8x8, Inc. (EGHT) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the 8x8 Inc., Fourth Quarter 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, today's program is being recorded. I would now like to introduce your host for today's program, Joan Citelli, Director of Corporate Communications. Please go ahead.

Thank you, and welcome everyone to our call. Today, I’m joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen to discuss our results for 8x8's fourth fiscal quarter of 2015 ended March 31, 2015. 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 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 facts 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 and our quarterly Reports on Form 10-Q and in our other SEC filings and company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you. And with that I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan, and welcome everyone to 8x8's fourth quarter and fiscal 2015 yearend earnings call. 8x8’s record fourth quarter capped off a very strong fiscal 2015. We achieved the revenue growth and profitability objectives we laid out a year ago and introduced many new features and capabilities to our service offerings which extended our lead in the market. Total revenue for the fourth quarter of fiscal 2015 grew organically 22% year-over-year to $43.5 million while service revenue increased 23% year-over-year to $40 million. Our non-GAAP net income results for the fourth quarter of fiscal 2015 were also strong at $4.9 million or 11% of revenue compared with $3.3 million or 9% of revenue for the same period last year. This is the 20th consecutive quarter in which 8x8 has generated non-GAAP net income alongside increasing revenue and we remain committed to profitable growth and strong cash flow. In addition to our solid financial performance, we made significant progress during the fourth quarter of fiscal 2015 achieving the objectives that are core to our growth strategy. First, we continue to successfully penetrate the mid-market with our differentiated Cloud communications, contact center and analytics service offerings while at the same time maintaining a healthy and growing small SMB business. Service revenue from mid-market customers increased 34% year-over-year and now represents 43% of total service revenue compared with 39% in the same year ago period. Examples of some mid-market wins during the quarter include one of the country’s largest dental support organizations with 150 affiliated dental practices in eight states, an independent non-partisan policy research center with over 400 employees, and a UK based executive agency that provides civil and criminal legal aid and advice in England and Wales. Our combined virtual office, virtual contact center solution remains a strong differentiator bringing us larger and larger deals. Two examples of new customers subscribing to our integrated offerings include a leading publicly traded lifestyle company for Yoga fitness and wellness products and a fast growing London based online designer furniture retailer. On the SMB side of our business, we’re continuing to see productivity improvements within the sales group as they steadily add new customers with an emphasis on larger SMB and smaller mid-market deals. With the acquisition of these customers becoming more and more of a low touch process, we’re able to invest more time and resources in securing larger, mid-market and enterprise business. Second, we significantly enhanced a solution set for the mid-market during the fourth quarter with a slate of new products, service quality and professional service introductions. These include one, the deeper integration of our virtual office and virtual contact center solution which seamlessly ties telephony, unified communication and contact center users across the enterprise with a single sign-on, share directly and shared presence over a common underlying platform. Two, our industry leading service level agreements which established 8x8 as the first Cloud UC provider to guarantee the highest level of availability and voice quality over the public Internet. Three, our Virtual Office Analytics suite of services which leverages 8x8 internal Big Data infrastructure to enable customers to transform their business through actionable insights into their communication trends and activities. Four, our Elite touch professional service offerings designed to ensure the swift and successful deployment of our Cloud communication services across an enterprise entire organization, and five, the establishment of our ISVForce partnership with Salesforce.com that provides our customers with tighter integrations with sales cloud and service cloud. All of these core communication capabilities and value added services have been bundled in a new Virtual Office Enterprise suite offering that layers critical capabilities and performance assurances on top of our Virtual Office Cloud Telephony Solution to ease the decision making and oversight CEOs typically engage in when making changes to their IT or communication infrastructure. Third, we expanded our channel partner program during the quarter through new relationships with leading vendors including Intelisys, Arrow Systems Integration, and CDW. These partnerships are already bearing fruit with collaborative wins such as a provider of mental and medical health services to correctional facilities across the U.S. that employs more than 3000 clinical, management and support staff nationwide through a network of 20 regional offices. Overall, the productivity of our channel is increasing with three of our top 10 wins during the quarter coming to us through our reseller partners. Fourth, our global reach initiative continue to unfold with the launch of our service platform in a Sydney, Australia data center and new partnership with EntrustICT, a provider of wholesale communication technologies to system integrators and service providers, who is now offering our virtual office and virtual contact center solutions to the Australian market. With our new presence in Australia, 8x8 now maintains nine data center operations throughout the world giving us the ability to provide superior service to our multi-national customers. Examples of multi-national mid-market customer wins during the quarter include a leading customer identity management company with six international offices and over 300 employees and a Silicon Valley based marketing automation Software Company with offices worldwide. We also unveiled our new virtual contact center global solution, the first cloud based contact center solution that seamlessly connects some organizations international agents over a single platform with integrated presence, multilingual char with automated translation, call routing, reporting and management. Fifth, we rounded out our executive leadership with the appointment of Puneet Arora as Senior Vice President of Global Sales in the fourth quarter and two other key executives in the prior quarter. We enter fiscal 2016 with a full senior management team on Board along with a technology, product portfolio, global presence, channel network and financial resources to a aggressively and profitably pursue the expanding mid-market opportunity we see across the Globe. These fourth quarter achievements include a full year progress across all of the key segments of 8x8’s business. We demonstrated our ability to win very large mid-market accounts and rapidly deploy our services across multiple locations. The strength of our communication solutions and their value of the mid-market customers was validated by new relationships we formed with key channel partners along with the high marks we received from industry leading market research firms including Gartner, HIS Infonetics, Frost & Sullivan and Synergy Research Group. The awarding of 100th pattern underscore the company’s ongoing technology innovation, which is evidenced by the [slew] [ph] of new product, service quality enhancement and expanded global capabilities we announced during the course of the year. Looking forward to fiscal 2016 we are issuing our guidance for annual revenue of between $193 million and $197 million with non-GAAP net income as a percentage of revenue in the 6% to 9% range. With the senior management team now in place and our enterprise cloud communication suite launched, we've plan to continue investing in our business in fiscal 2016 in sales, marketing, demand generation, channel enablement, global expansion and acquisitions to capture our fare share of the largely untapped mid-market and enterprise segments. With that I’ll now turn the call over to Mary Ellen, who will provide you additional detail on our financial results.

Thank you, Vik. As Vik noted financial results for our fourth fiscal quarter of 2015 were strong with a 22% year-over-year increase in organic revenue to $43.5 million and a 23% increase in service revenue to $40 million. Gross margin for the quarter was 73% compared to 70% for the same period a year ago. Service margin was 81%, an increase of 200 basis points from the year-ago quarter. Non-GAAP net income for the quarter was very strong at $4.9 million or $0.05 per share representing 11% of revenue compared with $3.3 million or $0.04 per share representing 9% of revenue in the same period a year ago. In addition, we took a GAAP charge for $1.2 million for a loss contingency reserve in the quarter. This is not included in our non-GAAP net income. For fiscal 2015, revenue grew 26.3% to $162.4 million, and service revenue grew 27.1% to $148.2 million. Gross margin increased to 72% compared with 71% in fiscal 2014 and service margin was 80% compared with 81% for fiscal 2014. Product margin was negative 12% compared with negative 27% in the same period a year ago. Full year fiscal 2015 non-GAAP net income was $16.2 million or $0.18 per share representing 10% of revenue, compared with $14.1 million or $0.17 per share representing 11% of revenue. Service revenue for mid-market customers now accounts for 43% of the company’s total service revenue, compared with 39% in the same period last year and 42% in the previous quarter. Average revenue per customer across our entire customer base was a record $320, up $33 or 11% compared to the same period a year ago. Monthly business service revenue churn also improved significantly in the quarter to just a 0.5% compared to 1.2% in the same period a year ago. As forecasted previously, our net customer additions were lower this quarter compared with our historical results primarily due to the end of life reductions previously acquired single line [ITel] [ph] account and an emphasis on the part of our SMB on selling larger deals. Cash, cash equivalents and investments totaled $177.1 million in the fourth quarter of fiscal 2015, compared with $178.4 million in the same period last year. Cash flow from operating activities was $21.2 million for the year. We spent $19.4 million during the year on our stock repurchase plan and to-date we have repurchased approximately 2.5 million shares at an average price of $7.72 per share. Capital expenditures were $1.3 million in the quarter, 3% of revenue and $5.8 million or 3.6% of revenue in fiscal 2015. We continue to invest in our core networking equipment to upgrade to the next generation 10-gig infrastructure to support our future growth. We expect this trend to continue as we invest in upgrading our back office systems to accommodate the additional complexity of serving our mid-market and enterprise customers. Sales and marketing expenses increased sequentially in the fourth quarter of fiscal 2015 by approximately $1 million due to higher commissions and French benefits especially related to the employer portion of Social Security Tax. In fiscal 2015, our sales and marketing expenses increased on a GAAP basis by 32% primarily due to the acquisition of our U.K. subsidiary and increase in headcount in both deployment and sales engineering teams and development of a new customers success team. These investments paid off as service revenue from mid-market customers grew 34% year-over-year in our fourth fiscal quarter. Our U.K. operations is doing very well selling our 8x8 products in the U.K. and Ireland and we saw approximately a year-over-year increase of 90% in [number] [ph] from this team. We expect our U.K. revenue to grow greater than 25% in fiscal 2016 when measured in local currency. Our deployment engineering team has enabled us to move up market and win large distributor enterprises with the ability to rapidly deploy customers with 1000 plus users in three to five weeks. Our customer success team has built solid relationships with our top customers with a favorable impact on up selling and revenue churn. We expect our investments to continue in fiscal 2016 as we remain intensely focused on expanding our penetration into mid-market and enterprise customers. As a life time value economics of these customers is approximately 40 times that of a small business customer. With the higher end of our new SVP of Sales and our new CMO, we intend to invest in our Enterprise Direct teams, our channel enablement and demand generation to continue to capture high quality, mid-market and enterprise customers. In addition we made great progress in R&D this year delivering many new products and features such as Virtual Office Analytics which were very well received by our customers. We will continue to invest in this team in fiscal 2016 and bring additional new products and features to market. We are still very much focused on our SMB business and saw a 38% increase in productivity from our SMB team, SMB sales team in fiscal Q4. As we mentioned previously, this team is moving up market and closed a number of deals that were greater than 1000 [MRR] [ph] with a no touch approach, in fact the team closed a 5K MRR deal without ever meeting the customer face-to-face. As Vik indicated, we are issuing our guidance for annual revenue of $193 million to $197 million and we expect our non-GAAP net income as a percentage of revenue to be between 6% and 9% for fiscal 2016. This concludes my prepared remarks, I now turn the call over to Vik.

Thank you, Mary Ellen. In summary, we had a very strong quarter to cap up a year of significant internal achievements and milestones and are now committed to focusing our resources on expanding our brand awareness and market share. With that we will be happy to take on any questions you may have for us today. Operator, please open the line for any questions.

[Operator Instructions] Our first question comes from the line of Nandan Amladi from Deutsche Bank. Your question please.

Hi good afternoon. Thanks for taking my question. So the ARPU trends are clearly very strong, the share of revenue from the mid-market is also very strong. As we model our fiscal 2017, fiscal 2016 and 2017 views, how will the ARPU trend? How should that base versus the overall revenue growth and the share of mid-market revenue, what are your expectations for that?

Thanks, Nandan. A couple of quick thoughts, I think as you can see our mid-market is growing in a very nice way, the ARPU in this particular quarter was significantly higher than I would probably model, part of it has to do with just generally the cleaning up of our smaller customers, we are also introducing new up sell capabilities such as VO Analytics et cetera. I would still model historical $5, $6 of sequential increase through FY 2016. Starting 2017 I think you will start to see that number move up, because we’re starting to see the larger customers become a bigger and bigger share of our revenue and as the mid-market starts to kind of cross over and start to get close to the 50% point of our revenue, you’ll start to see that ARPU number climb but that will be in the FY 2017 timeframe.

Thank you. And a quick follow-up if I may. At the Enterprise Connect Show large incumbents who have had big footprint in the traditional PBX business, they’ve all launched Cloud offerings and the marketing messages are very similar to yours. What has been the impact of that to the quality of your pipeline and their ability to close?

So a couple of things, I mean one, if you remember long, long time ago, I guess I’m dating myself but that Apple commercial where Apple welcomed IBM into the market for PCs. That’s how I feel, because suddenly people are not asking whether they should go Cloud or on premise or this that or the other, it literally is, we’re going Cloud, let me pick and our pipeline for larger deals has literally grown off the charts. I mean where I think when you and I started talking 18 months ago, may be you get few 2000, 3000 [MRR] [ph] type customers, a few 5000, 6000, 7000, 10,000 now suddenly you almost get a whole bunch of customers that are in the 8000, 10,000, 20,000, 30,000 as much as 150,000 type MRR that are starting to approach us. Where we think we are different is we have this really integrated solution where if you think about what we have done, which I think you’ve done it in a very systematic manner, we are the world’s best when it comes to VoIP. I'm very confident about that, our call quality is unprecedented, our reliability is unprecedented. We've then layered on multi-channel, we’ve then layered on the whole customer engagement piece which is contact center and we own all our technology and done a very tight integration between the two. We’ve then added in the back office integration with NetSuite, Zendesk, Salesforce.com and now we’ve layered on the analytics. I think some of the larger players are coming at it with piece parts and they are trying to think about it as a volume game, I think we are trying to become more and more of the one-stop shop for these large enterprise, where we’re turning communications into actionable information and I think that positions us as I think the leader and as I said I'm quite pleased with where we are and the pace into the mid-market is definitely accelerating.

Thank you.

Thank you. Our next question comes from the line of George Sutton from Craig-Hallum. Your question please.

Thank you. Vik as we look at your mid-market success and you are talking about it in a suite format, can you give us a sense of what’s driving that success within that suite or is it simply having the breath of functionality?

Combination of things, I think George, you and I have these conversations, it’s very easy on a flipchart to say we are SMB, we will become global, and we will become mid-market. It’s much harder to do. So if you think about how we went about it, putting together a world-class sales engineering and a deployment team is one of the first things we did. So you really understand the customer’s problem and more importantly you are able to come up with solutions that tightly integrate to their various back-office systems as well as tightly integrate into the various views that we want. So we think that’s a key competitive differentiator. Having essentially the equivalent of a Chinese menu of products so you can literally say enable this, enable this, disable this, no they need this particular stuff. That being able to provide that customized solution out of the box, I think is a key differentiator. And then as I said, the fact that we have put so much emphasis on reliability, security, compliance, I think makes it very unique for us also. So we think that’s what’s really bringing the market to us. I think the good news for us is that as we become more and more positioned for the mid-market, these are very discriminating users, they are not interested in a price war, they are interested in making sure that they partner with the right company. The fact they we have a strong balance sheet, the fact that we have 20 consecutive quarters of profitability, the fact that we’ve built all of the various capabilities that we talked about, the fact that we’ve a 100 patents that we own all of our IP, that tends to be a massive differentiator. So the market is kind of moving to us which you always hope it’s going to move to you when you kind of start making some of the investments that we made so I’m pretty happy that that’s happening.

Now, you just brought up the strong balance sheet and obviously relative to most of the competitors in the space, you are pretty cash heavy. We are in a clear consolidation environment. Can you give us an update on your thoughts relative to your plans for M&A?

Yes. So, again I think you know us a management team. UK was the last, VoiceNet Solutions, which we acquired about a year ago. We are thrilled with that acquisition, I think Mary Ellen kind of alluded to that fact that the new MRR grew 90% year-over-year in terms of bookings, in addition to that we’ve had no turnover at the senior management ranks of that entity. And we’ve learned a lot about how to integrate this acquisition and make sure you do it in the seamless way so it doesn’t impact your core business. Stay tuned on the acquisition front, that’s a key element of our strategy, globalization is a key element of our strategy, adding additional features particularly analytics to our core offering as we kind of go from the plumbing much more towards a knowledge solution that can help you transform your business is a key element of our strategy and M&A is going to play a very significant role in that.

Great. One quick clarification point. You mentioned the 3,000 employee organization and a deal that you won. Were you suggesting that was 3,000 seats or was that just a partial deployment?

That one started off as a partial deployment, but the intent is to keep going all the way up.

Okay. Thanks guys.

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

Hi, this is Joyce Yang for Nikolay. Hi Vik, just a quick question. Have there been any changes or improvements in the sales and marketing strategy since the new executives have come on-board?

No, more refinement. And I think we had chatted a little bit about it. We’ve been very pleasantly surprised that we have been able to move our SMB team to larger and larger deals, I think Mary Ellen alluded to the fact that we signed a 5000 MRR deal without ever meeting the customer. And the number of I believe $1000 plus deals grew 80-ish percent year-over-year by the SMB team which is phenomenal, basically it says that the SMB team can start to do the lower end of our mid-market. So on the enterprise team, Puneet and Vikas Bhambri, who also joined us from LivePerson, both of them, and a whole series of others and Enzo Signore who came to us from Avaya and Cisco. These folks have a very good understanding of how to attack both channels, as well as the enterprise. So we are starting to head larger and larger [ups] [ph], so in essence our mid-market team is starting to go to larger and larger deals and our SMB team is also starting to go into larger and larger deals. Our SMB team is a pure inside sales team model, our enterprise team is essentially more of a territory based model. So it’s more a refinement as opposed to a radical change, everything is just starting to move up market for both our sales team.

Yes, yes, got it. Just a follow-up to that. So I guess what percent of the business now is driven by the channel and how much do you imagine that to go three to five years from now?

With regards, we don’t breakout channel separately, but what I can tell you is I’m very excited about channel and again, you saw that one line, three out of our top 10 deals are from channel. And I think, I don’t know if you and I had chatted about it, but I know Nicolai and Cash and I had chatted about a long, long time ago. We used to have a lot of channel partners and this has been addition by subtraction, we have gone to less and less channel partners and we’ve the productivity of each channel partner go up. I believe channel is going to be by far the fastest growing segment of our sales strategy.

Thank you.

Thank you. Our next question comes from the line of Greg Burns from Sidoti and Company. Your question, please.

Just a follow-up on the M&A commentary you gave earlier, one of your competitors has been pretty active rolling up the BroadSoft provider space, I know your U.K. acquisition that was a BroadSoft provider that you layered on to your platform. Is that something that you might look to do domestically with these BroadSoft providers?

No. well if I may with what some of these competitors have been doing. We would do that for geographic expansion, not just to get customers. We can get customers on our own, so we don’t need to go get somebody else’s platform and then kind of combine them out here. The main rationale for voice net was it gave us a presence in U.K. which we think is a very fast growing market and had a complete sales team, support team, a customer support team, deployment team, et cetera and the fact that they happen to be on a BroadSoft platform that we’ve been start to migrate towards ours was a happen stands. But going after domestic BroadSoft platforms is not of any interest to us. We are looking for technology acquisitions domestically that add to our capability and that extend our lead, this is about some really cool stuff, what you have the ability to do, when you have that pluming done well, which is the whole Omni-channel communication, you can start to layer on some very cool analytics, you can start to layer on some additional capabilities. We’re looking for those kind of capabilities as oppose to just buying customers domestically. Internationally, we’ll keep an open mind, because internationally what you are looking for is geographic presence. So essentially that’s at a top level that’s our strategy.

Okay. Thanks. And just help me get a maybe little bit more color on the complexion of your customer base, what percent of your customers would you characterize is mid-market customers and I know you’ve kind of [indiscernible] line is like a 1000 and monthly MRR, but what’s the average MRR of your mid-market customers?

About 3,500 I believe.

Its .3,500.

Yes. About $3,500 is the average size of our MRR of our mid-market customer.

And the percent of your customer base that you consider mid-market.

So I won’t break it up by number of customers in terms of total revenue coming from mid-market customers versus others, 43% of our revenue comes from customers that are spending more than $1000 MRR on us.

Okay. Thank you.

Thank you. Our next question comes from the line of Catherine Trebnick from Dougherty & Company. Your question please.

Hey nice, thanks for taking my question. Can we go back and discuss your channel partners, you signed three in the last quarter and you had said three of the top 10 new customers were from these providers. It seems like they ramped pretty fast, from my understanding most of these partners were signed late and last quarter. My question is they must be very mature inside sales people and how much training have you done with each one of the partners? Thanks.

Yes that’s great question, Catherine, so surprisingly the ramp has been faster than I would have anticipated, now obviously we like to think we’re very good at training and we’ve come up with some very good training materials, we’ve assigned people to work with our various channel partners, but we’re seeing a lot of pent up demand from channel partners and we’re very excited with the channel partners we’ve signed. They’re smart, they have a great sales team, they’re driven, there has been a good synergy with them and it’s amazing and I think there is also a trend of the market which is you are spending less time trying to persuade somebody to go to Cloud, you’re spending a lot more time talking about how they can benefit from the Cloud and so I think that’s why the ramp has probably been faster than I would have anticipated.

Now are you planning to go after anymore large Arrow type agents or is that part of the strategy going forward in 2016 also?

Yes on a case-by-case basis, I mean I’m a big believer and I think you saw in this in our SMB team also, big believer sometimes it’s addition by subtraction, the productivity of our SMB sales team went up I believe Mary Ellen 38%, so the headcounts less than what it was at the beginning of the year and they had their best quarter ever in Q4 in the history of the company. So I’m of that same [indiscernible] on partners, make sure we get the right partners, make sure they share our values, make sure we invest heavily in training, make sure we’re able to give them the full attention, one or two more we will add, but again it will be on a case-by-case basis.

All right, thank you.

Thank you.

Thank you. Our next question comes from the line of Michael Turrin from Needham & Company. Your question please.

Thanks very much. Hey guys good afternoon. A couple of questions for you, first of all obviously the consulting in the mid-market channel were very strong in the quarter which is great, was there anything that actually was kind of one-time in nature that help drive that performance or I guess my question would be is the type of close that saw in Q4 is that sustainable through the year or maybe some color around kind of what we should be seeing from those kind of growth base from the bookings standpoint?

No I think Mike hopefully what you’ve seen with us is quarter-by-quarter we’ve been trending up, so I actually think it’s sustainable, I think we’re going to turn on the gas a little bit, because if you think about how we’ve gone about it, and I think you and I have spent quite a bit of time on both products. I wanted to make sure we addressed every area of the product whenever we thought we had holds add enhancements et cetera, then we brought in this deployment team that did a great job because deploying mid-market customers is painful, brought in a sales engineering team so that they really understand what we are deploying and how it fits into the customers problem, customers success being brought churn down to a very manageable level, so you’re not just getting customers, and then they are flying out the door and so 0.5% churn, I would model less than 1% which I think on a consistent basis 0.5% was good, but I think we’re modeling 0.1% and less consistently I think is good. So and then you’re seeing just step-by-step everything is trending up. So I don’t view it as any one-time event, it’s a combination of whole series of little things that are starting to go in our favor.

Great okay. With respect to competition, one of your key competitors is launching a contact center offering looking actually with another Cloud contact center solution out there, it certainly seems to validate your position, but I was wondering from your sense how do you believe this could impact your assumptions around competition and maybe just give us some general thoughts around that announcement?

We expect that people are finally coming to the same place we were about 2.5 years ago when we bought Contractual right, you and I talked about it where if you remember several of these folks use today these two technologies don’t go together. Contact centre and telephony are two different market, they need to be so separately dot, dot, dot well that seems to be changing. I’m a big believer in owning the technology so then you can evolve towards a common platform, you can share the development, you can ensure that you can price appropriately, it’s not two companies. It’s one company owning one core technology, one engineering team. So the validation I like, you know, the fact that they are heading in that direction is good, because it helps to validate the market so we are spending less time trying to convince people that those two technologies belong together and I like the fact that we own all of our own technology and we’re finally start to get it more tightly integrated, so game on, I’m looking forward to it.

Great. And I guess last question is, I don’t know if you have spoke around, but maybe if you could share some quantities thoughts when you look at the kind of the mid-market share deal that were done in the quarter, what percentage included both Virtual Office and Contact Center, and maybe you just kind of [indiscernible] and where that’s headed?

I think maybe a third to half, I can’t remember off hand the exact number, but at least the third, I would say more than a third, but less than a half in that ballpark, so is what included both, which typically tended to be the larger deals. So as I said, we are seeing great validation of two things and we’ve been saying I think both for some while, one is you had a whole bunch of people saying, well large enterprises will never go cloud, they really are premise, that seems to be changing pretty dramatically with pretty much everybody who was saying no, no, no premise solutions is starting to come up with their own cloud offering. The second one if you recall, people kept saying that VO or Virtual Office, or Cloud Telephony and Contact Center are two different technologies, two different products sold to two sets of buyers, we are seeing increasingly those two things that are coming together and people are buying an integrated solution, those two things as you recall are key tenants of our strategy. And the third element which I think is just as important is we are seeing a big push towards global, more and more of our customers are looking for one common global push and our global vender, that’s another area that as I said we, I think did it ahead of everybody else. And the fourth area we are seeing is increasingly important is security. That’s another area we architected our solution to be that and then the first area is analytics where you are basically taking communications and turning it into actionable intelligence and actionable information that seems to be also a trend that customers are increasingly growing toward. So I kind of like the trend in the market, we have to execute, but the fact that everybody else is starting to figure that all out is good, we just have to continue to execute.

Great, thanks so much guys.

Thank you. Our next question comes from the line of Amir Rozwadowski from Barclays. Your question please.

Hi, this is [indiscernible] on behalf of Amir. Just one question on the margin guidance in fact, you are guiding to the 6% to 9%. I wanted to just get your thoughts on as you kind of continue to see increased penetration in the mid-market. How should we think about the margin upside from that growing penetration and when do you kind of anticipate perhaps getting the leverage from that model. Are you still in investment phase and is that going to be the case for most of the next 12 months? If you could share your thoughts on that, that would be very helpful.

Yes, that’s good [indiscernible]. So go back to one year, if you remember the guidance I provided you in the beginning of FY 2015 was 6% to 9% non-GAAP net income and at the top-line we said we will grow inorganically around 25%. As you know we ended up at 26.2% and we ended up at 10% non-GAAP net income. So we were very good stewards of our shareholders money, because in essence what we did is we said don’t spend money really nearly like drunken sellers, start very systematically; invest first in making sure you have a good deployment team and a good sales engineering team. Second, make sure that you have a good customer success team and put all the infrastructure together so your churn comes down. Third, make sure you improve the productivity of your SMB team and turn that increasingly into a cash cow. Four, start to get that velocity of products up and then either invest a little bit in sales and marketing, but I kept a lot of my powder dry because I wanted to bring in the right leadership team for both sales and marketing. And so therefore, I told you guys 6% to 9% came in at 10%. This is year I feel pretty confident that now is the time to turn up to [specked] because a lot of the foundation has been laid and that now the investment can bear the kind of fruit that we are looking for. So we were able to achieve all the objective we set out for you with a whole lot less investment we think this is the time to invest, we had just 10% stage is a market that just seems to be taken up and guess what it’s no longer a mid-market play. The logos that we are seeing in our pipeline are enterprises, which is fascinating for me. I mean, we literally have seen people doing $20,000, $30,000, $40,000 MRR type deals and they are not even considering premise, the coming right to cloud. So we think this is the time and it’s prudent to do it. We’ve also factored in the fact, that we may make an acquisition or two. So we want to make sure we anticipate - as we would like to make sure we set your expectations, and we try to make sure we are consistent with telling you and being truly transparent about it. So we’ve kind of baked in the fact that we may do acquisition or two that will necessarily come in with a lot of profitability and to that guidance.

Okay. Make sense. And then, just one quick follow-up on the M&A comment as well. You talked about how the fact that you can offer a global platform, the friendship, your service offering? You did successful kind of acquisition in the U.K. At a time when the dollar is where it is, do you see this as an interesting time to perhaps do some more acquisitions into nationality or is your focus more in the domestic market, to the extent you can discuss of course.

Stay tuned.

Okay. Thanks.

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital Market. Your question, please.

Hi, great quarter there. Just on the contact center side, across your contact center customers, what’s the average fee count and then what’s your largest contact center customer?

I don’t want to disclose. Our largest contact center customers is probably six figures, yes, I don’t want to disclose the details of our customers, but yes, we’ve got - our range of customers is pretty large. They range anywhere from five seats all the way up to 500, 600 seats in terms of contact centers. We’re increasingly finding that we built it right. In other words, the knock against us had been our reporting, et cetera and we are finding now with the introduction of our VCC analytics and some of our reporting and then the fact that we’ve come up with this global follow the sun, contact center model. I am pretty confident we can take on anybody on a contact center alone basis, and beat them and I’m increasingly feeling better about the fact that most contact centers also like the integrated telephony and Omni-channel and chat and all the other stuff, all built in. So we think we can start to go more up market.

Great. And then just your comment on ARPU, you talked about I think $5 or $6 increment your, so this is $320 sort of the new base line is that we look at and you are going to build from there?

Yes.

Yes.

It will be more than that, yes.

Okay. Great.

I am hoping you saw, Mike, every metric, margins, gross margin churn, everything was up into the right systematically consistently, step-by-step.

Yes for sure. And then last, implementation timeframe, how you are feeling about that for your mid market, is that kind of been consistent, is there room for improvement or you kind of where you want to be?

Always room for improvement coming down. I am so proud of we call it sales engineering and deployment services which is an integrated team. I cannot tell you how proud I am of those guys. It’s been consistently coming down, we’ve kind of model two to six months. And overtime, we are starting to see it head more towards the two as opposed to the six. So we are not there yet, there is always room for improvement and part of the goal is to keep increasing the velocity of deployment.

Okay. Thanks a lot.

Thank you. Our next question comes from the line of Dmitry Netis from William Blair. Your question, please.

Yes. Nice quarter, guys. And good to hear your voice, Vik, since the end of that March quarter. It’s been a long wait.

Yes. You are right, it’s been a long wait.

Okay. Couple of questions. I hate to believe but the channel issue again, but this is by far the major catalyst of growth going forward, so is there going to be a metric you can provide us, I don’t know whether that happens when you reach 10% of your revenue or maybe you already there but how do we track that success of performance in that channel and you have about six master agents now that you’ve signed three in the last quarter. So want to make sure, we kind of track that and measure your success as you roll in revenue into that channel.

Okay. Fair, fair comment. Let me think about it, we have typically bundled mid-market and channel together and lump that growth rate up together but let me start thinking about how we start to break our channel, may not happen next quarter but very shortly thereafter it’s something we will definitely start to do because you and I are aligned on the fact that channel is going to be an increasingly bigger part of our growth story and I can’t tell you how excited I am on that. I mean I’m far from I would like to tell you we had work in progress and we hopefully learned day in and day out and we’ll keep making mistakes. But we’re starting to feel good about the formula and we’re starting to feel good about the traction in channel. So we’ll come up with some way for you guys to get color on it, we will hopefully give you little more color on our Analyst Day, I’m not yet sure what metric to provide and I’m not ready to break it out just yet because one quarter does not a channel make, I want to show it to you over three, four, five quarters and then I can start to feel like okay with there but it’s showing the right trend.

Okay. All right excellent and the other important I guess driver would be this Virtual Office Analytics Suite and I hope to learn more about it at your Analyst Day but anything you can give us as far as the traction of that product, the number of users or I guess the better way to look at it is maybe a percent of your customer base that this would apply to is it 10% of your customer base, 50% of your customer base. How to define a market or the up sell opportunity of this Virtual Analytics Suite?

It could be virtually our entire customer base over time the traction has been great, so in the sense literally two months of introducing it, if I remember right till late January, early February probably hit 30K of MRR in two months, we’re not going to break it out separately because it’s an add on but this is telling me something right, so it’s telling me what you and I discussed in the past, we are VoIP is just the start right, you start with VoIP, you add the Omni-channel Hallelujah, next you add this customer engagement and this complete solution. Great, then you ensure that you’re tightly integrated with the various application so you have contact but then you start to layer on analytics and it has been very interesting how many people are using our analytics to try and understand how their communications are happening, how many calls are coming in, who are they coming in to dot, dot, dot. So we think this is going to be an increasingly bigger part of our strategy.

Okay, great and I wanted to as you venture out into international space I would say, I want to focus on Canada real quick, I know U.K. you already mentioned good performance then that’s good to see but Canada you had some channel partners from the past contextual sort of presence, now that you are fully integrated is there much to write home about in that market segment?

Yes it’s starting to happen, to the extent that I believe we finally opened Canadian subsidiary, so we have got couple of employees are in Canada that Canadian channel is also starting to go in the right direction. So yes.

Okay. And then I want to leave one for Mary Ellen, on the G&A that was up a little bit this quarter, can you explain what were the drivers and what sort of the go rate on that line is going forward?

No the increase there is almost entirely due to legal fees and then we had mentioned that we took a loss contingency reserve that at $1.2 million that is in our G&A number.

Got it. Okay. So it should presumably come down in Q1 time?

Yes we would expect that to happen, yes.

Very good, very good. Vik, one more for you if I may?

Sure.

Coming from Enterprise Connect a lot of chatter about Skype for business now that you’re moving up market wondering if you’re seeing you’re bumping heads with Microsoft, in Office 365 Suite, et cetera, how you’re feeling, I know voice is still probably may be six to nine or maybe even a year away but it’s certainly coming together and they are guaranteeing a quality of service and although a good start, so I guess what’s your perception there, what’s your view and how you seen in the market unfold as they bring and head on?

Yeah, so we are not seeing them yet, so I don’t think they are not in the place that we are playing in and as I told you the thing I am more and more convinced about is if you are a single, you know, if you are a one trick pony then eventually the big guys can give you a hard time but in our case I am more and more convinced that the fact that we have this integrated solution, where you have got customer engagement, the VoIP, the Omni-channel tied in with back-office integration with NetSuite, Zendesk, Salesforce and then being able to layer on all of these analytics so that you can really be customizable to a large enterprise to help them solve their business problems. I think that's going to be hard for somebody that’s a pure volume player to just plains. I like our competitive position and we haven’t seen them yet, but if we do again Hallelujah I like to think the completeness of our offering gives us [non-tribule] [ph] edge.

Thank you. Our next question comes from the line of Mike Crawford from B. Riley. Your question please.

Thank you. So Vik, but for that $1.2 million charge, your S&A would have been the same $4.6 million in the last quarter and you don’t see a lot of change there, at least initially before you turn that perspective. You also have these 80% service gross margins which I don’t think you are expecting to deteriorate in the near term. And you talked about maybe potential acquisition I guess that would be a technology acquisition because I don’t think you include acquisition revenue in your guidance is that correct?

We’ve included some expenses associated with it, there will be primarily technology acquisitions and then also in some instances they may come with some revenue but more often then will not come with some loss also, but there is no revenue.

There is no revenue associated with an acquisition in our guidance. Yes.

Okay. So basically it would b e M&A that is just about the only way I think I can get you down to the low end of your target pro forma guidance, which as you mention was something you exceeded handling last year?

Yeah, but I think part of it is have starting to ramp-up, it’s in order of priority, engineering and continuing to ramp-up that scenario that I think we had incredible productivity for a company that spends about 80% on engineering compared to competitors that spend 20%. We are going to ramping that up as I indicated, so that’s non-trivial increase in expense right there, while at the same time we are making sure we don’t lose the productivity. I think we get more productivity out pr engineer head than anybody else’s out there and I think we want to have that number increase in terms of keep the productivities same but the overall numbers increase. Second area, demand generation particularly at the enterprise level we want to really start to put some money into - we are starting to see a bunch of larger companies go in this direction and we want to increase out demand generation activity, we want to increase our branding activity, we want to increase our channel enabled activity and a training per channels et cetera, et cetera and then on top of that we want to build up this enterprise sales team a little bit more keeping SMB essentially flat. So when you start to add it up those are three areas of non-trivial investments that we will be making, that will be faster than revenue. And then I am layering the fact that there are a couple of activities acquisitions that we are looking at, one that make on with no revenue but great technology, one that may come with some revenue but losing a little bit of money. So I want to make sure all of that was baked in.

Okay. Thank you. That is helpful. And then just slightly different here, your customer success team I think is been primarily a middle market effort. But is that - are you applying similar techniques to the SMB market?

Not yet. I mean that’s actually a great question because what we are - I am heading slightly different direction for the SMB market. We are putting greater emphasis this goes back to really leveraging our own tools, so we have our own VCC being able to provide a level of personalized support where you call in, if we know which number you called from, your record is automatically pulled in being doing skill based routing, so we can basically have various call centers, if one has excess call flow automatically routes to the other adding a knowledge tool so that you can kind of essentially do a lot of sales call creating chat sessions so you can answer questions coming up with FAQ. I’m trying to figure out a way to make SMB more and more automated and have the customer success be more and more focused on the mid-market as well as enterprise where there is a lot more hand holding involved. So that’s the way, we’re kind or evolving which is why I’m so pleased with the fact that our SMB team is starting to sell larger and larger deals. I mean those guys have transitioned I mean it’s not easy to kind of start to have an SMB team that suddenly starts selling thousand type deals on a consistent basis these guys have done it and now we’re trying to make sure that the support organization is able to support the large and larger customers with less and less touch.

Great, thank you. And then final quick question is as you’re upgrading infrastructure to 10-Gig in the like does that mean we should expect increase in CapEx this year as well?

Yes we are continuing to invest not only in our infrastructure but also in our back office systems.

So $8 million?

I don’t know, I don’t think it will be that much, no we’re actually, we’re CapEx light compared to other SaaS companies. But we’re moving up as a percent of revenue. So I wouldn’t expect it to get as high as $8 million.

Okay, great. Thank you.

You’re welcome. End of Q&A

Thank you. This does conclude the question-and-answer session of today’s program. I would like to turn the program back to Vik Verma, CEO.

Thank you, folks for joining us today. For those attending or listening in via webcast, we look forward to further discussing 8x8’s vision and strategy at our upcoming Analyst Day on June 4, 2015. Again look forward to it and thank you very much. Bye-bye.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.