a quarter, where we evaluate that. But today the reason we don’t give you topline is just we don’t necessarily always have it internal to our systems either.

Okay. All right. Great. And couple of questions here on the…

Okay.

… data hosting product side. You mentioned revenue churn was a bit higher than in the prior quarter and then it was due to some cancellation of a data cloud product. Could you give a little bit of explanation there, what’s happened and whether we can see that not to reoccur going forward, number one? And sort of give us a sense of where you are? I was still top of the first inning here with the data cloud product, is that kind of a fair assessment or are we moving along in that hosting space and could see kind of contribute to revenue in more material way?

Yeah. So, on the second part of your question first. I mean, it was 4% of revenue -- last quarter was 4% and this quarter we just announced. And we use this primarily is like an upsell to our installed base of customers and so I wouldn’t really categorized it in like the first inning. It’s just kind of like a derivative of the rest of our business and frankly, I don't know if it will ever grow above this percentage of our total revenue. But it is kind of consistently growing with the rest of the business. On the churn related to that, we had a couple of issues. We had a couple customer cancellations on that side and they were customers that are not buying our voice product and we had a couple of customers just get smaller. Some of these customers are like this Internet, social media type, start-up type companies and they can get big and small quickly and that was the two factors. So, as you can see our customer count churn was down below our revenue churn for the first time ever since we start disclosing revenue churn. And, yeah, I wouldn't consider this to be a kind of a negative indicator for multiple quarters in the future, the revenue churn. I wouldn’t consider that to be a negative leading indicator.

Okay. Great. And then last question, Dan, on the contribution margin side. You use to get that metric, would you care to give us that metric again this quarter?

Yeah. Yeah. So we have a presentation up our website, we have a slide in there on that and the contribution margin this quarter is 61%, and our definition of contribution margin is our GAAP service margin. Last two items that are in sales and marketing expenses, which is customer services and billing expenses and so we are 61%.

Okay. Excellent. Thank you very much and keep up the good work, guys.

Right. Thank you, Dmitry.

Thanks, Dmitry.

Thank you. And our next question comes from the line of Mark Zinski from 21st Century Equity.

Yeah. Good afternoon and congratulations on the quarter.

Thanks Mark.

First question, just as in terms, excuse me, of the rural small business segment, a fair amount of small -- rural small businesses still don't have Internet access. And are they generally not lumped in with the overall small business market potential?

I think my perspective, which is based on kind of the prospects that I could involved with and we are selling to the small businesses is actually most the small businesses we sell to these days do actually have high speed Internet and I think a lot of that was driven when the credit card payment companies required them to move their credit card processing machines over to IPs. So if your business that uses a credit card in your business, you pretty much have to have that in order to take credit cards. If you look at a map, the kind of maps where our customers are at very much correlates with population density. So we have a little more customers in the Western, specifically California, which we attribute because there’s some local effect there as well. But essentially our customers are where the population centers are and that happens to also correlate pretty well with where the Internet penetration is. But I remember the State of California did a survey in the last year and we were all very surprised by even in rural regions how available high speed Internet was to the vast majority of the residents of the state.

Okay. So, if like recent federal initiatives to stimulate uptick in Internet connections in rural areas, you don’t think will have, will give you any kind of appreciable uptick in market potential.

I don’t think it will have a large effect. Just again operating under the belief that I -- more Internet is obviously better, but I’m actually, like I said, I was very surprised by the California results. You can find those on the -- there is a state broadband task force site that maps out our state, which has a huge area and population that is covered or considered a rural area. We were shocked that how much high speed Internet is out there.

Okay. And then next in terms of SG&A, only picked up a little bit sequentially, is there any kind of inflection point there in terms of operating leverage or any more detail into perspective SG&A levels going forward would be helpful?

Yeah. This is Dan. So as you saw -- sequentially, we saw an increase in our non-GAAP net income as a percentage of total revenue and it was primarily factor of revenues increasing, overall gross margin increasing and there was a lower increase in SG&A. And so, as I mentioned earlier on forward-looking statements and guidance, we are not going to give an indication of where that's going. But, we are very cognizant that we need to make money and generate profits, and so, we are not going to speak too much to that.

Okay. And then just to clarify, were there any one-time expenses this quarter and what's your estimate for one-time expenses for next quarter?

We have a reconciliation table at the bottom of our press release to the non-GAAP figures and there was completely nominal one-time expenses related to our facility access of $9,000. Its -- that number is going to be closer to $200,000 in this coming quarter. So I mentioned that in our prepared remarks and it relates completely to our move from Sunnyvale to San Jose. We did have a one-time benefit from the patent sale of $11,965,000. But if you look at our non-GAAP reconciliation table, you can see that figure is spilled out.

Okay. Great. That’s it from me. Thanks a lot.

Thank you, Mark.

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back to Mr. Bryan Martin for any concluding remarks.

Okay. Thank you, Karen, for hosting the call and thank you everybody for dialing in today and listening. If you're not already a customer of one of our services, as always I’d like to do, I encourage you to sign up. You can do that on our website or at our direct toll free number, which is on the website. The site delivers a number of diversified cloud services that can help you lower the cost and improve the efficiency of your business and again our website is www.8x8.com. With that, we’ll conclude today’s call. Go ahead, Karen.

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