8x8 Inc (EGHT) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 fourth quarter and year-end fiscal year 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions following at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. Now, I will turn it over to Ms. Joan Citelli, 8x8's Director of Corporate Communications. Please begin.

Thank you, and welcome, everyone, to our call. Today, I'm joined by 8x8's Chief Executive Officer and Chairman of the Board, Bryan Martin, and 8x8's Chief Financial Officer, Dan Weirich, to discuss our results for 8x8's fourth fiscal quarter and fiscal year 2011 ended March 31, 2011.

If you have not yet seen today's financial results, the press release is available on the investors tab of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions.

Before I turn the call over to Bryan, I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.

Expressions of future goals, including financial guidance and similar expressions, including, without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor sections of our annual report on Form 10-K, in our quarterly reports on Form 10-Q, and in our other SEC filings and Company releases.

Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law.

Thank you. And with that, I'll turn the call over to Bryan Martin, Chief Executive Officer and Chairman of the Board of 8x8.

Thank you, Joan, and good morning, everyone.

I'm going to provide an overview of the quarter and full fiscal year ended March 31, 2011, and then we'll update you on several accomplishments and on programs where we've made some significant progress during the quarter.

Dan is then going to provide a detailed review of our financials and their trends, and at the end of the call, we'll open the lines for any questions you may have.

I'm very pleased to report record revenue of $18.2 million for the fourth quarter of fiscal 2011, up 15% from the same period last year, and $70.2 million in annual revenue for fiscal 2011, up 11% from fiscal 2010.

Of even greater significance is the 24.4% increase in revenue from 8x8's business customers between fiscal 2010 and fiscal 2011. Our revenue growth continues to accelerate. In fact, the growth rate increased from quarter to quarter throughout the past year.

Net income increased 80% year-over-year in the fourth quarter to $2 million, or $0.03 per diluted share, while net income for fiscal 2011 increased 67% year-over-year to $6.5 million, or $0.10 per diluted share.

The Company generated cash from operating activities of $8.6 million for the fiscal year, and we bought back approximately 3.59 million shares of stock for approximately $7.81 million over the same period.

Our subscriber base grew by 1,134 net new business customers during the fourth quarter of fiscal 2011, and 3,957 net new business customers during fiscal 2011 for a total of 24,385 business customers as of March 31, 2011.

In the March quarter, we added 3,009 gross new business customers compared to 2,798 in Q3, with an average lines and services count of 11.7 compared to 10.5 in Q3. Overall, our average lines and services per business customer increased to 8.0 versus 7.5 in the same period last year.

In February, we announced the augmentation of our go-to-market strategy for sales of our business services through distributors, direct and indirect resellers, and system integrators to further penetrate large distributed enterprises and government organizations.

Towards that end, Kim Niederman, 8x8's Senior Vice President of Worldwide Sales, and Don Trimble, 8x8's vice president of channel sales joined our executive team during the March quarter. At the end of April, Kim and Don spear-headed the launch of a new strategic go-to-market initiative based on selling a broad array of 8x8 cloud-based services through the channel.

Under our authorized reseller program, we plan to sign national and regional resellers at the rate of approximately 10 per quarter. Our first two partners came on board right at the end of April, and we have continued to sign additional partners this month.

As we engage with our new partners, they have validated our strategic focus on the small to medium or SMB market, which has long been under-served due to the domination of products and services that have historically been targeted at large, non-distributed enterprise applications.

These large applications were simply not appropriate for the SMB market and did not scale down to that market. However, 8x8's four cloud services are very appropriate for this customer segment.

Cloud-based voice-over IP, cloud contact centers, virtual managed hosting, and our recently demonstrated cloud video conferencing virtual room service, all of these services will be delivered as a software as a service model to the SMB market.

We are excited about the ability to sell more services, all leveraging our existing infrastructure to these customers.

As we have seen repeatedly over the few years that we have focused on selling our services to the under 25 person business, it has been very difficult for the large on-premise solution vendors to offer competitively priced large voice solutions because their platforms do not scale down to cost effectively serve the smaller business market.

8x8's opportunity is to take our cloud-based technologies and software as a service model to market to these larger distributed enterprise opportunities. As the low cost producer, we are currently putting the elements in place to effectively service the 25 to 1,000-seat market, with the support of our new channel partners.

To give you some color on how we're doing this, last month we demonstrated a new video cloud service that will extend the ease of use of 8x8's unified communications and meeting services to support room video conferencing equipment commonly used by these larger enterprise customers.

We will be offering a new flat rate model, whereby an enterprise pays a low per-month price for unlimited video usage. This offering will also be sold via 8x8's new channel partners and it combines the ease of install, ease of use, and cost effectiveness of our current services, with traditional video conferencing and telepresence equipment already in place at these enterprise and government customers.

In February, we augmented our managed hosting offering as well by beginning to sell virtualized cloud service solutions to the business market.

In the June quarter, we will be enhancing this product to a virtualized private cloud offering that will target the larger enterprise and fulfill government applications and needs.

At the other end of the customer spectrum, the very small market, small business, we launched a new service last week called Virtual Office Solo, for the one-person business, or any business that wants its mobile or traveling professionals to cost effectively access 8x8's award winning suite of unified communication services, including Virtual Meeting, which we're using today on this call, call recording, internet FAX, and a web telephony client.

We believe that Virtual Office Solo is the most powerful and affordable web telephony and soft service phone platform available on the market today. With this offering, we are providing the same big business caliber communication services, with complete office telephone capabilities for one low monthly price of less than $10 per month, per subscription, inclusive of all taxes and fees with no hardware or software download required.

Our strategy is to nurture these Virtual Office Solo customers, and then upsell them to more elements in the 8x8 converge suite of business services.

With that, I'm going to take a pause and turn the call over to Dan Weirich, the Company's CFO, who will walk you through our detailed financial results and provide additional information regarding our business.

Dan?

Thank you, Bryan.

Total revenue for the year ended March 31, 2011 was a record $70 million, an increase of 11% compared to revenue of $63 million for 2010. As Bryan mentioned earlier, revenue from business customers grew in excess to 24% between fiscal 2010 and 2011.

This was offset by a 35% decline in revenue from residential customers during the same period.

Over the course of fiscal 2011, we saw year-over-year revenue by quarter increases of 8% in Q1, 8% in Q2, 12% in Q3, and 15% in Q4 to reach $18.2 million in revenue for the quarter.

Net income for the year ended March 31, 2011 was $6.5 million, a 67% increase compared to 2010. For the fourth quarter, net income was $2 million, an 80% increase compared to the same period of 2010. This is the 13th out of the past 14 quarters that we've generated net income.

Our cash provided by operating activities was very strong for the year at $8.6 million, a 245% increase compared to 2010. This significant increase in cash provided by operating activities illustrates the leverage in our model at scale.

If you look at the past three years, we had revenue of $70 million, $63 million, and $65 million in fiscal 2011, 2010, and 2009.

During these three years, our cash provided by operating activities was $8.6 million, $2.5 million, and $2.3 million. The $7 million increase in revenue between fiscal 2011 and 2010 resulted in an increase of more than $6 million in cash provided by operating activities.

In fiscal 2012, we will be reinvesting some of- this cash flow in the head count to grow revenue and staff the new channel sales organization that Bryan discussed earlier.

Gross margin for fiscal 2011 increased to 68% compared to 67% in fiscal 2010. Service margin increased to 78% and product margin was negative 57% in fiscal 2011 compared to 77% service margins and negative 54% product margins in fiscal 2010.

During the fourth quarter of fiscal 2011, we increased the product subsidy to $934,000 from $726,000 in the third quarter. Simultaneously, our cost of acquisition declined to $725 per customer compared to $768 per customer in the third quarter of 2011, and $723 per customer in the fourth quarter of 2010.

Cost of acquisition declined because we converted a higher percentage of our leads to sales, as illustrated by the record number of gross new customers at 3,009, and because advertising, which is a sunk cost, represented a lower percentage of our cost of acquisition than in the third quarter.

Average monthly service revenue per business customer was $204 in the March quarter compared to $209 in the third quarter, and $204 in the same period a year ago.

Average monthly service revenue per business customer declined sequentially due to more aggressive discounting on service pricing for newer customers, and the addition of more features that have a lower average service price than physical telephone extensions and dedicated servers.

This is a figure that moves around a bit and we saw a trend upwards throughout the quarter. We expect average monthly service revenue per business customer to be in the $200 to $210 range for fiscal 2012.

Our advertising expenditures for the year totaled $5.9 million in 2011 compared to $5 million in 2010. For the fourth quarter, advertising expenditures were $1.2 million compared to $1.3 million in the prior quarter, and $1.4 million in the same quarter a year ago.

For the fourth quarter, stock compensation was $230,000, and depreciation and amortization was $369,000. For the year, stock compensation expense was $458,000 and depreciation and amortization was $1.3 million.

Capital expenditures for the quarter were $166,000 Capital expenditures were down sequentially because a majority of the capital expenditures related to the build out of our new East Coast data center occurred in the third quarter.

The migration of our redundant data centers from the West Coast to the East Coast is scheduled for completion in the first quarter of 2012, and we do not expect to be paying for duplicative data center space beginning in the second quarter of 2012.

Going forward, we expect voice capital expenditures to be in the historical range of approximately $500,000 per year, assuming growth rates consistent with the past couple of years, and hosting capital expenditures to be a function of how aggressively we grow this business.

As of March 31, 2011, we have approximately $153 million in federal NOLs and $90 million in state NOLs, so taxes were minimal in 2011.

During 2011, we repurchased 3,588,609 shares at a cost of $7,810,949. From July 2009 through today, we have returned $8,911,654 to shareholders through the repurchase of 4,172,785 shares at an average price of $2.14 per share.

As of March 31, 2011, total shares outstanding were $62.4 million -- sorry, 62.4 million compared to 63.2 million at March 31, 2010.

We have a very strong balance sheet, free cash flow generation, with which we can continue to invest in the growth of the business, and a large deferred tax asset in excess of $65 million.

That concludes my prepared remarks and I would now turn the call back over to Bryan.

Thank you, Dan. For your reference and convenience on today's call, we've posted a transcript of our prepared remarks on the events and presentations section of 8x8's investor website at www.investors.8x8.com.

I'll close my prepared remarks with the comment that we are very pleased with the progress we made in fiscal 2011. It was a record year for us on many fronts.

We have entered fiscal 2012 with a robust recurring revenue base and with a strong customer base that is trending toward more lines and services per customer.

We expect this trend to continue as we add more customers through our new channel partners. We have also seen the resurgence of investor and strategic interest in cloud computing and communications, with several highly publicized hosting acquisitions, which occurred during the March quarter, and of course yesterday's announcement of Microsoft's acquisition of Skype.

Smoothstone, another voice-over IP provider was acquired by West Corporation several weeks ago. We continue to hear from our customers and partners that 8x8's industry-leading technologies and services contribute greatly to the development of this nascent industry, which according to recent FCC data, has been embraced by fewer than 6% of businesses in the United States.

Our opportunity in this market is huge, and we are perfectly positioned to capitalize on this opportunity. As I mentioned earlier, we expect to expand our customer acquisition strategy with new channel partners in the coming quarters.

We intend to fully leverage our technology development partnerships with Polycom and other vendors that we work with.

We will build on our core managed service offerings in 2012, and we will continue to look for new opportunities to expand our available services in this space.

With that, we'll conclude the prepared remarks and we'll now be happy to take any questions you may have today.

Tyrone, if you could please open the lines for any questions.

(OPERATOR INSTRUCTIONS)

Our first question is from Mike Crawford of B. Riley and company. Your line is open.

Thank you. Bryan, actually just touching back to something you said right at the end of your remarks. You referenced -- everyone knows about the Skype deal -- you referenced this Smoothstone acquisition where West Corp. paid $120 million for that business. It apparently only has like 120 employees.

Do you have any idea -- I doubt they are doing $1 million revenue per employee. Do you have any revenue what Smoothstone was doing?

I don't, Mike. Good morning. They are closely held. I've heard rumors of the revenue number. Based on that, I like the multiple to revenue that West paid to acquire the business, but I really don't have any other information that I can share or validate with you.

Okay, thanks. And then regarding the move market, the channel strategy, so, I guess, a couple questions in that regard.

One, can you give a rough breakout of how many over-- how many customers you currently have in the 25 - 1,000-seat market? That's 1. And then 2, can you state who your channel partners are?

Okay. So, yes to both of those questions a little bit.

So, we don't really break out the 25 and up, but that's kind of -- the reason we chose that number, just for your information, is somewhere in the 25 - 35 extensions is where we're finding the sale to that business transitions from something we can do over the phone and completely remotely where we just support the customer and activate them by phone, to a situation where it's actually, you know, much better to go on site, do a more in-person, face-to-face sale, and then at some point in there as you scale up, somewhere between 35 -100, you actually do an on-site install and training -- traditional way to service that market.

We have approximately 1,000 customers today in our universe that pay us more than $500 a month of recurring revenue. And that's a number that we know because we give a dedicated account manager who is available over the phone via direct dial number to each 1 of those customers. We have approximately 75, something in that range, enterprise customers that are much larger and bill more than $2,000 a month.

So, you know, the bulk of that business is in between those 2 ranges. I won't tell you who our channel partners are. I'll tell you that we've signed 6 of them to date, the most recent one being Friday night, and we've already seen a couple of customers who have signed contracts based on those relationships.

I will tell you that they tend to be master agents, kind of traditional telecom bars, but they also -- the folks that are kind of new to this story for us are the data integrators, the folks that are out there selling routers, networking equipment, installing Power Over Ethernet or upgrading a customer's network from 100 BASE-T to gigabit.

Those are the folks that really understand local area networking, and those are the folks that I think can give us the leverage we need to support an install in the field and make sure that a couple 100 phones going into a corporate headquarters where the LAN is being converged with the data side of the house is going to work flawlessly out the chute.

And we know we can do that by sending our employees on site. We intend to go on site with these new channel partners and do a couple installs with them so they are able to do the same level of integration. And we think it's a great model for them. Because the residual model has effectively evaporated in this kind of data integrator market in the past couple of years after the '08 crash.

All the carriers stopped paying residuals. It's very difficult for these folks to make money, and they are very eager for an opportunity like ours, where they are going to get a residual for recommending us and putting us in, but they are also going to be able to upgrade that LAN and sell other equipment and services around the base telephony offering.

So, that's the type of partners that we are actively engaging with. A lot of them, as you might imagine, are out there selling Polycom gear today, and a lot of our early introductions to some of the folks we've signed already have come through that relationship.

Okay, thanks, and then final question relates to cash flow or the operating level, so the higher close rates and the low churn that block down your subscriber acquisition costs and enable you to leverage so much cash flow off the incremental revenue in 2011, but maybe, Dan, what do you mean by the comment that you intend to reinvest this cash flow in 2012? Does that mean that you don't expect cash flow to grow because you'll be spending more on these channels, or could you just flesh out those comments a little bit more?

Yes. So, in that section, I was, you know, comparing the past couple of years, fiscal 2009 - 2010. We saw cash flow from operations in roughly the $2.5 million range and then it jumped to just over $8.5 million in this year that we just reported.

And what I meant by the point that, you know, we're going to be reinvesting some of this in fiscal 2012 is that I would not expect to see, you know, incremental improvement of that magnitude in 2012 because we are, you know, going to continue to be generating, I would say increasing cash flow from operations

But the incremental improvement that you just witnessed over the past year will not be a as substantial because we are starting to invest in this channel program that obviously is going to cost money and we started to invest in that in this March quarter by bringing on Kim Niederman as our Senior Vice President of Sales and Don Trimble as our Vice President of Channel Sales. And so they are in the process of building out a channel organization that is a combination of existing internal resources, as well as hiring additional team members across the country.

Okay, thank you.

You're welcome. Thank you, Mike.

Thank you. Our next question is from Mike Latimore of Northland Capital. Your line is open.

Great, thanks, thanks. I guess just on that last comment, you do expect cash flow from operations to grow this year, is that what you said?

Yes.

Okay, got it. And then with regard to the new channels that are being developed, could you talk a little bit about, you know, sort of the time line to revenue there. If you add 10.25, does it show newspaper that quarter, or is there an education process and the revenues would be 6 months later, how does that kind of play out?

I think the general timeframe that we are looking at, Mike, this is Bryan, is over the course of the next 12 months we expect it to begin making sizable contributions. It's not going to make a large dent in the June quarter. We're actively signing these folks and training these folks, and, you know, when we're signing them, they are typically bringing in a deal or two with them that they are ready to bring us into.

And so, you know, like I said, we have seen, you know, a couple of in-customer acquisitions that have resulted already and it's been, you know, 2 weeks since we officially launched. To be honest with you, we haven't even officially launched this program. Most of these sign-ups have occurred without us even announcing a program's in existence, but this is a very tight community and word spreads quickly.

And as we begin to sign some more large national distributors, you'll see us announcing those and even beginning this week, we'll be at some of their partner events for their master agents. So, you know, I hope that gives you kind of the timeframe. It's not immediate, but, you know, it -- we know that we are losing deals in this 25 - 1,000 space because we're just not up to bat, and if the customer doesn't know about us and doesn't look into us and doesn't get a quote from us and find out how we can help them both feature wise, as well as save them money, you know, they are never going to give us the business.

So, we're hoping that these channels will bring us in and we'll see a similar conversion rate that we see in our inside sales when we sell direct to the end customer.

Great, and then in terms of additional head count, what -- how many other people do you think are needed to support this channel? And are there incremental marketing investments around it or that sort of thing? Maybe just a little color on the kind of investment that goes around the channel.

Yes, I think it's -- it's not like this is a huge CapEx investment like we had last quarter with the data center. But, you know, initially it's a kind of 8 - 10-person organization that will be employed here and, you know, that includes maybe some regional presence.

We already have a guy in New York who is covering that region for us and working with some of those master agents out there. There is incremental marketing spend to just go to events and be with these folks and train them and travel a lot more and just get the technologies in front of the customers. But, it's not a huge spend, I mean in a relative sense.

This is not a big investment to make, and we think there is potentially a lot of leverage that will result from us doing this right. We are, you know, both Don and Kim have done this many times before. They have a track record at doing this.

I'll tell you, I do not have a track record at building a channel, but these guys know how to do it and I've seen their expertise go to work already. I've been very happy with the results and how quickly they have ramped these programs, and, you know, more to come. So, we look forward next quarter to updating you on the progress there.

Great, and just last question. The sort of the traditional sales group there, any changes there, any change in strategy there, or do we view that as sort of status quo and this is incremental effort?

Yes, so our core sales efforts today have primarily been direct sales through our inside sales force and that will remain the same. And so what we're discussing on this indirect and channel side is incremental.

Yes, incremental. There are some changes that are going into that organization. You know, again, I think Kim Niederman's brought in a wealth of sales experience. He's putting it to work there as well.

You know, hopefully we can see some of that apply to incremental -- incrementally better closed rates as we go forward, but I think for modeling purposes, just assume that we'll continue to deliver the results that we delivered through the inside sales team that we've been able to implement with larger customers that pay us more per month, have a very similar ROI in terms of the investment.

And as we've seen with the large customers that identified earlier for the other analysts, you know, we see a much lower churn rate with these large customers once our services are installed.

Right, right, great. Thanks a lot. Good luck.

Okay, thank you, Mike.

(OPERATOR INSTRUCTIONS) Our next question is from J.D. Abouchar of JRT Capital. Your line is open.

Hi, guys. Nice quarter. Good job.

Thank you, J.D.

First question, maybe you could give us a little color now that we've had a little bit of time under our belt with the managed services. How that's doing, how the margins are looking, the marketing opportunity there. And then at some point are we going to break that out as a separate revenue line item?

Yes, so -- hi, J.D. It's -- the business is doing well. It's growing pretty nicely. And the business is still quite small. You know, last quarter we announced a figure that between our enterprise voice product and our hosting product, that revenue in the quarter represented 6.8% of total service revenue, and in the fourth quarter that we just announced, it's 7.4%. And so it's a combination of the 2 revenue streams.

It's still kind of too small to break out, but presumably if it got much larger, kind of in excess of the 10% or so of revenue, we would probably start to break that out on its own. But as Bryan, you know, alluded to in his comments, we definitely have quite a bit of product development work under way on additional products that will be rolling out in fiscal 2012 related to that business.

And I think we're also -- the only thing I would add is we're actually encouraged to see folks like TeraMark, and Savvis and NaviSite and folks like that disappearing from the market. Because in some of these especially larger enterprise opportunities for hosting, that was our competition, and so we view consolidation there as an opportunity to hopefully win more business as we go forward with more of a private cloud enterprise-appropriate offering there.

And then, of course, the managed hosting, the dedicated server hosting, and the virtualized cloud hosting at the low end are products that are in the market and we're continuing to see progress from that.

Great. One of the metrics you used to talk about was as a component of the churn, with the economic or involuntary churn, small businesses going out of business. And obviously this economy hasn't helped that. Is there any update there or sort of what your view is? Is that stabilized? Still an opportunity for that number to go down and therefore sort of bring overall churn down?

Yes. I'll let Dan give you an update on that.

So, in the most recent quarter, it was 52% of our total cancellations, and if you look back a year ago, it was 50%, and the last quarter I believe was 51%. So, it has not improved.

The -- we had a slight uptick in churn sequentially from 2.2% - 2.3%, and that's primarily related to, our churn rate in January historically has been higher than our other months, because we typically see an increase in cancellations due to economic-related reasons in January. And we experienced that this, this quarter as well.

So, yes, the opportunity is still there, J.D., if the economy can ever get better for us.

Got you. And then I know consumers is pretty much de minimus at this point, but I assume there was still some revenue and it declined a certain amount quarter over quarter?

Yes, it's still trending downwards. The rate of decline has slowed quite a bit because the base has gotten smaller. And today there's roughly still 40,000 customers. As I noted in my remarks, for the full year, it declined 35%, the revenue base.

Okay. So it's still a small drag that's masking the overall growth rate, but a lot less than it was.

Yes. It's not at the dramatic level that it was a year ago.

Yes. And then I guess final question is for Dan. -- Dan, you've announced sort of a new role there. And it seems to sort of tie in with this new marketing effort of going with channel partners and, you know, a lot of different things going on there. Maybe just sort of elaborate what your focus is going to be now.

Yes, so my focus today is running the finance organization and leading our M&A efforts.

We've seen a very sharp increase in the level of M&A, kind of -- it's resulting from certainly the activity that I discussed in my very closing remarks.

But Dan and I over the past couple of years have literally looked at probably, 1000s of companies, if not many 100s, that just didn't have a strategic or financial value, lot of upside down balance sheets and debt restructurings, and all sorts of different distressed activities. In the most recent quarter we've seen a sharp uptick in opportunities that we are interested in. The stories are good. They are accretive.

They provide new services that we either don't have on our road map or they may accelerate our ability to bring them into the market quicker than if we build it in-house. And so, that has become a very large component of what Dan is working on as we look to maximize this cash we're generating towards future growth, towards some of that activity. So, you know, as we make progress there, obviously we'll be updating you on that, J.D.

Got you. Final question. It seems like we had discussed maybe 6 months ago you talked about, well, we can spend a lot of money on marketing and advertising, but we're sort of at this plateau where unless we see a return on it, you know, it's not money well spent and you've done a really good job sort of managing the amount of sales and marketing expense.

But, you know, we have a nice step-up in gross sub adds. So, it seems like, you know, the new efforts are paying off. This new direction, even though it's very early is starting to pay off. Have we sort of maybe gotten another maybe small step up into sort of where we think sub adds can go?

Yes, so I'm not going to give you any guidance, but I would say that I noticed the same trends that you're referencing, if you graph out our results, as we've done in our investor presentations. You can see the last 2 quarters, we've actually seen a little acceleration in growth. Again, where we are evolving our sales organization, I hope to the next level, and we're expecting the results of our investments in that, both in the inside organization, as well as these new programs we've talked about today to pay off for us here, and so, you know, stay tuned.

It should be a very interesting story to follow as we get to roll this out and we are -- again, I just couldn't expect to be anymore perfectly positioned than we are in this market at this time with the economic backdrop that's out there and companies that are actively and creatively looking for how they can bridge their business and budget needs into the cloud, and yet run their business better than they were able to run it before they went into the cloud.

And so, we think it's very exciting time for the Company and look forward to continuing to report updates on how we do here.

Thank you, guys.

Thank you, J.D.

Thank you. Our next question is from Bryan Horey of Aurelian Management. Your line is open.

Thanks for taking my question.

I just wanted to focus for a minute or 2 on the Enterprise sales effort. Can you give us an update on how many people you've got involved in that effort now and, you know, just some general sense as to the level of success there. And I'm curious whether you have, think you've seen any uptick in the level of interest of larger enterprises in moving their telephony to cloud.

I've heard that on several other conference calls in the last month or 2, that there seems to be a shift of, some kind of a larger shift to get off of physical telephony devices and move to cloud-based services. I'm just wondering if you can comment on what you're seeing in that space and maybe also just talk about whether there's been any shift in focus now that you've got the channel effort going on underneath that.

Yes. Hi, Brian. We -- it's what we did was we kind of merged our Enterprise sales group with our channel efforts underneath Don Trimble, so he's spear-heading this effort. And what we are seeing there is kind of consistent sales with prior periods, but is what is occurring right now is we are currently in discussions with numerous customers on deployments that are, you know, significantly larger than anything that -- that are average in any respect, and I mean, we are in discussions with a wide variety of, you know, well above 100-plus seats.

And so these are corporations that are, you know, realizing that they don't need and Avaya or Cisco-premise-based system. These are businesses that have 100s of seat requirements and they are very, very seriously looking at moving their telephony requirements to the cloud. This is something that 6 months ago I don't think we could have said, made a comment like that with anywhere near the confidence that we're saying that we do today.

Okay, and are they -- are they kind of more finding you these days? Is that -- Do you see them kind of motivated on their own to, you know, go out and pursue this solution, or is it better coverage or a little of both?

Yes, some are -- Brian, good morning, this is Bryan. Some are finding us, and that's traditionally how we've, you know, gotten the 75 large customers that we have today. Most of those found us. They did their own research and trials and called up one of our sales people and said, hey, it's your lucky day. I'm going to place a really big order with you.

But I think the increased activity is resulting from our engagement with the channel partners that are already on our program today. Again, they are bringing these deals in, as I said, at the time, you know, they typically have a deal or 2 that we immediately are engaged with at the time that they sign up with us.

And I would agree with your statement that there just seems to be a wider acceptance of cloud concepts at a much -- it's a regular vocabulary that's part of an IT professional's daily use now. And across the board, I think conceptually it's become a much easier, more accepted concept that we don't have to go educate and draw lots of drawings of how, you know, this network architecture's going to work.

People know what that means when you say we're going to host this over here and, you know, associate it with everything from, you know, how they do sales force today to, you know, how they may manage their data in-house and so forth for storage. So, telephony, I definitely think we are benefiting from that increased trend and that increased acceptance of those concepts.

Okay, and just so I understand, on the opportunities that are larger than, say, 1,000 seats. Are those deals that you're prosecuting in-house, or are you typically getting the, you know, the channel guys involved in those as well?

The channel involvement is very new, because, again, our very first channel partner joined us right at the end of April. So, this is very, you know, we've been working on the program. We went to Polycom's worldwide partners conference. We met with a number of partners.

We are really validating the program that we were proposing to them at the time, make sure we got the details right, make sure we got the payment schedules right, and, you know, we've done that work. We've -- like I said, we've done a soft launch of it. We haven't even officially launched it with the press release yet. But, you know, the partners are receiving it very well.

So, I would say most of the, you know, the existing business is still being done by the folks that work for us, but again, we just can't, you know, we need these partners and we are openly embracing these partners. Because to take this business to the next level of scale, those partners -- we need that partner leverage and we are happy to pay those partners for bringing and servicing and helping us win those customers because it's a necessary component of our strategy to get in front of these bigger customers that, you know, frankly many of them have never heard of 8x8 before.

We've had visits in the last 2 weeks here in Sunnyvale where they -- the CIO flew out from the East Coast and said I just wanted to visit you guys to make sure you're real, because I don't know anything about 8x8 and I've read about you, but I wanted to see with my own eyes.

And they left here with even a greater appreciation of the capabilities we have, you know, this particular CIO I'm referencing came in specifically because he has a need on the telephony side. But he left here with a -- excited about our video cloud offer, our conferencing offers, and even our managed hosting capabilities.

So, you know, as people I think become more familiar with our, the broad array of services we have and that we're not just a narrow hosted PBX solution anymore, you know, I think we're going to see broader acceptance with those larger customers.

Okay. And on the M&A front, Dan, are you primarily focused on opportunities that add to your, you know, your product suite, or are there bases of business out there existing subscribers that are also of interest?

Yes, so we are currently looking at both scenarios. So, there's, opportunities that are, you know, kind of lower revenue type opportunities, but, call it an R&D acquisition or something to enhance our product set, as well as businesses that have comparable solutions to ours that have, meaningful customer bases.

Okay, and then in terms of the investment that you referenced in terms of making in the channel effort, is that something that you expect to scale kind of on a, you know, on a fairly consistent basis throughout the year? Will that be front end loaded? Can you give us some sense as to how you see the timing of that playing out?

It's pretty consistently scaled throughout the year. So it's kind of a function of, we hire these channel manager titled people and so it's -- initially there's investment of a handful or so people that will be hired or are being hired, and then, you know, it's a function of how many partners we sign up, we'll need more channel managers.

Okay, and do you all anticipate disclosing what percent of the revenue comes from the channel effort at some point down the road when it becomes more important?

Yes, at some point.

Okay, thanks very much.

Thank you.

Thank you. Our next question is from Patrick Lin of Primarius Capital. Your line is open.

Hi, guys. Congrats on the quarter, and also continuing to invest here for growth. Bryan, Dan, I know you guys have been doing this for a while, and I can sense you're pretty excited about the business going forward.

But can you provide some color in terms of, you know, as you look forward in terms of what the growth potential could be. Where are we in terms of kind of reaching that acceleration or inflexion point? It feels like we're getting closer, but, you know, and these investments are there, but we're not quite there yet. Can you comment on that?

Yes, Patrick, this is Bryan. Good morning.

You know, I know you're an investor in the company, but the number of businesses you personally have referred to us, you may want to get on our channel program, too, just a friendly suggestion.

Thank you.

We have on our website, if you look in our investor presentation, there's some really good data that is hard data that came out of the FCC during the quarter that was updated, I believe, March 23.

And, again, it shows that the use of voice-over IP technologies by US businesses as an access line technology, which is how the FCC references, so it's basically measuring how voice-over IP is doing from a penetration perspective relative to legacy circuit switched approaches, whether they are T1 lines or analog phone lines, or how a business actually moves telephony off of the premise and into the traditional telephone network.

We have a penetration rate the date is as of June 30, 2010, so pretty new data, of less than 6%. And if you look at the residential data that the FCC published in the same report, and you can get the link to that report out of our web presentation. Residential telephony, the access line penetration of voice-over IP technology is in excess of 25% already.

So, that you can see that the tipping point of people that are using anything from Vonage to a cable triple play, you know, has really matured and is rapidly approaching what you would call a tipping point. The business side has not happened yet, and, you know, part of the reason for that I think has been this kind of lack of education of these cloud concepts, this lack of common everyday knowledge, so I think that is going to be a huge driver. But, I would also say if you go back a couple of years, these voice-over IP technologies were very emergent, they were very early stage.

The technology and the access lines from a data perspective that we're able to run over are so much more mature today, that I do think you will see an acceleration of the adoption rate. I have said -- we've had hypothesis for many years here that in bad economic times is when businesses will go out and look for creative new solutions, but I can tell you we're actually seeing that with these IT managers, CIOs that, you know, have an extremely aggressive budget.

Sometimes they have no budget, but they still have to open a new office next month in a new city where the company's beginning to expand. And so, the IT people are being forced to be very creative and to think outside the box to some of the emerging kind of voice-over IP technologies that 8x8 offers. And again, we'll give it another 6 months and we'll see if that 6% makes meaningful penetration or not.

We are growing -- the interesting thing about that FCC data is the overall expansion of voice-over IP into the business access line market is growing relatively slowly. It's something like 5% annual growth, and as we referenced in our call, we are growing more in the range of 24% - 26% annually.

So, we are growing much faster than that overall market and we think that's because the technologies that we're delivering fit so well into all these needs that I talked about. So, that, that would be my overall answer to you in terms of where we are, and I think that's why the opportunity that's before us is so huge.

Great, thank you. And you talked about some of the technology developments.

Can you maybe share a little bit about the technology road map in terms of what other things you guys think the businesses out there might be looking for in terms of product offerings? Or enhancements?

Yes, again, at a macro level, you know, our -- I referenced that we are rapidly developing and getting ready to deploy a much higher end kind of enterprise hosting, enterprise class storage. We already have backup and security and, you know, a number of products that enable a business to securely access their technologies. We're seeing heightened demand for that type of capability.

Being able to get PCI compliant, the credit card vendors are out there beating their PCI requirements. So, if you're a small business needing to process credit cards, we can certainly help you with that. We're seeing a lot of folks go to very high performance database engines and we're able to facilitate that.

And then again, the 8x8 name means video and we are embracing video again with this new video cloud service that we demonstrated in Orlando in April, and we'll be ready to launch that sometime this summer because the channel partners are asking for it. Again, the CIO is saying, hey, I've got all of this room, video conference equipment deployed, I've got these video phones deployed that I bought from someone like Polycom in the past, but I can't do my status meeting on Monday morning with Hollywood Squares where I can see all 8 participants from 8 different locations.

And we're demonstrating a service that enables you to do that for a low monthly fee. But, it also makes that equipment a lot easier to use. You don't have to dial by IP address, which is how a lot of these telepresence systems are working today.

We treat the video conferencing end point just like one of our IP phones. It has a regular phone number. You have a regular access number you dial from it to get into the conference bridge, and an access code to join the call, or from Virtual Office Pro, you just click on your web browser and that video conferencing equipment will wake up and join the call. That has not been the user Interface that's been deployed with a lot of these systems that are out in the field and we think that we have a built-in opportunity if we can provide that functionality to these customers.

Terrific, thank you very much.

All right. Keep referring those businesses, Patrick.

Thank you. This ends the Q&A portion of today's call. I would like to turn the call over to Mr. Bryan Martin for any closing remarks.

Okay, thank you, Tyrone. And I want to thank everybody on the call that joined us today. Again, as I always pitch, if you're not already a customer of 1 or more of our services, I would encourage you to go to our website.

We have a wealth of information there, customer testimonials, slides like the 1 that we showed today in this call, and you can really learn a lot very quickly about how we can help your business or your firm, and our web address is www.8x8.com. So, with that, we're going to conclude today's call. We look forward to updating you for the June quarter. It will occur pretty quickly now that we're through year end, and with that, Tyrone, if you could go ahead and close us out, that would be great.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.