Good evening. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. Fiscal Third Quarter 2020 Earnings Conference Call.I will now turn the call over to Victoria Hyde-Dunn, Head of Investor Relations.

Thank you. Good afternoon, and welcome to 8x8's third quarter fiscal 2020 earnings conference call. Joining me today are Vik Verma, Chief Executive Officer; and Steven Gatoff, Chief Financial Officer. During today's call, Vik will begin with business highlights of our third quarter performance. Following this, Steven will provide details on our financial results and guidance. After these prepared remarks, we look forward to taking your questions.Before we get started, just a reminder that our discussion today includes forward-looking statements about 8x8's future financial performance as well as its business, products and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to materially vary from the forward-looking statements as described in our risk factors and our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.In addition, some financial measures that will be discussed on this call, together with year-over-year comparisons, in some cases, were not prepared in accordance with U.S. generally accepted accounting principles or GAAP. A reconciliation of non-GAAP measures to the closest comparable GAAP measures is provided with our earnings press release and PowerPoint presentation deck, which are available on our Investor Relations website.With that, let me turn the call over to Vik.

Thank you, Victoria. Good afternoon and thank you for joining us today. Building on our Q2 results, I'm very pleased with continued improvements in execution and financial performance, which led to very strong Q3 results. I'd like to focus my remarks on three topics: strong financial results in Q3, continued channel success and aligning our global operations for both revenue growth and profitability.Turning to Q3 results. Service revenue and total revenue each grew 32% year-over-year and exceeded the high end of our financial outlook. Key drivers of growth performance included success with mid-market and enterprise customers and broad-based global strength across our product suite, including both contact center and CPaaS. The momentum we are seeing is clear customer validation of our strategy of owning a global integrated single stack technology platform. Customers are increasingly migrating to cloud for their communication needs and they want to work with the platform leader. The investments we've made over the last few years in both go-to-market and product innovation are succeeding. Sales execution was strong in Q3 with robust pipeline growth in all segments.Total organic bookings grew 30% year-over-year, enterprise ARR grew 85% year-over-year. Four of our top 10 wins were Avaya replacements, who opted for our X Series bundled platform solutions. X Series now represents over 37% of our installed base up from 32% last quarter. We also continue to broaden our enterprise customer base with a record 40 new deals closed in the quarter with ARR greater than $100,000. And the common theme for many of these successes was our integrated platform. In fact, 71% of our new bookings greater than $12,000 ARR were from customers that selected bundled UCaaS and CCaaS as compared to 51% one year ago. This continues to validate the power of our single technology platform with our…

Thanks Vik. Good afternoon everyone. We appreciate you joining us. I'd like to review three topics today. First, I'll start by reviewing the financial results for our third fiscal quarter ending December 31. Second I'll share info around the actions that we've taken that are improving our operating efficiency and support our commitment to exiting Q4 fiscal 2021 at breakeven. And third, I'll go through our outlook for fiscal Q4 and the full fiscal year 2020. We'll wrap up with Q&A.Jumping into Q3, we delivered very strong revenue results as exhibited across multiple metrics. Total revenue grew to $118.6 million in Q3 up 32% year-over-year and service revenue came in at $113.6 million, also an increase of 32% year-over-year. Non-GAAP pre-tax net loss for the third quarter was approximately $16.3 million coming in better than outlook. This marks the third consecutive quarter that our financial results have finished above the high-end of our guidance.There were four primary drivers of our Q3 financial results. One strong execution in our go-to-market initiatives centered on demand gen and solid pipeline coverage ratios with particular strength, again from our channel partners. Two, continued success moving up market with mid market and large enterprise customers growing nicely with 8x8 platform purchases and becoming a larger part of our portfolio. Three, contributions from our CPaaS offerings that continue to be integrated into and a compelling differentiator of our global platform and that included a full quarter of results. And four, strong organic bookings growth of 30% across both new and existing customers with particular strength in our contact center offerings as Vik just mentioned.You can see the strength in our operating and business performance metrics where total ARR came in at $411 million for the December quarter, 33% year-over-year growth and the results of a combination…

[Operator Instructions] Your first question comes from the line of Michael Turrin with Wells Fargo. Your line is open.

Hey, there. Thanks for taking the question. I appreciate it. I guess, maybe to start off, Vik, in terms of the competitive commentary you mentioned for the top 10 wins coming from the legacy side. That side was also, I’m telling a similar tale, maybe to no surprise at their conference this week. So just more from your perspective, in terms of what might be driving that acceleration and migration today, and what might give you confidence that can continue?

Yes. So from our perspective, we have a fully-formed platform. And the key part that we have noticed is, there is no exclusivity between Avaya, and Avaya’s customers. So the moment that Avaya started offering cloud solutions, all of their customers started shopping around. And we have a fully-formed solution, where we are able to go-to-market and it includes a contact center. So that already gives us a competitive edge. So we started to see quite a few Avaya customers come to us.The second part that was actually even more interesting. And I think that is something we are uniquely positioned to do, because we have one platform and it has voice, video, contact center and it’s all integrated together. It has all the CPaaS, we can essentially enable VARs. We’ve developed this thing called the PartnerXchange and that’s what the ScanSource relationship is all about. And the relationship at ScanSource’s VARs plus the relationships that we just came up within the UK.The VAR model is, the VARs typically have the relationship with the customer, not the service provider. So in essence, what we’re doing is we are allowing VARs to go to their customers and sell our products. And it’s obviously, labeled with 8x8. But the VAR is selling it, the VAR is deploying it and the VAR is supporting it, which is the traditional model. That has been one of the impediments to this whole move forward. So in essence, now we have two routes to market, both of which are working. I have the referral channel, the master-sub referral channel, which frankly, as you can see has been consistently growing. And for us now represents over 50% of our bookings. And that’s working perfectly.And then there’s a whole new slew of channel partners, which are the VAR channel partners that have resisted the move to cloud, because they wanted ownership of the customer. And what we’ve done is we are now enabling them to go to their legacy base and offer a complete comprehensive cloud solution. But they are providing it and they are selling it for us and we’re supporting them and selling it for us.So as I said, from our perspective all of the – the shaking up of the market is all a good thing. And having this complete and comprehensive platform is a good thing. And I think we’ve literally got hundreds of Avaya customers’ already online that we’ve been able to basically deploy. And so we’ve had the experience of what it takes to migrate those guys and it isn’t easy, but it’s something we’re good at.

That’s clear. Appreciate that Vik. Maybe one for Steven, you’ve stepped through some useful detail in terms of efficiencies. I was hoping to revisit some of that commentary and maybe get into a little bit more detail. Can we talk about the underlying mix that maybe impacting gross margin trajectory and then in terms of free cash flow, I’m assuming some of the step-up in CapEx there was related to the relocation in terms of headquarters, but anything that you can do to kind of help us quantify and parse through some of those impacts, particularly, as we’re looking towards this profitability target exiting next year is certainly helpful? Thanks.

Sure. Yes, great question. I’ll take the last one first. It’s fairly straightforward. Our operating cash flow, our pre-cash as well, improved apples-to-apples from Q3 over Q2. There were a few one-time items in both of those quarters. We had the Wavecell acquisition in Q2. That was a big negative of negative $60 million. And we obviously had to convert deal in Q3. That was a positive $65 million that basically washes.But to your point, the Q3 also the cash balance was burdened in this quarter. One-time item was the build out of our headquarters office, new office space for about $15 million and change. And so that was a big degradation. Without that decline in cash would have been less down in the $28 million ZIP Code improvement over Q2. And we expect that to continue to improvement going forward.To your point on gross margin, Q3 had a mix of three or four things. One, there was more costs in our core in the UCaaS, CCaaS, we talked a little bit about that and so far as the VAR readiness, if you will. So there was some element of that. We also had a little bit more CPaaS than we anticipated. And so there’s a bit of a mix shift, if you will, that was pressure on gross margin. One, we had a full quarters worth, but we had even more than we anticipated. There was also a more product revenue. So that was a drag on a gross margin that you could see the economics there. That brought that down. And prof services was also a little bit more of a drag. When you add those all up, that’s how you get to the degradation.Looking ahead and I talked about this a moment ago for Q4, there are two meaningful drivers of gross margin expansion and we would offer that we expect that improvement to be going forward, not just a Q4 event. And that is we see more favorable cost structure on our underlying core UCaaS, CCaaS operating structure. So our ability to deliver our cost structure, some of the efficiencies that we just drove and our realignment, what all act to drive backup to a higher gross margin levels on UCaaS, CCaaS.We would also anticipate a bit of an improvement in our CPaaS business, both from a mix shift as well as an aggregate rise in the CPaaS gross margins. We’ve talked to a bunch about this in the past, one-on-one as well as with others, where the CPaaS business is expanding to the European theater as well as the U.S., and offering a higher margin services like chat and voice. And so as those two dynamics, geography and product set roll out more and more over the coming months. We expect to see margin lift from the CPaaS contribution.

Thanks. I appreciate all the color there. It’s helpful. Thanks for taking the question.

Your next question comes from the line of Ryan MacWilliams with Stephens. Your line is open.

Thanks for taking my question. So first off, congrats on reaching the 30% year-over-year service revenue growth milestone on the quarter, hopefully more to come there. And I’m also the $3 million increase in deferred revenue was another positive and it seems like it increase due to improved contact center bookings. What about your bundled offering is currently resonating with customers and you have any new marketing initiatives under the new CMO to promote this bundled offering?

So I’ll take that one. So a couple of things, the main part that is the most interesting thing, and this is where I think there is a big opening for us. Everybody is generally now concluding that you need one platform, right, which is you – most people are buying both contact center as well as UCaaS together. The most interesting statistic for me was that for our customers, we look at customers greater than $12,000 ARR. So if you look at those customers, the number of people buying both our unified communication and a contact center solution jumped up from 51% one year ago to 71% this year. And we are seeing that as a trend.And by the way, that tends to be a trend, particularly for Avaya customers’ because they’re used to buying both unified communication and contact center. And frankly, that’s where a lot of the confusion has been created because there is – they’re teamed up with one vendor for UCaaS but they’re going to go develop their own contact center solution. But their other vendor had another pre-existing relationship with a contact center vendor, and so us being able to go in and offer this complete and comprehensive platform makes it very simple.And then with regard to VARs, the VARs particularly own the customer, they have had long standing relationships and we’ve seen the effects of that because we’ve started closing our first few deals with VARs, where we play a role of support, we play a report of training, we play a role of enablement, but the VAR pretty much closes the customer and what they’re able to do is, close with either UCaaS or CCaaS and upsell from there.The more interesting thing is CPaaS then allows them to customize experiences, which allows…

Perfect, thanks. And this one is for Steve. The Wavecell meet your calendar 2019 revenue expectations that you laid out at acquisition, any color, any on growth there helpful. And for the higher margin APIs, have you seen any particular traction in voice or video? Thanks.

Sure. So, generally speaking, we are pleased with the CPaaS business. I think what the more important thing to us candidly is the technology. The revenue pieces is obviously helpful and that’s nice. But the integration of the open API framework into our video, voice and most importantly, the contact center offering and how we’re engaging with customers has probably been the biggest high-five around the floor. So, we’re happy with the business, how it’s performing. They’re growing nicely in region. They’re adding more customers. They’re adding more countries. Most importantly, coming to the UK and the U.S., and so we’re pleased with where that is.

I’ll add another element, because CPaaS as a differentiator for our core platform is increasingly valuable, give you a very simple use case. So imagine, if you are a customer with a contact center. So, you’re a vacation rental company and you get – your customer center gets a call to basically look for keys, the ability to send a – cut a link, which can be opened on a web browser and instantly, turn the customer’s phone into a camera, where they can look around and the customer service agent can then point to where they go or how they change the thermostat or something like that is a huge and massive productivity saving. That is an example of how you’ve taken a packaged solution, which is contact center and unified communication, and by the addition of video conferencing as well as CPaaS, you’ve turned it into a unique customer engagement that is hugely differentiated. That’s why we bought Wavecell and we are seeing huge traction in that particular area bundled with our products.

Great. Thanks for taking the questions. Thanks, guys.

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

Well, thanks, guys and a great quarter of that. Vik, can you just maybe, spend a little bit more time on the VAR side of things? How – what percentage of the enterprise market do you think they control? Do you think your relationship with the VARs now is relatively unique, I guess is anyone else kind of given the same level of support and terms and conditions that, that you are, and when will the VAR channel really be up and running at 100%, do you think? Thanks.

Okay, a great question. So, early days, so just out of the ScanSource and the ScanSource control and their distributors and VARs control approximately 15 million Avaya seats plus minus. And we will have the first set of initial VARs fully trained, enabled and they will be in market and their end-user customers this month.With regard to UK, there are several million seats that are Avaya seats that are for grabs. And as you know, we signed a VAR relationship with the top two UK VARs. Some of them have already closed deals with the – with end-user customers. One of our larger deals last quarter was closed through a VAR. So, we are starting to see VARs as a non-trivial approach to the market. And we think that has been some of the impediment to the move to cloud. So, if you think about it, the master subreferral channel is phenomenal. They’ve done a great job for us and we appreciate the relationship and we’re starting to become more and more the vendor of choice. I think both Intelisys and few others, just recently recognized us for being their top vendor.What is now interesting is, but there’s been an entire set of channel or customers that have not moved forward, because they’re used to dealing only with their trusted VAR and they don’t want to deal with the end – with their service provider. Us enabling the VAR to essentially be the front, where we can basically go out and enable the VAR to go provide the same kind of service to their end-user customer using our partner exchange, we think opens up a very significant portion of the market and that is additive to basically the ability going to the master subchannel, and then the ability through CPaaS for VARs to be able to provide customization services to the end-user customer, ends up providing that much more value for both the VAR and the end-user customers.So, we believe by building this one platform, we have two very unique ways to go to market. We can go the master subroute, which is working very well and as I indicated, is now 50% odd of our bookings. We’re enabling the VAR, which now basically is starting to work with the first few initial wins. But it really is a win-win for the VAR. The VAR gets to go in and maintain the existing business model and provide customization services. And for the customer, it’s a win, because they’re used to dealing with the same trusted person that they have always dealt with. And I think we’re unique in our ability to do that as evidenced by the relationships we are signing. I think, we’ll start to see revenue impacts of that in FY 2021 in early stages, but we’ve already had our first few wins using the VAR channel.

And are these relatively exclusive, I mean, I know, they’re not absolutely exclusive, but do you expect to be the primary partner?

I expect to be the primary partner, but I never asked for exclusivity, because I’m never willing to give exclusivity. So, from that perspective, but I think we will end up being the primary partner. And as I said, our single platform is uniquely positioned to do that.

Thank you.

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

Hi, this is Vijay Devar for Mike Latimore. Could you talk about a churn in small business segment and generally, across your customer base?

Sure. So, churn as we’ve talked about before is primarily for us a function of customers that are on our legacy platform. And so customers with generally older functionality of product not on X Series. A churn by definition is lower for customers. We have experienced once they migrate to X Series and for those customers, who are on X Series, it’s lower. And so our focus has been and is now this year, moving customers migrating the remainder of our legacy customer base to the X Series. That’s something that we’re starting to get more traction around and we anticipate moving the bulk of our customer base over to X by the end of this calendar year.

And is this still in your bookings number?

It is not. When we report our bookings number, that is organic if you will, meaning is the UCaaS and CCaaS business, and that business, that’s where customers sign up for committed contracts with us over typically, a three-year period. The CPaaS business historically and currently for the most part is a usage-based business, where customers are signing up. We become a part of their operational infrastructure. and so there is some very core amount of baseline revenue that they generate, but it is usage-based revenue that is not reported as bookings. So, when we report our bookings growth of 30% that is all the core UCaaS, CCaaS business.

And migrations by the way will not be reported as part of bookings. Migration is just moving the customers from one platform to the other.

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

Thank you. The four or five deals you mentioned, one; were any of those result of the CloudFuel partnership; and two, do they require a higher level of incentives relative to your sort of standard deals? Was there anything unusually – any unusual incentives in those deals?

No, no unusual incentives. The key part with regard to CloudFuel. CloudFuel will be in market this quarter. So, the initial wins we’ve had have been through our UK VARs and also, actually one other VAR that we have in the U.S. but yes, no unusual incentives as a matter of fact, it actually is – quite works out quite well from a incentive perspective, because spiffs and other things like that are lower and the customer takes on or the VAR takes on a significant portion of the selling, support and deployment costs.

Got it. Thank you. And then just to drill down a little bit more on the gross margin, I know you’ve given some color on this, Steve. but first margin has dropped about 800 basis points since you have completely pulled it in wells, Wavecell and by my math, about 400 of that should be due to Wavecell suggesting another 400 from sort of other factors, which you alluded to. So, I’m just wondering should we be thinking about gross margin once you’ve got through, some of the migration stuff you’re doing the cloud fuel costs, should we be thinking of it bouncing back on the order of, let’s say 400 basis points from where it was in the third quarter or any way you can help quantify that and maybe, how much you’re thinking of in terms of a sequential gross margin improvement. I know you said it, improve it, any quantification of that would be very helpful. Thanks.

Sure. So, the short answer is yes. We expect to improve orders of magnitude gross margin back into the 60s, not next quarter meaning Q4, but overtime, right, there’s two sources of that. There’s a more efficient cost structure that we have in the core business and there’s a higher margin profile for a CPaaS contribution. And so we’ll talk more about kind of target model, gross margin profile, I suspect in our earnings call next quarter when we close out the fiscal year and look forward. but we do expect an improvement in Q4, not on the orders of magnitude if you said 400 basis points in Q4, not so much. Coming – as you said, coming from where we are now with a trough hopefully, then that would be great if we start our client back up.

Would 50 basis points to 100 basis points would be reasonable?

Yes. We just haven’t technically given guidance on gross margin percentage per se, but you would hope to see some expansion at least in that ZIP code.

Got it. And then you, just with respect to the guidance, you raised the service revenue by $3 million and you kind of maintained the loss there and would have hoped, maybe, see some flow through of that should improved bottom line, is there anything you can point to there, why the bottom line didn’t improve despite the improved rev guide?

Yes. We, this was – this was part of our approach to managing a business. We decidedly invested a lot, really, the first three quarters of the year. And so it really was an anticipation of returning back to a more healthy expense growth and expense run rate. And so we saw this as part of our target and operating structure that we needed to get to, which is why candidly we’ve been so vocal about calling out that we are spending a lot of money historically here in Q1 and Q2 and Q3 on those two big areas of go-to-market, marketing specifically, demand gen and on our product innovation and technology. And so this was part of our thought process and how we saw it go forward. So, there’s no surprise to us and so far as bottom line, this is what we have been managing to.

Okay. Thanks very much. Appreciate it.

Yes, sure. Thank you. Good questions.

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

Nice quarter and thanks for taking my question. So, I want to drill back into the Avaya opportunity. So, my question has to do with there are, as you said in your prepared remarks, over 15 million Avaya seats out there, but also in talking to all the various channel partners, there’s hundreds and difference of Avaya implementations, right? Different operating systems, different integration. So, what kind of plan do you have in place to facilitate an easy win if it’s this version over this version to speed up some of that? Thanks.

Yes. That’s a great question, Catherine. And that was why some of the press we saw about how it would be easy just through quick relationships for competitors to migrate everybody all over to Avaya. I mean, as you know, even Avaya has multiple flavors of phones, I mean they have the SIP phones, but they have a whole series of other phones. So, there is no easy answer. So, we have built a lot of migration tools as part of it. As I indicated, we have had quite a few wins with Avaya customers and Avaya replacements, and they fall into three or four very broad buckets. And so that was part of the thing as part of our relationship with ScanSource as well as some – our relationship with the various VARs is to develop a series of very clear migration tools and processes, by which we will be able to migrate the existing Avaya customers.We also have kind of highlighted two, three, four features that are important to Avaya customers and made sure we tried to kind of prioritize them on our product roadmap, so that they are able to move forward in that area. And then that is also part of the relationship with Poly. We’re in some instances, where you have legacy phones and that are not SIP compatible. And so the ideas on those phones, we will work with poly to basically make it easy for the customer to be able to literally get a subsidized phone and transfer over to a very modern phone. So, this is a big, very thoughtful process that our team put together about a year, year and a half ago, and we’ve been systematically working towards it, because Avaya has 100 odd million seats; through ScanSource, we access 15 million of them, but my intent is to go after everyone that is in Avaya seat. And frankly, if you’re an Avaya customer and you have no exclusive relationship with Avaya, it is very much in your best interest to look out for what is your best option.We are a very credible option and since we particularly have one integrated platform with the contact centers already built-in, and we have the CPaaS and the video conferencing and it’s not a hodgepodge of stuff assembled together, we think we provide something very compelling for those Avaya customers and our intent is either throughout master subchannel or through of our channel to go after every one of them.

All right. thanks, Vik.

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

Great. thanks. question on, I know a part of the intent of Wavecell was to kind of bring better analytics to the X series platform and just wanted to get a sense of kind of progress on some of those initiatives. And then second on the professional services drag, just is that investment just due to growth or contact center kind of taking more professional services. Just any insight on that? Thanks.

Okay. So, Wavecell was actually – we have analytics, wavecell was actually to provide customization to our core platform. So, the example I would use and happy to set up a demo, because it really is kind of unique is, if you were for example a vacation rental company and you rent out a house and you call the contact center agent and say, I can’t find the keys, the normal approach would be okay, I’m going to get somebody in a car to go meet you at the house, so they can help you find the keys. With CPaaS, what you’re able to do is literally send a custom link, somebody presses it on their web browser and now, their phone becomes a camera and they can look around and say, hey, no, no, point the camera to the left or right, there’s your keys. Now, you’ve saved a huge amount of work and you’ve increased customer satisfaction.That’s one example. Also, the ability that if you have a phone call at the end of it, I can send you a quick link, where did you like the phone call, did you not like the phone call or something like that. That’s what CPaaS is intended to do. It adds that customization. It adds that customer engagement as an addition to our overall package solution. Callstats.io, which is the company we just bought, which is de minimis, actually no revenue, but a very interesting technology is for WebRTC. It analyzes all Callstats and flows for our – for WebRTC endpoints. So, it ensures that we have end-to-end analytics. So that’s something that’s core to what we did and now, we’ve added Callstats.io to add that to webRTC as well. But as I said, that's one part. Wavecell is intended to add the customization and that entire layer of personalization to both contact center and UCaaS and increasingly a lot of our customers are using that as a way to say, okay, it won't just be a context center, I'll be able to personalize my experience unique to my customers and we're seeing Wavecell be a significant player in that.I think with regard to professional services, why don't you take that Steven?

Sure. So professional services for us is mostly – and you know I've talked about this mostly deployment services. There's some element of higher margin, high value prop services, sure. But it's mostly deployment and the dynamic of those services is fairly different between more of the Flywheel FB model and a large mid-market enterprise deployments. By large mid-markets enterprise deployments are fairly understood economics and pricing and we still have some pricing power on that and those are not really massively loss making ventures for us.Where we have some work to do and we're thrilled that Sam is now taking this on as Chief Customer Officer and putting together all of the deployment and thereafter facing work with customers is looking at really partnering with engineering team and building a more fluid, less friction, higher speed deployment tooling. So our capabilities to drive leverage to get customers deployed quicker, faster, cheaper. And so it's something that we've begun the migration to. And so we're pleased with that and we expect to see improvements in our deployment gross margin over time. We going to see a huge lift in Q4 from that? Not so much, but I'm kind of looking at Vik and I'm sure that's on Sam's goals for the next six months to start driving that to be better. Does that make sense as far as the color of what – how that comes together?

I mean, that’s without objection so ordered.

Maybe, you there? Operator...

Mr. Marshall, your line is open. Your next question comes from the line of James Breen with William Blair. Your line is open.

Thanks for taking the question. Just a couple, a little bit on the margin structure as well. Is there any difference as you're talking about a lot of the sales this quarter with contact center. How does that in the mix excluding CPaaS, how does that impact the overall margin structure? And then around CPaaS, as you're getting scale there and you're getting the – there's a cost side to that equation, which I'm assuming you're getting some benefits there as you get bigger. Are you passing on some of that savings to the end user in an effort to drive higher volume growth like sort of what's the thought there in terms of the direction you go going? Thanks.

Sure. Vik and I will tag team on this. So the gross margin structure – the first part I apologize was I think our CPaaS in the first part was...

Contact center.

Contact center. Yes. So short answer is yes. The contact center gross margin is lower than UCaaS gross margin. And so the more contact center you do, that will pull it down more towards the mean. It's still above where our gross margin is right now. So doing more contact centers still pulls our gross margin up if we were to add one more dollar of gross margin today would have pulled it up. So that's an important message. But your instinct is correct.On the CPaaS side, it's a usage base volume model and so a lot of the economics for us are baked into a lot of the contracts with our customers at the time of signing. And so the margin expansion for us comes really from geography and product, less so from changing in pricing with existing customers. Over time do you have more pricing power with more value add services? Sure. But for the most part in the very, very core SMS message based products, we're really looking at maintaining pricing rather than driving savings and passing that on.

Great. Thank you very much.

Sure.

Your final question comes from the line of George Sutton with Craig Hallum. Your line is open.

Thank you. Steve, I wondered if you could just walk through the goal of non-GAAP profitability by next year's year end. As you're doing the planning process, could you just talk through the importance of that metric where you may run into situations, where you might otherwise want to invest for growth? I just wanted to get a perspective on that.

Sure. That that metric candidly is a top of the list for us. We are doing our fiscal 2021 planning right now. Had a board meeting a few weeks ago and started going through that with our board. Our whole team is oriented around that and we, we see that candidly as a very important sustainability and credibility factor to driving growth right? And it's a mix of driving growth, but driving profitability to support that growth. And so how we get there really is two factors. One is growing revenue and contribution at a higher rate and two is increasing costs at a decreasing rate. So it's the divergence of those two curves. When you ask how do you get there? That's how we expect to get there. And so what we just did the realignment we talked about was we removed a whole bunch of costs. And so that was good. We ratcheted it down the whole cost structure and we will look to increase costs at a decreasing rate.

And the part I would add, this goes back to the conversation I think we've had in the past about the platform. The whole idea of a platform is that you have multiple technologies with shared services on one common structure and some of the painful things we had to do, we did, now I guess nine acquisitions over the last few years is to put everything together with one common engineering team, which means anything that gets developed with context center also applies for unified communication. Any analytics and this I think was one of them made as questions. We had acquired this company, MarianaIQ, which provided a layer of analytics. That entire analytics applies for everything from CPaaS to UCaaS to video conferencing to our context center, et cetera. So that leverage of a platform means that for one more incremental dollar of engineering spend, I get a lot more productivity as opposed to, I mean there's probably 30% to 40% shared between all of these various technologies. So that's one.Second, increasingly because you're selling a platform to your customers, the same CAC can now be leveraged because once you sell UCaaS, you can sell the video conferencing, you can sell contact center, et cetera. This is all part and parcel of our core strategy. That's why you started to see engineering costs moderate even though our innovation continues at this kind of pace. And then at the lower end, the big investments we've made in e-commerce is so that the lower end customers, we can increasingly send more and more towards e-commerce because then that CAC goes down. So from that perspective you can kind of see how all the chess pieces over the last few years and the massive investments over the last few years are now starting to get to a point where they bear fruit and that's how it'll be reflected in our FY21 planning process.

Great. One last thing. Relative to our CMO change, we've obviously seen different iterations over the years relative to search engine optimization and the branding focus. What generically would you say might be different with our new CMO?

So, I mean the Marge has been and she is a very experienced CMOs. She was at MicroStrategy, so knows analytics. She was a CMO of Informatica, CMO at BEA, a very Senior Marketing Executive at HP, at SAP. There are very few people with that breadth of experience. She's been there, she's done that everything from and she's very familiar with this whole concept of platform. So more and more we're heading towards platform and then leveraging the platform to basically get maximum utilization and CAC. So I think you'll see Marge continue to focus on efficiencies, digital spend, go-to-market on channel, branding, product marketing, et cetera, and kind of combining it all together. But as I indicated, what Marge has done as she's come from an analytics background and a platform background, which we think gives us a huge edge.

Perfect. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.