Good day, ladies and gentlemen, and welcome to the 8x8 Third Quarter Fiscal 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Victoria Hyde-Dunn, Senior Director of Investor Relations. Ma'am, you may begin.

Thank you, Operator. Good afternoon, and welcome to 8x8's Third Quarter Fiscal 2018 Earnings Conference Call. With me today are, Vik Verma, Chief Executive Officer; and Mary Ellen Genovese, Chief Financial Officer. Our format today will include prepared remarks followed by Q&A. The earnings press release, prepared remarks and slide presentation that accompany this call are available in the Investor Relations section of our website at www.8x8.com. A replay of this call will be posted on our website for 30 days. 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. These statements are not guarantees of future performance, and our actual results could materially differ as a result of a variety of factors. Additional information concerning those risk factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our website. With that, I'd like to now turn the call over to Vik.

Thank you, Victoria. Good afternoon, and thank you all for joining us on our third quarter earnings conference call. This has been another very busy and productive quarter for 8x8. We have made significant progress executing against the strategic initiatives we laid out earlier this fiscal year. Our service revenue increased 20% year-over-year to $71.9 million, and total revenue grew 19% year-over-year to $75.6 million. Adjusting for constant currency and the discontinued noncore DXI business segment, service revenue grew 19% and total revenue grew 18%. Our non-GAAP pretax income was $1.6 million or 2% of total revenue, and non-GAAP service margins remained strong, exceeding 84%. Mary Ellen will provide a more comprehensive review of the financial performance in her prepared remarks. Before I turn the call over to her, I'd like to discuss our progress fiscal year-to-date and why we believe 8x8 is a disruptor in the marketplace today and enabled for success in the future. At our core, we are a technology company. Through foresight and years of hard work, 8x8 has built an integrated UCaaS and CCaaS platform that operates on a global basis, offering business communications and business intelligence to companies of all sizes around the world. There is a $50 billion market opportunity in the enterprise communications and contact center space that is only about 10% penetrated by cloud providers today. We have seen this market evolve over many years through multiple stages or waves, and we believe the market is now entering a third wave. The first wave of Enterprise Communications solutions is circa 1990s. It is the classic on-premise telephony, videoconferencing and contact center market. These on-premise point solutions provided features and localized control previously unavailable at that time, but they are expensive to implement, often require heavy customization and ongoing maintenance and offer…

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 refer to the tables in today's earnings press release for a reconciliation of GAAP to non-GAAP results. Adjusted results are based on constant currency and exclude the discontinuation of the noncore voice broadcasting segment of DXI. Our results for the fiscal third quarter included two special GAAP items, which are noncash, nonreoccurring items. First, we recorded $71 million of noncash, nonrecurring tax charges as a result of, first, the reduction of the federal corporate tax rate under the Tax Cuts and Jobs Act; and second, our decision to record a valuation allowance against our deferred tax assets. This decision was based, in large part, on our recent historical trend of GAAP net losses as well as forecasts of future GAAP net losses, given management's intent to continue to invest in growing our business, particularly engineering and sales and marketing. Second, we reduced our goodwill and other assets by $9 million, related to the UK EasyContactNow product. As we announced during our Q2 earnings call, management made the strategic decision to integrate the core technology into our Virtual Office and Virtual Contact Center Suite of products and deemphasize selling the stand-alone product. The underlying technology is strong and has tremendous value to the business as part of our integrated platform. These two onetime charges were approximately $80 million combined. We have adjusted non-GAAP measures for these items, along with the reoccurring charges for stock-based compensation, amortization and other nonrecurring items. Now moving on to our financial results. Foreign exchange rate fluctuations had a favorable revenue impact on…

[Operator Instructions]. Our first question comes from the line of Meta Marshall from Morgan Stanley.

Great. I just wanted to ask a question about -- now that you've had early days of having the Editions out and you think about moving that product up market, just kind of describe the typical customer for X8 versus Virtual Contact Center and just whether it kind of changed your opinion in early days of who that customer is. And then on the second point, obviously you rolled out a lot of stuff in the last year. So just kind of what are kind of the R&D priorities for the upcoming year?

Okay. Great. Thanks, Meta. So a couple of things. So let's start with one of our discoveries, and you'll start to see more and more of this, is this X series of products, which is what we're calling it, actually applies to pretty much all customers. So what's starting to happen is pretty much everybody that we have talked to, knowingly or unknowingly, is a little bit of a contact center. And so what X is intended to do is start to basically bridge the gap between essentially telephony and contact center and then combine it with our collaboration products. So what we are starting to see is, people using our X product, which essentially you're going to now fold VCC into our X product as well, depending on the level of sophistication of the contact center. But what it allows you to do, is imagine if your contact center is now essentially tightly integrated with your telephony, so your entire corporate directory is available to your entire customer support staff. So in real-time, you can figure out even though somebody is not a contact center portion or not, have a contact center license, they can be accessed to solve a particular question. So if there is a particular technical question in real-time, the person can go and figure out who the top few people that are assigned to solve that kind of problem, even though they're not part of contact center. And they will basically be able to transfer all the information, bring them into the same call so you can get to one-call resolution. It applies for as simple a customer as a bill collector, where in essence, even though they may be using a telephony solution and making outbound calls, the ability to have contact center functionality,…

Got it. Just back on the first question. I mean, I think I'm just trying to get a sense of, will X8 kind of be adopted by more people than Virtual Contact Center because it's more integrated within the system, versus kind of having to have two separate systems? Like, is that the end goal of just broader integration versus kind of having this separate product previously?

Fair enough. So what you will find is, over the next few quarters, it would happen over probably 2 to 4 quarters, VO, VCC, as categories are going to go away, and they'll all be a continuum of X products. As a matter of fact, we are going to beef up X8 because what we're finding is that people want X8 to have even more functionality, including the outbound dialer. So X8 will become our signature product, which will have a lot of core functionality also from VCC brought in, all the way from speech analytics, quality monitoring, et cetera, will all be part of X8. There will be an X5, which will essentially be an introductory contact center, all the way to essentially an X1. You'll see a complete launch over this, but over the next 2 to 4 quarters, all these various categories of VO, VCC, ContactNow, et cetera, are all going to go away, and it'll all be replaced by X.

Our next question comes from the line of Nandan Amladi from Deutsche Bank.

So Vik, you hired a whole bunch of new sales executives over the last six months or so. Are they fully up to speed now as you approach fiscal year '19? And what's your confidence level getting back to that 25% growth trajectory?

No, let's just put it this way. I think, one, I always like to say we're a work in progress, but you're starting to see some of the results of bringing on board that next generation of talent. We made a couple of very strategic moves, as you think about it. And they are not easy moves to make as a company. One is, we brought on board this head of engineering, and we basically told him, Stop worrying about what is VCC, what is VO, what is ContactNow, what is Sameroom, what is this, slam them all together, and create this entire new product line which is 8x8. Period. None of these other categories. You then brought on board a marketing person who knows how to create categories and start to sell value, so we avoid the commoditization that is going to happen at the low end of the market by providing clear differentiation. And third, we split our business and go-to-market strategies, where you bring on board somebody who knows how to sell to mid-market and enterprise and has done it at huge scale and very successfully, then you brought on board somebody who basically knows how to go after the very small end of the business and really create high velocity e-commerce efficiency. And so generally, I'm feeling better and better because we have then brought in that next layer of talent. It's amazing how, as you keep bringing on board people with these kind of skill sets, we have brought in that next layer of people. I'm sure you monitor LinkedIn and some of the other stuff. The best and brightest are joining us because they see this as a category creator. They see an opportunity to disrupt the market. They see a technology-centric company, which in the past was not great at marketing and sales, and that's something that can be fixed relatively easily. And then the ability to combine all of these various categories into one combined product offering, we think, is going to be huge. So generally, I'm starting to feel like we're on the right track. A lot of the heavy lifting has been done. We're starting to see early fruits, but I don't want to sit there and declare victory because there'll be -- the normal, inevitable soaking in of stuff, but as far as I'm concerned, we're ahead of schedule.

And our next question comes from the line of Rich Valera from Needham and Company.

Vik, I wanted to follow up on that. Obviously, you've made some good progress in terms of the first layer of hires, the kind of management layer and the sales and marketing and even R&D. And it sounds like you've made some progress on the second layer of hires, probably with the rank-and-file, sales. What should we look for in terms of other milestones or things you're looking to do over the next 2, 3 quarters, to keep that sales and marketing ramp going? What kind of metrics should we look for or anecdotal feedback would you be able to provide us?

We'll get back to you on the specific metric, but the next layer, as we were talking, the first layer of folks we started bringing in from February, March, and then most recently, October, the second layer, pretty much the next layer of VPs, by and large, we've been able to bring on board, the vast majority. The next rank-and-file is actually joining at a pretty accelerating rate. I think the key thing for us, candidly, if you look at what keeps me up, the last 3, 4 quarters, you're kind of reimagining the business. You're kind of structuring it the right way. You're doing a lot of changes in the business and trying to make sure that the business continues to perform while you're making this massive transformation. Now, from my perspective, I'm actually feeling great about the market. I'm feeling great about the product portfolio that we have. And I feel very, very good about the management team. Now it's a question of executing. Could I see us doing tuck-in acquisitions? Possibly. But do I have to do any big acquisitions? No. Do I need to do major hires? No. It's essentially turning this into a machine that continues to execute. And as I said, I think this X product is a game changer, because it's something we've built over time. I mean, it's basically -- think about it. We went and bought properties that basically were poor contact center, dialer, collaboration engines, team-to-team collaboration engines and basically, over the last few years, we've been kind of integrating all this stuff together and then now we're able to put in that layer of analytics on top of it. And you're starting to see the customer wins. As I indicated, of our mid-market and enterprise, approximately 50% were people are buying our combo deal, which tells you the market is starting to understand more and more that these traditional categories that were invented by on-premise systems no longer apply in the cloud. And you can combine all of this data -- these systems together and get one common layer of data.

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

I want to congratulate you on the strong bookings growth this quarter, middle market enterprise bookings. Can you help us understand because looking back a couple of quarters, where you had some challenging bookings numbers, you're talking about tougher comparisons. How do we read this number as a single point? Is it something you feel you can replicate? Is it indicative of easier comparisons? I just want a little bit more read into the bookings numbers you had, and then the future that you see.

Yes. So at a macro level, consider us, as I said, a work in progress. I feel very good about it in the sense that you're starting to see that shift, where, in essence, you're starting to see more and more large enterprises, which often buy, against master service agreements and then do purchase orders. But the interesting thing is, I think you have been tracking the number of large enterprise wins we've had. We had 22 large enterprise wins from a broad-based category of verticals. That's actually very interesting, right? Yes, it's the best we've ever had, I believe. And then, across the board I think, mid-market, enterprise bookings are all trending in the right direction. Actually, small business bookings are picking up also, which is starting to be good. So I don't want to sit here -- look, I think, hopefully, you guys have gotten to know us. We don't hype the company. We don't hype our stock. We don't do any of those stuff. We try to be very transparent with you about what's good and what's bad. I think a lot of the heavy lifting is done. I don't want to tell you that everything is hunky-dory, but I see the trend positive, and I see us continuing to build on it. And so we'll continue to get better over time. But I think, as I said, the long-term trajectory of this company, it's the most excited I've ever been about this company.

As a follow-up, I wondered if you could bifurcate the middle market versus the enterprise segments and just give us a picture of what you're seeing on both sides.

Yes, the interesting thing is, both are very strong, but there was one fascinating thing that I noticed. So enterprise has figured out that combo deals are critical. So I don't know if you picked up on the fact that when you look at enterprise bookings, 7 out of 10 enterprise deals did combo solutions, where we have a clear advantage. And then, if you look at mid-market enterprise as a category, approximately 49% did combo deals. So even mid-market is figuring out that combo deals are very important and is heading in that direction. Bookings probably for enterprise, where the growth rate was significantly stronger. The bookings rate for mid-market is starting to trend up. Win rates actually both for enterprise and mid-market is well north of 50% against all competitors. And so we're starting to feel, as I said, long way to go. Don't want to sit here and tell you everything is hunky-dory, but I think, step by step, we've built the company the right way. We control our own destiny, because we own our own technology. We're not doing this from borrowed technology. We're not a hype machine. You can also see channels in early stages, great progress. 6, I think, out of our top 10 deals -- 6 out of our top 10 deals came from the channels. And again, we don't have thousands of channel partners. We're investing in the channel. We're seeing channel. Particularly in mid-market, is doing a phenomenal job for us, and we see a lot of headroom there as well.

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

Just wanted to ask a question on the 45 partners that you discussed since the reorganization, a real big focus on partners. How many of the 45 are actually contributing to revenue? And do you think, some of this is the reason why you had a really good acceleration from 15% year-over-year growth in Q2 to 18% year-over-year growth in Q3?

Great question, Catharine. So early days, but we're seeing actually channel partners are ramping up faster. And again, different people focus on channel in different ways. I'm a big fan that, in the end, channel partners, you have to invest in them, and you want to make sure they invest in you. You don't want to be one of thousands. We want to be very -- that's why this new enablement program, where we go through a detailed training on both sides. Ultimately, our goal is to have a select few channel partners and make sure we really give them the help, support they deserve, so that they can provide value to their customers. And again, it's never going to be about volume for us. It's going to be much more about making sure we can make our channel partner successful. Quite a few of the 25, actually, I think there was one instance where a channel partner literally got ramped up and brought in, I think, two of our relatively large deals, within, probably three months of signing and ramping. So again, early days. I don't want to give you a sense that everything is hunky-dory. But generally, I feel like we've got the right strategy. The markets are inflecting in the right way. The combo solution is going to be a differentiator. Increasingly, channel is the key, but the goal with the channel is, you don't want to treat them as a commodity or fungible. You want to really invest in the right channel partners, make sure you make them successful, and we are building and investing to do all of the things necessary to dominate this particular part of the segment.

Our next question comes from the line of Will Power from Baird.

Yes, just a couple of questions. So first, it looked like good services revenue growth. And I guess, you just noted, a nice acceleration from last quarter. I guess, I wonder, as you thought about -- guidance had been laid out last quarter, for this quarter and for the year, perhaps, I was just -- some conservatism with the new sales and marketing hires. So I wonder if there were any positive surprises. I mean, did you see a bigger influx of enterprise deals that might have been expected? So I'm just trying understand the source of upside, I guess, in the quarter. And then the second question, just thinking strategically, Vik, you talked about the different products that you have in your arsenal from contact center, UCaaS, collaboration, et cetera. One of your competitors has talked about the advantage of having CPaaS in their portfolio as well. I'm just wondering if any of your customers are asking for that, if that's something you -- see as something you'd like to add as well?

Yes. No, so great question. So let's start -- positive surprises all around. I mean, just look, if you think about what we did as a company, and credit to the amazing group of people we have here, we basically brought on board a new head of engineering, a new head of marketing, two new heads of sales, a new Head of HR. And we managed to do this over the last 6, 9 months. And we managed to do it where they have now all brought in that next layer and some amazing, amazing talent from literally all over. And then augmented the team here that is already very strong. And so that jelling of people is -- for those of you who have been, from practical point of view, you bring in that level of influx, you have always inevitable issues. But the way people have jelled, you think about it. I brought on board my new head of enterprise sales and mid-market, October, I believe. October 22 or 23, right? So I'm midway through the quarter. My Head of Small Business sales joined, I think, literally, last week of September, first week of October time frame. So from that perspective, the positive surprise is how well the team has kind of jelled, how there's been no surprises. I mean, I'm thrilled with the people we've got. I mean, we've got people that actually make me look like I'm stupid. And that's the right thing. You keep hiring people that are significantly better than you. So that's a positive surprise. And you're seeing a level of focus and drive in the company to take this company to that next level, which is, don't be just take a communications telephony company, don't sit here and just talk. Because in…

Okay. And then I guess, just the second piece was, as you think about, there's different products you have in the arsenal, are there other pieces that you think you still would like to add, and where might CPaaS fit in that?

So CPaaS -- actually, you're right. Sorry. We have something called Script8. We made a conscious choice that what we want to do is we want to make our entire stack essentially configurable, programmable for the right type of professional partner. So we are aiming for a different type of developer. We're looking for somebody who's more of a professional services organization, as opposed to creating very simple widgets, et cetera. So we're not again aiming for the mass market. Analytics is a particularly key element of that. And so this is something called Script8 that we've been introducing. Initially, we introduced it with our professional services team. We most recently had a flagship customer start to use Script8 to do a very significant portion of their inbound business. So we don't see us having to buy anybody, but we see Script8, which is essentially a CPaaS-like language, except it's much bigger. It allows you to control the entire stack, an entire PBX functionality, corporate-wide, globally and so we see that. And also, do everything from rule-based, when stuff should come in, who should the call be routed to, who should be alerted, intelligence, all of that machine learning, we see all of that being bundled into Script8. It's going to be a bigger and bigger piece of our business. I don't need to buy anybody. I will be making some announcements of some very amazing people that we have been able to get on board, who know this stuff very well because -- and they are also looking at it. They're coming from some of the best and brightest companies around. And they're looking at the fact that all this aggregated data is now available to them, so it can provide disproportionate value to the enterprise.

Our next question comes from the line of Nikolay Beliov from Bank of America.

And just wanted to add my congratulations for the bounce back in new market occurring revenues. Mary Ellen, to get the 25% total revenue growth exiting fiscal year '19, what revenue growth rate -- what growth rate do we need to see in new monthly recurring revenues, for you guys to get there?

Good question. So certainly, the fourth fiscal quarter is going to be a little bit more difficult comp because we had some very strong bookings last quarter at this time. However, moving into the fiscal year 2019, we had the sales people on board. We had our lead-gen engine going, and we would expect that we would be achieving some very nice growth rates. I don't want to give you a number right now. I think it's more prudent to wait until we give you our fiscal '19 guidance and give you a number, but we are putting the team in place, the lead-generation engine in place, the brand awareness in place, so that we can achieve the 25% exit rate. We have a very solid plan. We're achieving that plan for Q3. We're on track in Q4, and we would expect the same moving into fiscal 2019, but you will definitely be seeing accelerated service revenue growth throughout the fiscal 2019. So you'll start to see us each and every quarter march towards that 25%.

And what underlying trend in the pipeline you think will give you that confidence, whether it's by vertical or type of business?

Yes, very good. So again, we're really focused on the mid-market and enterprise space. We're doing extremely well in both. The mid-market is -- the channel partners are doing an amazing job. We saw some really strong performance in this fiscal quarter from our channel partners, particularly in the mid-market space. And that's a great space to be in because it's -- the sales cycle is not as long and the time to deployment is not as long. So we are building pipeline. We're seeing signs of increased pipeline. We're seeing signs again from our marketing engine, where we're growing the number of sales qualified leads. We have more feet on the street. We have now hired a number of new business development managers for our channel teams, and they are focused on recruiting new partners. And by the way, we're the only ones out in the marketplace that are able to do these really truly integrated combo deals. And as Vik had mentioned earlier, 49% of our new monthly recurring bookings, just from combo deals, from the mid-market, it came from combo deals. So our new message is resonating, and it's something that's really unique in where 8x8 plays. And by the away, as Vik also said, our win rate continues to improve. So you start to build more pipeline, increase your win rate and then have a differentiated product that no one else can compete on. It's a win-win situation all the way around.

And lastly, at last earnings call, you were talking about a large customer that delayed their rollout of your product. If you can give us an update on that, that would be fantastic.

Yes -- no, that customer is continuing to ramp. So it's steady as you go. They're continuing to add more and more seats. Right now, there are over 30,000 seats from a Virtual Office perspective, and over 800 seats from a Virtual Contact Center perspective. So we're, in our forecast, we're just assuming the normal run rate of additions. We haven't assumed any acceleration yet. So it's -- if they do accelerate, that will be upside. But for right now, we're just forecasting the normal growth rate that they have -- that we've been marching to for the last quarter or two.

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

I can appreciate strong numbers in light of sales reorg. So kudos to you. I have a couple of questions. Just a follow-up on the prior major workforce provider rollout. Obviously, you're calling for that to be kind of a normal run rate. There was a couple of deliverables that needed to happen. Have those deliverables been satisfied and you're just waiting for the customers to turn up the heat?

Yes, yes -- no, I think everything is moving in the right direction. As I said their -- the rollout has started, in a sense, from a migration perspective. They're moving up. Each -- I mean, literally, the reason we can't tell you the seats is, it's now become literally ordinary course of business. Every few days to a week, new seats keep getting added, keep getting added. Same thing on Contact Center. So -- but one of the lessons we learned after the last one was, we went with our gut as to what will be the rollout as opposed to the schedule they provided.

Exactly.

And it's methodical, steady as she goes, keep going, keep going, keep going and not counting on any acts of heroism. And that's how we're modeling it.

Okay, great. And then maybe, on the DXI side of things, I know you guys excluded that. What was the contribution of DXI this quarter? Was it zero? Was it something more than that? And what are you assuming for the March quarter and maybe for 2019? When does it actually go down to nothing, as you kind of close that business down?

Yes. So Dmitry, just to be clear, it's the past business that the legacy broadcasting business that we have been excluding all year from DXI. We are deemphasizing the EasyContactNow product as a stand-alone product.

That's the one I was referring to. Sorry. Yes, thank you very much. The stand-alone.

It's a stand-alone product. So that is continuing to be in our numbers, it's in it -- and that continues to be a couple of million dollars per quarter, and we're continuing to service our existing customers, but we are no longer chasing or spending marketing dollars for new customers. We truly believe that the true value of that technology is to be integrated into our Virtual Office product, as well as our Virtual Contact Center product in those X Editions that Vik had talked about earlier. And that's where we see where the market is going, that new wave. And so we believe that the technology has tremendous value. And it's far more value as a fully integrated product than it is as a stand-alone product. So we would expect that it will decline slowly, right? And next year, fiscal '19, we'll be able to give you -- next earnings call, we'll be able to give you much better guidance as far as what we expect that business unit to do.

In the March quarter, you're assuming a couple of million dollars for that, still? Is that fair?

Yes, I don't see it changing significantly. It might be down a little bit, but not significantly.

And I'll add one more, so just a little more color on it. More and more, we are finding, and you'll see this happen over time everywhere, DXI and EasyContactNow, there's some amazing sales talent out there, some very cool people. More importantly, they've got a great customer base. What we're finding is there we will transition them more and more towards the X series of products, where you'll start to see Contact Now, EasyContactNow functionality as part and parcel of our EasyContactNow product. As I said, over time, you're going to see Virtual Office also go away. You'll start to see Virtual Contact Center also go away. You will only see X. And it'll be a be a continuum from -- everything from a simple, cheap placement phone in the cloud, which a lot of our competitors do, all the way to a fully integrated contact center with built-in telephony, as well as analytics and quality monitoring, which pretty much nobody else can replicate easily. And so from that perspective, you'll see an easy way to move customers up and down, so there will be some inevitable churn of the EasyContactNow, but the intent is to migrate as many of them as possible to the X series of products over time.

Right.

I guess, my question is, just a kind of a follow-up on this discussion. As I look into March, I sort of assume that this goes out of the model. Now that you have that in the model, the way you guided, and that's something that's sort of, raised the question in my mind is, your guidance sort of implies, sequentially about $1.5 million then, if you take the midpoint of that service revenue guidance of incremental revenue on the service line. You obviously did better than this in Q3, not going to go and say why you did this, but you've obviously provided a nice guidance so that you can upside that. But here, $1.5 million kind of looks a little weak, relative to your current Q3 upside that you've put out. So just give us a sense if this is a conservatism, or something else that's going on. Is it -- you've been expecting more than what you're actually guiding for. I'm just trying to reconcile the two things. I can't understand why the service revenue guidance is up only $1 million, $1.5 million, including the DXI business in there.

Yes, okay. So basically, we have been booking -- as you know, we've been moving upmarket, now 59% of our revenue is coming up from mid-market and enterprise accounts, 65%. So 65% of our old -- of our new monthly recurring bookings is coming from mid-market and enterprise accounts. And as you know, that is lumpier business. And by the way, enterprise accounts take a little bit longer to deploy. Mid-market accounts also take, typically about three months to deploy as well. So yes, maybe there's some conservative in there -- conservatism in there, but as we continue to move up market, you should expect to see some lumpiness quarter-over-quarter.

And then, Dmitry going back to your comments--

And by the way, although that the DXI product is still in our numbers, right, is it is starting to trend down. And it's not -- we're not getting any growth out of it, certainly.

Yes. So DXI, you'll see some inevitable churn. And you'll see some inevitable churn at the very low micro end of our business as we transition more and more towards mid-market and enterprise, and that's all baked into our guidance.

Right.

All right. So it's just timing of bigger deals, and then lumpiness around it. I appreciate that color.

And our next question comes from the line of Mike Latimore from Northland Capital Markets.

It seems like every quarter, you're announcing more multi-hundred-seat contact center deals. I guess, are your deal sizes in contact center growing, say, faster than the office side of things?

Yes, actually, they are. I mean, particularly combo is the key. And as I said, over time, you're going to find combo deals are growing the fastest of everything we have seen, which kind of then validates the strategy. And this builds on the conversation, which Dmitry is having, where, in essence, I'm looking for a certain quality of revenue. In the end, ultimately, we want to be the dominant player in this particular category, where you're looking for people who need something more than just a replacement phone in the cloud, right? Or very simple, low-end type solutions. Over time, we will continue to service at the low end of the market, and we will be competitive and our intent is, we will make sure that we are able to provide value, but increasingly, that is not our focus. The micro, 1 to 9 person business, is not our focus. The very low-end dialer business is not our focus. More and more, we are starting to see mid-market enterprise as our focus. And so you'll see as that little portion of that revenue at the very low end of our business starts to slough off, you won't see as much sequential revenue growth quarter-over-quarter as you would if we had continued to invest in the small-end or the dialer end of our business and stuff like that. So that's why you're seeing the guidance that you're seeing. But as I indicated, more and more, we are finding this X part of the business, which is the combo deals, is starting to stretch all the way to -- even the low end of mid-market, which is very interesting. Because it says, people didn't know -- a help desk that was looking for us, for a simple phone system, suddenly finds out that they need contact center functionality, and by the way, they also need some quality monitoring, they just didn't call it that. And that, to me, is the really exciting thing. And as I said, you'll see some lumpiness in our revenue. That's why I'm being cautiously optimistic. I'm telling you from trajectory point of view, I'm thrilled. You'll see the inevitable change as the business rotates into the higher and higher order mid-market enterprise. And increasingly, you'll start to see us being able to sell of these combo products over time. And hopefully, over time, you'll see that becomes a very significant portion of our business.

Okay. And then for new sales hires in mid-market and enterprise category. What's your expectation, in terms of how long it takes them to become sort of fully productive? And then, what is sort of the average blended sales cycle across mid-market and enterprise now?

So it's getting smaller, which was actually good, I mean, but that's -- we always use the obligatory 6 to 9 months, but we are seeing that it's starting to trend down. And ramping salespeople, depending on -- it's typically a six-month process, but we are finding that some salespeople have come and hit the ground running. Again, I am finding we can get some of the best and brightest out there. And so we have a differentiated product. That's why I want to make sure that it's the quality of revenue that counts. We have a differentiated product. We have -- and we're starting to get people who know how to sell that differentiated product so that they can get value. And so as I said, we are a work in progress, but good things are happening.

And our next question comes from the line of Jonathan Kees from Summit.

I wanted to ask specifically a derivative on the competitive picture question here. Avaya has come out of bankruptcy. And if you listen to them, they're talking about combo package of UCaaS and CCaaS and also AI and even analytics thrown in there. And I understand that this could be talk, there's still a vast majority of premise and very little cloud, and you guys are all cloud, and you guys are the disruptors here. You've been, in the past, picking up some deals from Avaya, picking up some of the Avaya customers. And you talked about, during this call that your win rate is north of 50% here. Just curious, are you still seeing the steady stream of leads from Avaya customers?

Yes. I mean, we're seeing them across. By the way, one, kudos to Avaya for getting out of bankruptcy. I think that's a credible company that's built up a business over a long period of time, and we wish them well. I like to think we have got something very differentiated, and I think we'll continue to execute. There will be lots of players in this space. I do think what we have is differentiated. But fundamentally, you'll hear me say the same thing. I'm playing my game. I mean, I think we have been -- we did contact center before it was fashionable, right? We then kind of started to integrate it with Virtual Office before it was fashionable. We've integrated in the dialer function before it was fashionable. We are seeing a very differentiated category. You'll start to see us do a lot of stuff on data analytics. You'll see us do a lot of stuff on integration that I think will be very interesting and we're already doing it for some key pilots. And so, as I said, from our perspective, we encourage and wish most of our competitors well, unless they're competing with us, in which case, I'd like to win.

Okay. All right. And I'll follow up with the financial question then, my last question here. The headquarters, how should we think in terms of that of CapEx? I know you're probably not giving guidance for next year, next fiscal year yet. Or is this more growing like a sales leaseback, an impact on the G&A line, Mary Ellen?

Yes, it's a lease. It's 11-year lease. We would expect to move in to the property right around January 1, 2019. Of course, we have a number of months free, 10 months free, and another four months after that where we pay 50%. So we won't actually start seeing the cash impact until fiscal '20. However, as you know, from a GAAP accounting perspective, we're going to have start to take the lease expense and amortization of not intangibles, the amortization of our leasehold improvement once we take possession of the building. And we don't know whether that -- when that will be, whether that will be January 1, 2019, or whether it will be sooner than that. But that will be a noncash hit that we will take once we take possession of that building. But we're excited about the new building. And certainly, when we give our guidance for fiscal '19, it won't impact anything in this fiscal quarter. So for fiscal '18, as we finish up our fourth quarter, but it will certainly add to expenses in our new fiscal year, fiscal '19. And we'll give guidance for that in May, so that you can model it appropriately.

Our next question comes from the line of Mike Crawford from B. Riley.

With small business bookings starting to pick up, can you talk about the trajectory you see for your small office, home office business overall, given MRR and churn?

Yes -- no, actually, both are -- and it's amazing, when you give focused attention to an area, how much better it can get, relatively quickly. We are starting to see small business definitely pick up in terms of bookings. I think there was an acceleration just in one quarter in terms of bookings. The other part that is interesting is, the lower end of our small business, I'm heading in more and more towards e-commerce and self-service. I mean, we're making some very significant investments there, where, in the end, we're going to really simplify the experience and kind of try and get as much as possible, the person out of the loop. And then for the mid-market -- for the lower end of the small business, I think we'll continue to invest in it with, as I said, a hardcore group of very competent salespeople, as well as an implementation team that can continue to provide value. So I don't see any major change, but now you've essentially -- the big change we made was we split into two business units. And those two business units are -- have very different go-to-market strategies. And the small business now has a guy who knows that part, and his strategy is the lower end of small business. We're heading toward self-service/e-commerce, higher end of that small business, we're heading much more -- we will continue to do what we're doing, just increase the efficiency. So no dramatic change in what -- on what we're doing there from what we have previously suggested.

Okay. So maybe that part of your service revenue that still comprises around 40% can grow low single digits, but certainly not enter any slow decline anytime in the near future?

Yes, yes. I mean, look, the good news is, you have two very strong executives who actually are compensated on growing their respective business units.

Yes.

So as I said, we got to a certain point where we, that was our revelation. We were increasingly focused on mid-market enterprise and small business was increasingly dragging us, because we were not putting the attention in it, but we had some amazing assets, in particular the investments we're making on mid-market enterprise has value down to our small business as well. Now you got a focused guy. And at the right time, I think we'll start to expose him to some of you guys. You'll get a sense. This is, and I'm sure you can look at LinkedIn profiles, I think you'll start to get a sense, I'll put my team up against anybody in any industry, and you've got some real winners out here. And they are now fit for purpose, so you don't have one-size-fits-all mentality.

And I'm showing no further questions. I would now like to turn the call back to Vik Verma, Chief Executive Officer, for closing remarks.

To wrap up, once again, we're very pleased with our earnings result. We look forward to seeing our customers at investors at Enterprise Connect and other events in the upcoming months. Thank you again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a great day.