8x8, Inc. (EGHT) Q4 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q4 2017 8x8 Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Joan Citelli, Director of Investor Relations. You may begin.

Thank you, Vicky, and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's fourth quarter and fiscal of 2017 financial results for the period ended March 31, 2017. The earnings press release which was issued today after market close and an accompanying slide presentation are available on the Investor section 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 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 Factors 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. I would also like to note that during this call, we will provide financial information that has not been prepared in accordance with Generally Accepted Accounting Principles, in addition to our GAAP results. Management uses these non-GAAP financial measures internally to analyze our financial results and believes they are useful to investors as a supplement to GAAP measures in evaluating the company's ongoing operational performance. Please refer to today's release for a reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. And with that, I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan, and thank you everyone for joining us today as we review 8x8's fiscal 2017 fourth quarter and full year results. During my commentary today I'll provide an update on the UCAS market and competitive landscape, the progress we've achieved in our key growth initiatives and our strategic goals for fiscal 2018. Then I'll turn the call over to our CFO, Mary Ellen Genovese for a more detailed discussion of our financial results and annual guidance. Business communications has become the next frontier for cloud transformation. Despite early rumblings from larger vendors seeking entry into the market, today's competitive landscape remains fundamentally unchanged characterized largely by a handful of cloud providers vying to displace legacy systems. We believe businesses will overwhelmingly choose a pure cloud solution due to the increased efficiencies flexibility and scalability enabled by over the top cloud based technologies. We also believe that our technology ownership, integrated communication platform and industry leading quality, global service delivery and support capabilities will keep 8x8 ahead of the curve as more and more enterprises seek to partner with next-generation cloud providers. Fiscal 2017 was a year of great progress for 8x8 as we achieved several key technology and operational milestones while continuing to build upon our position as the leading pure cloud communication provider to the enterprise business segment. For the full year we posted total revenue at the high-end of our guidance of $253 million and non-GAAP net income of 9% of revenue. We expanded our midmarket and enterprise customer base to approximately 3000 corporations with 10 ranked in the Fortune 500. Our overall service revenue in fiscal 2017 grew 23% while service revenue from our midmarket and enterprise customers grew 37%. 56% of our total service revenue is now derived from these larger higher LTV customers. I'm pleased with the progress our global teams have made throughout the year executing on the strategic growth initiatives we have focused on. As a reminder, these include; one, increasing adoption by midmarket and enterprise customers; two, enriching our product portfolio with new features and services; three, building an effective worldwide channel organization; and four enhancing our global operations to support our multinational customers and partners. First, we continue to enjoy excellent transaction moving up market. Midmarket and enterprise customers comprised two thirds of the monthly recurring revenue booked during our fiscal fourth quarter and 62% in fiscal 2017. During the fourth quarter alone we closed 19 large enterprise deals, 10 of which chose us for our combined virtual office and virtual contact center solution which continues to win us sizable new accounts. We are seeing particularly robust growth in the enterprise segment of our business. As I mentioned earlier service revenue from midmarket and enterprise customers as a whole grew 37%. But if we drill into this customer base further we find that the segment occupied by our large enterprise customers, those with a minimum billing of 10,000 in monthly recurring revenue or MRR has grown the fastest at an annual rate of 84% and now represents more than 20% of our total service revenue. This data underscores the effectiveness of our investment in building an industry-leading enterprise grade service offering and our success meeting the requirements of some of the largest corporations that are transitioning to the cloud. One great example of our continued success in the large enterprise segment is the expansion of our partnership with Regus. This expanded agreement leverages our market leading global reach network and includes coverage for 13 additional countries with our full suite of services from the 8x8 communications cloud. To date we have already deployed 20,000 unified communications feet in four countries for Regus plus 500 contact center seats and this expanded agreement with Regus has the potential to grow to hundreds of thousands of users. I want to highlight a number of other notable recent wins in order to provide greater insight into why customers choose 8x8 and how we are differentiated in the marketplace. A large enterprise deal that closed in the fiscal fourth quarter was Brookfield GRS, an international relocation company based in Toronto, Canada with 17 locations worldwide. In this win we differentiated ourselves through our market leading global reach coverage along with our differentiated 8x8 communications cloud. This deployment with include over 3000 virtual office and virtual contact center seats in EMEA, South America and Asia. This is also a good example of how we win against other cloud competitors who do not offer a fully owned and integrated VO/VCC product. LifeWorks, a global engagement and wellness company serving over 15 million users worldwide was another large win in the fourth fiscal quarter where our superior voice quality, faster time to deploy and a better user interface convinced them to select the 8x8 communications cloud for their locations across the U.S., Canada and UK. We also secured the business of Live Oak Bank, one of the largest originators of small business loans in the country for a combined virtual office and virtual contact center win for over 1000 users and room to grow. This customer wins displaced another cloud vendor and is a testament to 8x8's superior deployment capabilities and the care and attention needed to deploy enterprise customers that have more complex needs. Last quarter we described how certain large enterprise customers prefer to enter into a master sales agreement and pursue schedule location and end-user deployment thereafter. We're excited to be seeing the service adoption coming from the MSA agreement we signed with a Fortune 50 healthcare provider in the third quarter of fiscal 2017. This most recent opportunity for a 13 locations practice takes advantage of both our virtual office and virtual contact center solutions and is on track to save the customer roughly $3 million in annual cost savings. Key elements to this win include our superior voice quality along with attractive economics versus legacy on-premises PBX systems. Outside the U.S. our 8x8 Solutions business in the UK which we acquired in November 2013 is thriving with a 41% year-over-year increase in service revenue in fiscal 2017 when measured in their local currency. We have built a significant and rapidly growing presence in the UK with over 2,200 customers based in that region. One example of a notable large enterprise 8x8 Solutions win during the quarter was Oxford University Press, the largest university press in the world. In a highly competitive process 8 x 8 was selected over eight other vendors to update the communications system and support global customer service. We will be transitioning it's age into a dedicated virtual contact center solution with initial deployments beginning in June. The common theme in all these cases and the reason we are winning these enterprise deals is because CIOs are beginning to understand that all cloud communication services are not alike. They are learning in many cases by trial and error that it is what's under the hood that matters most when deciding who to partner with for mission-critical real-time communications. These customers looked under the hood and performed deep analysis of our service and technology. 8x8's global call quality and service delivery capabilities are unrivaled. This is due to the strength of our core technology and continued emphasis we place on delivering outstanding quality of service to our customers. A recently completed study by the Tolly Group, a leading global provider of IT testing and third-party validation services concluded that under both normal and adverse network conditions 8x8's virtual office consistently ranked higher in call quality than our other major cloud competitors delivering a superior voice quality experience for both on-net as well as PSTN calling. These large enterprise customers are not only choosing us above the competition, they are also growing with us. Land and expand is core to our strategy and this quarter we had a number of significant expansion orders from existing customers. Some of these include over 3000 new virtual office seats for Accentra, 1900 seats for Gerber Collision, 2100 seats for Zendesk, 1100 seats for Platform Specialty Products and 1500 virtual office and virtual contact center seats for Christie Digital. This add-on business speaks volume from a customer satisfaction standpoint and is reflected in our low gross revenue churn rate of 0.7% in fiscal 2017. Moving on to the second pillar of our strategy, our R&D and engineering teams have been busy throughout fiscal 2017 on several key platform infrastructure and product development initiatives that set us further apart from providers who do not own or manage the underlying technology of their solutions. One major project was the architecting of our new micro services platform Adman [ph] portal, desktop and mobile client and back office components to enable end-to-end workflows for quoting, ordering, provisioning, configuring and billing our expanding midmarket and enterprise customer base. Another initiative was the launch of the new 8x8 communications cloud platform our first in the industry solution which combines unified communications, team collaboration interoperability, contact center and real-time analytics in a single open platform. A key component of the 8x8 communications cloud platform is Sameroom, an interoperability technology we acquired earlier this year that enables costing, messaging and collaboration in the enterprise. So regardless of whether our customers use Slack, HipChat, Spark, or one of the many other collaboration applications in use today, we provide the translation layer. On the contact center side we upgraded all our virtual contact center customers to a more advanced unified platform and completed the U.S. launch of ContactNow, an intelligent, easy-to-use cloud contact center solution for teams. 8x8 suite of award winning omnichannel cloud contact center solutions provides companies of all sizes with a complete range of contact center capabilities including advanced analytics, quality management and workforce management integrated with advanced unified communications and collaboration services. Revenue from virtual contact center grew 28% during the fiscal year and accounted for nearly 20% of the new monthly recurring revenue booked in the fourth fiscal quarter. The pace of innovation at 8x8 has accelerated dramatically and we're continuing to receive new patents with 13 awarded in fiscal 2017 and 131 to date. This is a direct result of the expanded resources we've allocated to R&D and the invaluable expertise of our full-time engineering teams including the agile development teams working out of our offices in Cluj, Romania. Our third area of focus has been maximizing the effectiveness of our global channel network to ensure that our partners are motivated and well prepared to transition their customers to 8x8. We recently signed an agreement with Jenne, a leading value added distributor of technology products and solutions to bring 8x8 integrated cloud communication contact center and team collaboration solutions to mid-market and enterprise customers through a value added distribution model. In fiscal 2017 we enhanced our partner enablement offerings with a new global web portal extensive sales and technical training resources and marketing and lead generation support. We also announced new relationships with partners including CarrierSales, to [indiscernible] Packet Fusion along with several additional international partners and an expanded relationship with CDW in the U.K. 8x8’s global channel team has doubled in size over the past year to meet the demand for our services on a global basis and we plan to continue building out the segment of our sales organization throughout the year. Fourth, we made tremendous progress enhancing our global systems and customer support capabilities to better serve our more than 6,000 multinational customers. We're now live with all our customers on sales force service cloud an enterprise scalable platform that is fully integrated with our sales automation system. We've also moved all of our global support centers onto a common virtual contact center tenant enabling us to seamlessly route calls across U.S., U.K., Romania and the Philippines. With this capability we can now send inbound calls to whichever contact center is open giving us through follow this in capability. The ability to support all our unified communications and contact center customers via a single global support network is a significant differentiator in our space as our primary competitors have to rely on their vendors to in order to provide support for their individual offerings. 8x8 has grown to become a highly appreciated global organization with over 1,000 employees spread across seven global offices. In fiscal 2017 we added more than 200 employees to our organization along with two outstanding senior executives to the leadership team. Jeff Romano, Senior Vice President of Global Services & Support and Dejan Deklich, Senior Vice President of Global Research and Development. And I'm very pleased with the contributions they have each made to the business in such a short period of time. I'm also very excited to welcome Rani Hublou on board as our Chief Marketing Officer affective this past Monday. Rani brings tremendous knowledge and expertise to 8x8 and we're thrilled to have her on board. Looking at fiscal 2018 and beyond we are more excited and energized than ever to transform communications for businesses of all sizes and believe we can offer the greatest value to larger global enterprises whose infrastructure and requirements are most complex. To that end, we will continue to invest in maintaining the highest quality service and support for midmarket and enterprise customers while expanding our reach through new marketing and channel initiatives to businesses that are still burdened by legacy systems. Product innovation will remain a high priority and we will be maintaining an increased focus on our virtual contact center solution which we believe has far more potential now than in the past. We're also excited to be bringing our new ContactNow solution to the U.S. market to fill the existing customer service void that exists in smaller businesses with informal and non-traditional contact centers. M&A will also continue to be a key element of our strategy with technology tucks-ins such as Sameroom and Quality Rocket and acquisitions that broaden our global footprint such as Voicenet Solutions and DXI being the focus. With that I'll turn the call over to Mary Ellen for a more detailed discussion of our financial results and our outlook for fiscal 2018.

Thank you, Vik. And thank you all for joining us on the call today. My commentary will cover highlights from our income statement, key operating metrics from the quarter, a summary of our balance sheet and our updated guidance for fiscal 2018. These will be based on non-GAAP results unless otherwise noted and I remind you to refer to the tables in today's earnings press release for a GAAP to non-GAAP reconciliation. For the fiscal 2017 fourth quarter total revenue was $66.5 million, service revenue of $62.7 million grew 20% year-over-year. Adjusting for constant currency and discontinuation of the non-core voice message broadcasting segment of our DXI operations which we announced in the third quarter of fiscal 2017 our service revenue grew 24%. Service revenue from our midmarket and enterprise customers grew 32% year-over-year and 38% on an adjusted basis. 56% of our total service revenue is now coming from these larger business customers compared with 50% in the same period last year. Product revenue which constituted approximately 6% of total revenue in the fourth fiscal quarter declined 26%. We hope that this trend continues with more and more of our customers opting for desktop and mobile apps in place of the desk phone. Gross margin for the quarter was 79.1% compared with 74.1% in the same period last year. Service margin in the fourth fiscal quarter was 84.5% compared with 83.2% year-over-year. Product margin in the fourth quarter was negative 9.2% compared with negative 18.3% in the same period last year. We continue to see improvements in these margins due to a lower per minute cost on inbound local and toll free traffic as well as outbound domestic call terminations, lower subsidies on handsets and a more favorable mix between subscription and product revenue. Quarterly net income was $5.1 million or $0.05 per share and is 8% of revenue compared with $3.2 million or $0.03 per share representing 6% of revenue in the same year ago quarter. Our non-GAAP net income for the fourth fiscal quarter excludes non-cash charges and acquisition related expenses of approximately $800,000. A small portion of this relates to our acquisition of Sameroom in January, 2017 and the remaining portion is related to legal and accounted fees associated with an acquisition target that we ultimately passed on. Sales and marketing expense which also includes customer service and deployment cost were $34.7 million or 52% of revenue in the fourth fiscal quarter compared with $29 million or 51% of revenue in the same year ago period. The increase in sales and marketing expenses was primarily due to increased salaries associated with additional headcount. Turning to annual results for fiscal 2017, 8x8 posted total revenue of $253 million at the high end of our guidance despite currency headwinds of $4 million and the discontinuation of a non-core product of $1.4 million. This represents an increase of 21% year-over-year and 23% on a fully adjusted basis. Service revenue for fiscal 2017 was $236 million an increase of 23% year-over-year and 25% on a fully adjusted basis. Service revenue from midmarket in enterprise customers grew 37% year-over-year and 42% on an adjusted basis. Pretax income for fiscal 2017 was $22 million or 9% of revenue. Our non-GAAP effective tax rate for fiscal 2017 was approximately 38%. Our cash taxes for fiscal 2017 were approximately $0.5 million. Gross margin for the full year was 77.1% compared with 74.4% in fiscal 2016. Service margin in fiscal 2017 was 83.8% compared with 82.6% in the same period last year. Product margin was negative 12.2% compared with negative 18% in fiscal 2016. Turning our attention to key operating metrics for the quarter, average revenue per midmarket and enterprise customers grew to $4,494 compared to $4,083 in the same year ago period. Average revenue per business customer was $426 compared with $385 in the same period a year ago. Gross monthly business service revenue churn on an organic basis that is excluding DXI was 0.7% compared with 0.4% in the same period last year. During fiscal 2017 we saw an increase number of new enterprise customers sign initial contracts for a portion of their planned deployment followed by the addition of many more seats and services over a period of time. Companies such as Regus, Accentra, Gerber, Zendesk and a Fortune50 healthcare provider we announced last quarter are examples of businesses that are ordering and deploying services in this manner. We also added another customer of this type during the fourth fiscal quarter a Fortune150 supplemental insurance provider who has selected our virtual contact center solutions over two major cloud vendors for their independent sales agents. New monthly recurring revenue from midmarket and enterprise customers and by channel sales team comprised 66% of the total new monthly recurring revenue booked in the fourth fiscal quarter. Our bookings from midmarket and enterprise declined 7% on an adjusted basis compared with the same period of fiscal 2016 when we posted greater than a 200% increase in bookings which resulted from three large enterprise wins and a very large order from Regus. However, we saw increased momentum in our midmarket and enterprise business in our fourth fiscal quarter and saw bookings increase approximately 40% sequentially. I would also like to note that we have only scratched the surface with some of the large enterprise customers we added in fiscal 2017 and we see significant up-sell opportunities in these enterprise accounts. We believe the other quarterly metrics that we provide specifically the growth of our midmarket in enterprise service revenue and percentage of total service revenue from midmarket and enterprise customers are more representative and useful measures of our progress moving up market as opposed to the new monthly recurring revenue book in metrics we provide. This is because we're finding more and more frequently that our largest enterprise customers are entering into MSAs with little or no upfront commitments. Also our recently launched ContactNow service in the U.S. will largely be a pay-as-you-go model. Cash, cash equivalents and investments were $175 million at March 31, 2017 compared with $163 million at the end of fiscal 2016. Cash flow from operating activities was $6.3 million in the fourth fiscal quarter and capital expenditures including capitalized software were $3.9 million in the quarter or 6% of revenue. For the full year cash flow from operating activities was $28.5 million compared with $23.6 million in fiscal 2016. Capital expenditures including capitalized software were $14.4 million or 6% of revenue in fiscal 2017 compared with $7 million or 3% of revenue for fiscal 2016. The increase in capital expenditures was due to global expansion and support for new product introductions. On May 23, 2017 our Board of Directors approved a new share repurchase program authorized an up to $25 million in repurchases of the company's outstanding shares of common stock. Given our strong balance sheet and history of generating positive operating cash flow, management and board believe that based on the current price of our common stock this $25 million share repurchase is a prudent use of our capital allowing us to increase shareholder value, offset dilution attributable to our stock based compensation plans and yet maintain sufficient liquidity to invest in strategic growth initiatives including acquisitions. Moving on to our guidance for fiscal 2018 we expect full year service revenue in the range of $280 million to $285 million representing approximately 19% to 21% year-over-year increase. We expect total revenue in the range of $296 million to $300 million representing approximately 17% to 19% year-over-year increase. Adjusting for the currency headwinds which we anticipate mostly in the first fiscal quarter of 2018 and revenue from our non-core voice message broadcasting segment of our DXI operations we expect fiscal 2018 service revenue growth in the range of 20% to 22%. And total revenue growth in the range of 18% to 20%. We expect our full year non-GAAP pretax net income in the range of $21 million to $26 million or approximately 7% to 9% of revenue. Our estimated non-GAAP effective tax rate is expected to be approximately 36%. Our cash taxes are expected to be less than $1 million. That concludes my prepared remarks and we will now open the line for questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Nandan Amladi with Deutsche Bank. Your line is now open.

Hi, good afternoon. Thanks for taking my question. So, as your enterprise piece becomes bigger and bigger when would you consider breaking out midmarket from enterprise rather than reporting a combined number.

Probably within a year or so, if you go back to our strategy Nandan, and we've talked about this. We started off as a SMB play years and years ago and then we went after these really giant enterprises and then we seemed to get quite a bit of traction there and now we started to almost come down and start to cover the mid-market in the smaller enterprises but 20% of our business is now these large enterprises paying more than $10,000 in monthly recurring revenues where they are the ultimate test of your product. And I had hair before I started to go after all of these $10,000 plus monthly recurring revenue type customers and so we'll continue to start to fill up the mid market and enterprise so in essence we have a range of offerings that basically spans the entire group and is very effective and so probably towards the end when I think enterprise continues to become - a large enterprise continues to become a bigger and bigger element of our business we'll break it out from small, medium and enterprise.

Thanks and for the follow up question on the channel approach, a few years ago you took this support of narrowing down your partner channels into sort of more concentrated larger partners. You are continuing to add partners now. So has there been any change in thinking or are these now focused more on geographies and more so than perhaps segments?

No, actually no change in thinking. I mean, I always believe less is more with regard to partners. Our channel - revenue from a channel doubled in the last, from the last year so in 2017 it was double what it was in 2016. What we're starting to see is now a new type of channel particularly the folks that used to service Avaya and Mytel and all the rest and we're transitioning more and more towards channel partners that can basically be self-sufficient. So they can sell, they can support, they can deploy and that's part of what we're looking for and that's part of the transition we're making as a company because that is what will truly increase our footprint because what you'll then be able to do is really enable the channel partner, the channel partner will then enable the customer you're there to provide support to the channel partner periodically to the customer, but it's less you know day-to-day support per se. So that's the type of channel partners that we are continuing to add and I think we've been very successful in that area because that gives us the opportunity to keep moving up market.

Thank you.

And our next question comes from the line of George Sutton from Craig-Hallum. Your line is now open.

Thank you. Vik, you mentioned that Regus could ultimately become a 100,000 seat customer. I'm curious if you could explain that process how that would happen and within the same context I'm curious if you think across your enterprise base and midmarket and enterprise base what percentage do you feel you're penetrated?

Okay, so couple of questions. So let’s start with the Regus one, so one just to make sure that we're very clear, its hundreds of thousands not just a 100,000. They have already deployed 20,000. So the way Regus is working out and it's a phenomenal partner, Regus’s goal is to start providing a bundled voice service for all of their tenants in all of their offices and the idea is to start with initially the 17 countries we already had four plus and other 13 and then the idea then we will have the ability to up sell additional services ranging from a virtual meeting, virtual contact center, ContactNow, team collaboration, et cetera on top of that. So Regus is going to essentially fund the baseline which is go out and deploy voice, our core voice platform to every one of their tenants over time and then the idea is to kind of move up from there. So that's their plan, that's their intent. So, we are very excited about the future and as they've been a very good partner we went through a couple month process. We want them where we started the U.S. deployment, they looked at us then to truly expand it globally. They're never easy to negotiate with, but we feel very good about the future with them.

One other thing if I could ask strategically, you did pay some fees for an acquisition you didn't go through with, what is the takeaway strategically, is it that you are actively looking, is it that you're showing discipline, is there anything else that we should be taking away from that?

Yes, so we are actively looking. So we are very significant pipeline of candidates we look at and from time-to -time you get that letter of intent phase, the due diligence phase. But one of the lessons I've always learned through acquisitions is you have to make sure that there are no surprises at the end of it and we have to be extremely disciplined because otherwise acquisitions look great and then you have to kind of deal with them after the fact. And for us acquisitions is very key and core to basically adding to the DNA of the company. I think in January we rang the bell at NASDAQ and I look back and I think the last four acquisitions I think senior executives from all four of those acquisitions were there. And I think we've had 70ish percent of the people from all our acquisitions still be part of the company. So we try to be very, very disciplined and we're not afraid to pull the plug. However long in the process we are if we feel the price is not right or we see something that bothers us and so we’ll continue to look, but we'll continue to be very disciplined. We want to be very careful with shareholder money.

Thanks for the perspective.

And our next question comes from the line of Jonathan Kees from Summit Redstone. Your line is now open.

Great, thanks for taking my question. I'll start with my follow up first. Have the 19 large customers you won in the quarter I had a curiosity, how many of them were VO/VCC and analytics or what is common to those?

Yes, I think 10 out of the 19 were VO and VCC and I think a couple were VCC only, but I don't have the, the other breakdown in front of me but 10 out of the 19 because that's starting to be the key reason for our strategy. The larger customers are looking for one throat to choke or one hand to shake and so the ability to have an integrated solution, particularly VO and VCC which is the contact center as well as the voice platform becomes critical. The other element is, these guys are very focused on support, so they want one vendor that can do the entire support for the entire platform. So the larger the enterprise is the more we are finding that the fact that we have these integrated offerings is becoming a huge differentiator.

So that certainly is a big plus for the guys and which is essentially a part my second question I guess more strategic is, as you've talked about this quarter and I know you started talking about last quarter a lot of your larger customers are coming in with massive service agreement where there's no commitment for up front commitments for further business, but you see a lot of potential there and in the end you get more money or just as much money as you, if they bought the system in a lump sum up front. Are you still seeing that with a lot of your enterprise customers since last quarter has anything changed in terms of your projections there with the master service agreements?

No, it is a matter of fact as I had mentioned on the call we had another customer just like that a Fortune150 customer who also did the exact same thing. He spent a lot of time with hen I had narrowed us down among a number of competitors and chose 8x8, but again it's a master service agreement and then we'll continue the release orders as we go in that one for contact center only. We're seeing a lot of upside I think just from the customers that we had booked in fiscal 2017, the enterprise customers we have booked there's a lot of upside certainly with Regus with a Fortune50 company now it is Fortune150 company and a number of others where this is their style as we continue to move up market and as we continue to go into the enterprise as we had mentioned last quarter. This is more normal, this is the normal way that they do business which is you know get all the tees and fees. Get the MSA done and then start to release orders and we've made some traction in this quarter with the Fortune50 company and we expect to continue to make significant traction in fiscal 2018 to service these customers and like I said there's we just barely scratched the surface. There is a lot of upside here.

Great, good luck guys. Thanks a lot.

Thank you.

And our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open.

Great, thank you. A couple of questions. First, if you could just kind of give some early customer you know gross perception or just kind of how many customers are evaluating Sameroom? And then second, just how you are valuating kind of some of the early investments and branding initiatives are there for in metrics that you guys are looking at or certain ways that you're looking at continue to spend on some of them more branding spend? Thanks.

Okay, I'll do the Sameroom one. I think its several 100 already that are either evaluating and we also have some of the best known brands that are already starting to use them. To basically including actually some of our competitors are using them to tie their own chat systems together. So view that more and more as they integrated offering with our VO and so will be starting to but we're also considering starting to do that just as a standalone basis which is the way we currently sell them right now, but that pipeline looks quite interesting. And part of the trick for us is how we use that as a way to penetrate larger and larger customers because that deployment model is so, easy for people to start using that then after that how can we drag on virtual meetings and virtual office right after that. That's one of the key areas that we're spending time on, but currently we're going into either standalone Sameroom or a very shortly we'll be going with an integrated Sameroom with virtual office, but in both areas particularly in Sameroom only wishing quite a bit of traction. With regard to branding and other initiatives, you are looking at the in terms of CMO that was very happy to relinquish the CMO I'm not a marketeer I've been CMO since January of this year. And so, Rani is just on board, I will let her kind of comment on it. We will be very targeted. We are not a mass marketing company. So we always try to tie and Rani is back on this, the intent is to tie everything that we do on advertising branding with a particular segment and make sure we ROI and we'll be able to give you more color on it probably in the next three months or so, but she's just been on board for a few days.

Great, thank you.

And our next question comes from the line of Catharine Trebnick with Dougherty. Your line is now open.

Thanks for taking my question. Nice quarter, a quick thing on the VCC, you had said that 20% of the new MRR for Q4 was from that, what is the total percent of total revenue you're doing with the contact centers?

Contact centers is almost 20%, I think just shy of 20% and we're seeing that Catharine as a very, very attractive business. One, I think as I indicated that business is growing 28% and we're starting to I think if you look at Dejan Deklich’s background he used to be the CTO of Merced as well as I think was a CTO fir Workforce Management at Nice before being Head of all of Cloud Engineering as well as I think the general Cloud business for Splunk. So this is an area he has a lot of expertise in but one we see VCC as well as contact now standalone as very compelling contact now we believe is disruptive and then the second element is as integrated with VO they make sure that there is something that is truly differentiated particularly for large enterprise customers.

Okay, one more question, I didn’t hear the full answer when someone else asked it, but two years ago you guys had roughly, you wanted to focus on your 10 master agents and it looks like now you're really expanding internationally. I noticed there's a couple of new partners even before I wrote a note up internationally in Europe and you’ve done a really good job in the U.K. I mean what do you attribute some of the success in the U.K. in getting some of the newer partners up and running there and then what is really the plan for the partner program, is it to really expand, add another 100 or is it to be more focused and really try to drive a certain amount of revenue through a certain portion of them? Thank you.

So there is couple of things, thank you Catharine. So one the goal is to always be focused because hopefully you've seen this we’re disciplined about everything that we do, so we had a pretty much of a standing start in Channel almost two years ago and so then we did almost a subtraction of channel partners to a few math to service agents we've found quite a bit of traction from them, they have been excellent for us, now we're starting to move up the stack one way to start to take some of these channel partners and they're starting to become truly global. But increasingly we're heading up the value added reseller model where we are looking for the channel partners that can do the entire suite. It's good for them, it's good for us because good for them because deployment professional services building an analytics practice using some of our technologies, we have the ability remember we have cross-platform analytics, your contacts center, your texting, your messaging, your virtual office is all integrated together and you're able to get consolidated analytics that is absolutely valuable to businesses. So value added partners that can learn enough about it to provide some level of consulting and value added services becomes more and more valuable to us because what it allows us to do is not have to scale up a professional services or deployment organization they become essentially the people that train our channel partners who can then go out and service their customers and we're there as experts if and when needed. So increasingly that is becoming more and more of the go to market strategy for this company and particularly as we move up market, that tends to resonate with our customers as well. So that's the main plan of our channel. We will always have less channel partners. Then there are people who announced thousands of channel partners, I just think they'll be extremely effective and will make money for channel partners because we'll invest in them the same way they will invest in us.

I appreciate you clarifying that, thank you very much.

You’re welcome.

And our next question comes from the line of Rich Valera with Needham & Company. Your line is now open.

Thank you. Just a question on your midmarket MRR new bookings, you mentioned they were down year-over-year over off very difficult comp but I think you mentioned a sequential number which was around 40%, just wanted to clarify that number and talk about how maybe we should just think about the business and that number seems to becoming less maybe, less of an indicator for the business given this shift to MSA type deals?

That's exactly right, so it was a sequential increase of 40% of approximately 40% from Q3 to Q4, so we are really pleased with the traction we received in our fourth fiscal quarter and I think we went into it in quite a bit of detail last quarter and a little bit of detail in this quarter, we don't believe it will still continue to provide that metric but we don't believe it's a key metric anymore to actually measure our key strategy three strategic initiatives which is moving up market And the key metric there is we always disclose the service revenue, the percent of our service revenue that's coming from mid-market and enterprise customers and we also disclosed the growth rate of those customers that that portion of our revenue. So that I think is a better metric to measure us by than this new – from midmarket and channel business.

Got it. And just a clarification on your the tax rate and your non-GAAP net income Mary Ellen, in fiscal 2017 as I understand that there was very little tax embedded in that guidance number and you actually ended up having very little tax for the year kind of a nominal number and now you've called out this 36% pro forma tax number this year, is that actually embedded within your non-GAAP net income guidance this year?

No, no and Rich thank you for – thank you for that question. It is a little different than the way we displayed our non-GAAP metrics in fiscal 2017, but going forward as required by the SEC we must tax effect our non-GAAP pretax income. So we didn't do that in fiscal 2017 because we were halfway through the year and we had given guidance on a non-GAAP net income basis that was not tax effective. We disclosed what we had anticipated our cash taxes to be which as you know it is very small it is $0.5 million. Going forward, we expect our cash taxes to also be very small less than a $1 million probably somewhere between $0.7 million and $1 million at the very highest, but we have to tax affect it. So the non-GAAP tax rate for fiscal 2018 will be 36%. So we will give you each and every quarter we will give you the pretax number, our non-GAAP pretax number and then we'll also give you a tax affected non-GAAP number and we will compare that to fiscal 2017 in an apples to apples comparison, in fiscal 2017 our tax rate was approximately 37.8, I think it was 38 rounded to 38%. We expect that to be 36% in fiscal 2018. Again I just want to make clear it is a non-cash number, it's just what is required by the SEC when you disclose non-GAAP numbers you must tax affect it. Did that make sense?

So the non-GAAP net income guidance range you gave that effectively just includes your cash taxes, is that correct?

That is correct because that is a actually I gave you a pretax number and the cash tax number is very you have to add the $1 million on top of that, the cash is less than $1 million but I gave you a non-GAAP pretax number.

Okay. So we need to add on that, all right, I got it. Okay, thank you for that clarification.

And our next question comes from the line of Kash Rangan with Bank of America. Your line is now open.

Hi thanks for taking my questions. Congrats on a nice quarter and the guide here. Just wanted to clarify something the metric you guys provided customers with 10,000 plus 20% of total services revenue in the fastest growing segment, 10,000 in what count of number of seats that would translate and my back of the envelope math shows that on 400 did leverage, but I just want to confirm that?

It changes, it depends on the seats but yes so that number is only monthly recurring revenue, so my guess is probably yes 400, 500, it all depends on whether they are contact centers, there is the buy analytics, do they buy, what is the case of the various virtual office systems that they're buying, are they just buying virtual office with voice are they buying it with virtual meeting, are they buying it so we have various bundles, so 400, 500 is a reasonable number.

What's your best guess when 20% of services revenues involve the customers more than 1,000 seats are we a year away from there, two years?

I’m sorry, say that question again?

When 400, 500 seats is going to go up 2000 seats like 20% subscription revenues have gone a bit 1000 seats and plus, are we a year away from that or might couple of years from there as you continue going up market?

No I will tell you what is quite interesting and Mikela [ph] you have followed us for a long time, as I was preparing for this earnings call, I was starting to get a list, I was looking at a list of customers the number of customers that I think I just picked a random sample of recognizable names and you saw the number of 1,000 seat customers, it's almost becoming more and more commonplace for the 1000 seat customers. So we’re probably a couple of years away from it but we are now 56% of our business is mid-market and enterprise, 20% of our business is greater than 10,000 monthly recurring revenue, so I think our SMB business, our small business grows in the mid to high single digits. So you will continue to see that crossover happen, if these growth rates continue which we have no reason to believe they won't.

And Mary Ellen a question for you, when I look at the organic constant currency trajectory in subscription revenues, you guys started accelerating in Q4 2016, you grew 25% then and then the trajectory has been 25, 25, 25, 28, 24, the most recent quarter and you’re guiding to basically 21 as a mid-point? Just trying to understand the puts and takes here, is this a classic example of enterprise pipeline building up, but not getting enough revenues to expand acceleration in the revenue growth rate, are we seeing a pause here as you view the enterprise pipeline and could we potentially see reacceleration in fiscal year 2018?

Good question Mikela [ph]. It’s actually a combination of a couple of items. So in the fiscal third - in the third fiscal quarter, I think we had mentioned that there was some much higher, there was higher professional services than we normally see and in addition to that, we had one or two because it was our calendar year end one time sorts of items that can repeat itself obviously in fiscal in our fourth fiscal quarter. So that’s one of the reasons. The other reason is, you’re right as we get more and more of our enterprise business like for instance Regus right, we can deploy as quickly as they want to deploy. So when they say go, we go. We can deploy very, very quickly. So it is basically when the customer wants to go and they are going to be with some largest customers, there might be some starts and some stops. [indiscernible] is a perfect example where it was go as fast as you can until you hit the retail, until you hit like September timeframe, then stop and re-engage with us in February. So that's what you're going to see when you’re working enterprise customers. And then the other reason is that we put a lot of focus on our ContactNow product that we wanted to release here in the U.S. So we took resources from our U.K. and brought them here to train our teams on how to sell that issue. And then don't forget we do have the past impact, we're no longer selling the pass on discontinued basis and we did have quite a bit of headwind from a currency perspective.

Yes and I think we will continue to see going back to your larger question, these enterprise customers are very interesting and their buying behavior is quite interesting. They spend, they are here for three to six months to kind of negotiate all the terms of the contract, but once they start buying you become the approved vendor which means every division can start to buy from you, that process tends to accelerate. So you will see growth continue to accelerate through FY 2018 and the other thing is for us our focus has been primarily enterprise now starting to be more and more mid-market but we have not focused on the small portion of our business and it just is that as a company we feel we’re geared for the large enterprise and enterprise but we have huge differentiation. And so as you see, the small business become a smaller and smaller portion of our revenue the growth rate over time should start to normalize towards the growth rate of a mid-market and enterprise as opposed to the drag that small business has been on our overall growth rate. So it could be, it's a mathematical exercise the key for us is to continue to accelerate our enterprise and large enterprise business and keep executing and then over time I think the growth rate will take care of itself.

And lastly Mary Ellen from me, can you please comment on the seasonality for fiscal year 2018, you provided the annual guidance, if you can comment on the revenue and margin trajectory throughout the year that would help us with the modeling that will be very helpful? Thank you.

The seasonality across the years for fiscal 2018?

Yes.

From a revenue perspective?

Both revenue and margin perspective?

Okay, typically our best season is in our third fiscal quarter and our first fiscal quarter or actually our third fiscal quarter is where the highest peak is because of the usage expecting our U.K. businesses and in our contact center businesses is a heavy busy travel initiative. But we typically don’t see a lot of seasonality outside of that to be honest. You should see growth throughout the year each and every quarter. We should continue to grow as we had in the fourth in fiscal 2017.

Got it, thank you.

You are welcome.

And our next question comes from the line of Will Power with Baird. Your line is now open.

Great, thanks. I just want to come back to the 19 I guess midmarket enterprise wins in the quarter. I know you talked about your contact center was obviously a differentiation, but and Vik as you kind of step back and you look at these RFPs and I know you've referenced competing against eight folks in one of the UK take offs [indiscernible] what are one or two things that you things that you think are really helping you differentiate yourself and win these deals, is it the global capabilities, or QOS and where does the pricing fit in all that? Thanks.

Actually that's a great and it’s the 19 one that I referred to large enterprises and not midmarket, we have a whole bunch more midmarket wins. So the key part there for you is so those – what I'm finding are that there are three key themes that we are seeing. Increasingly global is something, because again people can talk a damn good game on global, they can put press releases out, global is hot and making sure that your customers have the ability to make phone calls to every part of the world and that the voice quality is good is critical and so that is the key element. The number two element we find is this integrated platform because the fact that we own all our technology and we are able to provide both VO and VCC becomes a huge differentiator. We hear horror stories about people who have sometimes gone with competitors where they'll talk about the fact that support becomes increasingly difficult because they are not sure who they are dealing with. And in once case, I mean literally is one throat to choke. And then the third area that we find becomes increasingly important is our deployment. We do I think a bang up job of white glove deployment for all our core customers. And then in addition to that I think we - I referenced this Tolly report, because it was something I was curious about. I wanted to benchmark our voice quality in both good networks and adverse networks against all our key competitors and we found that we were very far superior with regard to all both under good circumstances where we were better but not by a lot, and really crappy network conditions where we were better by a huge amount. And so I think that report is available and we released it this morning so people can look at it, but those are the four or five fundamental reasons why we win. And another one that also becomes increasingly important particular at the large enterprise level is security and again the ability to own every element of your technology allows you to provide significant security much better than if you were kind of cobbling together three or four different vendor's products. I mean it's one I think the classic example is IBM PCs were always harder to secure and were always subject to penetration because it was the weak points were all the integration between all these various technologies where Apple was always difficult for people to penetrate and was always much more secure, so that again becomes another key reason why we win.

Great, thank you.

And our next question comes from the line of Dmitry Netis with William Blair. Your line is now open.

Hi, thank you very much and thank you for squeezing me in. I had a couple of questions, maybe I can load it up in one. I just want a clarification on the LeChat and how much of contribution was there in the quarter and maybe what do you think it will contribute in 2018? And then secondly, you talked about the win rates and some of the deals you may not be able to see and opportunity within to work on digital marketing and lead generation and doing it better and better. What – where are you now on the win rate and where do you think you are at 2018? I know that's more of a qualitative question, but is the win rate improving? Are you seeing more deals as a result of your marketing and regeneration efforts come your way? Can you just comment on that? And then my last question would be on Regus. If you could maybe explain what happened there and why that customer kind of put only a year and a half since you wanted rental rebid and what's caused them to kind of enter the new process and is that now kind of part of this MSA agreement or are they are not an MSA customer, what's the pricing potentially as you want it here again is it more competitive pricing than it was a year ago? You don’t have to go when you first want it? So those are the three questions I have if you can address them one by one that will be very helpful.

Dmitry, that has got to be the longest question in multiple parts I've ever had. Let me see if I can remember all of them and make sure I answer them. So step one, LeChat which is basically Sameroom, so very de minimus revenue. I mean we bought the company essentially. They have very, very little revenue and that's not necessarily our focus for them. I mean we want to get revenue off it – on it because we do think it is a compelling product, because think about it, it ties multiple peoples chats together and some of the most visible brand names that you know are using it as part and parcel because it basically is almost the equivalent of freeware where people initially downloading it and paying a de minimus amount. So, we actually view it as a more penetrate radiate strategy. It gets so much traction because people love the product that it kind of almost creates a little bit of a viral effect. So I don’t necessarily want to make a lot of money from the product. I want them, the key goal is how can it be used to then drag in all of our various other products. And the - we're also tying it in as you know to our virtual office system where it provides a differentiated capability with virtual office. So long story short, it has very little revenue, but it has great differentiation particularly at the enterprise customer levels as well as the ability to provide huge differentiation for our virtual office across the board. So that's I think question number one. I believe question number two was about marketing. So couple of things, I mean there's - I think I'm not a subtle guy and I've telegraphed I think for the last two or three earnings calls that we were not necessarily great at marketing and that's the reason why there are some changes in our marketing organization. I was the acting CMO for marketing since January and I can tell you unequivocally that I was completely incompetent. And so now I have somebody who is competent. I expect that you will start to see more of a presence from us. We have great pride in the fact that when we are in a deal, particularly larger more complex deals which are not just driven by hype we believe more often than not we win. Now the key is we win 0% of the deal that we're not in and there are lot of deals that we're not in and that has been one of the weaknesses of this company and that is one of the weaknesses that we need to address. And so that's part of why we're making some of these various changes in marketing and I've been as I said I tried to be non-subtle about it and the fact that I think I have been telegraphing this for probably the last two to three quarters and that's - I acted on it this time. So that's with regard to your second question. And then your third question was Regus. Regus is an amazingly fun customer and not necessarily that different than large retail type customers and I think as you would find they were very happy with us and then of course it is not unusual for competitors to say how they could provide X, Y or Z and what they had asked for certain concessions from us and it is not inappropriate for Regus to constantly look outside and see if they are partnered with the best. And they went through a very rigorous exercise and I think if you see from the quote that I think Andre Sharpe, the CIO of Regus made, is he did a very detailed survey and presented it to the CEO as well Board of Directors and concluded 8x8 was superior. And you know what, he was right. I wholeheartedly agree with Andre and it was a great validation and on the basis of that they expanded the scope of our agreement, but in addition to that, what they did is, they allowed us to bend in addition to just the core voice services now they have basically deployed our virtual contact center where every sales agent from Regus making an outbound call to go solicit new business for Regus is using our virtual contact center. And then on top of that they now want to use this as a way to create a business where they can go to everyone of their customers that already have built in voice and start to offer virtual meeting, team collaboration, virtual contact center, contact now for teams etc. So it becomes a very powerful way for Regus because they have approximately 200,000 to 300,000 users, but they have approximately a million people that basically were former Regus users, but use just their "offices" on a periodic basis. So that's what they want to do. So I have great hope for the future. I don’t want to make that as any form of guidance and I want to set your expectations that they have deployed 20,000 seats, that's a lot. And these are 20,000 paying seats. This is not some speculation. That's approximately 20,000 seats and 500 contact centers and I think they expect to deploy significantly more than that and then how far it goes you know I have great hopes, but I'm not willing to commit to anything.

Great, I appreciate the candid response. I'm going to take the rest of the questions off line. Thank you.

Okay, thank you.

And our next question comes from the line of Mike Latimore with Northland Capital. Your line is now open.

Great quarter there. The Fortune 150 customer how many contact center seats and what’s that kind of addressable market there were contact center seats and then second, did you say that the channel revenue doubled in the year?

Yes, sure. The channel revenue approximately doubled year-over-year. I don't have off hand how many contact centers seats was that Fortune 150 customer. So I don't unfortunately have that number off hand. But I mean, again, another great brand name. Again rather then and to give you guys a perspective, I don't want to just make it pure puffery about 8x8. This is a fascinating trend where larger and larger enterprises are going over the top. They are not going in with just hybrid cloud or anything like it. These guys are going over the top and they are basically going out and feeling that it is secure enough, this is an insurance company. These are starting to be – we've had some luck I think with financial verticals which surprised me because that tends to be the last to go towards cloud. So what is starting to happen is increasingly cloud communications is becoming mainstream. And the part that I am very excited about is very systematically 8x8 has put in all the pieces from a technology perspective because the next barrier is going to be the ability to provide comprehensive analytics which cover all forms of real-time communication in a company across the globe and provide it in dashboards to senior management. That helps make the transition where communication is no longer a utility, but it becomes a value-added business, that's the exciting stuff. That's how the next really giant companies are going to get billed and it's a long way to go, but I think step-by-step we are getting there.

Thanks.

I am showing no further questions at this time. I would now like to turn the call back over to Mr. Vik Verma, CEO for closing remarks.

Once again thank you all for listening in on today's call. We have a busy few weeks ahead presenting at a number of conferences including [indiscernible] Craig-Hallum, Baird, Citi and William Blair and we look forward to meeting with you at one or more of these events. Thank you very much.

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