8x8, Inc. (EGHT) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. And welcome to the 8x8 Second Quarter Fiscal 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Joan Citelli, Director of Investor Relations.

Thank you, Operator. 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 second quarter fiscal 2018 financial results for the period ended September 30, 2017. The earnings press release, which was issued today after market close, conference call script and accompanying slide presentation are available on the Investor’s section of 8x8's Web site 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 press release for a reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures. I’d now like to turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan. And thank you all for joining us on our second quarter fiscal 2018 earnings conference call. This has been a very busy and productive quarter for 8x8. I’m pleased to report that we have made significant progress implementing the strategic initiatives we laid out last quarter. I’ll review this progress shortly, but let me first begin with a high level summary of our financial performance during the quarter. 8x8 posted solid top and bottom line results for our second fiscal quarter with an 18% increase in service revenue to $68.1 million, and a 15% increase in overall revenue to $72.5 million. Service revenue from mid-market and enterprise customers, those billing greater than $1,000 in monthly recurring revenue, increased 28% and now represent 58% of total service revenue. Our non-GAAP pre-tax net income was $4.2 million, or 6% of revenue and service margin remained strong at 83%. The market continues to inflect and we see tremendous opportunities for accelerated growth across the four customer segments we serve, from small business to mid-market and enterprise. Our goal is to drive revenue growth across our entire business with a continued focus on mid-market and enterprise customers, along with new initiatives to accelerate revenue growth from small business customers. In order to position ourselves most effectively for our next phase of growth, we have identified and have begun to execute on several strategic initiatives. First, we are aligning global business units around our core market segments to optimize for growth. At the beginning of October, we’ve segmented our internal sales operations into two separate business units, small business and e-commerce aimed at businesses at 1 to 99 employee and mid market and enterprise, aimed at businesses with 100 plus employees. We determined that establishing two separate business unit will enable us to unlock the growth potential of each unit, and allow us to optimize our sales and marketing strategies around the specific needs of each customer segment. These business units will align sales and delivery, and be tightly coupled with demand generation, service and support to drive segment revenue growth and profitability, globally. Small business and e-commerce will focus on our high volume transactional business with an aim to accelerate growth and productivity through e-commerce and self service. Mid-market and enterprise will focus on both creating and leveraging channel relationships, and building a direct sales force to drive a consultative approach through our land and expand strategy for larger accounts in the U.S., EMEA and APAC. Second, we reported top industry talent through newly created executive leadership position in our marketing and sales organization to align with our new business units and accelerate adoption of our solutions across all market segments. With these changes, we are aggressively gearing up to accelerate growth. Third, we’ve expanded our global field sales organization with both mid market and enterprise sales executive and channel development management. Our field sales executives work directly with customer prospects to understand and customize the optimal solution for their business, while channel development managers are responsible for recruiting and enabling partners in their respective territory, evangelizing the 8x8 brand and growing the sales pipeline with partners. In Q2, we have 21 new partners participating in our channel enablement program with six of them already bringing us deals in the August and September timeframe. Five of our top 10 deals in the September quarter were brought in by our channel partners. Our unique differentiation in the market, driven by internally owned voice, collaboration, contact center and analytic technologies, makes us a highly desired vendor partner to mask mass region and VARs that are rapidly evolving their business models to accommodate the transition from legacy to cloud communications that is occurring today. Fourth, we laid the groundwork for some new marketing, branding and lead generation initiatives, designed to highlight the true value of our solutions over those of both legacy vendors and cloud competitors. 8x8 has a most comprehensive set of our cloud communications, contact center and analytic capabilities in the industry. Over the past several years, we have created, assembled and expanded the building blocks to reinvent the business communications market. We have transformed our core virtual office communications platform into an open platform with API ScriptE, Extensive Integration and the leading global voice quality in the industry. In parallel, we have added a full spectrum of contact center and customer engagement capabilities with the acquisitions of Contactual, which brought us high end contact center capabilities and DXI with their innovative easy to use contact center functionality for business needs. With the acquisition of quality software in same room and their leading edge technologies, we are ready to further lead throughout the industry with speech analytics for everybody, and next generation collaboration capabilities. Business enabled us to further disrupt the market within new suite of products that unifies cloud communications collaboration online meeting and contact center solutions with an end to end data analytics platform. Representing a combination of technologies from years of continuous innovation from 8x8, this launch signifies a new edge of truly unified cloud communications. In early October, we launched our new virtual office editions product suite, including our groundbreaking 8x8 virtual office X8 edition. Designed for easy consumption by small and mid-size businesses from a pricing and packaging standpoint, deal additions also includes three enterprise class business communication options, provides customers with the flexibility and mix and match pricing model that’s best suited for their needs. Our new 8x8 virtual office X8 edition offers a unique and powerful business communication and collaboration solution along employee to interact anytime from anywhere, and includes easy to use contact center capabilities, such as inbound call handling, outbound campaign dialing and rich reporting and analytics for new business insights. This new offering enables companies to connect everyone throughout the organization, including both contact center agents and employee within single unified solution. 8x8 continued to execute in the market with many sizable customer wins during the quarter, including 13 large enterprise deals. 61% of the new monthly recurring revenue booked in Q2 came from mid market and enterprise customers. One of our largest enterprise deals, carrying a total contract value of approximately $7 million, came from our UK team, which continues to enjoy excellent traction in the market, specifically in the public sector with local and central government opportunities. This laid this government contract with counsel calls for an initial deployment of 10,000 virtual office seats and 600 virtual contact center seats, and potentially provides an opportunity to deploy our services through 30 additional London borrowers. We continue to win sizable mid market and enterprise customers with our integrated virtual office virtual contact center solution, which was present in eight of our top 10 deals in the September quarter. A new marquee customer win in the U.S. is Lenox Corporation, a market leader in quality table top giftware and collectibles. For Lenox, we will be replacing a legacy on premise system with approximately 600 virtual office seats and 70 virtual contact center seats. 8x8 won this deal following a competitive RFP process that involves several of the UCaaS and CCaaS providers. Another combination win was standard motor products, a leading independent manufacturer, distributor and marketer of replacement parts for motor vehicles, calling for a deployment of over 2,200 virtual office seats and 1,000 virtual contact center seats. 8x8 was selected because of our integrated platform, our global reach and our superior voice quality. Select Travel Service, a global travel agency, also selected 8x8 for a combined deployment of 530 virtual office seats and 140 virtual contact center seats. Collect was upgrading to the cloud from an antiquated legacy system they had been using for 17 years and wanted to upgrade to the cloud. Our contact center solution was a dragging factor for this global customer win. Finally, 8X8 garnered recognition as an industry leader for the sixth consecutive year in Gartner’s 2017 Magic Quadran for UC as a Service, an important validation of our continued investments to drive innovation in the cloud communication space and an acknowledgement of the great strides we have made in delivering measurable benefits for mid market and enterprise companies. We also named a challenger for the second year in the Gartner Magic Quadrant for contact center as a Service. And in a recent report published by synergy research group, 8X8 was named a worldwide leader in both revenue and subscriber seat in the midmarket and enterprise segment of the UCaaS market. In summary, our second fiscal quarter has been one of significant changes, which I believe overtime will materially alter our growth rate trajectory. We brought some amazing new talent on board, rolled out our next generation platform, launched a highly differentiated UCaaS offering and realigned our business by creating two distinct go to market vehicles that will materially improve our efficiency and win rate, all within the last 90 days. However, we anticipate that the sheer volume of these changes will take one or two quarters to bear fruit. As such, we feel it is prudent at this time to reset the bar on our revenue expectations for fiscal 2018. But I feel confident that the investments we have made keep us on track for achieving 25% service revenue growth exiting fiscal 2019. With that, I’ll turn the call over to Mary Ellen for a more detailed discussion of our financial results and revised guidance.

Thank you, Vik, and thank you all for joining us on the call today. My commentary will cover financial highlights along with key operating metrics from the quarter. These measures will be based on non-GAAP results, unless otherwise noted. And I remind you to please refer to the tables in today’s earnings press release for a reconciliation of GAAP to non-GAAP results. Foreign exchange rate fluctuations did not have a significant impact on our comparative results this quarter as the British pound remains flat versus prior year. So none of the financial information we are presenting has been adjusted for constant currency. Total revenue in the second quarter of fiscal 2018 grew 15% year-over-year or 5% sequentially to a record $72.5 million. Adjusting for the discontinuation of the non-core voice message broadcasting segments of our DXI operations, total revenue grew 16% from a year ago period. Turning to specific revenue line item contributions. Service revenue increased 18% year-over-year or 5% sequentially to $68.1 million. On an adjusted basis, service revenue increased 19% from the year ago period. Product revenue, which constituted approximately 6% of total revenue in the quarter, declined 20% from a year ago period. Service revenue from mid-market and enterprise customers grew 28% year-over-year and 6% sequentially. 58% of our service revenue is from our mid market and enterprise customers compared with 53% in the prior year period, and 1 percentage point improvement sequentially. Gross margin for the quarter was 77%, almost 2 percentage improvement year-over-year and flat sequentially. Service margin was 83%, flat over the year ago period and sequentially down 1 percentage point due to the increase in third-party network and service costs, which are attributed to higher usage. Product margin was negative 17% compared with negative 6% last year. Moving to operating expenses, sale and marketing expenses in the quarter, which includes customer service, product management and deployment costs, were $38 million or 52% of revenue. This is up 2 percentage points versus the same year ago period as we continue to execute on our strategic initiatives around channel deployment and demand generation. R&D expenses were $7 million or 10% of revenue. This is up 1 percentage point from a year ago as we continue to invest and execute on our commitment to develop truly unified best in class communication solutions for our customers. G&A expenses were $7.1 million or 10% of revenue. Quarterly net income before taxes was $4.2 million or $0.04 per share and 6% of revenue compared with $5.4 million or $0.06 per share and 9% of revenue in the same year ago quarter. We saw solid improvements in key operating metrics for the quarter. The average revenue for mid market and enterprise customer grew to $4,690 compared with $4,351 in the same year ago period. Average revenue per business customer was $442 compared with $409 in the same period a year ago. Gross monthly service revenue churn on an organic basis, excluding DXI, was 0.4% compared with 0.6% in the same period last year. Please note that the third fiscal quarter revenue churn maybe higher than second quarter results due to the upcoming holiday season. New monthly recurring revenue or MRR bookings from mid market and enterprise customers and by channel sales teams comprised 61% of the new monthly recurring revenue booked in the quarter on an adjusted basis. New MRR was essentially flat on an adjusted basis compared to prior year. Sequentially, we saw positive momentum across the mid market enterprise channel and small business segments. Cash, cash equivalents and investments were $167 million at September 30, 2017 compared with $170 million one year ago. Cash flow from operating activities was $5 million in the second fiscal quarter compared with $6.9 million the same period last year. Capital expenditures, including capitalized software, were $4.8 million in the quarter or 7% of revenue and increased 9% sequentially. During the quarter, we re-purchased approximately $1.1 million shares at a price of $13.23 for a total of $14.1 million. We currently have about $11 million available for share re-purchase under our current program, which goes through may of 2018. 8x8 has a clear capital allocation strategy of investing cash to grow our business organically, through acquisitions and strategic partnerships and returning cash to shareholders through share buybacks. This approach is a strategy we have been and remain committed to. Looking ahead to the second half of the fiscal year, we continue to recruit world class talent, primarily in sales, marketing and our research and development teams, while enabling our channel programs to enhance demand generation and support our global brands. To better model third and fourth fiscal quarters, operating expense growth is expected to be in the low to mid double digit range versus the first half of the year. Q4 is expected to be sequentially higher than Q3 and the highest quarter of spend for the full year. Specifically, sales and marketing expenses will increase from added headcount, channel enablement execution, commissions and advertising spend to support the brand and go-to-market strategic initiatives on the mid-market and enterprise. As a percentage of total revenue, we expect sales and marketing to be in the range of 55% to 56% during the second half of this fiscal year with Q4 being the highest sales and marketing expense quarter. As a reminder, product management, customer report and deployment services, is included in our sales and marketing expenses and represent approximately 14% of revenue. R&D will increase modestly in absolute dollars to support the development of unified solutions and our class platform real time analytics, but we will remain stable as a percentage of revenue from previous quarter. As a percentage of total revenue, we expect G&A expenses to be approximately 11% during the second half of the year. We also anticipate our quarterly service margins to decline slightly from the second quarter level in the second half of the year due to additional expenses related to the amortization of previously capitalized software. In addition, we will continue to invest and deploy our capital to execute on our strategic business initiatives, while taking a very disciplined approach to share re-purchases. Having said all this, we are modifying our revenue outlook for the full year due to three primary factors. The first factor is attributable to our UK easy contact now product. During the first half of the year, service revenue from the product was largely in line with our expectations. However, due to our strategic decision to integrate the core technology into our recent Virtual Office X8 product launch, we are now deemphasizing selling the standalone product. The underlying technology is strong and has tremendous value to the business as part of an integrated platform. The second factor is related to a large enterprise client that has revised its timeline for a major rollout of services due to constraints on their end. Lastly, we have recently realigned our global sales and marketing leadership teams and operating structure to support our strategic initiatives to generate revenue growth and support sales execution. We have streamlined these two important corporate business units to generate demand, accelerate bookings growth and respond more quickly to customer needs. We will also continue to build out global functions to strengthen our leadership position in the unified communication space. Although, we have made good progress to-date in our strategic initiatives, we may need another quarter or two to see improved bookings. Taking all these factors into account, we have revised our outlook for the fiscal full year; total revenue in the $262 million to $294 million range, representing approximately 15% to 16% year-over-year increase; service revenue in the $275 million to $277 million, representing approximately 17% year-over-year increase; adjustment for the discontinued revenue from a non-core voice message broadcasting segment of our DXI operations, service revenue growth in the range of 17% to 18% and total revenue growth in the range of 16% to 17%. We continue to expect fiscal 2018 outlook of non-GAAP pretax income to be approximately $9 million or 3% of revenue. Our estimated non-GAAP effective tax rate is expected to be approximately 36%. Cash taxes are expected to be less than $1 million. Lastly, taken into consideration our increased investment in the business, our market leading position and the market opportunity, we continue to expect that service revenue growth will begin to accelerate in fiscal 2019, within an extra growth rate of approximately 25% in the fourth quarter of fiscal 2019. To clarify, total revenue -- for guidance -- total revenue is expected to be between $292 million and $294 million. The series of strategic investments and initiatives mentioned earlier are all contemplated in our financial outlook. We believe this is the right time and prudent use of our capital to increase future growth for fiscal 2019 and beyond. We are on the right path and taking action for the long term success of our Company. We are investing in our brand, employees, product innovation, demand generations and channel, to enable our global clients to grow their business and reduce their cost. We made good progress on this front with many of our partners, and this is a longstanding commitment on our part. Before we begin our question-and-answer session, I have one more topic. During the summer, Jonan informed me her decision to retire at the end of this month. On behalf of 8x8 management team, I would like to say thanks Joan for her 13 years of contributions to the Company. Joan built the investor relations department and established and nurtured relationships with all of you over the years. We with Joan all the best in her future endeavors. I’d also like to introduce Victoria Hyde-Dunn. She joined 8x8 four weeks ago from Visa, and will be your Investor Relations contacts going forward. With that, operator we are ready for questions.

[Operator Instructions] Your first question comes from Meta Marshall with Morgan Stanley. Your line is now open.

Hi, thanks for the question. I was wondering if you could just talk about how you decided like now is the time for the reorganization, because it seems as if a couple of quarters ago, you identified that you needed to increase branding efforts and then a quarter or two after that, you decided you wanted to increase sales and marketing and then you’re making more changes. And so I just wonder like how you decided the timing and the roll-out of some of these changes and particularly, with our being other disruptions in the space as far as M&A or bankruptcies? And just why not make all the changes at once or what led to the timeline of the changes that have been made. Thanks.

Okay, that’s a very good question, Meta. So let me clarify that one. So I think we talked about it last quarter where I think that was the comment, which is why did we decided to materially increase our investment. We got the sense that the market was inflecting. We wanted to get the right people in place in marketing before we needed to go out and really emphasize that we’re willing to go out and really ramp up our marketing expenses. And as part of that, as we talked about it, we telegraphed you that essentially our business is two parts; we have our small business, which has been growing essentially as a drag on our business, particularly our micro business; and then our mid market enterprise that is growing pretty healthily. And as I went through and really did a detailed review, it became increasingly obvious to me that what we had done is we’ve made a nice foundation of sales. But what we needed to do was essentially get specialist. The person who is very good at growing a very fast pace, essentially self service, low end business, is very different than the person that builds a large enterprise mid-market business. We felt bifurcating the business was critical. And the other part that became more and more obvious to us is we have a unique asset, which we have essentially paid for in blood, which is we have all core technologies that constitute voice, video, text, context center, essentially on one ruff. Which then became obvious with us we were of using our new management team who’s coming in and looking at it with fresh eyes as to why do we have to live with other people’s definition of what constitutes, contact center and what constitutes virtual office. We have the ability to mix and match. So as we have combined all of these things together, we made three clear decisions. One is let's take our contact in our product, which is essentially a very easy to use contact center and why don’t we integrate that essentially as part of our virtual office solution. So now in essence as built in your core PDX for essentially the same price, you have the core simplified functionality of contact center. So people who didn’t even know there were contact centers as part of their phone system can get that. We think that gives us non tribunal differentiation and we think that gives us a very significant opportunity to almost create a category for people who literally saying hey I bought a phone system and my phone systems comes with the ability to priorities who I should answer, to keep records of everybody who calls, to route calls where I can get other people involved, to address any particular problem and have a complete record all. All of those things that contact centers consider part in partial. We’re not going to bundle into a VIO, which we think gives us something significantly disruptive. And then we’re starting to see our enterprise market take off, but the thing that’s fascinating about our enterprise market is they are looking more and more at APIs. They’re elsewhere, for example, one particular customer we’re starting to do everything from two factor authentication to literally creating workflow rules, leveraging our API solutions. So with all of those things, we figured this was a perfect time, we brought ahead of essentially engineering and place who comes from an analytics background. So you have the ability to do cross platform analytics. We brought on board a marketing person who also comes from an analytics background, and has in her background spent a lot of time creating new categories. And then in essence, we bifurcated sales into somebody who comes from pure ecommerce background, so the idea to do a whole series of sales services. And then we brought on board somebody who will be former CRO for NewVoiceMedia. But prior to that, the head of worldwide analytic sales for IBM and ran as many as 4,000 people, and so with all of those things, we managed to do all of this in 90 days. Winning the markets inflecting, we think there is an opportunity and there is a lot of talent available. Just in the last 90 days, we’ve been able to add about 40-odd people to our sales and marketing group. And as I said from that perspective, we felt this gives these folks a clean slate, kill some or deemphasize some of our standalone orphan products, more and more integrate towards a series of three or four very differentiated products and go for it.

And if I could just ask one follow up question. I mean, the decision to segment by enterprise and small business versus, or I guess I'm just trying to get a sense like, is there somebody dedicated to channel versus direct? Are those kind of similar alignment that’s given the channel development, who is running that at this point?

So we enterprise and mid market, particularly mid market, channel is a huge part of it. And so if you look at a lot of our hires and I'm sure all of you follow my various LinkedIn accounts and posts, I am noticing more and more of the top tier channel assets, channel managers BDM some of the very best in writers who have joined because the idea is our problem has always been we’ve had the best technology, we just not had our feet on the street. So channel is now part and parcel of our mid-market and enterprise business unit where in essence with channel is just a lead source. We make no distinction between having a direct sales force that’s just by itself or channel sales force that sell through the channel, we have one common sales force and channel just becomes a lead source. That eliminates friction. It makes it very clear that we’re very channel-friendly organization, and we view that as an opportunity to really go out into hyper growth. And again, channel is inflecting as you can probably guess and the ability to get one vendor where they can get everything. And then as I indicated the ability for us to mix and match portions of our product, because since we own every element of our technology, I can carve out portions of my contact center make it part our VIO and that gives something disruptive. I can take portions of my APIs and give people the ability to create professional services organization, so that you can provide value-added services. That’s why we have bifurcated the Company like this, increasingly are going to see more and more on our midmarket and enterprise, particularly enterprise, our focus on analytics and increasingly on our small business, we’re going to see the ability to go in there. We will have a virtual office offering, but it’ll have built-in context center type functionality, so that it, it won’t just be a replacement PBX or a cheap phone in the cloud, it will have the ability to have a built-in contact center, because essentially that’s now going to get integrated as part of that solution.

Your next question comes from George Sutton with Craig Hallum. Your line is open.

Thank you. Vik, I wanted to make sure I fully appreciated the new suite of products. And can you give us any key competitive differentiators that are going to come from this new suite?

So as you know, one of the things we’ve done with our VIO edition. So we have had, as you do with a company which is acquired as many technologies and assets we’ve had and that has been in business as long as we have, you end up with a whole series of different products. And what I started to do again is bundle them into what I call edition. VIO edition, which is essentially a virtual office edition, meaning you bundle in three broad categories and it required a reengineering of our product, literally from the back office. We have to completely go away from the good old PeopleSoft CRM that would always had, all the way up to creating a new coding cash engine to a new billing engine. And then as I said, creating a self service portal and fundamentally changing the user interface. And we’re now starting to roll this out bold for one of our very large strategic customers that is going to use this, so that every one of their customers can just do self service and we’re also load rolling this out more and more towards our small business. If you think about it, we have had our legacy small business that has been a drag on our business. But now, the ability to have a product like edition, where literally it’s A, B or C. You can have three options. If you want contact center built in Xa, if you want just a basic telephony X1 or X2. We’re basically making it so that it literally becomes something what people can add to it, self revision, they can modify. So less and less support cost, less and less sales cost. This was one of the key reasons why we wanted to do this, because it allows us to continue to not have to increase our investment in our small business, but accelerate our growth rate. Then you also have a common platform that now starts all across. And then particularly now that we add our VCC edition, you have cross platform analytics that nobody else can provide. We have a new product coming off of [Saurom] as you can probably guess my engineers named it. But [Saurom] will basically give you analytics, which will encompass voice, video, text interactions, all the way to your context center interaction in one common dashboard company wide. So that is what we mean by truly unified communication. It’s been about 18 months of work, and I’ve highlighted that it required me having to completely rejigger our back office system, it required us to completely rejigger our provisioning system, it required us to completely change our configuration manager. And as I said, we now started to roll all of these things out. And we think that, as I said, by unifying all of this, it decreases my support costs, it increases the velocity with which I can sell and allows to me bundle stuff together where I can create disruption in the market.

And one of the question on the ongoing Avaya gift that you’re getting. Where are we in that migration from your perspective? And then can you just discuss some of the other M&A activity that’s occurred over the quarter, the short term Mitel and the Broadsoft Cisco in terms of what you think that means for you? Thanks.

Whatever M&A does that are out there, I am on bended knees and thanking him for it. Again, it's very easy to see you guys did a phenomenal job of channel checks, as well as figuring out. We have been the beneficiary of some incredible talent from all of the people that are now going through all of this stuff. We have also seen a lot of channel partners now migrate to us. The fact that -- the weakness and the strength of 8x8 has been we are techie geek company with the greatest technology, but then everybody said from a branding and a selling perspective, we will not roll fast. I brought a world class talent on that. And particularly in channel, you’re starting to see channel gravitate to us because in essence, they view us; A, as a one stop shop; they are now seeing the same people they have dealt with before here; and they are seeing our commitment to massive investment in this space, and that we will do whatever it takes to own the space. I think from that perspective, we think we’re going to be a significant beneficiary of all that is going on. So there’s a few other people that you can recommend and get bought as some of the rumors are out there, I hope all those rumors end up being true because we love it.

Your next question comes from with Jonathan Kees of Summit Redstone. Your line is open.

Great, thanks for taking my questions. I just wanted to, I guess, dig a little bit deeper in terms of the reasons for the revision. There was firstly the product in UK that was no longer going to be sold separately than it's not going to be integrated that you could contact. I would think if it’s going to be integrated then the ARPU would go up to offset standalone sales you get normally? And then second, you had mentioned about the large enterprise price customer, they pushed out to service revenues. I guess, is that implying as we push out to the second half fiscal second half, or is that still be question mark?

That’s a very valid question let me take that on, because ultimately, I made this call. Three things, one, we continue to sell our UK ECN product. It’s just something we have deemphasized. By that I mean we’re siphoning off all the resources from selling that product more and more. The existing customers will continue to support, but we’re siphoning off. So you’re starting to see a very significant drop in the product, because as we take away resources from adding features and/or support and/or sales from that product and move it more towards x8, which is still early days and hasn’t kicked in, you’re starting to see that the new sales and that product is coming in well below planned. And it's something I am not trying to reverse, because in the end, it's coming on faster than I would have liked. But it's not one that is worth reversing. So that’s step one. Step two, this customer that I talked about, their plans actually have expanded. And one of the key elements, they have been a great driver in creating this self service element of the product. And they had put together a very detailed schedule and roll out plan, and they have started against that roll out plan just the ramp has been a little bit slower than anticipated, because of resource constrains on their end. But we anticipate over the next two three months, the ramp will pick up. But as you can tell, the services revenue, if the ramp starts out slower, you try not able to recognize the service revenue. And then the third, just the sheer volume of changes I’ve instituted. I believe it's the right thing to do and obviously that is why I telegraphed that I was going to change, or not telegraph, I told you guys I'm going to change my investment profile. And I was going to significantly increase my investment in sales and marketing. So as you think about it, two SDPs, one to head up sales and one to head up -- one to head up mid market and enterprise one to head up ecommerce and small business, all brought on board in the last 90 days plus another 40 or so sales and marketing people, including probably four marketing VPs. And I can remember three or four sales VPs globally, all of that’s happening. Part of what I want to do is take a little bit of the pressure off these guys. In other words, come on board give them a couple of quarters to get their feet back, and doing massive amounts of change, creating all of these business units. So I wanted to provide the air cover to say guys, there is going to be -- I don’t think there is going to be major disruption, but there is going to be something. And so, with these three things, I felt the right thing to do was take this guidance down and just go for it. It doesn’t fundamentally affect our views on the growth rate. As a matter of fact, we feel that growth rate accelerate. But I just don’t want to give short-term pressure on people that I’ve just brought on board.

No, that certainly makes sense, and that’s very reasonable. If I could sneak in one last question and on a more promising note here. Just wanted see if you can talk about your partnership with the HipChat? Is that -- how was that going to move the needle. I'm thinking that’s going to be not exclusive, because you also partnered with their product. The service test, but you also partnered with the Zendesk service test. So I'm thinking this is not exclusive, but will still contribute towards revenue growth.

Stay tuned. As I told you, we have some awesome technology. And I have to spent 18 to 24 months just building all of the stuff up. You’re going to start to see -- this is where additions, this is where essentially the ability to have a Lichat, which is a next generation of collaboration engine, which basically allows you to integrate with everything from slag to HipCha to whatever. We have got some seriously cool stuff. And now we have also -- I’ve just brought on board a VP of strategic alliances, who came from IBM. And she has got a stellar background. There, you’re going to start seeing some more and more fascinating stuff. We have been a technology company, and I know that has been the rap on us. But that’s the a reason why we’ve been a technology company, build really cool stuff then bring on board the people with all the relevant backgrounds put some gas in the engine for executive management to provide enough air cover so that they’re not being forced to do stupid things in the short-term, and they have the ability to make that happen and then go kick at. That’s what I think we’ve done.

Your next question comes from Mike Latimore with Northland Capital. Your line is open.

I just get to the longer term growth goal here. What growth do you need to see out of the small business segment? You talked a little bit more about I think improving the growth on the small business segment. But does that need to be 10%, 15%? What growth do you need see there to get your longer term variable?

We don’t need a lot, because we think we can grow the enterprise, the mid market significantly. But as I said, it is always good to see our small business, which as you know, I ring fence and didn’t do much around it, because literally we put them in a room and we send a pizza under the door and just give us more. We’re now bringing on board some seriously cool talent that’s looking at every element of our process and they’re highlighting so many inefficient fees that it’s almost pathetic. And so, I mean, I don’t need more than 10-ish percent growth. I think I can get to 15-ish percent growth. But again, as I said to a large degree, small business with $150 million, $140 million business that has been this massive drag on our company, because as we were moving more and more mid market and enterprise, which I think we’ve done well. But all of the changes we made to the product, including this addition, which to a large degree creates the self-service capability and the self-provisioning capability, applies just as easily to small business. And then now we’re bringing in people who have 21st century expertise on how to build high velocity small businesses, and also up level existing customer base, which is pretty darn incredible. And so, I said from that perspective, we think we can see significantly greater than projections growth on small business. Long term, I don’t anticipate it’s going to be a drag on our business. I think it won’t grow anywhere close to how like midmarket and enterprise is going to be. But I think it’s not going to be a drag on our business at all.

And you’ve talked about hiring a lot of sales people and business development people. Do you have a rough sense of what percent growth you will see in those types of employees this year, this fiscal year?

Some of it -- Mary?

Yes. That’s one of the critical thing that we’re hiring for the channel. Channel enablement, business development managers, we want folks that can help us bring in the best of the best channel partners, enable those channel partners and get more feet on the street so that we can accelerate our growth. I fixed that earlier, the mid-market is almost off of the channel. And it’s a great resource for us and we have the right people out in the field to help them close the deal. So we would expect it will continue. As we said, there were 40 sales and marketing new employees this quarter, including a couple SVPs. We would expect that continue that that rate of higher, and we’ll continue in Q3 and Q4.

And I’ll just give you color, and I apologize, because I know I’m lowering guidance but at the same time I do -- I am a little bit of a proud papa. I mean, just we do an on-boarding process out here. We make it pretty comprehensive. We do between three to five days with every employee in the Company, whether it’s the receptionist all the way up to an SVP, goes through an on-boarding exercise where they have to learn every element of our product, as well as they go through and spend time with everyone of my direct reports. It culminates with a dinner in my house where they have to make a presentation in four person teams of something new that they can introduce to the Company or something that they think that they can do to improve the Company. This most recent dinner was October, middle or late October, there were 53 people that showed how pleasant that there are 15 or so of their managers. Let’s just say if this keeps going, I’m going to need a bigger house. But just some caliber of people we’re getting is just awesome, I mean some amazing people are joining us.

And just last question on this deal where you -- it sounded like it was 1,000 feet contact center deal plus 2,200 virtual office. Can you just talk a little bit about the competitive landscape? There was a main competition on premise guys, or were they make sure cloud, PBX and separately cloud context. And what was like competitive dynamic on that deal?

Those are on premise guys. But I will tell you, and again, it has taken a lot of effort and a lot of pain but our contact centers standalone is now competitive, right. We all look at Gartner. But even there, we’re not quite in the leaders quadrant on contact center, but we definitely moved up and to the right. And we’re getting to the point that with our contact center, I think we’re starting very close and maybe very year or two away, but we’ll be in the leaders quadrant but it's standalone is seriously cool and can stand on its own. Couple that with our VIO, you’ve got a virtual office and a virtual contact center that wins us these very large deals. And now for the mid market, which is traditionally the one that if you remember I told you, they tend not to buy a lot of contact center fees. I’ve now introduced an integrated contact center as part of our virtual office offering. I can kill that category, right. And particularly mid-market literally, you buy a virtual office and I have a low end contact center built in as part of my X8, game on that was it. I think at the high end, I can start to win with my VIO VCC, because I’ve got two best of breed products. I am not yet best of breed in contact center, but getting there. And then I have integrated our virtual office by adding all of these features. So from my perspective, our problem has always been feet on the street, our problem has always been coverage our problem has always been brand. Just hired the President of North America -- Great San Francisco as our VP of brand, she comes in same thing. You’re starting to now see people from across some very interesting segments are coming in here, because they see an opportunity with our core technology to kill a category. And I have, as I said, we’ve got a lot of dry powder, I don’t need to do major acquisitions, because to a large degree we have made all of these very unique tuck-in acquisitions. We have combined them all together. I have a guy who basically built really big engineering organization. And now I have guy in mid market who has built very big sales organization. Now, we just have to give them time to, as I said, makes that happen.

Your next question comes from Dmitry Netis with William Blair. Your line is open.

Certain, appreciate the guide and how you lower the -- gave yourself some headroom here to execute. I think it's the right move. Also, I just wanted to confirm couple of things. The new MRR was flat you said just from that and also the service revenue, exiting fourth quarter of 2019 will grow at 25% versus the prior full year of 2019, growing at 25%. Is that -- those are the…

That’s correct. And Dmitry that’s the same as what we had said last quarter as well that we expect that our fourth fiscal quarter will grow at approximately 25% year-over-year in fiscal 2019.

And then a couple also quick ones here. On the channel side how did that segment grow? You had, I think, you said 15 of five of top 10 deals with channel and then you said you have 13 enterprise deals. And maybe how many of those 13 came through channel and how fast did the channel grow?

So I don’t have the exact number, because as you know, now channel is integrated with my direct. So all sales are essentially being funneled. More and more of online core deals are coming from the channel. Channel is the most interesting and fastest growing segment as I indicated to you before, refining is particularly now that we have removed friction from the system, which is a non-tribule reorg that we did last where you eliminated essentially a team that sold direct and a team that sold through channel and combined it into one common team. And channel is basically a source to a skill based sales team. But more and more you’ll see a bigger emphasis on channel. And we view that as our fastest growing segment, which is where as you can see, we have almost doubled and tripled the number of BDMs that we brought on board that can go out and really service the channel.

It sounds like the inflection in sales force productivity you expect couple of quarters here one to two. But let's assume it's the March quarter when you will be firing, let's say, on all cylinders and the productivity will be top shelf…

You got it. And that was the thing. I mean, to some extent, as I said, part of executive leadership is to do the right thing for the team you bring on place. And I want to give these guys a chance. These really are killers and you can see their resumes and you can see how much in demand some of these guys were. I want to give them the air cover to really go in and kick ass. And so I think it will take them one to two quarters to come up to speed. They are pretty aggressive group. So I'm actually quite excited. But I think FY19 Q1, I'll start feel very good about where we are, and I think Q4 of FY19, my job is to put my feet up on my desk and just watch them rolling.

Maybe last question guys, and this was asked before. But I just wanted to confirm the date on this, the big large enterprise customer. And I'm going to connect the dots here and tell me if I'm wrong. But you did expect the inflection, which you had it press release out there for them to start deploying in the second half of this year. So, I think October 1st, what’s the license to sale date? Does that shift now? What is new date on that deployment then? And maybe double click a little bit to tell us actually what happened with that contract, why did it slip? And maybe, even if you could, what's the capacity per quarter number of seats that you could deploy with that customer? Is there a number there, or is that incident?

So couple of things, I won't comment on a specific customer, because I just won’t comment on specific customer. But let's just say customers like this, it literally is they needed to get a bunch of the infrastructure, and they already started the process of deploying. And now, as I indicated, they initially had 14, 15 countries. They are now talking expanding this growth even much beyond that. They are also now expanding the scope but they want to start selling, which is where sales service part comes in, reselling it beyond just deployments to their customers, they want to basically create an offering with anybody that uses their facilities can also buy all of the stuff. So the scope keeps expanding. They are an amazing customer. Again, I won't comment on a particular customer, but I would urge you to go. There was a interesting talk that was given by the CIO of this particular customer where he laid out all of his vision and his plan that he and the CEO have come up with. And I think you will find that fascinating.

When will it deploy…

It's already started, the ramp is slower. The deployment is started -- the ramp is just a little slower, the deployment has started.

The next question comes from Charles Erlikh with RW Baird. Your line is open.

I was just wondering if you’ve seen any meaningful competitive changes this quarter. And are you seeing anything different from Microsoft or Google? Almost seems like Microsoft is going to stepping off the gas pedal, so to speak. Any comments there would be helpful. Thanks.

No. I think actually I’m seeing the competitive landscape, that’s part of why I’m really turning on the gas. I’m seeing the market play out essentially as anticipated. As you know, Cisco was often heavy on Spark. It’s unclear exactly how all of this is going to play out but BroadSoft is an interesting acquisition for them, and probably a very good one. Microsoft and the integration of teams and Skype is going to be interesting. I view this as more and more, I think, you think about it all the major contact center players have been taken out. We’re the only one that has our own contact center. We have our own essentially collaboration engine. We’ve own chat engine and we have our own voice and telephony, and we have started to do these aggressive investments, because by building these platforms, we have the ability to mix and match. So where we have been probably a little commit is probably one word, is over the last year or year and half, I probably could have started my investment cycle a little bit earlier, but I wanted to have the right people in place. But you can see just in the last 90 days, how much we’ve hamped up in some of these hirings, as well as some of our developments and making some of these tough decisions about deemphasizing orphan products and going after some of our core products. We think that positions us very well for this market. And I do say the market is inflecting, and I don’t think any of the big boys are going to be there for a while.

Your next question comes from Catharine Trebnick with Dougherty & Company. Your line is open.

Thanks for taking my call. I just have a housekeeping question. You have said you added 20 new partners this quarter. Is that just domestic or is that including international?

We actually said that we enabled 21 new channel partners this quarter. So, we enabled them. They went through all. We have brand new training for our channel partners where the SEAs and the sales representatives come to 8X8, and they’ve learned all about our products. And we teach them everything they need to know to sell. So that’s enabling our channel partners, which we think is a very -- that’s another big part of this investment program that we have put in place to enable our channel partners to win more and more deals on behalf of 8X8.

And of that 20 that were enabled…

Catherine, just to build on that. We primarily in the U.S., but we are seeing amazing, amazing growth in UK, as well as now Western Europe as well. That again, I think, the fact that we own every element of our technology and the fact that is probably from security compliance, we have talked to the world and then our entire core engineering team is essentially employees. I think the best things that channel partners like, because it gives them a level of comfort that will be around. And so, we’re seeing very, very strong growth, particularly in UK public sector as well including some huge wins, including Ministry of Justice and others. So the more you win the more channel partners are coming to us, and my job is to make sure I enable channel partners, so they can make a lot of money. And the more money they make the happier I.

And then six of these enabled partners started delivering revenue this quarter, correct, if I heard that right?

Actually that’s exactly right. So some of these new partners that have been interested, we’ve been able to recruit since the beginning of our fiscal year, are now bringing us deals and we’re closing those deals with those partners. So it’s been very, very good.

Now, one of the things I get confused on with this huge investment that you’re going forward to get back to the 25% year-over-year growth in services. When -- and we can take this offline too. When someone brings a deal in from your new business development person, does the channel and the business development individual or the channel partners that you’ve assigned both get compensated?

It’s a single compensation mile. So the business development managers have a different responsibility. Their responsibility is to recruit the new partners, enable the new partners and to help them develop their pipeline. The actual leads that Company’s channel partners go to, either are enterprise team in the field or our mid market team in the field, depending on what size deal is. It goes to the best person in that territory to close the deal. So it’s the account executive who actually gets compensated for that, the BDMs have a different structure.

No I wondered if the channel also got compensated, if you’ve got…

Absolutely, the channel is going to definitely get compensated. And it means any channel partner that brings us the deal that we close will be compensated, absolutely.

All right, sorry to make you go through the mechanics, I just wanted to make sure I understood. Thank you.

You’re welcome.

Your next question comes from Nikolay Beliov with Bank of America. Your line is open.

I am trying to reconcile the continuing strength in mid market and enterprise deal wins stable churn. And when I look at new mid market enterprise channel for the last four quarters, is it being flattish? And you guys facing much easier comps in the second half of the year? And I know the 12 based on your expectations in the past that as we get closer to anniversarying of implementation timelines and what not [indiscernible] acceleration in Nomura. Can you please update us on the puts and takes of what’s happening under the cover here?

No, I think you got it. Look, what’s happening under covers is if a company goes through a process, we did a good job laying out the overall foundation vis-à-vis our sales. But we had essentially a sales team that basically service and sales leadership that serviced everybody from one line all the way to 10,000, 20,000 30,000 lines, did a nice job of laying the foundation. It became increasingly clear that we needed to go and build on the foundation, and bring on board specialist. And bookings have been flattish, it's not necessary the perfect proxy, as I have indicated, because larger enterprise customers, just to give you a perspective, this quarter three very large enterprise customers closed a week and a half after the quarter ended. It is what it is. I mean, enterprise customers tend to close in their timeframe, so be it. But the idea was the reason I am making all of these changes in the sales team to basically upgrade the talent in terms of specialist is for a reason. And the reason is markets going fast, my bookings aren’t going the way they should. Ultimately, you have to do whatever is necessary. I am upgrading marketing. And now as I said, I am really ramping up sales and I am trying to make sure we have enough feet on the street. So we have enough opportunities. So those are the changes -- that’s the puts and takes.

And when we think about fiscal year ’19, we appreciate the guidance on subscription that you operate. How we should be think, at least qualitatively about pretax margins what we see in ‘19?

Good question. We do not expect to show leverage next fiscal year. We still believe that we’ll be investing in the business. It’s a very large market. And as you know, it's underpenetrated and we have some, as Vik has explained earlier, we have some very new interesting disruptive products that are coming to market. So we will be investing next year. We want to be profitable from a full year perspective on a non-GAAP basis, because we believe that that shows good disciplined management, but it's not going to -- we’re not going to increase over the 3% that we have this year. At least at this point, we haven’t finalized our numbers. But at this point, we don’t expect to show leverage for fiscal ’19, but growth, that’s where we’re…

Yes, it's all about growth. I mean we have managed the Company balance between growth and profitability. The market inflected, bringing in everything necessary to really upgrade the company from one end to the other to manage in a hyper growth environment. I feel like I did the right thing. Silicon Valley companies always do step backwards. First, they hired sales marketing and then they try and build the product. We’ve built the product. We then integrated the product and now what we’re doing is we’re bringing in that next layer of sales marketing branding meet on the street and we’re going to invest in it. The bias for me right now is growth.

And my last question is around, you’ve spoken about U.S. and UK sales and go-to-market. And how are you addressing these new sales and management changes in addition with the rest of the world outside of the U.S. and the UK?

Tightly integrated. I mean I believe in global teams, so there is a global small business and ecommerce team and a global mid-market and enterprise team. And again, as I said, look at the people and their background. Scott Samson that comes on board as the head of mid market and enterprise globally was the former head or CRO for NewVoiceMedia, which is a UK headquartered company. Prior to that, he was worldwide analytics for IBM with about I think, 4,000 or so people reporting in to him. We’ve also brought on board the head of interactive intelligence, APAC. He is on board. We have then promoted a person to run all of EMEA. The idea is to build a completely integrated organization common set of products and then we’re going through all of this local language capability. And this is where some of our amazing customers have been the front end going out, and they have been the once kind of adopting our products in multiple countries. And that has been a great bit of, that’s the product everywhere.

Your last question comes from Mike Crawford with B. Riley and Co. Your line is open.

With the channel, are you seeing a handful of the same channel partners being the top channel partners that are bringing new deals quarter in or quarter out? And ancillary to that is, are you exclusive with any of those?

It's actually a trend, that’s a great question Mike so initially and doubtful as like this. And we’re trying to get people’s mindset to change that this is not Telco. The original set of channel partners tend to be okay we’ll introduce you and we’ll introduce a couple of your competitors. And so you need to make sure you have faced time with them. We’re now starting to increasingly see VARs that is why we’re investing in them in terms of enablement and other things that are starting to be semi-exclusive. In other words, they lead with us. And if they fail with us then they have the right to go with somebody else or something like that. And eventually, as I said, we may end up with getting more and more exclusive. But I am willing to invest in channel partners. But I'm not just willing to invest in channel partners, which are just going to be bringing multiple people. I will do whatever is necessary to earn their business, but you’re going to see an enormous amount of my energy, effort, dollars, time and just free information about product, going more and more to those loyal channel partners, because I'm trying to create that as a category and Shoretel and Avaya, had done that very well, which is why those companies survived through some very tough times. And I think we have the opportunity to do that.

And then last question is, as you are more and more one stop shot for unified communications needs. Are you still not seeing anyone and that’s asking you about network as well?

No, network we don’t get asked because that’s the one thing that is interesting. More and more people are linking this over the top stuff. And because I’ve got so much analytics, we have a pure software player, right. You do your network our stuff is an asset rides on top of your network. So we have not seen that that tends to be something that really low end customers ask for, the customers we’re dealing with more and more, I’ve got my own network infrastructure, you’re just be over the top provider. But the fact that you have analytics that allows me to get cross network information. So it's not just in network information about the health of my network, that’s a huge differentiator. And then as I indicated, because of the way we’ve architected our solution because of our engineering team and the way they are compensated and the fact that the majority of employees, security compliance is something that we are world class at.

I’m showing no further questions at this time. I’d like to turn the call back over to Vik Verma.

So closing remarks from me is very simple. We are going to be, me in particular, we’re going to be very active on conferences and non-deal road shows. And we’ll be telling you about some of our new products, some of our new activities. I think, there is a lot of exciting stuff going on. So I think I expect to see several of you, and I think Joan will be leading us. But Victoria has now got me signed up for a lot of various conferences. So I’m sure I’ll be seeing a lot of your over the next few weeks. So with that thank you very much.

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