8x8, Inc. (EGHT) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon. My name is Jason and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8 Inc. Second Quarter 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. Ms. Victoria Hyde-Dunn from Investor Relations, you may begin the conference.

Thank you, Jason. Good afternoon and welcome to 8x8’s second fiscal quarter 2019 earnings conference call. Joining me today are Vik Verma, Chief Executive Officer; Mary Ellen Genovese, current Chief Financial Officer; and Steven Gatoff, our incoming Chief Financial Officer. During today’s call, Vik will begin with business highlights of our second quarter performance. Following this, Mary Ellen will provide details on our financial results and guidance for our fiscal third quarter and full year 2019. After these prepared remarks, we look forward to taking your questions. Before we get started, just a reminder 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 will find on the SEC’s website and the Investor Relations section of our website. The earnings press release, presentation deck and non-GAAP to GAAP reconciliations that accompany this call are available on our Investor Relations website. This call is being simultaneously webcast and a replay will be available for 30 days. With that, let me turn the call over to Vik.

Thank you, Victoria and thank you everyone for joining us. First, let me welcome our incoming Chief Financial Officer, Steven Gatoff. Steven brings over 25 years of leadership and finance expertise that will support 8x8’s globally expanding business. He has a unique background across technology investment banking, Big 4 public company auditing and Chief Financial Officer experience in high-growth SaaS companies. It is great to have him as a key member of our executive team and many of our shareholders will have a chance to meet Steven at upcoming sell-side investor conferences. Also, I would like to thank Mary Ellen for serving as 8x8’s Chief Financial Officer for the last 4 years and sitting beside me through 17 earnings calls, including this one. Mary Ellen has played a significant role in driving 8x8’s revenue growth through innovation and transformation from small businesses to large enterprises. She will be moving to London soon to oversee our European operations and accelerate our plans to drive expansion and innovation into new markets. Now, on to our fiscal second quarter performance, we reported another strong quarter and beat top and bottom line guidance. Service revenue was $81.3 million and grew 19% year-over-year. Adjusting for constant currency and excluding VXI, service revenue growth was 21%. Non-GAAP pre-tax loss was $3.6 million. I would like to share four observations about the quarter that highlight our strong performance and growth trajectory. And then I will turn the call over to Mary Ellen to cover the financial results in greater detail. The four areas I would like to address include first, how we see the overall market involving; second, our specific success with mid-market and enterprise customers; third, the importance of owning a full cloud technology platform; and finally, where we will focus on investments going forward. First, with respect to the overall market, we see continued acceleration in the shift to cloud across enterprises of all sizes. Recent research from IDC estimates the combined global communications, collaboration, and contact center market opportunity has larger than $50 billion by the year 2022. We estimate total cloud penetration in this market is less than 10% today. That means the opportunity in the next few years with customers of all sizes from small businesses to the largest enterprises will be massive. Equally important however is the increasing demand we see from enterprise customers for complete solutions based on a single cloud platform that can provide common data and analytics across all of their communication and collaboration needs. The platform advantage of common services we describe as one system of engagement refers to one overall solution that can deliver improved customer and employee experiences. The further platform advantage of shared data and cross-platform analytics what we call one system of intelligence is also driving customers towards an integrated platform solutions. We have a $50 billion market shifting towards cloud solutions with a preference for a single technology platform and 8x8 is the only cloud provider that delivers voice, contact center collaboration and video with integrated data and analytics from a single technology platform today. It should come as no surprise that we are excited by the opportunity ahead of us. The second observation on the quarter is that our success in the mid-market and enterprise segment is coming from our ability to deliver strong sales execution, world-class customer service and industry innovations with our X Series. Service revenue for mid-market and enterprise customers billing greater than $1,000 in monthly recurring revenue and adjusting for constant currency and excluding VXI increased approximately 30% year-over-year. Service revenue from mid-market and enterprise customers billing greater than 10,000 in monthly recurring revenue increased approximately 60% year-over-year and now represents 28% of our service revenue. Our strong performance in this segment is also seen in our bookings. New monthly recurring revenue booked from mid-market and enterprise customers increased approximately 50% year-over-year and comprised 65% of total bookings in the quarter. This compares to 25% year-over-year growth and 57% of total bookings in the previous quarter. Our sales team closed 27 new mid-market and enterprise deals with monthly recurring revenue of $10,000 or greater during the quarter. We more than doubled the number of new large deals closed year-over-year, with a 29% increase sequentially. Our vertical strategy continues to gain traction as overall we saw strong new logo growth and booked approximately 57% of new monthly recurring revenue from new customers as compared to 52% last quarter. One marquee enterprise customer win is Condé Nast, a U.S. based mass media company founded in 1909. For Condé Nast, we will be replacing a legacy on-premise system with several X series solutions across 4,000 users in 14 sites. The customer chose 8x8 to take advantage of our one system of engagement, contact center capabilities and out-of-the-box integration with salesforce, Google, Okta and Zendesk. A notable international win is a global material solution company based in Belgium who operates in 43 countries globally. This company was looking for a global customer experience solution to improve customer satisfaction by tracking customer interactions across the world. Our solution, which displaces several incumbent contact center products, will be deployed in multiple countries in Europe, Asia and North America. In the UK, we sold to a large contact center outsourcer with a focus on large commercial and UK government agencies in a deal that included 250 contact center seats both in Europe and the UK and displaced an incumbent on-premise solution. We were referred by an existing UK public sector customer and were selected because of our single cloud technology platform and ability to support a distributed mobile workforce. Turning to the channel, our engagement and investment with channel partners continues to accelerate as more partners look for a single cloud technology platform. During the second quarter, channel bookings grew more than 50% year-over-year and 7 of our top 10 deals were assisted by channel partners. We signed a new master agent, Planet One to our strategic channel partner program. We also doubled our channel enablement program participation quarter-over-quarter to over 250 partners. A recent channel win is Toll Brothers, a Fortune 500 company that specializes in building luxury homes. The customer is growing rapidly, but their legacy on-premise communication system lacked the flexibility to turn up new sites quickly to standardize across existing sites and to integrate with third-party cloud applications. 8x8’s X Series solutions were able to solve these customer pain points and will be deployed across 6,000 users in over 400 locations. Customer success is an important priority for us and delivering great employee and customer experience is at the forefront of every customer conversation our sales teams have worldwide. Because of this focus, we are highly successful in both landing new customers and expanding existing customer relationships. Revenue churn continues to decline and annual retention rates, including up-sell well over 100% across all business segments. The third observation is that the market is showing that ownership of a complete cloud technology platform is critical. As I mentioned before, we are the only provider in the marketplace today that owns the full set of technology required to deliver, voice, video, collaboration, contact center and one system of intelligence. With X Series built on our leading cloud technology platform, we offer customers a future proof solution on which we can continue to deliver new innovation and capabilities. Since its launch in the middle of July to the U.S. and UK, X Series has rapidly become the leading solution for our new 8x8 customers. Our cloud technology platform enables flexible mix-and-match capabilities for each organization and end user, including solutions that combine communication and contact center what we refer to as combination deals. In our initial months, we are already seeing approximately one-third of new seats being sold with higher value contact center and collaboration capabilities. We had approximately 80 mid-market and enterprise combination deal wins in our second quarter, including 8 of our top 10 deals. Over 50% of new monthly recurring revenue booked from mid-market and enterprise customers came from combination deals as compared to approximately 42% last quarter. In addition, we are continuing to extend the capabilities of X Series as evidenced by our newly announced 8x8 Team Messaging Solution. Team Messaging enabled business units, project teams and internal and external collaborators to share content and communicate as a team by providing instant access for all employees through a direct connection to your global directory. Furthermore, 8x8’s Team Messaging allows full interoperability with almost two dozen third-party Team Messaging platforms, including Slack. What that means is that workgroups don’t have to change existing behavior tools, but can still bring all of their conversations into collaborations room that think with existing solutions. So for example, engineering teams can continue to use Slack and their conversations will be present in 8x8 Team Messaging and vice-versa. Our Team Messaging platform is the only solution in the marketplace today offering this capability. Because we own a complete cloud technology platform, we will continue to strategically pursue opportunities to enhance and extend capabilities of our cloud platform to drive innovation in the market and increase value for our customers. In that context, earlier today, we announced the acquisition of Jitsi, an open source video collaboration technology. Jitsi further extends 8x8’s cloud technology platform with highly scalable video routing and interoperability capabilities all built on industry standards such as web RTC. Jitsi’s open source technology and team of video technology experts will play a role in leading development of new X Series capabilities, including dedicated video collaboration applications and web RTC, which will open up new parts to market and further enhance our 8x8 meeting solution. Our market leadership position has been recognized by Gartner for the seventh consecutive year in unified communications as a service magic quadrant. We are honored to be the only cloud provider to be awarded this prestigious accolade 7 years in a row. We were also named a challenger for the fourth consecutive year in the Gartner Magic Quadrant for Contact Center as a Service. This speaks to the success of our strategy of innovation and building cutting-edge technologies into one common platform that delivers more value to customers than simply cobbling together multiple third-party applications that don’t share common platform, data or analytics. The final observation I would like to make is our ongoing commitment to invest for growth. Given the magnitude of our market opportunity, we will continue to invest in the go-to-market capabilities required to capture increasing share of these opportunities. And as just discussed with Jitsi, we will invest in technologies that enhance and differentiate our single cloud platform and deliver additional value to customers. Finally, we continue to attract and hire the top talent in the industry across all functional areas. Looking ahead to the second half of the year, given improving execution, we are modestly raising our full year service revenue outlook to between $334 million and $338 million. We also remain focused on our service revenue growth goal exiting the fourth quarter of 2019 of 25% excluding DXI revenue and on a constant currency basis. As we have discussed before, execution against our 25% target is driven by three core factors. First is to accelerate new mid-market and enterprise bookings growth. Second is to improve revenue churn. And third is to shorten our time from bookings to revenue. We are making great progress across all three fronts. For the full fiscal year 2019, we expect an average mid-market and enterprise bookings growth rate north of 30%. Churn rates are steadily declining and the X Series is allowing us to deploy solutions faster than ever before. In closing, we had a strong first half to our fiscal year. We see our $50 billion market increasingly shifting to cloud. We are accelerating our success with mid-market and enterprise customers in both domestic and international markets. We see customers demanding solutions based on a fully owned single cloud technology platform with analytics exactly what X Series offers and we continue to make investments in innovation and go-to-market initiatives that will provide tailwinds for the remainder of the fiscal year and beyond. With that, I will now turn the call over to Mary Ellen.

Thank you, Vik. I will provide a more detailed review of our second fiscal quarter 2019 financial results under the new revenue recognition standard ASC 606, which we adopted in April 2018. For certain income statement items, we will also provide the second fiscal quarter 2019 results as they would have been under the old standard ASC 605. Reconciliation of ASC 606 and 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 comparisons. A reconciliation of GAAP to non-GAAP results was provided with our earnings press release and PowerPoint presentation deck. As we mentioned during our fourth fiscal quarter earnings conference call, we made the strategic decision to integrate DXI’s core technology into our new X Series platform and have deemphasized selling the standalone DXI EasyContactNow product. We continue to expect revenue from DXI to decline by approximately 50% in fiscal 2019. Our second quarter results were strong. Total revenue was $85.7 million, an increase of 18% year-over-year. Adjusting for constant currency and excluding DXI, total revenue grew 20%. Service revenue was $81.3 million and came in above the high-end of our guidance range. Service revenue increased 19% year-over-year and increased 21% year-over-year, adjusting for constant currency and excluding DXI. Adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers billing greater than $1,000 in monthly recurring revenue grew approximately 30% and represents 61% of total service revenue. Also adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers billing greater than $10,000 in monthly recurring revenue increased approximately 60% year-over-year and now represents approximately 28% of our total monthly recurring revenue. Gross margin for the quarter was 77% flat to prior year. Service margin in the quarter was 83% also flat year-over-year. Moving on to operating expenses for the second fiscal quarter, sales and marketing expenses, which also include customer support and deployment cost, were $51.8 million or 60% of revenue compared with $38 million or 52% 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 $2.9 million from the capitalization of sales commissions. Research and development expenses were $11.1 million, net of capitalized software or 13% of revenue, an increase of 59% year-over-year. As we previously stated earlier this year, we reclassified our product management team into research and development from our sales and marketing expenses, which represented approximately 4% of revenue and we increased spend to support the development of our new X Series platform. General and administrative expense was $7.6 million or 9% of revenue. On a GAAP basis, this expense includes a charge of $4.6 million related to U.S. sales and use taxes. Pre-tax net loss was $3.6 million and better than guidance range of $4 million to $5 million. Net loss was $3.8 million or negative $0.04 per share. Cash, restricted cash and investments were $137 million at September 30, 2018 compared with $167 million in the same year ago period. Cash flow used in operating activities was $5.3 million in the second fiscal quarter. Capital expenditures were approximately $1.7 million in the quarter or 2% of revenue and capitalized software was approximately $6.3 million. Turning to key operating metrics, we saw strong improvements during the quarter. The average monthly service revenue per mid-market and enterprise customer grew 6% to $4,988 compared with $4,697 in the same year ago period. Average monthly service revenue per business customer was $490 and grew 11% when compared to $442 in the same period a year ago. Before reviewing guidance for fiscal 2019, I would like to remind everyone that we do not expect a material difference to our revenue and year-over-year growth between ASC 606 and ASC 605. We continue to estimate that our fiscal 2019 non-GAAP operating expenses will be between $11 million to $13 million lower under ASC 606 due to the capitalization of a significant portion of commission expense rather than recognizing 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 on to our financial outlook, for the third quarter of fiscal 2019, under ASC 606, we are introducing the following guidance, service revenue in the range of $84.5 million to $85.5 million, representing approximately 18% to 19% year-over-year increase. Excluding DXI revenue, we expect service revenue in the range of 20% to 21% and our non-GAAP pre-tax loss is in the range – is expected to be in the range of $5 million to $6 million unless. Turning to fiscal 2019, we are updating our full year guidance. We are raising service revenue modestly and expect it to be between $334 million and $338 million for an annual growth of approximately 19% to 21%. Excluding DXI revenue, we expect our service revenue growth in the range of 21% to 22%. We are reiterating our total revenue guidance to be between $347 million and $352 million for an annual growth of approximately 17% to 19%. We expect our non-GAAP pre-tax loss to be at the high-end of the previously stated guidance of approximately $17 million. This excludes approximately $3 million of expenses related to Jitsi. I will add some additional color to help you with your models for the full fiscal year. We continue to expect non-GAAP gross margins to be approximately 77%. We continue to expect non-GAAP operating expenses as a percentage of revenue to be approximately 83%, excluding approximately $3 million related to Jitsi. We expect our sales and marketing expenses, excluding the impact of ASC 606 as a percentage of revenue to be approximately 59%. As a reminder, our sales and marketing expense includes customer support, professional services and deployment. Specifically, sales and marketing expenses will increase from added headcount, channel enablement executions, commissions, and advertising spend to support the brand and go-to-market strategic initiatives from the mid-market and enterprise segment. We expect our research and development expenses, net of capitalized software development, as a percentage of revenue, to be approximately 14%. We expect general and administrative expenses as a percent of revenue to be approximately 10%. We expect interest income as a percentage of revenue to be approximately 1%. We estimate our income tax expense to be approximately $100,000 each quarter. Due to the full valuation allowance against deferred tax assets, our tax expense reflects the current cash income taxes in certain U.S. states and foreign jurisdictions. In closing, we are pleased with our second quarter performance. We are executing to our fiscal 2019 plan and as Vik mentioned earlier making great progress on delivering to our revenue growth targets. Before we answer questions, I would like to say a few words about my journey at 8x8. It has been my sincerest pleasure serving as Chief Financial Officer for the last 4 years. I lived in London earlier in my professional career and I am excited to go back and work with our European team as the Managing Director of European Operations. I am delighted to pass the baton to Steven. I am very confident that he and Vik will continue to create shareholder value as we continue to execute over the long-term. Operator, we are now ready for questions.

[Operator Instructions] Your first question comes from the line of Matt Van Vliet from Stifel. Your line is open.

Yes, hi, great. Thanks for taking my question. I guess looking first at the acquisition that you made. I see that it’s really helping scale up some of the video routing you talked about and just making maybe a more robust video conferencing solution. Is this something that customers have pushed back on in terms of what your solution was offering or was this more opportunistic to see sort of where the product roadmap can go over the next couple of years and really just jumpstarting that?

A combination. I mean to me, I mean, I am thrilled about this acquisition, really a very cool team, great and vibrant open source community and some really, really impressive technology. For us, as you know, we have always believed in this concept of one platform and we have always believed that the market is going to evolve to this as opposed to just cobbling together loose partnerships between multiple companies. So, it started off as you think about it on UCaaS where we are industry leading and have been world class for several years. We added contact center where we are moving up the Gartner Quadrant and hope to be pretty close to industry leading across the board in that. We have added collaboration and team collaboration and now we have got some really world class technology with the way we interoperate with all the various platforms out there. Our video conferencing solution is increasingly becoming more and more important to customers because they’re looking for one-stop shop. Our video conferencing solution has always been solid Jitsi makes our video conferencing solution world-class this is some seriously cool stuff so now, when you’re looking at 8x8, UCaaS, we’re clearly world-class; contact center, we’re getting pretty close to world-class with own technology; team collaboration, world-class; video conferencing, with the acquisition of Jitsi and the team world-class we have again, believe that this whole concept of an own technology, a single platform, not having to depend on other third parties to provide this one integrated solution and then a common data layer and analytics that basically build on top to that is game-changing.

Great and then looking at some of the sales and marketing investments that you’ve made, particularly around headcount, where are you in terms of progress for your full year plan? How much of that is maybe back-end weighted? And when would you expect to have the majority of those hires at sort of a maybe 75%, 80% sales efficiency rate in terms of getting new deals booked?

Good question, Matt. We do expect we are pretty much on plan right now we had mentioned as we entered into this fiscal year that we would have about 30% growth in our new talent and we’re pretty much on plan halfway through the year we’ll continue to add especially in the sales and marketing area we do have a sales team that is ramping and then we are seeing productivity improvements now from our ramped sales reps if we continue to grow, which we expect to do, into fiscal 2020 and beyond we’ll constantly be hiring new sales talent so that we can meet the needs in the market this is a very large market as you know, $50 billion, less than 10% penetrated and we think we have something very unique in this market so we’ll continue to invest in headcount in order to get us to where we want to be from a growth perspective.

Alright, great. Thank you for taking my question.

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

Great, thanks. First thing I wanted to dive in on you mentioned one of the keys to achieving growth targets is short lead-to-sale cycles I just wanted to get a sense of what you’re seeing there and then second, just give how much more accelerated the bookings growth rate is in the billings growth rate? Is there anything we should think of as timelines of deployments of those contracts or things that we should be aware of there? Thanks.

So, I’ll take that one on so one, as you know, we introduced a new platform, and we’ve been evolving our technology so it makes it much faster with the single platform to do provisioning for our customers bookings, as you rightly point out, has accelerated quite materially and we’re starting to see quite a bit of pent-up demand and we’re also seeing customers now starting to deploy almost instantly across all of their various offices and finally, channel has been a great I think this is the second quarter in a row where we delivered north of 50% bookings growth for channel and when I say it’s more than 50%, it’s more than 50%, and the sales cycle there are definitely accelerating so and then the other part that is also good and gratifying is churn is starting to come down, and I think we had probably the best churn we’ve ever had in our last quarter least churn that we’ve ever had so with all of that going on we those are the three pillars that we have been targeting as I indicated we’re trying to have an average bookings growth rate for the year of approximately 30% the newer platform allows us to deploy significantly faster and then the third thing is churn continues to come down below our expectations which is better than our expectations all three of those things are goodness so we continue to chug on along in the right order.

Yes, just this is one follow-up so I mean, is there anything that we should be aware of in timeline to getting those bookings to revenue that may elongate things or just being cognizant of what could cause the revenue growth rate to accelerate kind of in the timeline to that in the coming year?

Yes, so yes as you know, we book a number of large enterprise deals, customers that are billing more than $10,000 that was our 27 new deals in that category and they typically do take longer to deploy however, as Vik had said, with our new technology we should be able to deploy them quickly, so we’re expecting that a great deal that will in fact be able to turn to revenue by our fourth fiscal quarter. And in addition if you remember, we also had a number of large deals that we booked in our third fiscal quarter, so we have had two very good quarters in a row from a big deal perspective and we would expect that, that would start to turn to revenue certainly by the fourth fiscal quarter and continues to deploy more quickly as we enter into fiscal 2020.

Great. Thank you.

Your next question comes from the line of Rich Valera from Needham. Your line is open.

Great, thank you. I think you may have just answered my first question, which is your guidance implies if you are at the midpoint of your third quarter service revenue number that you would need to see kind of a 7% to 8% I think quarter-over-quarter increase in service revenue in the fourth quarter to hit the midpoint of your guide, which you haven’t seen I think in the last 4 years. So that would be a pretty meaningful acceleration from recent years in terms of that seasonality. So, is it fair to say that its orders that you have already booked in the first couple of quarters of this year that really underpins that expected acceleration in your 3Q to 4Q growth rate?

Yes, you are absolutely right and you will see a hockey stick in our fourth fiscal quarter and that has a lot to do with the strong bookings of large customers in Q1 and Q2 that we expect to be deployed no later than Q4. And a lot of that has to do with some of the new technology that we have as well that allows us deploy more quickly.

Great. And then you had a pretty remarkable increase in the number of your channel partners, I think you said they roughly doubled quarter-over-quarter to 250 or more. So just what do we attribute that kind of very large increase in your number of channel partners relative to sort of recent gains you have made and can you give us a sense on how long it takes them typically to become productive? Do we think those will be contributing in the third quarter, fourth quarter, any color there would be appreciated? Thank you.

So, two things. One, we brought on board as I indicated probably in quarter first, a pretty strong channel team in under great leadership. We have also put major emphasis in channel marketing. I mean, the two or three things that are happening as you indicated, we have seen our bookings at the mid-market enterprise level increase quite dramatically. We have seen much more of an outreach by channel partners to us, particularly now when channel partners are realizing that we are a one-stop shop, because the idea of being able to come to one company, one platform and be able to get essentially contact center, video conferencing, collaboration as well as telephony has been huge and we are making a real effort with all – given all of that outreach we are seeing that we can get a channel partner productive in the 30-day timeframe. We are also coming up with multiple ways to basically fast track different enablements. And again, it has been a real pleasure to deal with a world class channel team that we have here now and the level of interest from channel partners has been quite dramatic. You are seeing how channel bookings two quarters in a row have been well north of 50% and I think the best is yet to come.

Okay, that’s it for me. Thanks for taking my questions.

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

Hi, Vik. Question for you, what are the preliminary indications and metrics you guys look at to evaluate the executive traction in terms of win rates? Are you seeing maybe improvement in win rates and how you guys stack up against the on-premise guys and the cloud guys with the X Series, what are the preliminary indications here?

Very positive. So that is the number, Nikolay, as you know I look at all the time. Bryan Martin and I both monitor that literally weekly. We are well north of 50% against all competitors and particularly against on-premise we are doing very well. And X is helping us that much more. So again, work in progress, X has only been introduced in the last few months, but we are seeing again a lot of good uplift on X Series.

And are you guys going to upgrade the installed base to the X Series and if yes, how disruptive that could be to the installed base?

Actually, the intent is to make it non-disruptive. And so we are going to do this in a very systematic and thoughtful manner. Right now, approximately 10% of our installed base is on the new platform. We will start with small business to basically start to migrate them over to the X Series. The intent is to literally do it with one click and then over time we will start to migrate mid-market and enterprise customers, but we don’t anticipate any level of disruption. As a matter of fact, we expect we will be offering additional features to customers as bundled in as opposed to what they’ve had in the past so we actually expect that this will actually give us opportunities to up-sell significantly and we’ll do it right around time of renewal.

And my last question is around Regis if you can give us the update on the deployment there and whether it’s tracking in line that will be great? Thank you.

Yes, no Regis is steady as she goes, moving in the right direction up into the right it’s not the accelerated timeline as we had indicated it’s moving in a steady, continuous, thoughtful, organized manner.

Thank you.

Your next question comes from the line of Catharine Trebnick from Dougherty. Your line is open.

Thanks for taking the question. Could you clarify something, Vik, last quarter or Mary Ellen, you said the SMB segment grew pretty much in line with the market at 15% year-over-year can you update us on that segment? And then I have a follow-on question.

Okay. Yes, we are pleased to say that we’re continuing to grow our small business, that we are growing at market or slightly ahead of market we saw sequentially about a 70 basis point improvement in growth, which is very, very nice so our goal, as you know, is to grow our small business at least market, slightly above, and mid-market and enterprise, above market.

Alright, great. And then Vik, could you provide some color as to during the quarter any particular product feature that stood out the reason why you landed the deal over another cloud provider or premise provider? Thanks.

Yes, Catharine, it’s X, I mean, if the X Series it is all about the X if you look at an interesting number, 50% of our mid-market and enterprise bookings are what we call combo deals, which is some variation of X1 through X8 that number used to be 42% and our win rate there is phenomenal and so we are seeing X, this concept of one cloud system with basically voice-video collaboration, conferencing, contact center and the ability for the customer to mix and match and upgrade or downgrade, depending on how the business needs change and for each end user to have that level of flexibility is absolutely game-changing X, as you know, we just introduced in July time frame, so these are early days but initial indications are very, very positive, and I think that has been a huge differentiator for us going forward.

Alright. Thanks, Mary Ellen. Good luck in Europe and we will stay in touch.

Okay. Thank you, Catharine.

Your next question comes from the line of Jonathan Kees from Summit Insights Group. Your line is open.

Hi, thanks for taking my questions and I too want to wish Mary Ellen good luck in your new opportunity you always been helpful with your insights and the time that you spent you will be missed so, and look forward to working with Steven in regards to my questions, I’ll stay on the M&A track in regards to Jitsi, they I guess we are targeting more developers you tend to target more IT and CIOs are you going to be differentiating your sales targeting your sales cycle with regards to this new acquisition? And I have a second question after that.

No, actually the intent is both I mean, they have a vibrant open source community and we love the idea of continuing to invest in that open source community, invest in that technology this stuff is really cool stuff, and it’s pretty game-changing and it can be highly disruptive to some of the incumbents in that space we can also expect to integrate portions of this technology into our both meetings product as well as the X Series and it also opens up different routes to market for us I mean, we were very fortunate that the team became available, and we are very fortunate that they chose to kind of come on board with us these are some really cool people, really smart people and video conferencing is going to increasingly be more and more important, and I think we’re ahead of the curve and basically getting ownership of that technology and incorporating it, and that will leverage the open source community a lot.

Okay, it sounds like an exciting acquisition. Second question would be also on M&A, but not yours this morning, obviously there’s a lot of news with the Red Hat acquisition and that’s a taking a cloud computing bent, but the focus here is going to be on hybrid I know you, Vik, in the past you’ve talked about the opportunity is more in pure cloud and less so in the hybrid contrary to what like your peers might tell in short I would say I guess, I’m just curious how many times do you have customers who like either you turn away or they choose not to go with you, you probably will not give me the specific statistics here, but I guess I am just trying to get a gauge here in terms of hybrid what kind of interest have we gotten from customers in terms of especially with enterprise, larger customers in terms of hybrid? Thanks.

So for the record and I am saying this tongue in cheek, we just announced the second largest open source acquisition in the last 24 hours. I just want that on the record. There were a few zeros more that IBM paid for Red Hat than we paid for Jitsi, but hey, who is counting. So going back to your comment on hybrid, I actually feel more and more that people are becoming more and more comfortable with pure cloud, enterprise included. I don’t believe that there is any hybrid required for telephony. Of course, I defer to colleagues who have different viewpoints, but for us, we are seeing old guard companies, new guard companies essentially all evolving purely towards a cloud-only offering. And I think you are seeing that in the success of people like us who are continuing to see an uplift in the market and I expect that this trend is going to continue and I think the train has left the station for hybrid solutions for communication systems. I think it’s more and more going to be a cloud-only offering and I think it has been de-risked to a sufficient enough degree that you are going to start seeing very large enterprises all shift en masse to the cloud. That’s our view and that’s the trend we are seeing.

Alright. Fair enough. Thank you.

Thank you, Jonathan.

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

Thank you. Vik, you mentioned that partners are looking for a single cloud partner and I have honestly not heard that as we talked to channel partners. So I wanted to better understand your thoughts there?

So what we are finding is that particularly large channel partners servicing enterprise customers, what they tend to want is one vendor and over time they want to play a bigger and bigger role and basically being the service provider and the value-added reseller, trying to do that with three or four different technologies with three or four different service agreements is typically not ideal if you are a VAR [ph] and/or essentially a channel partner. So the ability to go to one partner very much like a Microsoft Office, you don’t want to necessarily go to WordPerfect than for Word and then Lotus 123 or whatever, you go to Microsoft and you get the Office Suite. We are seeing that for people like that it becomes that much easier to basically go to one vendor. And then X I do think is game changing, which is X1 through X8 where you can add contact center, you can add video conferencing, you can add collaboration or you can add telephony and you can subtract it and you can do a different mix and match by different end users. We are so I don’t quite know where your sources are but our sources and I have spent quite a bit of time with a lot of different channel partners we are increasingly seeing that that is why they are coming to us. You are seeing the number of channel partners that have gotten engaged with us significantly increase quarter-over-quarter and you are seeing our channel bookings accelerate quite significantly.

One other question to you, just wanted to see if you could expand on your single technology platform differentiation like given M&A and integration work, it seems like there will be a few players with very similar strategies to yours. I wondered if you could just elaborate there?

So George, I will pull on that thread. That is exactly right. You used the exact words that we have been saying, which is we see this market will have to evolve to a single platform with all the technologies that are relevant to providing that platform all under one roof. So your point that you are seeing a lot of our competitors make M&A decisions where they are trying to buy the missing pieces of their technology very similar to what we did 3, 4, 5, 6 years ago they are now starting to do that. One, I applaud them for their strategy, because I think it is right on. That is exactly where the industry is headed. The second thing is it’s going to take them the few years that it took us to start to integrate all of these various technologies together. And it’s a long and painful process as we have learned, but we are more and more convinced that it is the right one and I think the fact that people are paying top dollar to acquire missing components of their technology so they can provide that one platform solution tells us that we were right we just have to keep executing and I think this market is coming to us.

Perfect. Thank you.

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

Yes, thanks for taking my question real quick, a little bit of a housekeeping matter could you run through a little bit over $6 million of non-recurring expenses in OpEx that were kind of backed out? What’s the breakdown of that?

Okay so a portion of that was the $4.6 million that I had mentioned on the call, which has to do with sales and use tax.

I’m sorry you said sales and what tax?

Sales and use tax the sales and use tax so many SaaS companies, especially in the UCaaS industry are constantly evaluating local and state tax regulations we currently file almost 1,400 tax returns each and every month, and from time to time, these companies come or these states and local municipalities come and inquire about our collections and remittance of sales tax and fees we currently have several jurisdictions that are conducting sales tax audits as a result of this, and we’re doing some internal work with our tax advisors, we accrued $4.6 million during the quarter as a contingent liability for various sales and use taxes that may be imposed on us by various states and jurisdictions from previous periods this is something that we have experience, and we have a great deal of experience working with the government authorities for each one of these and there’s a lot of that goes into this there’s there several factors that goes into the number for instance, our estimate depends on where the company’s services are being used in excess in that area, and the tax liability the taxability of our services in those particular states or jurisdictions.

Thank you. And then I was going to ask, so I know earlier, Vik, you’re talking a bit about expanding the company’s platform with the recent acquisition and what the company has been building on over the last few years to really complete an end-to-end solution here what are your thoughts on some of the recent news that’s come out? Seems like more people are entering into the contact center space where you see the acquisition announced by Vonage Twilio also made an announcement not too long ago and what impact do you think that will have on EGHT as you continue to compete with the number of firms for the enterprise business side?

Yes, they have both come thrilled about it. I mean, to some extent I think you’ve heard me say over the last 4 years or 5 years that I see the entire market converging towards one common platform: voice, video, text, contact center, all basically being tied together with a common framework and common data, common analytics, and I have said that as part of that you need to ensure you own your technology because you can loosely cobble stuff together, but then everybody’s interest eventually diverge and we have seen this story play out in the technology industry year after year so that’s why 8x8 was very aggressive we bought three companies in the contact center space we bought a collaboration company we just recently bought a video collaboration company we have acquired across the board to basically build out so we have this one common framework, one common platform I think we’ve got a leg-up on everybody and that’s the investment we started to make with the X Series is to bring all of these various technologies together, and I think pretty much the entire industry is waking up to the fact that that’s what you need to do, and that you can’t just go in and loosely partner with everybody and kind of just talk about it you have to eventually go acquire the technology so from that perspective, I applaud these moves and then I think, as you said, they are all going to go through the same pain of how you integrate all of these diverse technologies into one common platform, and I wish them luck the second part is that more and more I see us two or three world views evolving I think I see a world view evolving towards essentially a packaged solution, which is voice, video, text, collaboration, contact center, all as part of one platform with basically the ability to control the entire platform through APIs, that’s one world view and the second world view is going to be a series of build-it-yourself developer kits, which is the 12-year world view, where companies that have very large development teams can go in and basically build custom solutions, leveraging essentially these widgets 8x8 has taken the view that we’re going to have a packaged solution and we think that the majority of the world is going to go towards these packaged solutions and we are creating APIs so that you can control the entire packaged solution. Twilio, which is a phenomenally successful company has taken an opposite world view. And so either way, I think those are the two world views. But I do believe that the concept of loosely cobbling three or four different companies to provide and calling it an integrated platform or calling it a common platform I think over time, I think all of that is going to change and people will have to make all of these acquisitions, which I like to think we bought when they were relatively inexpensive.

Thanks for the detail. And then last question from me, I know you have mentioned and talked about the company’s ramp, particularly in sales and marketing. Just how long does it take to train up a sales staff for their full quota carrying member of the team going out there and able to actually close deals and drive some top line revenue growth?

3 to 6 months. Typically that’s been the typical ramp that we have had depending on the size of the market, small business, you can ramp much faster obviously. Enterprise takes a little bit longer. But again and we are early stages yet as I said. I always characterize us and I am very pleased about quarter two, but I would characterize us as a work in progress and little by little you are starting to see the machinery start. You have seen what X Series has done for us and X Series was years in the making. It didn’t just happen. And now we have built up the sales and marketing engine to support that and you are starting to see it little by little get moving and we expect to see this ramp continue for some time.

Thanks. That’s it for me.

Your next question comes from the line of Will Power from Baird. Your line is open.

Great, thanks. Yes, so Vik, I want to come back to the 25% revenue guidance exiting fiscal ‘19. I know you talked through some of the drivers, bookings growth, which has been great to see. I think one of the elements you called out was improving revenue churn and I wonder if you could drill down into that for us a bit more. Maybe what some of the key drivers have been? Any data points in terms of where it can go from here? I don’t know if it relates to deployment as the bundled solutions, what are some of the things that you are doing to help on that front?

I think it’s just growing up as a company. So to some extent, we have systematically taken a look at all of the four segments. And I think as you have pointed out in the past, we have always had the lowest churn amongst our peers in our industry. And now systematically we have been going segment by segment and figuring out every pain point, every reason for churn at every level and putting in place plans to kind of go address. I mean, I would love to tell you we have this blinding flash of insight. It literally is just basic blocking and tackling. We have really built up our customer success team. They are phenomenal folks. We have tied engineering bonuses towards customer satisfaction and quality, which makes it that much more of a focus. We measure churn on a weekly basis and go through customer health on a weekly basis. It’s little things like that. We have upgraded our team and customer success by bringing in I think our VP of customer support just came from was head of I think customer support for Marketo. So little by little, we are looking at every aspect of our business and improving it. And as I said to me, as I would love to tell you is brilliant insight on the CEO’s part, unfortunately, I can’t say that. It’s a lot of good people working very hard and literally making a list, checking it twice and one by one ticking and tying it together. I think that’s what’s causing our churn to head in the right direction.

Okay. And then my second question, I know you spent a fair amount of time on the call talking about some of the bundling opportunities and the X Series product helping drive that. Are there any parameters you can provide with respect to usage? I mean, what you are seeing in terms of collaboration growth, same-room growth, contact center? And then how do we think about then kind of ARPU from here? What’s the right way to think about the revenue from adding these additional products going forward?

It’s a good question. I think the interesting one is a third of our X Series customers are actually buying the contact centers. They are buying the highest end of X. So over time, you will start to see ARPU trend up, because what’s happening is people that wouldn’t traditionally just by X1, X2, X4 are buying more and more of the X8, which is the full-blown contact center. We have not yet seen the uplift from Team Messaging that only just became generally available in the last few weeks. Video conferencing is also a nice to have so far and we think that will become a big lift as well. But so far what we have seen is about a third of our X Series of orders have contact center, which is starting to be more and more interesting. And so again too early to tell exactly what’s going to happen on ARPU, but I think over the next few quarters, we will be able to provide you with more color, but our sense is that over time you will start to see more and more of our ARPU trend up as contact center becomes a bigger portion of our business.

Okay, thanks. Yes and Mary Ellen, good luck with the transition.

Okay. Thank you, Will.

Your next question comes from the line of James Breen from William Blair. Your line is open.

Thanks for taking the question. Now that you are seeing a lot of growth on the channel side, can you sort of give us color on how you think about the mix in terms of where you are generating revenue from in terms of versus the channel and other places? And then just with respect to the channel in general, is there more room for growth there as you sign up new partners going forward? Thanks.

I actually think what you are seeing is small business, the micro business we are heading more and more towards e-commerce and self-service. We are starting to see that trend up. Let’s say, 49 seats to about 150, 200 seats, we are seeing more and more, direct is still the primary driver. Anything above that we are seeing China will be a huge driver of demand. And then at the enterprise level, you start to see again direct be a material driver of business. So at a macro level, small tends to be either self-service or direct, mid tends to be primarily channel, small enterprise tends to be channel, very large enterprise often is direct. That’s what we are seeing. I think channel is barely tapped. It is fascinating to find out how little the channel knew about us. And we have been around a long time, but our brand has not necessarily been great. And as we go out and we put a full team together and we go out and we meet with enough channel partners and you can start to see people going holy smokes, this is a one stop shop, this could be huge and so we are starting to see uplift. So, I actually believe there is a lot of headroom in channel and we will see how it all plays out, but right now we are seeing quite a bit of opportunity there.

Great. Thank you.

[Operator Instructions] Your next question comes from the line of Mike Latimore from Northland Capital Markets. Your line is open.

Great. Thanks a lot. On the idea of upgrading the base, Vik, I think you said you would plan to do that on renewals and then up-sell when those renewals occur. I guess what does that imply in terms of when you might get through the base? Is that sort of a 12 to 18-month process or how long it’s going to take?

In that 18-month timeframe is what we are going to do. We want to do it in a way that it is absolutely no impact or minimal impact to our customer and only impact should be goodness. So we will start – we have started the migration from the small customers, where it literally is one click, but the intent, the number one intent of this migration is it should be absolutely non-disruptive to our customers and they should have more than they had in the past. And so I think that’s what X Series allows us to have happen. So the customers will have no disruption and they will have more value and then for our small businesses have just started the whole process, but again, we will do this very systematically. Approximately 10% of our installed base is X Series and on the new platform and then over time, as I said over 18 months or so we will do that. But I am more focused on making sure it’s non-disruptive for our customers and that they always get more value from the X than what they had previously.

Got it. And then I just wanted to make sure I am synced up correctly on 25% exit growth rate, does the year guidance that you have given for service revenue, does the midpoint sort of sync up with that view, constant currency, ex-DXI or like where do you need to follow the kind of – within your guidance there to hit that 25% what it looks like?

Yes, Mike, that’s a great question. So if you look at the Q4 implied number, that actually gets us close, very close, because you have to add-back in constant currency. Remember, last year in the fourth fiscal quarter, the pound to the dollar was 1.38 versus where it is today at 1.28, so that’s going to be a huge adjustment that you will see and then also take out the DXI. So when you look at it on a constant currency without DXI, you are going to be very close to that 25%. And then if we do a little bit better than the midpoint, you are going to be at that 25%. So it is contemplated in the high end of our guidance, but you can get very close at the midpoint.

Got it. And then just last one since you just made a video acquisition, have you seen video usage – I mean, can you give any color just on the video usage across your platform? Has that been accelerating or the same as it’s always been?

No, trending up. Video has become much more popular. I would say it’s been a fascinating journey, because for us initially it used to be all around telephony, then we started to see more and more collaboration and that’s become very popular. Then we started to see contact usage even for people not using contact centers, non-traditional contact centers start to leverage helped us to set our – all the contact center functionality. We have been watching our customers keep trending up on video usage over the last probably 1 year, 1.5 years and so that’s why we have been very thoughtful about what we wanted to do. We architected it in such a way that we could basically go in and plug in this next generation technology, but not touch the front end except we will continue to make it more user friendly and easier to use. So, I cannot – I am beyond thrilled about this Jitsi acquisition. It’s an amazing team and some really cool stuff is going to come out of it.

Great. Thanks a lot and best of luck, Mary Ellen.

Okay. Thank you, Mike.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you, folks. I appreciate all of you listening into our second quarter earnings call. Steven and I will be on the road and we look forward to seeing you at various other earnings calls and Mary Ellen will be heading over to London where she will develop a taste for warm beer, but again thank you and look forward to talking to you over the next few days.

That concludes today’s conference call. You may now disconnect.