8x8, Inc. (EGHT) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8 Fiscal Q1 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Victoria Hyde-Dunn, Head of Investor Relations, you may begin the conference.

Thank you, operator. Good afternoon and welcome to 8x8’s first fiscal quarter 2019 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 questions and answers. The earnings press release, presentation, and non-GAAP to GAAP reconciliations that accompany this call are available in the Investor Relations section of our website at 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 now like to turn the call over to Vik.

Thank you, Victoria. Good afternoon everybody and welcome to our earnings conference call. We are very pleased at the broad based strength across the business this past quarter and believe it represents ongoing validation of our strategic plan. I'm also happy to report we're seeing strong early returns on the investments we have made in product, talent, and go-to market expansion. Our first quarter results exceeded expectations on both the top and bottom line. Service revenue was $78.1 million and grew 20% year over year. Adjusting for constant currency and excluding DXI, service revenue growth was 21%. This is over a 100 basis point improvement sequentially. Non-GAAP pretax loss was $3.4 million. I will spend a few minutes reviewing three primary observations from the quarter before turning the call over to Mary Ellen who will cover the financial results in greater detail. First, our solid quarterly performance was driven by bookings growth from our mid-market and enterprise customers. Increasing sales velocity from our channel partners and strong customer demand for our Integrated Solutions. In particular, service revenue for midmarket and enterprise customers billing greater than $1,000 in monthly recurring revenue grew over 30% year over year adjusting for constant currency and excluding the excise. This was led in part by channel bookings which grew over 50% year over year. Our performance from large enterprise customers also improved as our sales team closed 21 new large enterprise deals with monthly recurring revenue of $10,000 or greater during the quarter. This represented a 61% increase in the number of new large deals closed year over year. Regarding bookings, new monthly recurring revenue booked for mid market and enterprise customers increased 25% year over year. With respect to deals where customers purchased both integrated communications and contact center which we refer to as combinations of deals, we continue to see our strategy of owning a complete cloud suite resonating. During the first quarter, about 90 customer deals were combination deals including five of our top ten deals overall. One notable win is with an Austrian enterprise software company. The ability to provide a truly global unified platform, analytics, customizable API, and jira integration was a deciding factor in replacing the incumbent on-premise provider. We are also pleased by continued strong upsell and expansion from our current mid-market and enterprise customers and the healthy addition of new logos. We booked approximately 48% of new monthly recurring revenue from our existing installed customer base and annual attention rates including upsell were over 100% across all segments. One recent example was an add-on order from a retail customer that sells eyeglasses and provides eye exams. The customer originally turned to 8x8 after needing to replace a legacy on-premise provider and evaluated several cloud communication providers. They ultimately chose 8x8 because of our ability to provide a unified communications and contact center solutions which will deliver a better and more efficient experience to their customers, member optometrist and store retail operation. This past quarter, the customer significantly expanded their relationship with us by adding more than 5,000 new seats to 750 retail locations. Turning to the channel, our engagement with channel partners continues to accelerate as more partners look for fully integrated complete cloud solutions. In fact, seven of our top ten U.S. deals were assisted by channel partners. We were also honored to be awarded as the leading company to “grow revenues with” and “easiest vendor to do business with” by channel partner advanced communication. A recent win in which a key channel partner played an instrumental role is a U.S. large transportation distributor who operates in over 250 locations within 45 states. Their existing on-premise platform was overly complex, outdated, and cost prohibitive. 8X8 won this 3,700 seat deal after a competitive RFP process with another cloud communications provider in which our ability to provide both the Cloud PBX and Cloud Contact Center solution as a single platform was the deciding factor. Second, our strategy of delivering one system of intelligent engagement is now live with 8x8 series. Customers want one cloud system of engagement that brings together voice, collaboration, video conferencing, messaging, contacts center, and analytics. This is what we have described as the third wave of enterprise communications. The natural next stage of evolution as more communications move into the cloud. Now available for sale in the US and UK, X Series helps companies through this transformation with one cloud solution that delivers a system of engagement across all devices including mobile, desktop, or dedicated hardware. X Series is a true global solution offering unlimited calling within 47countries and which will support users in over 150 countries. We believe X Series is a game changer for 8x8 and the market. It is the end result of hundreds of employee years of research and development efforts and multiple acquisitions. X Series now provides a natural progression of capabilities that I call the stairway to heaven. Each plan from X1 to X8 layers on incremental features, functionality, data analytics, and customer engagement experience that allows customers to add on more sophisticated capabilities as their own business needs evolve. The X Series tiered subscription model simplifies the purchasing process for our customers because it enables our direct and channel sales team to sell a complete integrated solution that works out of the box. Since 8x8 is the only pure cloud provider with our own core technology, we can ensure customers on the X platform will benefit from integrations across the suite and continuous improvement in each of its components. That means when we release a new user interface or new integration, they will be available across the entire platform. As an example, we now have Okta Integration available across the X Series platform. X Series also integrates with Salesforce, Zendesk, NetSuite, G Suite, and Microsoft Office. X Series has already gained early adoption and success particularly across mid-market and enterprise organizations in a wide variety of industries including retail, health care, manufacturing, technology, and the public sector including Applebee's in the U.S. and Brent and Lewisham Councils in the UK. IDC has endorsed X Series saying, “as more organizations digitally transform and focus on the customer experience adopting an intelligent integrated communication, collaboration, and customer engagement solution is the wave of the future”. In fact, with X Series teams can share and connect in more ways than ever. X makes it easy for teams to turn a chat into a phone call, a video conference or an enterprise wide collaboration room. More importantly, 8x8 is the only provider in the market today which provides an open integration approach. With both a native fully integrated team messaging application as well as integration to over 26 different collaboration platforms including Slack, and Stride. This is a powerful differentiator in the collaboration and team messaging marketplace and we're excited to be on the forefront of this technology offered through our same room solution. Plans are underway to migrate our small business customers to X Series beginning in our third fiscal quarter. our mid-market and enterprise customers will follow in future quarters. As you can no doubt tell we are very excited about the prospects for X Series. The final point I wanted to cover is based on time I have recently spent speaking with customers and partners. We hosted user conferences in Silicon Valley, Chicago, and London. In New York, we hosted clients, prospects, and channel partners at the New York Stock Exchange during our June 19 opening bell ringing. It was an exciting event and a defining moment for 8x8. These meetings create an opportunity for clients to provide testimonials and further personalized their 8x8 experience. Feedback from the event was outstanding, and we are planning to continue these user conferences throughout the year as the learnings will shape future innovations and offerings. Through my conversation with CIOs and VPs of IT, it's become very clear to me that everyone is working towards creating a frictionless communications environment and a better customer engagement experience for the employees and their customers. I continue to hear four recurring themes. First, customers require a single system of engagement from the cloud. As workforces evolve remotely and globally enterprise requires a seamless cloud experience across any device. Second, superior voice quality across the globe is table stakes. This includes markets like Southeast Asia where we have seen competitive wins because other providers have difficulty with international deployments and call quality. Third, clients require an exceptional level of customer service. They are looking for a global partner who can provide 24/7/365 customer support that delivers the right expertise to resolve any issue affecting their employee or customer base. Fourth, there needs to be one source of truth for data, one comprehensive platform with a single communications infrastructure and one set of data, analytics, workflows, and applications is imperative. These meetings confirm for me that 8x8 is already at the forefront of seeing what customers want and where technology and other opportunities to serve them are headed. I believe these four customer requirements validate our strategic vision and product roadmap initiatives. These discussions also reaffirm my belief that the investments we have taken over the course of several years have enabled 8x8 to become the only pure cloud provider with owned core technology addressing mid-market and enterprise customer needs for cloud phone, contact center, team messaging, video conferencing, and collaboration. We are uniquely qualified to deliver a unified solution to customers as we continue to disrupt a 40 billion marketplace which is inflecting to the cloud. Let me close with saying that our decision to invest additional capital in fiscal 2019 to accelerate revenue growth for fiscal 2020 and beyond remains the correct course of action for the company. We continue to invest in talent, product innovation, and global expansion to fuel revenue growth, drive brand awareness, and deliver exceptional customer and employee engagement experiences to our customers through our X Series. I am proud of the results the company has achieved during the quarter and the successful launch of the X Series. We're excited about the direction we're headed and pleased with our start to the new fiscal year. With that, I'll turn the call over to Mary Ellen.

Thank you, Vik. I will provide a more detailed review of our first fiscal quarter 2019 financial results according to the new revenue recognition standard ASC 606. We have adopted ASC 606 starting April 1, 2018 under the modified retrospective method. For certain income statement items, we will also provide the first quarter 2019 results as a would have been under the old standard ASC 605. Reconciliation of the ASC 606 and ASC 605 results are included with our earnings press release. In addition, unless otherwise indicated all measures that follow are non-GAAP with year over year comparison. A reconciliation of GAAP to non-GAAP was provided with our earnings press release and PowerPoint presentation back. As we mentioned during our fourth fiscal quarter earnings conference call, we are deemphasizing selling the standalone DXI ContactNow product and continue to expect revenue to decline by approximately 50% in fiscal 2019. First quarter results were a strong start to fiscal 2019. Total revenue was 83.2 million, an increase of 20% year over year. Adjusting for constant currency and excluding DXI, total revenue grew 21%. Service revenue was 78.1 million and came in above the high end of our guidance range. Service revenue increased 20% year over year and increased 21% year over year adjusting for constant currency and excluding DXI. This represents a sequential improvement in growth of over 100 basis points. Adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers bill in greater than a $1,000 in monthly recurring revenue grew over 30% and represents 60% of total service revenue. Also adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers bill in greater than $10,000 in monthly recurring revenue grew 58% year over year and represents 27% of our total monthly recurring revenue. Gross margin for the quarter was 76.2% compared with 77.8% in the same period last year. Service margin in the quarter was 82.7% compared with 83.9% in the prior year. This was related to the amortization of previously capitalized software which we telegraphed in our fourth fiscal quarter earnings conference call. Moving on to the operating expenses for the first fiscal quarter, sales and marketing expenses which also include customer service and deployment costs were 49.1 million or 59% of revenue compared with 37.7 million or 55% of revenue in the same year ago period. As we mentioned last quarter, we are adding sales capacity and increasing demand generation. The impact from ASC 606 was approximately 1.8 million from the capitalization of sales commissions. Research and development expenses were 10.9 million, net of capitalized software or 13% of revenue and increase of 65% year over year. We reclassified our product management team into research and development from our sales and marketing expenses which represented approximately 3% of revenue and we increased spend to support the development of our new X Series platform. Pretax net loss was 3.4 million and better than our guidance range of 4 million to 5 million net loss. Net loss was 3.5 million or negative $0.04 per share. Cash, restricted cash, and investments were 153 million at June 30, 2018 compared with 178 million in the same year-ago period. Cash flow from operating activities was 789,000 in the first fiscal quarter and capital expenditures including capitalized software were approximately 6.3 million in the quarter or 8% of revenue. Turning to key operating metrics, we saw solid improvements during the quarter. The average revenue per mid-market and enterprise customer grew 8% to $4,953 compared with $4,592 in the same year ago period. Average revenue per business customer was $480 and grew up 11% when compared to $432 in the same period a year ago. New monthly recurring revenue booked for mid-market and enterprise customers increased 25% year over year and comprised 57% of total booking in the first quarter. Before reviewing guidance for fiscal 2019, I would like to remind everyone that we do not expect a material difference in our revenue and year over year growth rate between the ASC 606 and ASC 605. We continue to estimate that our fiscal 2019 non-GAAP operating expenses will be between 11 million and 13 million lower under ASC 606 due to the capitalization of a significant portion of commission expense rather than recording it at the time of sale. The adoption of ASC 606 increased retained earnings as of April 1, 2018 by approximately $40 million due to the capitalization of commissions from prior years. As a reminder, this new standard is an accounting change only and has no impact on our operating or free cash flow. Now moving to our financial outlook. We are reaffirming our financial outlook for the fiscal full year 2019 under ASC 606. Service revenue in the range of 333 million to 338 million which represents approximately 19% to 21% year over year increase. Excluding DXI revenue, service revenue growth will be in the range of approximately 21% to 22%. Total revenue in the range of 347 million to 352 million representing approximately 17% to 19% year over year increase. And we still anticipate our non-GAAP pretax loss in the range of $13 million to $17 million. In addition to full-year guidance, the company introduces new quarterly guidance. For the second quarter of 2019 under ASC 606, we expect service revenue in the range of 80 million to 81 million representing approximately 18% to 19% year over year increase. Excluding DXI revenue, we expect service revenue growth in the range of 20% to 21%. And our non-GAAP pretax loss in the range of $4 million to $5 million. I'll add some additional color to help with the models for the full fiscal year. We expect non-GAAP gross margins to be approximately 77%. We plan to run a pilot program in the current second fiscal quarter that should reduce phone subsidies in the second half of the year, thereby improving gross margins. We expect non-GAAP operating expenses as a percentage of revenue to be approximately 82% to 83%. We expect research and development expenses net of capitalized software as a percentage of revenue to be approximately 14%. We expect sales and marketing expenses net of ASC 606 Commission credits as a percentage of revenue to be approximately 58% to 59%. As a reminder, our sales and marketing expense includes customer support, professional services, and deployment. We expect general and administrative expense as a percentage of revenue to be approximately 10%. We expect interest income as a percentage of revenue to be slightly less than 1%. We estimate our tax expense to be closer to approximately $100,000 each quarter. Due to the full valuation allowance against deferred tax assets, our tax expense reflects the current cash taxes in certain US states and foreign jurisdictions. In summary, we are very pleased with our first quarter performance. We are executing on our fiscal 2019 plan and we remain focused on our goal of 25% exit service revenue growth excluding DXI revenue in the fiscal fourth quarter of 2019. In addition, we continue to make investments to enable accelerated growth into fiscal 2020 and beyond. With that operator, we are ready for questions.

[Operator Instructions] Your first question comes from Will Power with Baird. Your line is open.

Hi, this is Charlie Erlikh on for Will. Thanks for taking the question and congrats on the solid results. Just the question would be any early feedback on the X Series, what are you hearing from customers and kind of how that transition is going and is there any potential for sales disruption there, any comments there would help? Thanks.

So, one of the feedback has been extreme positive. And as you know, it's been multiple years in the making. All forms of communication is converging. So voice, video, text, contact center, collaboration, everything all coming together and then this stairway to heaven where you can literally go from X1 to X8 is something customers really like and the ability to then promote and/or demote depending on the needs of the customer is something that I think is going to be game changing. We don't anticipate any disruption per se because it has been a natural evolution of how we’ve kind of migrate our products from initially what they were to additions to X Series. X became generally available in July 17th of this quarter. And again, I actually think that is the core platform that we will continue to build towards. That’s what we've been working towards.

And just one more from me. 25% mid-market enterprise bookings number, really solid good to see. Is that something that can accelerate further? And how do you think about comps going forward for that item?

We do expect that we will see acceleration in our mid-markets booking beyond 25% as we continue through this fiscal year and beyond. We won’t actually set a number, but again, this is - there are three things that we are completely focused on for our exit 25% growth rate. One is new bookings; two is retention rates; and three is time to revenue. Those are the three key factors that we're focusing on and we have a detailed plan in place which will help us achieve our goal of approximately 25% in the fourth fiscal quarter.

Our next question comes from Tim Horan with Oppenheimer. Your line is open.

With X Series and the new bundles, I know it is early, but do you have any indication of what people like about them, what they're using maybe you know a little bit more of what features are surprising you. Should just drive up ARPU per customer, you know just as you think about the mix issues? Thanks.

So couple of things. One, we are finding as I said, I think this has been something we’ve been working towards for a long time. We will find the same customer depending on the type of user we'll get different versions of X. So you may have the receptionist with an X2 or an X4, engineering team which wants video conferencing may have an X4. The customer support department may have an X8. The IT helpdesk will have an X6 and the ability to seamlessly integrate between all of them we're finding is something that customers are really gravitating to. The other game changing thing that we have done is this ability to basically connect with all the industry leading collaboration tools that are out there like Slack and Stride and basically “bring everybody into the same room”. So that's been one of the key things from X that I think people have really gravitated to. The next thing that people have gravitated to is this concept of a common data model. So in essence you have one platform where every real time interaction that happens in a company every voice, every video, every text, every call according to customers partners, vendors, other employees is all available and available in the form where you can create dashboards that are basically available to management to basically go in and improve operations. Those two things are the two drivers that we have seen for X where people have really found that this has disruptive capabilities.

And do you think this will drive up overall spending for [indiscernible].

We don't know that yet to be honest. It's still early days. Our ARPU per customer is growing quite nicely. That’s an indication of A, we’re winning larger and larger customers and two is our customers continue to add on business. About 48% of our new monthly recurring revenue is coming from our existing customers. And we would expect that to continue. But too early to tell you whether X Series in and of itself will increase the ARPU, but we would expect again that there is a path for them to continue to upsell and that would increase ARPU over time.

We would not model if I were you Tim. I would not model an increase in ARPU, but over time it's logical that you will start to go up because you're making it easy through the stairway of heaven for people to be able to add additional capabilities, you may suddenly find more and more people want video conferencing built in. So it's very natural progression to go from X2 to X4. And also the ability to start up-selling because you have so many of those same capabilities available for every function in the company. So we do see possibilities and we do anticipate that happening, but we shouldn’t model that just yet.

And then lastly on the collaboration integration, is there any degradation in quality or usage for customers? How is user experience?

Phenomenal, I mean that is something what - it allows you to basically ensure we have certain vendors for example that may be using Slack, they are now able to integrate with our team here using our X2 or X4 and it's completely seamless because everything is “available in the same room”. And the Slack interaction as well as the interactions that happen within our X Series all become available in the same room and it's completely seamless.

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

Vic, I wondered if you could be a little more specific on a couple of things. You mentioned strong early returns from the spending and you mentioned increased velocity with the channel, I just wondered if you could be more specific.

I think you're starting to see you know look let's start with a few quick metrics, right. So number of channel enablement partners where north of 125; channel bookings, north of 50%, well north of 50% increase. Seven out of our top ten deals came from the channel versus three out of top ten deals from channel in quarter four. New monthly recurring revenue from mid-market and enterprise customers up to 25%. So, when you look everything is up into the right and it's continuing to kind of evolve in the right direction and then as said, X, the reaction has been extremely positive. So a lot of the piece parts that we have been putting together over the years are finally all starting to come together. And you're seeing it reflected in all the new logos w are winning, you’re seeing it in the fact that we're having the ability to basically up sell and candidly you're seeing it in our ability to hire world-class talent just across the board. So from that perspective, I'm feeling better and better about the business.

Just curious, Google yesterday put out this contact center AI had a very long list of partners, you were not on that list. And I'm curious there's probably a story behind that and it may be related to your integrated contact center with unified communications platforms, just curious.

Look, Google is an awesome company and we're working closely with them. We're a technology alliance partner. There are some - a lot of the Google AI stuff is very tightly integrated with the stuff we're doing on our AI ML, stay tuned, there will be a lot of very interesting things we will be talking about with Google over the next few months.

Your next question comes from Matt VanVliet with Stifel. Your line is open.

I guess jumping into the last question there, could you talk a little bit about what the most recent acquisition of MarianaIQ is expected to contribute to the platform and when we should expect to see some more advanced features in there relative to that acquisition. But then also how that can build in with other tech partners out there.

MarianaIQ is a phenomenal group of folks, we’ve been very impressed with their capabilities. They add this whole buyer persona context and what you we’re able to do is by having all the information of whoever is calling in and being able to have a complete buyer persona, you get a very complete picture and your response can be tailored to that. You'll start to see over the next two quarters very interesting applications where we'll be able to show value of why having one integrated platform along with this AI ML makes a difference and can be very significant for corporations. So, you'll start to see it as I said over the next couple or three quarters, but more and more that's why we built X Series. X Series is the aggregation of all the data of any real time interactions in a company. Now you start to add in context as well as personas suddenly it becomes extremely powerful. That’s essentially the vision of the company and that's what we've been working towards.

And you’ve obviously announced quite a few large deals this quarter and a lot of good bookings momentum here. As you book customers just over the last few weeks of the quarter knowing that the X Series was coming mid July. Will those customers just go ahead and implement on the X Series or have they bought the additions product and sort of over time they'll have to migrate even now.

So, if they are new starting - I mean depending on when the deployment is starting, a lot of the new logos are already starting to implement on the X Series. The additions migration is going to be relatively seamless to the X Series. That’s what we've been working towards. But going forward, the majority of new customers are going on board on the X Series right from the get go. And a lot of the customers that came onboard towards the end of last quarter are going to be deployed on the X Series.

And then lastly just a follow up on that question, how long do you think it will take your existing customer base to eventually move to the X Series, so that you're just supporting sort of that one platform.

So, it will start to happen over the next twelve to eighteen months and I think most of it will be - most of the effort will be for the smaller customers. The idea is to make it completely seamless for our customers and that's why we have done this as a two step process where we started off with additions which was a very significant change and then we've done X Series which brings all of these various technologies together. So there's a long-term plan, we will start executing. I think we’ve already started migrating some customers and we'll start executing our small business customers over the next quarter and then subsequent quarters will start to migrate all our mid-market and enterprise customers, but over the next twelve to eighteen months, there will be one platform all X.

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

So a couple of questions. One the service revenue, you’re guiding for roughly 18%, 19% growth. That’s actually down from Q1, when you delivered 20%. Your mid market bookings are accelerating which is good to see to 25%. So what I'm trying to see is, if you can help us reconcile why you aren't seeing a bigger ramp in service revenue. Is there something with the booking to revenue conversion that's just not there yet or when we will see sort of service revenue kind of match your bookings growth in the mid-market enterprise. And maybe the secondary part to that is, if you could add to this SMB side of the business and what the bookings growth is in that side of the business that maybe help us kind of square away the difference here.

So, basically we have reaffirmed our guidance for the full year. So there's going to be some fluctuations from quarter to quarter, normal course of business, we're not expecting anything unusual, but again, there are going to always be fluctuations. One of the things that we are absolutely working on is time to revenue and we're going to start to see over the next couple of quarters because that’s a key initiative for us. And as we had mentioned in the past, we do expect the acceleration to really kick in in the second half of the year. I think we have been pretty consistent with that forecast.

I'm just raising the question because you have spent quite a bit to try to drive this acceleration through, but I mean I guess it's not showing yet in the service revenue side of the business.

Actually, I think it is showing. I mean it did show this quarter for instance, our service revenue on a constant currency without DXI is up 21% compared to 20% last quarter. So, we are up 100 basis point quarter over quarter, more than 100 basis points. Also if you look at our core business, take out the micro which we say that we would - we have been saying we are not investing it anymore and take out the DXI which is, of course, continuing to decline at a rate of approximately 50%. Our core business today is growing at greater than 25% year over year. So, there is definitely some acceleration in the business and we would expect to continue to see acceleration. On the small business side, we don't actually disclose the bookings as you know, but our small business is continuing to perform. Last quarter we showed a 300 basis points year over year improvement in growth, we're pleased to announce that we're continuing not a 300 basis point but we're continuing at the same rate of revenue growth for the 10 to 99 segment. And by the way that team is in fact moving up and executing extremely. And they are starting to close deals over the phone from 100 to 250 seats now. We think we are accelerating Dmitry and again we are reaffirming our full year guidance and we're putting all the pieces together, we have a detailed plan and we're executing to that plan.

Maybe just remind us what the DXI contribution was this quarter versus last year's period, my expectation or my estimate is somewhere in the $3 million range, so about 750K a quarter last year. And then you said it's going down about 50% in fiscal 2019. Is that fair assumption?

What we had talked about last quarter was that in last year in our fiscal 2018, we were actually running approximately $2 million per quarter. So a year ago quarter in our first fiscal quarter we're at $1.9 million and we have expecting a 50% decline year over year. So we're running – this particular quarter was approximately 1 million, so we are exactly on that 50% decline year over year and we would expect that to continue. And by our fourth fiscal quarter it may de minimis.

Your next question comes from Josh Nichols with B. Riley. Your line is open.

[Technical Difficulty] operating leverage and spend beyond the fiscal year as you look to maintain that 25% level service revenue growth rate.

Josh, I don't think we heard your question.

Your first part of the question was cut off.

Sorry. So, what I said was, obviously this is a year of investment, but beyond that how should we think about the operating leverage and the operating spend as the company tries to achieve and maintain this 25% service revenue growth rate as far as the operating leverage inherent in the model.

So we do expect that the 25% is not the angle, we're really investing to accelerate revenue growth beyond 25%. We're seeing the 25% as a milestone but our goals go beyond the 25%. And some of our key initiatives this year are truly to build a pipeline to execute and accelerate growth into fiscal 2020. We don't expect to see leverage right away. I would expect to see leverage. We're not going to obviously give guidance at this point in time for 2020 or 2021, but I wouldn't expect to focus on leverage until fiscal 2021 or towards the end of fiscal 2020.

And then international revenue is only a small piece right now, but there are some good opportunities to grow that. How do you see that evolving over the next couple of years as a percentage of revenue?

Actually I think it's around 10% or so right now and I anticipate it will continue to grow from there. You're seeing some of these very interesting very large wins all over the world. And as I said I think we have a differentiated solution X resonates globally and we're now getting the right methodology together so you can go country by country. We're already as you know in Austria, UK, Canada, France, and the intent is to continue building on that and continuing to evolve that over time, but international is a significant opportunity for us.

And then just heading on a previous question from a slightly different angle. So service revenue growth Q1 and then the guide Q2 is at 20%. Are there specific offerings or what do you think is going to drive that 500 bps of service revenue growth over the next two quarters specifically.

X Series and primarily mid-market enterprise, but I think to me it’s steady as she goes. I mean we've got a plan in place, you've kind of seen a certain baseline. DXI, we have decided to basically end of life that product and over time migrate all of that away. But step by step we're kind of moving forward towards just X Series and greater adoption. The entire industry is inflecting to cloud and we have a very different solution.

And the last question from me is, whenever I’m looking at this, you mentioned in response to my previous question that 25% service revenue growth was just a near-term target, but you’re looking to accelerate well past that. I believe I guess it's fair to say that based on the company's investment we're seeing this year and transition from positive earnings to burning cash that continues to be the priority and the company is willing to stay on the track and potentially accelerate the cash burn?

Yes, actually I would say yes. We are in a very unique situation as Vik has mentioned before, no one else has a package like we do from a technology perspective. We have been innovating over a number of years and others are beginning to follow. We've had the vision and others are beginning to fall. We are in a - the market is inflecting, it's $40 billion market, it's less than 10% penetrated. We find ourselves in a very strong position right now. We're taking the friction out of the UCaaS and the CCaaS it’s becoming one. One system of engagement, one system of intelligence and like we mentioned on the call, we think it's a game changer, an absolute game changer. This is a real opportunity for 8x8 and we're uniquely positioned to capture that. We have a strong team in place and we're going to go for it.

Your next question comes from Meta Marshall with Morgan Stanley. Your line is open.

I just wanted to see if you could talk about kind of traction with the channel this quarter and adding partners and whether you're starting to see kind of a shortening of time to meaningful revenue or just kind of any metrics on getting that channel up to speed. And then maybe second just you know should we expect any meaningful gross margin difference by X Series or are you guys really impartial to kind of whatever the customer decides opts for. Thanks.

So I'll answer it, so I’ll do the second one first, second one, no change. X has been anticipated and been planned for a while. So no change from margin or any other perspective, we do see an opportunity to up sell but no real material change. Channel is definitely accelerating. I mean you can just see it in just the pure growth rate in channel and let's just say it was meaningfully bigger than 50% from last quarter. Even just the channel enablement partners we now already up to 125 just this quarter. I think we are 80 something last quarter. Bill Corbin and his team, I mean we've literally built up the entire team over the course. Bill joined us I think mid April and his core team has already been built out. I was actually at their offsite yesterday. So you're starting to see quite a bit of acceleration and to some extent we have been I think channel partners are waking to the fact that we have a very differentiated solution and X makes it very easy for them to sell both UCaaS and CCaaS without all the complexities of having to do contact centers. So we feel channel is going to be huge for us and we've been very happy with the traction there and we will be investing significantly in the channel.

I guess maybe just a follow up on that. I mean you gave this data, seven of the top ten deals kind of came from the channel or any of those partners that were added in the last year or just something they kind of give a sense of the new channel partners versus kind of the mature channel would be helpful.

I think it's a mix. I think several of them were added in the last probably year. So we're seeing actually the larger channel partners coming on board are actually coming in with deals already in mind that they are bringing us to the table on. And so, from that perspective, we have definitely seen the newer channel partners start to contribute and I think most recently this recognition by Avant that they see significant opportunities with us and we are the easiest to do business with, It's a focus on the channel that we have done over the last few quarters that I think is going to start to bear huge fruit for us going forward.

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

Hi, this is actually Jacqueline on for Nikolay. So, my first question is to get to the 25% revenue growth rate exiting fiscal 2019, how should we think about the new MMR growth rate during the remainder of the year.

As I had mentioned earlier, we had some very nice acceleration between Q4 and Q1 as we had expected. We expect that that number will continue to accelerate. I don't want to necessarily put a number out there. But again, there's three ways that we have very detailed plans in place that we are executing to and that is, of course, on the [indiscernible] side there is no question about that and acceleration on the bookings quarter over quarter. Also, as I had mentioned earlier, retention, retention, retention. That's huge for SaaS companies and we're doing very well on that front. And last but not least is tied to revenue, right, the sooner that we can get the system deployed and up and running and billable, the better for us. And we're working on a number of initiatives to that end as well. So those are the three key focuses that we have that will get us to the 25%.

In terms of - how are hiring plans progressing in regards to the 30% headcount increase announced last quarter.

Right on target. Amelia Generalis who runs our HR. She's phenomenal, she's hired top talent in terms of recruiting. We actually even have an on-boarding session where we do a monthly on-boarding where as part of people being on-boarded, we have dinner at my house where we have all our new hires go through orientation and then make a presentation to management. If this thing continues, I may need a new house, but we have been averaging between 60 and 70 people, all coming on board. So, yeah, and we're getting some amazing people. So that’s on track, as Mary Ellen indicated the three core things that we're talking about bookings were celebrating, retention is getting better as well as time to revenue is coming down. So it's a step by step approach.

And then maybe if I could ask the last one. How has the Sameroom integration progressing, do you see opening of new opportunities.

Absolutely, that is such a core thing to X. Because if you think about it, X to us is the combination of voice, video, text, chat, contact center, and collaboration, and then the key part of collaboration is you have a native collaboration where you basically have the ability to do team messaging and just general chat rooms and persistent rooms, but you also have the ability to integrate to 26 other collaboration engines and ensure that whatever is happening in the other collaboration engine as long as they give you permission can all come to one persistent chat room, that's huge in essence what you've done is you've said somebody can be on Slack, Somebody can be on Stride, somebody is on 8X8 and you can combine it all together so you have one common room which communicates between all three and allows everybody to see chats going on and all three. So that is a phenomenally great technology and we're very pleased we acquired those guys.

Your next question comes from Chase Bunnell with Dougherty. Your line is open.

This is Chase on for Catharine Trebnick. And we just had a quick question about your channel partners. We were wondering how you guys are planning to continue to drive further acceleration in sales through channel partners and how you plan on kind of improving productivity with each channel partner.

Look, in the end, channel is something we have been doing, but I think the general genesis was if you're going to really go big in channel, you get world class talent. We brought in world-class talent that has done this before and the team as I said got assembled. We’re putting big emphasis on enablement. And in essence what we're seeing is there's a whole series of programs that we're putting in place that will allow us to accelerate with the channel partners. But it's primarily about the fact that we've brought on board very quickly a completely big channel team from some of the best known companies that do channel and put them all together and [indiscernible] them all together, I think which will bear a huge fruit for us going forward.

Last one is, on your international revenue, what portion of that is contributed by channel partners currently?

I mean it's growing actually quite significantly because what we're finding is we have a combination of direct and channel approaches to international, we're finding that the channel in international is growing significantly faster than direct. And so over time, we expect that our international play is going to be more and more channel and we'll be able to basically support them with some 8x8 resources, but it's going to be primarily channel.

In Asia right now, especially Australia things are really starting to happen. We're seeing some significant growth in our channel partners bringing us more and more deals. As a matter of fact we're really accelerating mid-market enterprise deals in the Australia area. But we're having success in France which we just launched and of course, the U.K. And then there is multinational throughout the world that continues to grow in other countries.

This concludes the Q&A session for the conference. I’d now like to turn it back to Vik Verma for any closing remarks.

Thank you everybody for taking the time to listen into our earnings call. I do want to - it's been a very strong quarter and I'm very pleased with our progress towards our fiscal 2019 targets. I do want to take this opportunity to thank all of our employees. We have about 1,200 awesome people that come every day and make a difference. In the end, what I always say is people make companies and we're very fortunate to have some of the very best. Thank you again and look forward to seeing several of you at upcoming conferences over the next few months.

This concludes today's conference call, you may now disconnect.