Ladies and gentlemen welcome to the 8x8 Incorporated Q2 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 follow at that time. (Operator Instructions) As a reminder, today's conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Joan Citelli, Director of Corporate Communications. Ms. Citelli, please begin.

Thank you and welcome everyone to our call. Today, I am 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 second quarter of fiscal year 2013 ended September 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 reflects 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, 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 would like to begin by providing an overview of our second quarter of fiscal 2013, ended September 30, 2012, which will be followed by Dan’s discussion of the financial details. We will then open the lines for any questions you may have. 8x8’s topline revenue grew 33% during the quarter to a record $26.4 million, up from $19.8 million in the same period a year ago. Non-GAAP net income during the quarter was $3.7 million or $0.05 per share, compared with $1.7 million or $0.02 per share, in the same period last year. Revenue from business customers, which now represents 96% of total revenue, increased approximately 41% year-over-year, compared with the quarter prior to the acquisition of Contactual. To give a more apples-to-apples comparison, if we included pre-acquisition revenue from Contactual from July 1, 2011 to September 15, 2011, year-over-year revenue growth from business customers would have been 25%. Average monthly service revenue per business customer increased for the fifth consecutive quarter, growing to $256 in the September quarter, compared with $250 in the June quarter and $207 in the same period a year ago. We are consistently adding approximately $10 in monthly ARPU from our business customer base every six months as we continue to sell more services to our existing customers and also sell new services to larger businesses. The average lines and services count for new customers who subscribed to 8x8 services in the September quarter was 14.7 lines and services, up from 14 lines and services in the June quarter and 12.4 lines and services in the same period last year. Dan is going to provide you with additional detail on our margins, but we were pleased to see service margins improve this quarter to 76%, up about…

Thank you Bryan. As Bryan mentioned revenue growth for the quarter was strong with approximately 25% organic revenue growth from business customers compared to the same period last year. Non-GAAP net income for the quarter increased 119% to $3.7 million or 14% non-GAAP net income as a percentage of revenue from the same period a year ago. For the six months ended September 30, 2012 non-GAAP net income increased 96% to $7.1 million from the same period a year ago. GAAP net income was $1.7 million compared to $832,000 in the same period a year ago. Income before the provision for income taxes during the September quarter was $2.8 million compared to $854,000 in the same period a year ago. Fiscal year-to-date net income of $10.4 million compared to $2.8 million for the first six months of fiscal 2012. Year-to-date income before the provision for income taxes was $17.2 million compared to $2.5 million in the same period a year ago. Service margin improved to 76% compared with 75% in the first quarter of fiscal 2013 but was still down from 77% a year ago in the second quarter of fiscal 2012. As we stated last quarter our goal is to get service margins to 80% as quickly as possible. To achieve this goal we have entered into a commercial agreement with new network vendors and are optimizing our network and network operations activities. Overall gross margin was 68% compared to 67% in the first quarter of fiscal 2013 and 66% in the second quarter of fiscal 2012. Gross margin increased due to an increase in product margins from negative 45% in the second quarter of fiscal 2012 to negative 22% in the second quarter of fiscal 2013. The company’s cash, cash equivalent and investment balances are very strong at…

For your reference and convenience we have posted a transcript of our prepared remarks on the events and presentation section of 8x8 investor website at investors.8x8.com. As a remainder, we will be hosting a west coast analyst demonstration of our cloud based offerings on Monday October 29 at 10:00 am noon and 2:00 PM at the Bentley Reserve 400 Samsung Street in San Francisco. We will be also being presenting our November 13th at the Stevens Phone Telecom and Media Conference in New York. We look forward to seen you at one of this events. With that I will be happy to take any questions you may have for us today to mean if you open the lines for any questions.

(Operator Instructions) And our first question will come from Mr. Mike Latimore of Northland Capital. Please proceed.

So the organic growth rate look very strong, is the kind of environment dynamics, you are seeing there to support that kind of growth rate, for the rest of this year?

Mike, this is Bryan. We don't have guidance going forward, but I will say through the end of September we haven't seen really any change in the macro environment out there. We don't see any change in the competition that we are coming up against, really no change in pricing or any other issues that might affect things. We continue to see the weakness that we've seen for more than three years now with business closures as being the number one cause of churn and didn't see any improvement in that, maybe after the election we will see something there but I just don't see any macro changes that should affect our ability to keep the organic growth where we've been historically.

Great and do you have a number for ARPU of gross ads in the quarter. Or a rough range?

Mike, that's a number that we don't disclose but ARPU for new ads is higher than our average, the $256 so that's what pulling ARPU up quarter-over-quarter and as Bryan mentioned the average new customer subscribed to 14.7 services this quarter compared to 14 a year ago and our overall base is at 10.6. So 14 in the prior quarter. Yeah 14 in the prior quarter, sorry and 10.6 across our entire base at the end of the quarter we just reported.

How about, what was the employee headcount at the end of September and where might it go December timeframe?

So it’s right at 350 and we are hiring I would say as aggressively as we can. If you go on our website you'll see the number of racks we have opened the higher, the flip side of that is Silicon Valley traffic is getting worse and worse day-by-day and I don't think it has anything to do with San Francisco Giants in the playoffs. So we are seeing more people lured away by other opportunities, so we have to hire more than we have to hire a few years ago just to keep the growth up and that’s kind of a challenge again that’s starting to come back in Bay Area. Don’t get me wrong, I am not complaining about an improvement in the macro environment but I am just saying it’s becoming a competitive environment against a very, very talent which is what we seek to hire here.

Just last question, what percent of revenue came from the managed server hosting in consumer?

The managed hosting site which we called cloud data represented 4.7% of the company’s revenue and revenue from residential customers was 4% of the company’s revenue.

Thank you. Our next question is from Greg Burns of Sidoti & Company. Please proceed.

Just a question about the gross ads, you had a lot of games on the (inaudible) side of the business but gross ads has been relatively stable for the last couple of years and given that you are giving new sales channel and you are up to a 106 channel partners I would expect you start to see that number go up. So I am just trying to understand what you need to do to kind of fill the funnel little more and get the gross ads going higher from here?

Greg, this is Bryan. So I was actually very pleased to see our mid-market and channel team basically exceed their internal goals for the quarter. We mentioned the increase from 9% of new sales to 12%, which I think is very healthy for a sequential quarter-over-quarter growth. We’ve started to do a lot more events and different activities with these channel partners. We’ve had several events with certain partners during the quarter where we co-sponsored events. We've been kind of (inaudible) out the non-producing partners and we've signed up some, I think pretty exciting partners including one nation-wide partner that we're not ready to announce yet but we will in the near future. And I would say just, we focus on growth, on new customers coming in the front door equally as we focused on churn and appreciate you taking notice of the tremendous impacts of the churn initiatives we had on our growth but we're in the process and we're pretty far along the path of implementing some new growth strategies and those growth strategies really focus on three priorities. Our highest priority remains focusing on our inside sales team which is selling both our virtual office and our virtual contact center products to small businesses. Our second priority is to continue to push the growth in this bid market and channel effort at these larger opportunities. And our third focus is really to grow our federal and government sales and I can’t give you more details on what we're doing there. We think it's extremely sensitive from a competitive perspective but we are very focused on that equally with the focus that we talked about in previous quarters on churn.

Okay, and then, I guess when I think about the inside sales, that the traffic you generate from internet advertising, I mean are you kind of maxed out on the number of customers you could bring at the [door] is going to really depend on how quickly the channel develops, is that how to think about is or is there additional gains you can make on the internal sales and internet advertising?

I don’t think we are maxed out. Marketing and kind of some enhancements to our marketing programs as part of those growth strategies I just mentioned and again I can’t give you any detail yet because we are still in the formulative stages of rolling this out, but we really think that beyond just waiting for the indirect partners to start pulling their own section of the rope on the growth strategy we really do think that our inside team can continue to make inroads and grow quicker than it’s grown or fail to grow depending on which quarters you are looking at in terms of new growth apps. So that’s our number one priority in the company and that’s what the majority of the employees here are focused on.

Okay. And I was looking at your website I noticed you are offering had some special pricing offers for Virtual Office, Virtual Office Pro is that in reaction to anything you are seeing in the market or is that just something you normally do throughout the year any kind of insight into that would be helpful?

Hi Greg this is Dan Weirich. I mean the promotions that we have on our website or fairly constant or various different promotions overtime but the promotional pricing that you are seeing on there today is very comparable to what you would have seen a year ago or six months ago. So it’s not in reaction to anything specific but it’s typically based on some sort of discount of the list price and we tend to price deals differently based on the geography where the customers coming from so in some geographies around and then I would say expenses are much higher than in other geographies so we provide our sales people tremendous flexibility and ability to price as well as volumes increases for customers meaning more employees and larger customers that we can tend to provide volume based discounts to new customers.

The next question is form the Dmitry Netis of William Blair & Company. Please proceed.

Couple of questions, on the breakdown between the hosted BX and the contractual, can you give us what the breakdown more at this quarter?

Yes, so we are not providing that breakout and the primary reason is that it’s done entirely well 96% of the customers (inaudible) it will migrate on 8x8 systems. Many of those customers are buying 8x8 PBX services as well kind of decent amount of success in selling PBX solutions into these folks, but all of those customers are buying the Telephony solutions into their call centers from us which is the toll free calling and to the call centers as well as the outbound calling capability. So these customers have been completely migrated on to systems and we have to break it out in the product line at that point to provide you that information, but I mean the main figure is to focus on is 96% of the company's total revenue is coming from business customers and the earlier item that we broken out is just this cloud data component which is the only non-voice related services is 4.7% of the company's revenue. So we talked about 25% year-over-year growth. We are referring to the 96% of the company's revenue.

And will you be able to please tell us that 25% organic growth, how is it relative to each of the businesses; is it about the same for both or, I know you are not splitting it, but are you able to -- I think last quarter you said 23% is what your cloud PBX and Contactual grew quarter-over-quarter, I'm sorry it was year-over-year I think was the number that you gave and now its 25%, so it grew nicely and I think last quarter was about the same for both businesses, the PBX and Contactual, would you care to tell us whether its about the same again this quarter?

All that we can really tell you is that 96% of our over revenue from business customers grew 25% year-over-year. Its really been sold transparently as just an additional, its almost like the customers signing up for an additional checkbox if they want some call center. So we migrated the networks together, we've now migrated all of the billing and backlog of the systems together and its really one unified service which is why we’re not trying to differentiate between them. Its just another capability you can buy and you can buy one seat of it or you can buy 150 seats of it and the functionality is the same.

I am sort of getting to that same point, because I am noticing your ARPU is growing nicely and that's probably some Contactual, adding Contactual seem to be doing well, what it boils down to. Your net adds however were below last quarter and last quarter was actually a nice number. You printed I think 12.42 net business customer additions, this quarter I would see 5.85, if I'm doing my math right. So this is the reason, so the question is, Contactual seem to be doing well, is it the cloud PBX that sort of trailing because mostly your net adds are not growing as fast as one would expect. I mean last year you were somewhere in the 1,000 to 1,200 net adds range across, well probably even going back to December of 2010, so last say six, seven quarters and now this quarter so to 585. So what's going on there, could you give us some perspective on that and how it might sort of trend going forward?

Yeah, so we mentioned that we had wanted fairly to be represented approximately 400 customers and if we look in the second footnote on our selected offering statistics table we specify that as the 411 customers. So adjusting for that, I mean gross adds, our net adds were up in excess of 900 customers. A year ago the 3,176 gross adds included 250 customers acquired from Contactual, so you can see that in footnote one of the selected offering statistics. So if you adjust for both of those, the change in gross adds was 10 year-over-year and the item that we keep kind of reiterating is that a year ago the average customer we’re finding out for 12.4 services, and this quarter it was 14.7. So the number of services, the ARPU of the customers coming in the door is going up almost every single quarter, fairly consistently and it’s not because contact center is doing better than PBX; both of the businesses are sold in tandem and they’re effectively one and the same and they’re growing at a very comparable growth rate.

And I just have one last question on the service margin. Dan, would you give us sort of the bridge between the last year’s 77.5 and this year’s, 76, so that’s roughly 150 basis points or 150 basis points of downward change in the service margin. It has improved from last quarter. So if you could comment or give us a perspective of what drove it quarter-over-quarter and what drove it higher on a quarter-over-quarter basis and lower on a year-over-year basis, that would be great? Thank you.

So on a year-over-year basis, why declined was, as we mentioned last quarter, we made significant investments over the last 18 months or so on building in the East Coast a presence for our network infrastructure. Every quarter that we add more revenue, in sense of spreading that cost over a greater component of revenue which results in expanded gross margins. So we're more fully utilizing our fixed cost is one of the reasons for increase in the most recent quarter over the June quarter. But the reason for decrease year-over-year is that there is a lot more fixed cost today than it was a year ago related to this network infrastructure and also that is coupled with what we mentioned quarter ago that some of our network expenses had increased for kind of a multitude of reasons and we have since entered into multiple commercial relationships with network vendors to bring on additional coverage and reduce pricing and just a lot more vendor diversity. The prime vendor that we entered into relationship with during the quarter is Verizon, it’s a contract that covers a wide variety of services and they have extremely comprehensive offering and will be a huge backup as well as kind of diverse vendor for level three communication since been the company’s biggest vendor for quite some time and became a larger vendor when they merged with (inaudible) a year ago. So those are lot of the activities that we have had in place.

Got it. When will you start seeing the benefit of Verizon being on board in terms of termination costs improving?

We think that we start seeing improvement almost immediately. We have reiterated that our goal to get to 80% service margins as quickly as possible. Our compensation of our executive team is based on hitting that figures as soon as we can, which means this fiscal year and I can tell you that we are working day and night to hit that figure and it relates to many, many things in the organization and signing a Verizon contract is just one component of many.

Okay. And then the fixed cost for the network infrastructure do you see that diminishing going forward, or it was going to probably say at the same sort of rate, that you seen over the last couple of quarters as you were fielding new data centers?

Yes, so the investment the data centers is done and so the improvement quarter-over-quarter did that represented will be similar improvement in their future quarters. Just think of it is unrealized real estate and you are using 50% of it, in the next quarter you are using 55% of it. So you‘ve got revenue running over greater percentage of the fixed infrastructure.

Yeah, Dan mentioned, we expect CapEx that kind of go back to our historical levels. We are going through the operations build up and also through the movement the corporate headquarters until which was the big source of the CapEx this quarter.

My last question would be, if you were to take that 160 basis point improvement, sorry. It’s truly a 100 basis points improvement quarter-over-quarter right there. So how much of that is related to termination and how much is related to the fixed cost network infrastructure?

I mean, there is a lot more components just termination of our business. yeah, where we can provide the exactly details of what else it is. I think you can characterize as most of it is the customer based growing into operations investments that we previously made. It’s written down are very little, the vendor we talked about is not online yet, so that had no impact on the improvement.

So it’s got to be the outbound and outbound cost which is the direct. So the inbound termination partner which is Verizon not on board yet, you have not seen the benefit of that yet, but you are still incurring some outbound charges, aren't you?...........

We are just incurring improvements in our operations efficiencies. So essentially we've got market customers coming in you know there's additional ARPU we talked about and there's think about essentially there is no net new investment in operations to support those customers.

Our next question is a follow-up from Greg Burns of Sidoti & Company.

Just wanted to dig into the acquisition costs, they are down this quarter but some (inaudible) keep on going up so it seems like we get efficiency, somewhere can you just talk about what's driving that.

Yeah, we saw some efficiencies I think in our advertising during the quarter than the previous quarter, but this is a number that historically it’s always been in kind of $90 to $100 per service or per line range. Even going back to the days when we were selling home phone lines, it cost between $90 to $100 in advertising to get a new consumer customer signed up so it does, it varies but we really don't worry about it or pay attention to it as long as it kind of stays bound in that range or kind of $90 to $100 per service. So I wouldn't read too much into it. Some of its in effect on timing, some of the different marketing programs were running, some of it just kind of it moves around. So it’s a significant improvement as a percentage of the figure. Our payback is still six months on these customers. So I think that might be a better macro number to look at and if suddenly we go to eight or nine months to payback the business customers then whatever reason why that is.

And in terms of the churn, do you have anymore buckets of customers like this that are risk of at least one-time churn events and could you just comment on the linearity that you saw in the quarter? Thank you.

The answer to your first question is no. I don’t think we have another affiliate which is administering this many different individual businesses or at least to have control. We certainly have channel partners that have brought in these many businesses but they don’t that’s kind of run the administrative function of selecting which service provider does businesses are using. So we believe this is a unique situation and you won’t have kind of weird hiccup in customer churn that we had to explain this time. Having said that revenue churn kind of is to me a much more important metric but I appreciate your patience and kind of faired through the differences there. So I'm sorry second question.

Just linearity that you saw throughout the quarter?

And that's the other thing. We talked about some growth earlier in the call and in the month of July historically is has always been tough. We did very well a year ago July and I can't really explain any difference in kind of our approach to the month, this year July 4, fell on a Wednesday which meant I think effectively you’ll kind of lose the entire first week of July and if you count the number of business days and where the weekend so it was just a particularly brutal month. So we did get a very slow start to the quarter as we sometimes do in the summer months but other than that I would say linearity was there was nothing unusual about it.

The next question is from Mike Crawford of B. Riley. Please proceed.

As the market starts to mature a little bit, are you still competing mostly against people, businesses moving away from old wire line services? Are you seeing more or less of any of these other private startup cycle and bring (inaudible)?

Hi, Mike, it's Bryan. I don't think, I think the majority of our new apps are still kind of migrating away from a circuit switch solution that might be powered by anything from a Nortel to some other aging kind of PBX infrastructure. It's interesting because we're seeing, I would say, more in the larger customers, the mid-market base coming to us with maybe an Asterisk type of system which is public domain software that a lot of IT staffs like to utilize and they may have started with that or have that for a number of years and they’re seeking something that’s maybe more enterprise quality or more turnkey solution that doesn’t involve the same administrative cost that having to sink into, to managing the Asterisk platform themselves. We're also seeing a lot of these mid-market customers come to us with Cisco CallManager refreshes and maybe called Manager platforms they had for a number of years and from an expense both on the administration side but again as you move forward with these licensing models to get the latest and greatest features in unified communications and support the latest devices out there, a lot of these vendors are requiring a very significant capital renewal in order to get the latest and greatest code on that platform and we believe some of these large vendors are in that cycle right now. So I think in the mid-market it's very interesting to see that. On the call center side, we continue to see people that are using ShoreTel call center products that are again looking for a more enterprise grade call center product and that’s been a great source of leads for our virtual contact center team. So it’s basically the same competitive dynamics but we are seeing, I have seen a lot of them and we just came back from a mid-market CIO forum event last week in Florida where we saw literally dozens of very large mid-market customers with kind of these refresh problems. So we are hoping that that is a new trend.

I am showing no further questions in the queue. I would like to turn the call back to Mr. Bryan Martin.

Okay, thank you Janine and thank you everybody for joining us today. If you are not already a customer, I would encourage you to go to our website, look at our many diversified business cloud services you can find that at www.8x8.com. With that we’ll conclude today’s call. Go ahead, Janine.

Ladies and gentlemen, thank you for attending today’s program. This does conclude the conference and you may all disconnect. Everyone have a great day.