Greetings and welcome to RingCentral Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Paul Thomas. Please go ahead.

Thank you. Good afternoon and welcome to RingCentral's third quarter 2018 earnings conference call. I am Paul Thomas, RingCentral's Senior Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO; Dave Sipes, Chief Operating Officer; and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Dave, and Mitesh, followed by Q&A. Some of our discussions and responses to your questions will contain forward-looking statements. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today’s discussion. RingCentral assumes no obligation and does not intend to update or comment on forward-looking statements made on this call. I encourage you to visit our Investor Relations website at ir.ringcentral.com to access our earnings release, slide deck, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today’s call, and to learn more about RingCentral. For certain forward-looking guidance, a reconciliation of the non-GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, let me turn the call over to Vlad.

Good afternoon, and thank you for joining our third quarter earnings conference call. Third quarter results were excellent. Revenue growth, non-GAAP operating margin and EPS came in at or above the higher end of our guidance ranges. Our core subscription performance led by our mid-market and enterprise business and momentum with our channel partners continues to be strong. And we expanded our product portfolio and TAM with the acquisition of Dimelo, a leading B2C digital customer engagement platform. Let me begin by covering some of the key highlights of the quarter. First, total revenues for the third quarter grew $274 million. This is a 33% increase year-over-year above the high end of our guidance range. Second, our core subscription business normalizing for the legacy AT&T base continued to outperform. Core subscription revenue grew 38% year-over-year up from 34% in the same quarter last year. Third, mid-market and enterprise business continue to lead the way. We define mid-market enterprise as 50 seats or greater. This grew 75% year-over-year and is now a $270 million annualized business. Our enterprise business defined as customers with $100,000 or more in annual recurrent revenue or ARR grew over 100% year-over-year. By itself, this business is now over $145 million. Fourth, momentum with general partners continues. In the third quarter, our general business grew over 90% year-over-year to over $160 million. Fifth, we again saw outstanding performance internationally with several large deals in U.K. and our first million dollar plus TCV deal in Australia. Finally, this quarter, we extended our relationships with both AT&T and BT. AT&T agreed to reengage with RingCentral and has restarted selling corporate account, which is based on that RingCentral platform. AT&T plans to sell the solution through direct and indirect sales channels to enterprises and to vertical sectors like financial services,…

Thank you, Vlad. It was a great quarter and we're pleased with the continuing momentum in our mid-market and enterprise business. We continue to build on our mid-market and enterprise momentum by expanding both our direct sales presence and channel partnerships across the U.S. as well as internationally in Europe and Asia. Asia. Channel continues to be an important part of our enterprise success. This quarter, over 80% of our top 20 largest deals came through our channel partner network. Let me walk you through just a few customer win examples from our third quarter. We have highlighted in the past that enterprise businesses with large workforces dispersed across a significant number of retail locations are well-suited to benefit from RingCentral. This quarter we have a new major win with Monroe, a leading automotive services company with RingCentral Monroe can centrally manage their thousands of locations. In addition they plan to adopt our team collaboration capabilities clip across both their corporate and retail locations. Also this quarter intersection, the smart cities technology and media company chose RingCentral essential to power communications on over 1,500 digital kiosks that are transforming urban environments such as Lync in New York City. This has the potential to grow globally as intersection enters new over markets across the world. Our open platform continues to grow rapidly and is a key factor in many purchasing decisions. CRM applications are among our most popular integrations. For example, this quarter, RingCentral signed the Tampa Bay Buccaneers. The Bucs are replacing a legacy Avaya system and chose RingCentral for its ability to easily integrate with their cloud CRM system. This is the third NFL entity to choose RingCentral. Internationally, we continue to expand the capabilities of RingCentral global office. This quarter, we added two more countries with native dialing…

Thanks Dave, and good afternoon, everyone. Before I begin discussing RingCentral results, I'll ask you to refer to the slide deck posted on our IR website. This provides the key points of our call today as well as supplemental information. We adopted ASC606 of January 1, 2018 under the retrospective method. We have provided comparative numbers for the respective periods of 2017 in the slide deck and press release. Unless otherwise indicated, all measures that follow our non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings press release and in the slide deck. With that, let's move on to the results. We had an outstanding third quarter. All our key financial metrics came in at or above the high end of our guidance. This was led by continued strength in our midmarket and enterprise business supported by channel partners. In the third quarter, our subscription revenue grew 32% year-over-year to $158 million up from 30% a year ago. Our core subscription revenue normalized for the legacy AT&T base grew 38% up from 34% a year ago. Total ARR grew to $674 million, up 31% year-over-year and ARR for RingCentral Office grew to $592 million up 36% year-over-year. Our performance again was led by robust growth in mid-market and enterprise business. It was up 75% year-over-year with ARR of $270 million. Our enterprise business of over $145 million growing in triple digits year-over-year, represented over half of this business. As it relates to new sales, the share of mid-market and enterprise business was over 60% for RingCentral Office, up from over 50% a year ago. Channel partners again made a significant contribution to our growth. ARR from our channel partners was over $160 million and grew more than 90% year-over-year. In addition to…

[Operator Instructions] Our first question comes from the line of Terry Tillman with Raymond James. Please proceed with your question.

But first congratulations on the quarter. Great set of results. Mitesh I wanted to ask you specifically as it relates to the Enterprise business. It’s a scale that is now still seeing the triple digit growth? I'd like if you could get some more details on maybe some of the drivers kind of that is driving at triple digit growth, it is much higher level now revenant?

Yes, it was a good quarter. Good performance from our Enterprise segment as you said. It’s a $145 million business, going very nicely, still over 100%. So, I'll provide color in two ways. One is the large deals we saw. And then what it means in terms of land and expand. So, in terms of large deals, this third quarter is being albeit a seasonally slow quarter. We saw a record number of deals over $1 million. It was up from Q2 last quarter and from Q4 of last year so seasonally slow quarter, but it actually outpaced the momentum of both last quarter and seasonally strong Q4. What is interesting is that, within that if you pass it out even further, 80% of those new deals were new logos, so that provides a land and expand opportunity in the future so that's on the new logo side. Now, if you look at the expansion side, we had shared at the Analyst Day that only about 15%-ish, Terry in our midmarket and enterprise installed base is penetrated. So that itself gives us a lot of headroom to grow just within that installed base. One example we gave in this quarter was Red Lobster where we saw a 10x increase in the seats from 200 seats to 2000 seats this year versus last year. So that's just one example of - and there are many more like that in terms of land and expand. So just to give - to summarize landing record number of new logos with expansion potential which then drives future business lends itself to a very durable growth story in the future.

And I guess my follow-up question and I'm not sure who this is for, so I’ll just - I'll throw it out there, because again I think I got some really loud background noise. With Dimelo, I mean, I get it in terms of it's a large market, customer engagement, messaging, conversational messaging et cetera. It's a high growth area. But, how are you all going to tap that market and are there any synergy opportunities maybe some things you've been doing on kind of vertical selling in retail or financial services. But I'm just trying to understand the go-to-market on that, it seems like a big growth opportunity, but it feels like it's a little bit different than kind of knowledge work or productivity and things of that nature that you focus on. Thank you again. Take care.

On Dimelo, we're seeing a way to expand customer engagement for our customers in addition to voice centric context on our solutions and adding digital focused agents as the new employee - the new consumer generation is using messaging, in app, social to much greater extents to connect with the businesses. And this allows companies that have large engagement or large brands, typically consumer facing brands that are engaging with customers in high volumes to centralize that activity through administrative portal and often becomes their first opportunity to move to the cloud as they've been on some of the largest legacy systems historically. Our customers have been very receptive in initial discussions with them at adding this type of capability and we think it's a way to add non-voice capabilities to our current offering as we see that growing over time. For verticals, we see this has penetrated historically large telecoms, financial services, large brands that are dealing with a lot of consumers and that gives us additional vertical capabilities to align with where we've been successful historically with healthcare and financial services.

Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.

So, Mitesh maybe I'll start with you. So, if we think beyond the fourth quarter guidance, how should we think about the balance of growth versus margin expansion going forward, any light you can share on that?

So, let's start with the growth first and then we'll double click on growth with - growth economics, then investments we are making and then we'll wrap up with margin and then we'll dive into a longer term for fiscal 2019 beyond fourth quarter. So, if you look at the growth itself, it was a strong quarter across the board. Our core growth rate was 38% ex-AT&T and if you look at how qualitatively we perform, we did break away further from the back in terms of competition. If you look at Gartner’s results, we further were up into the right. So, that’s good. But that's right, so that's growth. But what's as important or if not more important are growth economics who drive the growth with the cost of book and then retention. And we saw improvements in both those measures. So if you look at cost-to-book our mid-market and enterprise cost-to-book was down or lower year-to-date versus last year. So we are seeing some sales cycles shortening and the margin given the improvements and awareness of the cloud space with the larger enterprises. So cost-of-book is coming down, and on retention, customers are staying longer and they're buying more. So with the growth and growth economics working, the bias is to keep investing and further separating from the back to capture this unbounded story here. And so we will be investing in our go-to-market segment with pipeline generation, demand gen, brand and then also on our product roadmap, product portfolio for the separate the lead on innovation. But having said all of that, to wrap up with margin, now we will show operating margin expansion the way we've been doing previously and we'll be growing in a fiscally disciplined manner to drive shareholder value just the way best-in-class companies do. So that's sort of the overall backdrop for growth versus margin tradeoff. If you look at be on the fourth quarter for fiscal 2019, we're not going to give out specifics on 2019, we'll have to wait for the fourth quarter guidance. But I do want to highlight a fact that as you guys do your models, look at sequential trends the way we have been in the past and model accordingly. So that's one, but overall, we feel really good about the long-term prospects of the business here. And we have some long-term drivers which are new in place and I think that’s, that will help the long-term potential growth of the company.

And just following up obviously there’s some good news with some carrier partnerships this quarter versus maybe what we talked about previously, it sounds like there's much more of an enterprise focus there. I'm curious has that helped your enterprise business already in the third quarter and when should we see that as a real accelerant to the enterprise thereof? Thanks, guys.

This is Dave Sipes. So, we were happy to announce both the AT&T expansion and BT expansion into their FBT into the corporate segments and major account segments, that’s up to a 1,000 employees and then major accounts is over a 1,000 employees segment has been the preferential UCaaS provider in that sector and with AT&T expanding the relationship. Those are still very early. We’ve had very good receptivity with AT&T sellers. As we've been able to roll it out, we still have significant enablement that will go on with some sellers that this is new to them, some that have been with us for a long time, have been with AT&T for a long time. They're able to sell immediately, but I would say it's still at the very early stages but we've been very happy with the receptivity and enthusiasm that we're seeing.

Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.

First, I just wanted to kind of ask a question on what you're seeing on sales cycles. I know the past couple of quarters you had some examples of very quick wins, but just overall what you're seeing as far as kind of in the mid-market how long it's taking to achieve sales? And then second, the gross margin was on the subscription was obviously extremely impressive this quarter, and just wondering how to think of the progression of that or how we should think about how high kind of subscription gross margins can get since we're kind of above where your targets were? Thanks.

Meta, this is Dave, I'll start do with the sales cycle and then I'll hand it over to Mitesh for the margin question on the sales cycles, we've talked about it being six months to nine months that may be shortening at the lower end to maybe four months to nine months. In some instances, we do have instances like Technology One, which is $1 million dollar deal we announced in Australia of being under two months in sale cycle. So there are examples of very large deals that are coming quickly, but overall, we still see that kind of similar trend with maybe a slight improvement.

Meta on the gross margin side, yes, it's - so the gross margin, there are two dynamics going on. One is underlying, we are seeing scale take over where we are seeing our fixed cost spread over a larger base. So you're - seeing scale in that. We are also seeing our scale in or cost reduction in our Telco-costs. So, those two are helping the cogs and the gross margin, the offset is our contact center business which is inherently a lower gross margin business. If you add the two together, again this quarter we did punch over 83%. But as contact center take share over the long - long run, in the next year or so, I would model gross margin around an 82% zip code plus or minus. That's the way to think about gross margins. Still, a very - still very healthy over 80%, but look there will be some pressure on the - with the contact center so that's the way out to model it.

Our next question comes from the line of Bhavan Suri with William Blair. Pleased proceed with the question.

David, maybe I'll start off on to the international business here. You've had some really nice large international deals throughout the last couple of quarters. I guess Mitesh maybe, I'll direct it you first and I have one follow-up for Mr. Sipes there. But I just have to understand that what the drivers are and then sort of how you're expanding or what the plans are for expenses I think U.S., and sort of how do you see the trajectory of that business over the next say three year to five years, some of those maybe mix and things like that and then what the drivers are?

So, international remains an interesting vector of growth for us. It's in the very, very early stages, but it remains a key growth future driver, which will be layered onto our story in the upcoming years. So, I'll give you color in three dimensions. I'll start with the performance of international. Then we'll talk about the investments you're making as you asked. And then we'll tie it in with the recent BT expansion and the Dimelo acquisition. So, starting with the performance on the international side about if you look at the all the deals we had over a $1 million, 20% of those deals came in through the international markets in the U.K. and in Australia. And the story is, is just the same playbook. Large companies are ripping out their Cisco and Huawei boxes to go to the cloud, so that's what we are seeing. We added two deals this quarter. Technology One in Australia and Financial Times both marquee names in the UK. So, we've seen some momentum there and why are they choosing us, they're using us for two simple things. One is the global capabilities we have to stamp out countries across the globe. And second is our open platform, because more and more enterprises want to tether other applications to their core communication stack, so that’s in the performance. So given the early success, we are going to be doubling down and investing in the international markets in brand in both direct and the indirect channel and that will all take hold and ramp next year very nicely. So that remains a future driver for us. And the third point on BT and Dimelo, they are both again new emerging long-term drivers for us. Again as Sipes mentioned earlier and we mentioned in the call, we expanded our relationship with BT with - to open up their - our solution to their enterprise and mid-market accounts, which was not done before. So that remains a vector and Dimelo’s acquisition gives us a good start in France because most of the success has been in Europe or in France. So that gives us something to start with. So, hopefully we’ll be able to cross-sell in other international geographies.

It’s really helpful Mitesh, I guess. Maybe one for the broader group there, David, I just you need to jump in here. It’s always build versus buy for loss philosophical question exists. And your approach so far clearly seems to be in resonating either correct one given so the current market position. But how do you think about this? Obviously, you’ve made some acquisition. But you’ve also done some organic investments and growing internationally because you think about products that some of the philosophical how you think about oversupply at sort of the strategic benefit of either one? Thanks.

Vlad here. Maybe I’ll take this one. We’ll look to be clear. So with Dimelo, yes we've acquired you know a French company here and certainly they have a very nice foothold there with great accounts like alliance and orange and you know a few others. But we don't view them as an - as a French play or you play you know it’s - we view them as a global play. The digital channel engagement platforms that they provide is needed by enterprises channel engagement platforms that they provide is needed by - by enterprises, and in particular, by brands across the globe. So this is just to clarify that. But to your question, okay, well when do we build versus buy? Look, we've had a very consistent message over time. We are about - it's not really about build versus buy for us, it's about how do we deliver the best user experience, the best value and the stickiest most engaging products that we can. If we can buy to plug up GAAP or two, then we will. And this is our second acquisition now. As I think most of you know, our first acquisition Glip was very, very successful, has differentiated us in a very meaningful way. To this day, we are that only scaled up provider with full UCaaS, full cloud phone system, as well as team messaging and collaboration all of the same platform, and now all seamlessly integrated into the same app. So there's been really great for us. One - was of enterprise account, including many of our 7 Digital CV accounts came through that and I have to say you know it's very early with Dimelo, but we are - we're optimistic with the announcements has been well received by the end of this community. I can't share that we've got some - let's put it this way, we have not had any negative customer feedback on this. And people are intrigued. So yes moving forward, even and when we can find other nuggets of advanced world-class efforts that we can acquire we will. Whatever we cannot acquire, we’ll develop. And as a reminder, we are at our scale now and our growth, our commitment to technology, and R&D really dwarfs at this point - works the next guy down line by like a factor of four now. So we expect that those continual efforts will continue bearing fruit.

Our next question comes from the line of George Sutton with Craig-Hallum. Please proceed with your question.

Vlad let me follow up on the last question with a little bit more of a direct question relative to both video and contact center. Two areas where the trends are obviously around acquisitions and having them fully integrated. Is that a goal of yours or do we read the continued increase in R&D as you know really you are going to pursue some of these things by an internal bill?

Yes. Look, yes, no, I appreciate the pointed question here. But it’s pretty much the same answer. So - but let build again on Dimelo. The thing with Dimelo is that even though it was not a huge company, actually a fairly small company, but in our judgment, they had and frankly in many other people's judgments, including all of their customers and even companies like Apple, who selected them as one of the very early integration partners for Apple business yet. So that's, that's a big deal. So, what this team was able to demonstrate is very high end polished digital customer engagement capability, which is really second to none. And this is why people have been continuously selecting them over much better established companies. For example like Genesis, who have some of the similar capabilities, but not nearly as polished. So, we felt this was a little bit of a diamond, and so we’ve integrated, as so as to your question then okay what's next as far as the contact center is concerned, Dimelo is a contact center to be clear. It does not have the voice capability, but it has every other capability and as they've already mentioned we believe that the world is moving to at least augment voice with digital channels. But more and more people probably will be using less voice and more non-voice messaging, in app messaging social media and the like of that texting. So, so anyway that is definitely our foray into the contact center space. We do expect to continue working with in contact nice close that we have been therefore, we have a very differentiated product. And look I'll just have to say we will have to see what the future brings. Eventually we do see RingCentral offering a world-class industry leading, and hopefully in time, Magic Quadrant leading as well, technologies in voice contact center, as well as non-voice. So that ones on the contact side. Yes, and with video, what similar answer. We’ll provide best available experience in partnerships, if we have to through its position if we can or our own development if - as necessary. But for now, we’re very, very happy with relationship there.

Thank you. You pointed out a Glip related win, I'm just curious can you give us a sense of how broadly that is getting adopted?

Yes, we're seeing Glip adoption very strong in our large accounts, that’s become part of our standard implementation process. It's also been standard in our pre-sales activities. We've been very happy with the adoption we're seeing there across some of these big accounts and it's really product we bought three-and-a-half years ago, but we've kept improving it and it's gotten to the point where it's a world-class solution that we're proud of.

Our next question comes from the line of Nikolay Beliov with Bank of America Merrill Lynch. Please proceed with your question.

Hi, RingCentral team. Congratulations on the results here. Mitesh, to start off a question for you, just a little bit more puts and takes on net retention rate in the mid-market and enterprise and call that translates into sales and marketing efficiency, which has been increasing. When you look at incremental sales in marketing dollar producing incremental prescription revenue that’s being big and better.

Sure, Nikolay. So if you look at the net retention, it's driven by two things; our gross churn and then upsell. And let's start with the first one, gross churn. We did see record low gross churn this quarter. If you look at our office business, the gross churn was up 10% annually. So it was the lowest we've ever had and it's basically as you know, it's driven by in large part the move to midmarket enterprise customers because naturally the business mortality is lower and it's stickier. That's on the gross churn. On the upsell again, we saw a very strong upsell quarter this time as customers bought more seats and bought more products like contact center or global office and some of the video capabilities. So one example we shared was Red Lobster earlier. But again, there are several others like Avery Dennison which is a total potential customer of 20,000 seats again tripled its footprint from last year to this year to close to 2,000 users this time. So combining both the gross churn and upsell led to a very strong net retention quarter that it was about a 130% again for the midmarket enterprise segment. And as the flywheel keeps on turning, it leads to a higher predictability in the business model as we march to a $1 dollars in revenue.

And Mitesh my follow up will call that ties into improving sales and marketing efficiency?

Yes, exactly. So that - it's a virtuous circle right. So we have got lower churn, more upsells and then our cost-to-book is coming down. Even though we are moving to the enterprise segment, so these three factors combined is very, very accreted for the business model. Now what we don't see from the outside in is that we’ve been taking all that money and then further reinvesting it into pipeline we’ve been taking all that money and then further reinvesting it into pipeline, into demand gen, into a brand. So, over the next year or so, we'll hold sales and marketing as a percent of revenue flat or slightly up ,but underlying we will maybe at the next Analyst Day further show you how the unit economics have been further improving. So that's the way to think about it.

And last quick question for you, one thing that we're hearing from your partners is that you've done a pretty good job surrounding your call center OEM relationship with additional tools that are resonating with customers. And if you can just refresh our memory what they are and the type of used cases they drive, and how does that jive with Dimelo? Would call center customer also maybe acquired Dimelo, whatever reasons or just trying to like get some clarity on the used cases between the existing call center solution in light of the enhancement versus Dimelo?

And this is Dave Sipes. So, I think the question is how we surrounded the contact center with additional capabilities. Well, Glip has been core to that and surrounding agents and spreading information out across the entire organization not just keeping it in the contact center to that and we announced Pulse, which creates smart alerting within a contact center and notifies back out through Glip’s into the rest of the organization. We also do standardization or synchronization of contact center teams with team messaging teams. All of those capabilities are definitely fruitful opportunities for the new Dimelo product as we look to enable those digital agents to also have access to the entire company as well as experts within the company. So, those are things that we’re considering, so stay tuned as we announce new integrations with that product.

Our next question comes from the line of John DiFucci with Jefferies. Please proceed with your question.

This is [Samad] here for John. A couple of questions, if I could. First, a very nice strength in the enterprise and mid-market. I was wondering if you think about the growth there, could you maybe help us test out the growth in average deal size versus the growth in units? Just trying to get an idea of what the bigger contributor to that very strong performance stays on the enterprise mid-market side of the business? And then I have a follow-up question.

I think the average, I think we’re seeing both. It's a mix. The deal size is getting larger and, as well as we're seeing a pickup in units. So, you're seeing and that's where, if you look at the ARR, we publish for the mid-market enterprise segment, which is $270 million business, that actually takes into account. It normalizes for all of that. So, you don't have to then try and divide by the deal size or deal duration. It's all normalized for that.

And then maybe one for Dave Sipes, on the - congrats on the first $1 million plus in Australia. I guess, could you help us understand maybe how penetrated UCaaS is in that market and compared to North America and EMEA and any potential competitive advantages that RingCentral has it tries to penetrate that market?

I think UCaaS is still new across all these markets. We know legacy has the dominant share today, but is shrinking in size over time. In Australia, there's been a big push on fiber a role for the whole country that's helped ancillary services like UCaaS. And so we're seeing great reception when we went into that market, we've been in there with our channel team less than four months, we've already signed up 50 partners in that market and help to contribute to the technology one win, but the receptivity is very high so we've been encouraged with the expansion there.

And Mitesh, maybe just one housekeeping question. On that fourth quarter guidance, is there any contribution backed in from Dimelo? I know it's not specific material, but is there any revenue in that from that from Dimelo and the new part of the AT&T deal. So the incremental part of the AT&T expansion. Thanks again.

So both are totally insignificant Dimelo it's a very small company, it's more of an aqua hire, so nothing significant there. And on AT&T again, we just signed a contract in September, so it takes a long time for the recurring revenue base to bill, so not material at all. But that said both these - what you said as both these are very, very interesting long-term drivers of the business, and we expect in the - over the next couple of years both will contribute pretty meaningfully, hopefully, aspirationally to this - to our growth vectors.

Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed with your question.

I just wanted to follow-up of a couple of the comments that you had in your prepared remarks, you talked about the success you are having with the partner community. I was just wondering if you could help us think about the percentage of your enterprise deals that partners are driving now and kind of may be what that looks like a year ago? And then also how much larger would say your lands are now versus a year ago in these large partner led deals, and I guess the last metric Mitesh would just be you guys talked about lower churn. I'm just wondering if you could share with us kind of the delta between the enterprise customer churn and the rest of the population. Thank you.

So this is David. So on the, I think one question there was the enterprise and how is channel contributing to the enterprise. I think we're seeing it in over about 70% of the enterprise business. We've been able to continue to grow the channel strongly. We had a record number of new partners signed even quarter-over-quarter, it's up almost 25%. We've been able to sign a couple of very large partners, for example, like PCM, which is a national partner, which is a large Cisco dealer, which is over $2 billion in annual revenue and 800 direct sellers, as well as a second one AGC, which is the large global Avaya partner. So those have helped as we've moved into enterprise to add the reseller - the partners that have been more enterprise focused over time, and so that's where you've seen the positive contribution. I hand it to Mitesh on the margin question.

I would just clarify one thing what Dave meant to say is that the 70% is of the new deals we signed, not of the total base. So just I'm sure you picked up on that, but just wanted to clarify that to set the script straight. In terms of the churn, Heather, the delta is pretty sizable where the gross churn for the mid-market and enterprises is less than half the churn, gross churn of the SMB side. If you just look at the enterprise side, I don't think we've lost a single account. So it's sort of almost like zero. But if you combine the mid-market and the enterprise, it's a sub-5% annual gross churn rate, and then the other SMBs over 10% so that’s the way to think about it.

Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.

Can you talk a little bit about how you're dividing up the new resources that you're bringing on board, given the success that you're having in the mid-market enterprise versus what resources are still going towards the more traditional lower end. So in other words, how are you dividing up the hiring is specifically in sales marketing and R&D?

This is David Sipes. We continue to expand the upper ends as we fight from both strategic as expanding into that category as well as having lower churn and longer life of those revenues. So, we have been expanding the up market teams. And we do that a rapid pace as we grow new business and new pipe into that channel, into the segments.

So, Sterling, just to add on to what Dave said exactly what he said, but also what's happening is as you the SMB segment is a very, very efficient for us and it's a machine for us to generate profitability and we are taking all those dollars as we had highlighted at the Investor Day and re-funneling those dollars into the enterprise pipe. So that's what is happening under the hood.

Our next question comes from the line of Michael Churn with Deutsche Bank. Pleas proceed with your question.

Core subscription revenue growth actually accelerated on a tougher comp to 38% growth. Wondering if you can walk through some of the key factors driving that strength? Is there any commentary you're able to add around either ramp reps or underlying productivity trends you're seeing?

So yes, the core revenue did accelerate at 38%, I would please do not extrapolate that, but because soon we'll be at 70% and that rate. So, don't set the expectations there yet with a tough call, but a couple of things we - it was a broad based trend. And I'll point out to one or two or three factors that led to that. First is again the enterprise in the mid-market segment that growth rate was over 75% on a base of $270 million-ish. So, about quarter or 30% of our office business is coming from the enterprise and mid-market side that provides obviously a natural tailwind to the overall growth rate. That's one. And second is in terms of the ramp, we are seeing a little bit more of our enterprise sales folks being ramped. So that is providing a natural again a second tailwind to the productivity there. So that again we saw that phenomenon as well. So both those together led to the 38% growth rate uptick.

And then just going back to the churn comment quickly, you’re seeing record loss in gross churn, Mitesh, I’m just wondering how much room for improvement there still exists in your aggregate as you continue this move up market into the channel? Thanks.

No - it's a good one Michael. So if you look at the churn as Heather asked, if you look at the upper end of the segments the churn is up 5% annually and the SMB side it's little bit over 10% now as this mix shift continues towards the upper end and it's a mix shift issue or it’s a mix shift dynamic. Over 60% of our new business is coming from the upper end. So as the mix take holds even shifts even more to the upper side. You can see maybe a point or so point or two points over time of an improvement just because of the mix shift and hopefully we'll be performing organically better in the SMB side as well. So, I think you cannot expect churn to just asymptotically go to zero, but there are a couple of points of tailwinds there over the next couple of years.

From here now, please limit your questions to only one question. Our next question comes from the line of Catharine Trebnick with Dougherty. Please proceed with your question.

Mine's on resellers. Is there any way you could tell us how the top maybe three performed year-over-year this year versus a year ago? And anything different you did to support sales enablement or new portals or any type of pricing to help stimulate the growth rather that segment? Thank you.

Sure, Catharine, it's Mitesh. So nothing different in terms of sales enablement. We all are trying to do the same thing and it's a pretty formulaic equation there. I think what we've been hearing at least from the channel partners is again, it's about the product that's driving it. And the ease of use and the way our global capabilities are, is what's really driving the momentum in the channel side. And if you look at the contribution from channel partners, it's been very consistent year-over-year.

Our next question comes from the line of Matt Van Vliet with Stifel. Please proceed with your question.

I guess, as you look out towards 2019 and even your 2020 revenue target, where do you feel like you're at in terms of sales coverage from your quota carrying reps maybe in the U.S. versus how much more growth you need internationally? And then how should we think about the mix of increasing sales and marketing spending going to sales productivity enhancements versus marketing versus overall headcount growth?

Yes. I think the question is how do we see expansion of those upmarket teams. And we continue to still see a lot of opportunity domestically. There's huge demand internationally also. So, we carefully try to measure the best bang for the buck and where we expand the team. But we do see opportunities across the board to continue to expand that team.

Our next question comes from the line of Brian Schwartz with Oppenheimer Funds. Please proceed with your question.

[Indiscernible] for Brian Schwartz. Congrats on the quarter and thanks for taking the question. I had questions either for Vlad, David or Mitesh. So, Dimelo is one of the preferred vendors for Apple business chat and that's great and I believe it also can provide messaging on Facebook Messenger and WeChat too. Just curious to hear your high level thoughts on Google's NexGen as the next platform for first Android platform, I think they call it the rich communication system? And is the Dimelo Technology set up to quickly enter that messaging channel opportunity in the future? Thank you.

Brian, it’s Vlad. So firstly, just to clarify, we hope that Dimelo will become one of Apple’s leading partners or providers. But for now, they've been, just to clarify what I said is they’ve been chosen as one of the very early integration partners. So, we'll have to see how it develops. But obviously it’s not a good place to start from. Look as to Google, there is nothing - there is the thing we most liked about the Dimelo platform is actually channel agnostic. So what this means is that really is a smart of it is in the queuing engine and ability to direct messages from any digital channel to the most appropriate agent and keep track of all of these threads in a same manner. So they already integrate with a wide range of providers where messages can be originated from and some of the bigger names now, Apple, WhatsApp, we certainly - Facebook for that matter. We certainly expand them as new technology becomes available, we’ll absolutely expect to be within the first echelon of available integration. And as you all know, we have a pretty special relationship with Google. One of our Board members is a very senior executive there. So I would be very surprised if somehow Google's integration is lacking with us.

Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.

This is actually Charlie Erlikh on for Will. Just had a quick one on the competitive environment. Any changes overall from your perspective and how are you thinking about some of these entrance like Google and Zoom and also Avaya as they push more towards the cloud? Thanks.

Maybe, I will take. Well, look it's a really great question because what we see so far is a little bit of a repeat like we saw with Microsoft and Cisco a couple of years ago whereby there were all the announcements and media and all of that, but the products haven’t materialized and as a matter of fact they still haven't materialized to this day. And what we hear is that for example if couple of years ago people were always asking, well what about Microsoft, what about Cisco. Now people are asking, they keep our cable, what about Zoom, what about Google. The truth of the matter is none of these companies and that includes still to the Microsoft and Cisco and Avaya and some of these new entrants. They really don't have a full featured UCaaS product. But some of them like with Google they've just announced a - that they made an announcement a few months ago, we haven't got much sense, Zoom has pretty much stated that there will be mostly competing with Skype, Skype for business. I think they even mentioned that some of the call or the user conference saying that for higher end - higher requirements enterprise implementations is a point people in our direction. It’s a very, very heavy lift as we found out the hard way and you know where it has there is a wide mouth and we have one of the probable world's largest dedicated teams on this and that includes any vendor you can think of. So yes, I mean we have to see how it will develops but just way we look at it, very large market, very under penetrated and where is the lead. We are doing everything we can from this side. And I can assure you to stay in that lead and improve the gap.

Our next question comes from the line of Jonathan Kees with Summit Insights Group. Proceed with your question.

Even though I have a couple of strategic questions, I’ll make mine easy. I just want to - it will be more housekeeping. My question is more on the - I think, quite catchy did you go over the number of significant deals that you had, 7 digit TCVs and then the number that were also included contact center? Thanks.

Sure, Jonathan. So we’d give some color on that. We said that Q3 deals for $1 million TCV was a record this quarter, you know seasonally slow quarter, we did have more deals than last quarter and versus the strongest quarter, we had which is seasonally strong Q4. And those deals did include contact center as well. So what we saw in the $1 million TCV deals was pretty interesting dynamics. We saw more than 70% come to the channel. We saw a mix of contact center. We saw International and we saw some mix of vertical, so it was a really, really broad based strength in the $1 million TCV side and also overall if you look at the enterprise segment and the overall business of close to $150 million, it was a very, very broad based trend across verticals, across channel. And so hopefully this momentum is here to stay.

Ladies and gentlemen, we have reached the end of our question-and-answer session. And this does conclude today's third quarter earnings call. Thank you for joining. You may now disconnect.