Good afternoon, ladies and gentlemen, and welcome to the 8x8 Second Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Joan Citelli, Director of Corporate Communications.

Thank you, and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma; our existing Chief Financial Officer, Dan Weirich, and our newly appointed Chief Financial Officer Mary Ellen Genovese, to discuss our results for 8x8's second fiscal quarter of 2015 ended September 30, 2014. If you’ve 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 Vik, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitations, 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 Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan and welcome everyone to 8x8’s second quarter of fiscal 2015 earnings call. Before we begin, I would like to introduce our newly appointed CFO Mary Ellen Genovese. As previously announced, Dan is leaving 8x8 to join a non-competing cloud-based big data start-up here in the Bay Area called Treasure Data. May Allen who has been working with 8x8 in various capacities for over two years and has a proven track record as a CFO will become our new CFO effective November 1 2014. To facilitate this transition, Dan will be working with Mary Allen through the remainder of 2014 in an advisory capacity. On behalf of all of us at 8x8, I wish Dan the best in his new role and thank him for his service to 8x8 over the past decade. Dan has played a very significant role in our growth over that time and has been key in our efforts to capture the midmarket segment and launch our global reach initiative. We are fortunate to have Mary Allen join us as CFO. I have known Mary Allen for more than a decade. In fact, she was my CFO at Savi Technology prior to acquisition by Lockheed Martin. Prior to Savi, she was CFO of Trimble Navigation where she played a leadership role in helping them transform from a horizontal GPS technology provider to becoming the dominant player in targeted vertical markets. Under her watch as CFO, Trimble’s revenue more than doubled from 271 million to 669 million while she maintained strong operational margins and positive cash flow. In her previous CFO position, Mary Allen completed numerous acquisitions, complex joint ventures, secured financing, led cost reduction programs and built global financial reporting capabilities. Dan has built a deep and experienced finance organization here at 8x8 and…

Thank you, Vik. Our second quarter revenue growth was strong with a 30% increase in service revenue and 29% increase in total revenue, compared with the same period last year. 41% of our total service revenue in the second quarter was from customers who generated more than $1000 in monthly recurring revenue or MRR, compared with 35% in the same period last year. As Vik noted, our sales were robust in the quarter with new monthly recurring revenue sold by our channels in midmarket sales increasing 59% year-over-year representing 44% of new MRR sold in the quarter compared with 33% in the same period last year. All of our sales channels experienced an increase in MRR sold in the quarter. GAAP net income was $1.3 million or $0.01 per share. Non-GAAP net income was strong at $4.3 million or $0.05 per share and 11% of revenue, compared to $4.1 million and $0.05 per share in the same period a year ago. Sequentially non-GAAP net income as a percentage of revenue increased from 8% to 11% due to approximately 1% expansion in gross margin, 1% related to better optimization of our sales and marketing spend, and 1% related to capitalized software. During the quarter we received a $1 million licensing payment related to family of patents we sold in fiscal 2013. We removed the $1 million benefit from our non-GAAP net income because we consider this to be an isolated transaction that is not reflective of our ongoing operation. 8x8 continues to innovate and was awarded three patents, our 90rd, 94th and 95th patents in the quarter. Gross margin was strong at 72%, the highest since the first quarter of fiscal 2014. Service margin was 79% and product margin was negative 8%. This compares with 71% gross margin, 81% service margin…

Thank you, Dan and again thank you for your decade-long service to 8x8. Before we close our prepared comments, I like to have Mary Allen addressed you and introduce herself directly.

Thank you, Vik and thank you also Dan. I have had the pleasure to speak to many of you listening on today’s call since we announced my new role earlier this month. I am very excited and honored to step into 8x8’s CFO role. Dan has built a world-class finance organization and I enjoy working with his team. As many of you know I am familiar with the company as I've been working with the 8x8 board since April 2012 and have been a member of the executive staff since September 2013. I see great opportunity ahead for 8x8. I believe we are in a position of strength in the market compared to our competitors. I am already to help 8x8 take the next step. I am ready to help take 8x8 to the next level and I believe my experience with profitable worldwide growth, acquisitions and integration with both domestic and international businesses, as well as my experience with developing vertical markets will help 8x8 as we continue to capture increasing market share. I am looking forward to working with Vik and the rest of the management team to continue our domestic and international growth. I look forward to meeting many of you in my upcoming travel for investor conferences and road shows.

Thank you, Mary Allen. You have our full support and confidence in your new role. In summary, we’ve had a strong quarter characterized by continued growth and profitability. We are executing on the plan we have laid out to you previously, expanding our midmarket customer base while increasing customer size and ARPU. While others in the space are targeting the midmarket, 8x8 has demonstrated proven success with a viable strategy and sustainable business model. With that we will be happy to take on any questions you may have for us today. Operator, please open the line to any questions.

(Operator Instructions) And our first question is from the line of [Amir Rosewood Belsky] from Barclays.

Hey, this is Arindam Basu on behalf of Amir. Great results, a couple of questions from me. First, this improvement in churn, is this more like a quarter on lead train, or are you seeing a structure shift as you move to larger customers and then a follow-up to that is also on the margin guidance. Again is this a result of the ongoing mix shift in the type of customers or is that a function of tighter cost control as well, if you could just break that down a bit, that would be very helpful.

Hi Arin, it’s Dan Weirich. So on the churn question, last quarter we had a phenomenal figure 0.4%, we stated to consider to be approximately 1% until further notice. If you go back a few years we're 1.7% in fiscal ’13, we were 1.3% in fiscal ’14, we put up 0.4% in the June quarter, 0.9% in the most recent quarter, it’s primarily due to the mix shift, as greater percentage of our revenue is coming from midmarket customers. This is why you have seen this trend. But in addition to that we just continue to improve our product, improve our deployment of our product as well as the customer success and support of our product. Those combination of many many things, we definitely think there is more room for improvement. If you look at it on just kind of a macro view kind of the mix different is midmarket customers are going to churn in the neighborhood of like 0.3% or so from a like a logo count and it doesn't always tie that close on revenue but it’s significantly lower than a smaller customer who is going to churn at like 1.7% or something like that. So over time mix shift is going to bring it down to consistently sub 1% but as we noted in the past we’re still comfortable at the approximately 1% range. On the overall margin side, if you look at the two different types of revenue streams from SMB which are customers that spend less than thousand dollars a month and midmarket distributed enterprise who spend more than $1000 a month. We talk about something called contribution margin which essentially is our GAAP service margin less customer service and billing related expenses. For the quarter, the combined company was 63% contribution margins this…

Our next question comes from the line of Catherine Trebnick from Dougherty & Company.

Hi, thank you for taking my question. Can you provide any more detail on the midmarket in terms of segmentation? Are you having any more particular success in the financial versus healthcare? And then what would be the reasons for that driving that? Do you see some of your security sweet spot that you have or suite spot adding to that?

That's a great question. Security is reliability, it’s compliance I think is the key things that we bring to the party. As you know we have 99.997% reliability. We have fifth is mine, every other alphabets super compliance. And just generally we are -- we take our security element and the architect of the product to be highly scalable and highly secure. We've seen traction in the financial sector, we’ve seen traction in healthcare. We've seen traction surprisingly in recruiting as well as law firms, those have been the four verticals that we are starting to see quite a bit of traction in but there are others that are jumping on board including transportation and a few others. But as I said the first few financial, healthcare, law firms, and recruiting offices are definitely starting to take off for us.

Our next question comes from Michael Huang with Needham & Company.

Thanks very much, guys. Thanks for all the help, Dan, and welcome aboard, Mary Ellen. Look forward to working with you. Just a few a couple of questions for you. First of all, so drilling into the net add number, so obviously kind of on the lower end it seems that price increases dropped some churn there but it's great to see some replacement of higher MRR customers. But when you look at just the mid-market segment, is there any color you can share with us to help us understand because the number of midmarket customers that are being added and what the trend with respect to previous quarters?

Yes, so Mike, just on your first point, so on the net add increase, it was down sequentially effectively on purpose by us. We sell to businesses that have one employee and we sell to businesses that have thousands of employees. It's what we did, is we do start to look at our small customers, kind of defined as one or two line customers. They were calling customer service a lot more than bigger customers and a combination of things and their contribution margin is materially lower than the balance of the organization. They were chewing up lots of time on installs and various things like that. We looked around the market and saw that some folks that compete in that size customers range were charging a lot more than we were charging. And so we did two things. One is we raised the pricing on all of our customers that have been with us for more than a year, that were one or two line customers effective September 1. And number two, our SMB sales team for new one and two line customers had to sell at a higher price effective September 1 than they were selling pretty much for the years prior to that. And so it's a combination of – we had a few cancellations related to the higher price increase that was completely immaterial relative to the overall price increase. And we had a few last signups that effectively is the explanation for the net add piece. On the midmarket customer additions, it's something that we're not breaking out primarily for competitive reasons. Historically we provided tremendous amount of information relative to some of our competitors in the market and it’s something that we keep pretty close to our vest. We did note last quarter that the figures -- as of last quarter and fiscal year end 14 we had in the neighbourhood of 1200 midmarket customers who are spending $3500 a month on average. 60 plus percent contribution margin and 0.3% churn rate. So the LTV on these customers is enormous. And we're doing really well on adding those customers. We're 59% in the amount of monthly recurring revenue that we sold to our midmarket and channel sales efforts in the quarter. But just on the number of new logos we're adding, we're not breaking out that figure but we're giving you a little insight as to what some of these look like. So last quarter we talked about an urgent care operator in kind of numbers and things like that. And yesterday we just announced who that customer was, so you can kind of see the type of customers that we are targeting and how quickly we're getting them deployed and what services they are buying from us.

Directionally if you look at the number of kind of midmarket customers that you added, was it up sequentially or are you able to kind of qualitatively share with us that?

Yes, it was up sequentially. I think in essence we were up in terms of percentage – I think it was 60 basis points sequentially and then as I said every quarter you’re starting to see that -- the number keep trending up.

My second question, so thanks for sharing some thoughts around the innovations that are upcoming. Could you share any detail around some of the beta customers that are working with you on the VCC 9.0. I mean are they – like how big are these contact centers and are they customers already or are they prospects we’re ultimately playing around with VCC and ultimately phone -- accepting 8x8 once this is generally available? Or maybe just provide little color around that.

So - that's always a good thing. Second I think part of the point that you started to see is a steady stream of new product and new features. 8.1 I think I talked to you a little bit about everything from local language translation, multi-chat et cetera, et cetera. You’re starting to see some of the other functionality with this VCC 9.0. We have a handful of customers that we are using to basically beta, we brought in approximately 18 CIOs and senior IT level folks here to -- that had international offices as well as domestic offices and what we were noticing is we kind of went them through our product roadmap and several of them signed up for additional beta. We’re trying to do this in a very interactive process which is exactly what you do with midmarket. You find a handful of representative customers, work very tightly with them and then you keep innovating very quickly and I think you start to see the pace of our product releases is picking up pretty significantly.

Our next question is from Mike Crawford from B. Riley & Company.

Thank you. I was glad to see you raised the guidance on the operating margin to 8% to 10% this year. I'm wondering what your thoughts are if you dare look out a year or two or three given likely very probable topline growth, what that might translate to in terms of potential operating leverage given that you are you have much of your midmarket channels now in place?

We're midway through the year Mike, so we just raised our guidance as you know to 8% to 10%, exactly 15 minutes ago. I'm probably not ready to look at 2016 and beyond. We will probably provide that to you towards the latter half of this year. But suffice to say we're starting to feel good about our business and I think hopefully you're getting the sense, we tell you what we're going to do and then we make sure we try to give you a good sense of what is going to be and keep trying to meet our expectations.

Okay, Vik, thank you, maybe I will just try that the follow-up just to be a little less specific, but are there any factors that would prevent there from being more operating leverage as the top line grows from here?

Not that I can think of, Mike. I think as you can see we're starting to get the improvements across-the-board in everything from overall spend as well as gross margin. I think we have the industry's leading gross margin and we see that actually getting better.

Our next question comes from the line of Greg Burns from Sidoti & Company.

Good afternoon. I just had a question on what your thoughts are in terms of use of cash evaluations in the space of come in over the last six months or so, so I’d imagine that things are getting more potentially more attractive out there. What are your thoughts on M&A or other uses of cash?

So that’s actually a great question and I think hopefully you recognize the process that we follow. We've been pretty darn disciplined on price, as you know we had a reasonably decent M&A pipeline and we have – get churn for that, what we are finding is people are starting to be a lot more amenable to different prices and by different I mean lower prices. And so we will continue to go through a rigorous process but the intent is to keep adding bolt-on technologies that can keep enhancing our platform. I mean I think you keep hearing the same common vision, we have a global unified platform with multiple capabilities all built-in one-stop shop and we will keep adding to that as we go on, so that's essentially our M&A pipeline. But what we are trying to make sure is we keep thing at very fair price so what we get, we get full value for.

Okay, and in terms of the investments you're making to support the expansion into the mid-market, do you feel like you have increased bandwidth now to handle more customers or more incoming volume? Can we see accelerated growth at some point based on the investment you put in? Or do you feel you need to make incremental additional investments in certain areas of the business to continue to pursue the mid-market?

I mean all of it is as you know work in progress, in the sense that -- and it's all incorporated into guidance we’ve just provided. So we just took up our guidance on revenue to approximately 26%. We took up our guidance on net income for the to 8% to 10% for the whole fiscal year and that incorporates the fact that we will continue to be investing in R&D as well as in other areas. I think the key part for us is I think we like to feel we have now a differentiated platform and we’re going to keep adding more and more features and functionalities to it so we can put nontrivial distance between us and our various competitors. So but again it’s all incorporated in the guidance that we've already given you.

Our next question is from Nikolay Beliov from Bank of America.

Good quarter, guys. Thanks for taking my question. Vik, you took the helm of the company about a year ago. When you look back over the last one year, what were the surprises, where did you guys do better than you expected, -- if you remain is like -- coming out like you see a year ago and versus where you maybe underperformed than what you can do better?

Actually it’s a very good question. So couple of thoughts. One, I think the way we went after midmarket was SMB plus and I think that was where we had to make some changes in the way we approached it. Midmarket is a very different type of sales, you need a very different type of salesperson, you need a very different type of sales engineer, and you need a very different type of deployment, different level of documentation, a different level of customer support, a different standard on reliability etc, it is not just a larger SMB customer. So I think that’s an area we’ve kind of made some nontrivial progress on it, I think you can see it in two very distinct areas. We put together a dedicated customer success team, that basically has partnered with all our major customers and we’re starting to see the fruits of that both from the fact that they are providing us input on new products that they want and need, plus they are also upselling significantly, and then also you’re starting to see churn stabilized. The other area we've invested very significantly in is this rapid deployment capability. As you know everybody wants to go from SMB to midmarket and I think I made this comment that it's more than just putting it on a PowerPoint. You have to put in a very detailed design documents. You have to make sure that the customers’ expectations are very clearly set, acceptance criteria is defined, billing happens in a very structured way, those are things that don't just happen, and it's not just as simple as, okay, connect the phone and we will bill you. And so I think to a large degree as you know a lot of our competitors in the space…

And to your last comment, just to clarify you talked about on the call about optimizing sales and marketing investment, so you got some leverage out of that. What did you guys specifically do?

In essence everything from a different quotas for new logos versus upsells to having very dedicated teams of sales engineers and account executives to changing quotas. But it’s a standard blocking and tackling sales 1.01 type stuff and I think it's just very different from SMB to midmarket. And as I said I would like to think we've got a nontrivial amount of headroom where we can continue to get our sales productivity better.

Our next question comes from the line of Dmitry Netis from William Blair.

Thank you. Nice, gentlemen John and Mary Ellen welcome to the team. Good luck with the new role and Dan thanks for a good ride and good luck with Treasure Data. Okay, real quick couple of questions. What was your crude backlog at the end of the quarter and how did that grow from last month – from last fiscal Q1 I guess?

So Dmitry, we mentioned last quarter that we weren’t going to provide that anymore – we provided it in Q4, we provided it in Q1, just to illustrate to folks that we are in a transitionary period of time, we are migrating from the vast majority of the revenue going live within 30 days to a situation that where it didn’t go live in 30 days and went live in two to six months or so. We are starting to see very, very good success as the customer is installing very quickly, so ChenMed is an example of that, where it installed in 35 or so locations, 1400 seats in a very short of time. And so we just felt that the backlog figure was something we could kind of let the folks know that we are in a transitionary period of time, the revenue was delayed a little bit but we are in a situation now that we are very comfortable with it and it’s nothing that is great news or bad news in any form or fashion, so it’s something that we are just not disclosing.

And then if I were to remove your international revenue, are you guys able to tell us how the growth looked like here in the US?

So once again we’ve stated that where -- acquisitions are part of our strategy, we haven't broken out the organic from inorganic revenue growth in the past. I mean we do have in our tables in our 10-Q revenue from Europe and Asia. There is revenue that was kind of 8x8 customers which are two different types -- legacy of 8x8 customers, they are Fortune 500 customers, they are these young rapidly growing recently public typically Internet-based companies who grow internationally. And you know some of that revenue started to get recorded in Europe and in Asia today. And so it is not like a clean cut on exactly what was organic revenue from the acquired revenue as lot of our sales are now cross-border and various things like that. But in the March quarter, the acquisition we fully annualized and really clearly – and as we’ve stated and you can kind of figure out our guidance that the acceleration in revenue should appear, very very loud and clear at that point in time.

Is it fair to say your international revenue is accelerating or the growth of that revenue is accelerating?

Yes, I mean we are seeing increases across all elements of the business. So whether it's our SMB or midmarket or international or domestic, anywhere you kind of look, we’re seeing good growth across the business.

I like to add a little more color Dmitry, I just was in UK on our QBR [ph], I think I talked to you about this very large deal, this is another significant deal that we won, which is a very large public university that you’ve heard about. And the UK market is actually a very interesting market and we're starting to see good growth there and as Dan pointed out all our channels are seeing good growth.

Okay, very good. And then last if I may squeeze that in on the ARPU side, you’ve had very nice sustainable add quarter over quarter of about six bucks. How should we think about that going forward? Are you comfortable with that $6 number going forward? Or is it going to fluctuate? Give us a sense on that.

So we were kind of in the $5 range for a while and we moved it up to roughly $6 or so. And yeah, I mean I think that pretty much if you look at it from a net add standpoint and ARPU standpoint, it’s got to be like 6 plus to maintain the growth figures that we’re talking about. It is not something that we like monitor and manage or quote on or commission on is how many new logos are coming in the door but you know, our overall emphasis is just moving the average size of the customer up, so ARPU is a derivative of that and is where the rubber really meets the road in a business like this. So that's why we provide the metrics that we e do provide and this is one of the handful or so that is extremely important to business.

Our next question comes from the line of George Sutton from Craig-Hallum.

Thank you. Vik, when you were discussing the focus on the mid-market and the strength you're seeing there, I wondered if you could specifically talk about the channel partner contribution to that and your happiness or lack of happiness with respect to how the channel partner program is going?

So one, that’s a great question. One, we are seeing huge pent-up demand in the channel partner program. I think we'll see a nontrivial contribution, it’s still relatively small and early stages for us on the channel but we're starting to see several big deals come through our channel and I think increasingly that will be a bigger contribution to our revenue. So I actually -- it is early days yet in the sense that I think what I've been doing is decreasing the number of channel partners that we’ve had, we have a lot of channel partners, I’d rather have much more productive and much more engaged channel partners, we’re starting to see that and we’re starting to see channel partner spend a nontrivial amount of time really learning our product, us training and the support, joint marketing, all of those kind of things. But we want to do it with less channel partners than more and I think – it seems solid growth, I think it can grow much faster.

As my follow-up, you mentioned Sydney for the first time that I've heard Sydney mentioned. What specifically happened there that encouraged you to move into that market as well?

George, this is Dan. Yeah on Australia it’s what happened – couple of things. One, is we have a partner that we picked up in the Contactual acquisition three years ago who had been distributing the product – the contacts and our product in Australia and -- they wanted to get a lot bigger and so that was something that was pulling and then we had one very large Fortune 500 customer of ours who is using us globally in a very good way, kind of give us the ultimatum like get a presence in Australia, we’re going to – we got to buy from somebody else, we don’t want to buy from someone else. So those were the two main ones and then we do have a number of other customers who have a lot of call flow that occurs in Australia and it is a little bit away from Hong Kong where we have our Asia Pacific data center. And so it’s just a combination of factors as to where we put our next deployment. And so it is going to be live imminently. And by the way one of the things -- that is starting to be a huge competitive differentiator. We were seeing this more and more where one of the interesting things is a lot of companies that are approaching our UK office are actually US companies that have UK presence or UK subsidiaries and then there are others that have for example Australian subsidiaries or Hong Kong subsidiaries and they will basically approach us and say -- can you put this particular office and/or they will dictate to their office and that gives us that much more tentacles into that particular customer.

Our next question comes from the line of Mike Latimore with Northland Capital.

Thank you. This is Jim Fitzgerald standing in for Mike Latimore. My question is regarding organic growth. So the March quarter is going to be all organic growth not including that acquisition revenue. Would you expect somewhat slower growth in that quarter the March quarter regarding total revenue as compared to earlier in the year?

Yes, I mean definitely if you’re comparing it to the quarter we just reported, there's not an apple and orange comparison of our acquired revenue to organic revenue, but it’s what we're saying is that last time we provided organic revenue growth rate was in the December 2013 quarter, we gave this specific revenue for the UK business in the month of December that we acquired it, we closed the acquisition November 29, 2013. And so you've got the organic figure there, what we are saying is that the growth rate in the quarter ending March 31, 2015 will be higher than that.

Okay, great. And then one other quick question. I might have missed this. Are 9 out of 10 midmarket deals still against the on premise system vendors?

Yes, actually more often than not we see on premise as the primary competitors.

I am showing no further questions at this time. I would now like to turn the conference back to Mr. Vik Verma.

Thank you everybody for listening to our presentation today. I look forward to seeing you all in the coming months at upcoming financial conferences and other industry events. Again thank you very much.

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.