8x8 Inc (EGHT) 2012 Q2 法說會逐字稿

(Operator Instructions) Good day, ladies and gentlemen, and welcome to the 8x8 second-quarter 2012 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 is being recorded. Now I'd like to turn the call over to Joan Citelli, 8x8's Director of Corporate Communication.

Thank you, and welcome everyone to our call. Today I am 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 second fiscal quarter of 2012 ended September 30, 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, expects, 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 Factors sections of our annual report on Form 10-K and 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. And with that I will turn the call over to Bryan Martin, Chief Executive Officer and Chairman of the Board of 8x8.

Thank you, Joan, and good afternoon everyone. I'd like to begin by providing commentary on 8x8's performance in the second quarter of fiscal 2012 ended September 30, 2011, including our technology development and integration accomplishments, an update on the indirect channel partner program we have been incubating since the end of April, and my personal views on our competitive positioning in the ever-changing business cloud solutions market. Dan Weirich, our CFO, will then provide a detailed review of our financials and their trends, including a breakout of metrics resulting from our recent acquisition of Contactual, Inc. After that we will open the lines for any questions you may have.

8x8 performed exceptionally well during the second quarter of fiscal 2012 as we experienced unusually strong summer demand for our cloud-based unified communications solutions, resulting in a 21% year-over-year increase in Business Services revenue. Total revenue for the second quarter of fiscal 2012 was a record $19.8 million, a 14% increase compared to revenue of $17.4 million for the same period last year, and a 7% increase compared to revenue of $18.5 million in the prior quarter. We ended the September quarter with 26,727 business customers, including 250 business that resulted from that acquisition of Contactual. This figure is up from 25,455 business customers in the prior quarter, and 22,167 businesses a year ago.

Executing on our previously outlined 3-pronged growth strategy, which includes M&A activity, the introduction of expanded service offerings and the addition of a channel component in our go-to-market strategy, we completed the acquisition of a privately-held Contactual, Inc. on September 15, 2011. The Contactual software-as-a-service offering represented the only major cloud services technology that was not developed and owned by 8x8. And after 4 years of selling and deploying this solution alongside our telecommunications technologies, it was fortuitous timing that we were able to consummate a deal with Contactual's investors and bring this technology in-house. It has been my pleasure this past month to welcome the 32 Contactual employees to 8x8, and I'm very pleased to report today that we are well into a successful integration effort. All of the Contactual employees who joined us from their former Redwood City, California, office are now part of our Sunnyvale, California operations at our headquarters.

Contactual revenue contributions in the September quarter represented $444,000 of our overall revenue for the second fiscal quarter of 2012. We are looking forward to a full quarter's contribution of Contactual's growing business services revenue to our results this quarter, along with the opportunity to provide IP communication services to the 90% of Contactual's customer and revenue base which does not currently subscribe to 8x8's Business Services.

Churn remained flat at 2.1% sequentially, while average monthly service revenue per user from these business customers increased to $207. ARPU without Contactual's half-month contribution would have been $202, up from $200 per month in the prior quarter. These are all fantastic metrics for our shareholders as they demonstrate the progress we are making in selling more services to larger business customers. During the quarter, approximately 300 of our new business voice customers, not including Contactual customers, subscribe to more than 25 physical lines of our voice service. I believe we are very effectively penetrating this larger segment of the SMB market due to the exceptional quality and reliability of our services, as well as the recent investments we have made in new sales and marketing initiatives. Our average new customer in the September quarter subscribed to 12.4 lines and paid services, and our overall customer base average increased to 9 lines and paid services, up from 8.4 lines this past quarter and 7.7 in the same period a year ago.

Our recently-launched channel program, which provides sales channel partners with the new model of earning meaningful revenue by offering 8x8 cloud services, is progressing well under the leadership of Don Trimble with over 40 signed partners, 5 of whom which are video specialists and 240 sub-agents as of September 30. This program is growing and we are still in the sampling stage with new customer prospects. Many of the larger customer deals in the 25- to 1000-line range are taking more than 6 months from introduction to sales close. But we are seeding these deals with small [numberation] and demo services in order to move the deals along to sales wins. We are also continuing to evaluate strategic alternatives that can be used to accelerate our channel presence and sell-through, and we will have a further update on these indirect channel programs in our December quarter call.

I would like to note that 8x8 has been awarded 78 patents, counting our most recent patent issued last month. We are pushing the entire industry forward and making it difficult for our competitors to keep up with the diversity of services we are offering. Voice, video, conferencing, mobile apps, unified communications, call center services, recording, video conferencing and telepresence bridging services, high-definition support for a variety of both Polycom and Cisco endpoints, both voice and video, public cloud managed hosting, and private enterprise cloud for large organizations and government applications.

While companies like BroadSoft, CBeyond, M5 and others appear to be following our lead and expanding their cloud-based service offerings with miscellaneous point solutions, 8x8 offers a well-thought-out continuum of cloud-based services that complement each other and are built on a common technology, provisioning and service base. 8x8's technology is best in class, and we have a long history of demonstrating that time and time again, we are able to deliver the best services to the industry. It is the core reason this Company has survived and persevered over nearly 25 years in the ever-changing Silicon Valley. We are now growing faster than at any point previous in that 25 year history.

An interesting and common theme we see emerging amongst our customers is a corporate municipal and federal mandate to implement disaster recovery services. This mandate is spanning many of the sales conversations concerning both communications and cloud data services. On August 29, we announced that the city of Garden Grove, which is located in Southern California, had selected 8x8 to host its disaster recovery servers and operations. The city currently operates off of an on-premise VMware-based server infrastructure that is located in their city hall. In the event of a catastrophic earthquake or natural disaster, the city of Garden Grove will now automatically failover those Web services, including the city and Mayor's websites, their police and fire databases and a collection of other servers and services, to a hot swap VMware private enterprise cloud offering that is hosted in 8x8's Northern California Silicon Valley data centers. While power may be interrupted to the city in the time of emergency, it's employees and citizens will still be able to use the wide variety of robust Internet data connection sources, including mobile data connections, to connect to the Internet via cell phones, which are on battery power, in order to reach the city's disaster recovery servers that are hosted here in Northern California by 8x8.

Please keep in mind that the Internet was originally designed by the military to be self-healing, especially in exigent circumstances, and we've seen time and time again examples of 8x8 customers who are able to access our services in times of emergency when all other forms of traditional communications are down. This theme of disaster recovery is a very common sales discussion we are having with our cloud data customers in light of the hurricanes, flooding, wildfires and other natural disasters that have plagued much of the United States this summer. 8x8 offers one of the most secure, cost-effective solutions for this type of disaster recovery implementation for our cloud data services.

These types of cloud disaster recovery services are not just limited to the cloud data world. They are equally, if not more applicable, to communications systems and infrastructure. Hosting a business's communications in the cloud gives rise to the same flexibility and redundancy in times of emergency. In the second half of September, the Contactual sales team signed a disaster recovery deal with a California utility, and we have not yet announced this deal yet so I am not going to name them today, but this regional utility operates an on-premise big iron call center solution for customer service calls. They have now signed with 8x8 to operate a failover-hosted call center based on the Contactual-hosted call center platform out of the data center currently operated by Contactual in Canada.

Again, in the event of a theoretical disaster, their customer service employees would use the diversity provided by the Internet and the mobile Internet to reconnect to their cloud-based call center applications in the 8x8 cloud, and be able to answer and route incoming calls as they currently do with their big iron on-premise call center solution. Again, this is very secure, very cost-effective and very forward-thinking. This type of disaster recovery solution is applicable to any large enterprise, any mission-critical business, municipality or government operation.

Another interesting competitive advantage we hold is the cloud-based architectures like ours are quickly becoming a requirement to cost-effectively deliver, share and proliferate communications and data to the smart mobile phone and tablet environment that is taking root across businesses of all size, especially those that have employees in many locations. All of those smartphones, tablets and other mobile devices that are a vital part of the business world need a cloud-based architecture in order to make the communications and data generated by businesses' communications and data infrastructure available to these mobile devices in real time. You cannot shoehorn these capabilities very easily or cost-effectively into an on-premise communications solution.

We are seeing that the on-premise PBX manufacturers are being forced to get creative on how they quote and deliver so-called managed services in order to be cost-effective with our cloud-based communications solutions. We've seen some very creative proposals from on-premise providers who turn a simple on-premise manufacturer-owned equipment lease into a managed services quote. These equipment providers do not have the capability to bring dial tone and connectivity into the back of the equipment, however, so their low-cost monthly equipment lease is quickly burdened by legacy telecommunications charges from circuit switch communications providers.

What is more, the managed services often lose even more appeal when it comes time to share information collected or information that is flowing through the on-premise communications infrastructure with these mobile devices and people and endpoints that are in many locations. These types of on-premise solutions cannot keep up with the feature set that we are offering from a true hosted cloud architecture. And 8x8 will continue pushing this technology and developing new applications for sharing a business's communications and data, and continue to provide innovation leadership for the industry that others in the industry can try to follow.

I'd like to close with a few additional comments on the synergy between Contactual's vision and ours, along with some examples of Contactual customers who have now joined the 8x8 family of customers. Contactual's driving vision was that full-featured, business-grade call center technology can be adopted without the need for expensive hardware or system software. This is the same vision 8x8 had when we launched our hosted PBX service in March 2004, and has made the integration of our 2 companies much easier because of our common belief that businesses do not need to spend hundreds of thousands or even millions of dollars on premise-based hardware and software to meet their business communication needs.

Some of the forward-thinking Contactual customers that joined 8x8 last month are Aon Hewitt, Cadence Design Systems, General Electric, HomeAway, Jamba Juice, NetSuite, Olympus, SaskTel, Sony, and TripAdvisor. I'm sure we will see many similarly-sized names embracing cloud communications in the future as this paradigm shift away from legacy on-premise solutions continues to take root. With that, I am going to turn the call over to Dan Weirich, the Company's CFO, who will walk you through our detailed financials and provide additional information regarding our business. Dan?

Thank you, Bryan. We're pleased to report record revenue of $19.8 million, with revenue from business customers increasing 21% compared to the same period last year and representing 91% of our total revenue in our second quarter. Revenue from residential customers was $1.8 million in the quarter, compared to $2.1 million in the June quarter. As Bryan noted, we closed the Contactual acquisition on September 15, 2011, and revenue from Contactual customers in the second half of September was $444,000 for an annualized revenue run rate of more than $10 million. Contactual's revenue is 100% service revenue and does not consist of any product revenue.

Our data cloud business grew 30% sequentially to 3.1% of the Company's revenue in the September quarter compared to 2.5% of the Company's revenue in the prior quarter. Gross margin remains strong at 66%, with service margins at 77% and product margins of negative 45%. Net income for the quarter was $0.8 million, or $0.01 per share. Operating income was $865,000, including approximately $480,000 of acquisition-related expenses in the quarter. Depreciation, amortization and stock-based compensation were $378,000, $48,000, and $329,000, respectively. Amortization for our 3 acquisitions will be approximately $350,000 each quarter for the remainder of this fiscal year.

Our cost of customer acquisition increased to $906 compared to $826 in the same period a year ago. This is due to increased advertising spend and commission expenses and selling to larger businesses in the 2012 quarter. Our advertising expenses for the second quarter of fiscal 2012 totaled $1.8 million, compared with $1.3 million in the second quarter of 2011. As Bryan mentioned, our churn rate remains at historic lows. We continue to see business closures as the primary reason for cancellations, representing 52% of cancellations in the most recent quarter, compared to 48% in the first quarter of 2012 and 54% in the same period a year ago. [To reinforce] our best sales month in the Company's history this past August, we see no impact related to the current macroeconomic conditions.

ARPU was $207 in the most recent quarter. A full quarter of Contactual would result in ARPU of more than $230 per month. Our contribution margin, defined as service margin less customer service and billing expense in the quarter, was 61%, or $126 per customer. The payback on the $906 cost of acquisition is 7 months, which is the cost of acquisition divided by the monthly contribution margin. Capital expenditures for the quarter were $1 million. $713,000 was related to the purchase of the VCE Vblock Infrastructure platform I mentioned last quarter. We expect capital expenditures to be back in our historical range of 1% to 3% of revenue beginning this third quarter of fiscal 2012.

Our effective tax rate in the first half of fiscal 2012 was 1.6%. We expect our effective tax rate to be between 1% and 2% for the remainder of this fiscal year. As of March 31, 2011, we had a deferred tax asset of $65 million. Contactual's net operating losses exceeded $40 million and will result in an overall increase to the combined Company's deferred tax assets.

As of September 30, 2011, total shares outstanding were 69.3 million, compared to 63 million at September 30, 2010. In September 2011 we issued 6.5 million shares related to the Contactual acquisition. That concludes my prepared remarks and I'll now turn the call back over to Bryan.

Thank you, Dan. For your reference and convenience we've posted a transcript of our prepared remarks on the Events and Presentation section of 8x8 Investor website at investors.8x8.com. With that, we would be happy to take any questions you may have for us today. Operator, please open the lines.

(Operator Instructions). Mike Crawford, B. Riley & Co.

Could you please give us some commentary on traction you're seeing with some of the newer services, like Virtual Room and Account Manager, and response to those offerings, or features?

Mike, this is Bryan. We announced the new Account Manager, which is the web-based portal that our phone administrators, for lack of a better word, basically the person running a business's phone service, how they interface with the device -- the service. We've also upgraded over the past few quarters what an end-user, that is just an extension on the service, sees as well. And they are using a web-based version of our unified communications platform to manage their individual extension. And as part of the upgrade we did, we announced yesterday, we added some new capabilities to that portal as well. So each extension user, for instance, can choose to upload their own on-hold music and so forth that you hear for their extension. We had launched an external data about 3 to 4 weeks ago with the new portal and all of the feedback was extremely positive. The bugs that we found in the data were quite minimal. And so we started, I think about 2 weeks ago, provisioning all new customers that had ordered the service for the first time on the new Account Manager portal. And again, we were able to gradually roll it out that way, and again the feedback was all positive. About a week ago, I guess it was Thursday night last week, we made it available to all of our customers. So we've only got a week under our wings, but certainly the responses we have had on our Twitter and Facebook pages and the feedback we're getting from the customers we are talking to has been very positive. So obviously it's very new.

We are expecting this to have a meaningful impact on both churn as well as the ability to upsell existing customers new services. It's now, for instance, very easy to log into your, as an administrator, and if you want to upgrade from one of our older -- some of our customers are still using analog phones with adapters to interface to our service -- if you want to upgrade that to a state-of-the-art IP phone from Polycom or Cisco, the capability to do that is a couple of clicks and you can do that right on that Web portal.

So I think next quarter we will hopefully be able to report what the results are, what the trends are on the churn number. But I would say we are very pleased that we've been able to keep our churn that we just reported here at the historical numbers. As Dan mentioned, economic churn has not gotten any worse. It certainly has not gotten any better, but I think at this point in the world economy, I will take the it is not getting any worse and at least be content with that, and hopefully we'll have some better results to report. On the services at large, you mentioned Virtual Meeting and some of these other services. We've seen data recently that approximately half of our customer base now is subscribing to at least 1 of our suite of unified communications services, and that is up from 18 months ago or so we had something like 15% of our customers. So we have been able to roll that out, and I can tell you from the customers I talk to especially the mobile and smartphone apps are very popular. I just saw a report from a customer overseas who was using it out of a coffee shop and was able to take a very important customer call and he was just thankful he had our mobile app installed on his device and he said it worked flawlessly.

Thank you, Bryan. And then on the channel efforts. So it is getting to the point now where you should start to enjoy closure of some of these deals that maybe have been incubating for 6 or 7 or 8 months. So if that happens, 1, how much do you think that could bump up your growth rate and/or ARPU, and also with the slightly added fixed-costs of infrastructure to support this channel, should we now think that the marginal subscriber acquisition cost is going to bump up to a higher level like we saw this quarter, or do you think that was more of an anomaly?

I will comment on the channel and I will let Dan comment on the acquisition costs. I agree, it was higher than probably that we were expecting to be over the $900 level. Channel, in general, the reason we called out the 300 new customers that had ordered 25 or more physical lines, which means it is at least 25 employees typically in the business, is that's a very large number. We are very pleased with that progress. A lot of those sales, as I noted, are coming through our enterprise sales team which is selling direct to some of these large customer opportunities. And I would say a more typical channel sale in the quarter was a much smaller sale. I described it as sampling. From my old chip days, that's what you would sample a new chip before you bought it. We see a lot of very small or maybe single-location rollouts from a channel-brought deal that we expect over time will roll into a much larger deployment as the first location becomes successful with our service.

We have invested in quite heavily on the head count side. Before the Contactual acquisition we had about 12 salespeople and channel support people, meaning sales engineers and project managers that are working with the channel partners, including 2 people that are dedicated to our federal government efforts. The Contactual acquisition brought us another 11 people that have joined the Company, and so our channel and enterprise team collectively is about 23 people right now. So it is almost half the size of our direct sales force, which is still 55 salespeople or so. So we've got the people in place, we are very pleased with the people that we have been able to hire. Some of these people have fallen out of Cisco or they decided to take the Cisco packages that were out there. Some, as we have done in our press releases, have joined us from some of our on-premise competitors. And 11 very good enterprise-class salespeople and channel relationship people joined us as part of the Contactual acquisition.

So we have the people in place, we have the channel partners signing up and we just need to see the deal flow come through. My only comment on that is that it is a 6-plus-month kind of cycle, start to finish. There is a large competition, but we are seeing traction and I am pleased with where we are. So I am still going to comment that the second half of this fiscal year you should see some of the results from that investment. I will let Dan comment on what he thinks about the acquisition costs going forward.

So the way that we calculate acquisition cost is we have a business subscriber acquisition cost per service. Then we have the average number of services subscribed to per business customers, so we multiply the 2 figures together and come up with the acquisition costs. What we are seeing is that the overall subscriber acquisition cost per service has moved up. So it was $101 in this most recent quarter compared to $89 in the first quarter of this year. The average number of services subscribed to per customer has moved up to 9 from 8.4. So, we definitely are very confident that the average number of services subscribed to per business customer will continue to move upwards as we're signing up larger and larger customers, and so that figure will definitely get larger. I think that the business subscriber acquisition cost per service, it has been in this $90 to $100 range for the last 4 quarters. I think it will continue to stay in that range, but overall acquisition costs will probably continue to trend upwards primarily as a factor that we are signing up larger and larger businesses.

Mike Latimore, Northland Capital.

Why do you think -- you mentioned maybe seasonally a little stronger than normal, particularly in August, any reason for that?

I think there's -- I don't think it is any one reason, Mike. I think it's, and this is my personal opinion, I don't know that I have hard data. I have little data points that I string together and try to form a logical opinion based on what I see there, and the customers I talk to. Certainly I think the sales, in addition to building a channel and indirect team from scratch, which obviously, we keep giving you the metrics, I think we are making very good progress there. Our new sales leadership here has also been focused on improving our internal sales team. And so we do see better productivity and certainly much better linearity out of our direct sales team, which is the 55 salespeople that work primarily here in Sunnyvale selling over the phone. So that team was extremely productive during the summer and they just showed extremely good linearity. One of the things that Kim Niederman told me when he came on board back in February was, he did not really understand why our sales should slow down in July and August. He thought we should be selling just as much then as we do the rest of the year. I said, well, Kim, if you can show me that, that is true then I will start to believe some of these walking on water things that some of your former Polycom colleagues had told me about when I made my reference checks on him. I would say that Kim and the team delivered, and they have done that by upgrading and improving the sales management that is leading that team. They have done a lot of training, they have just done a lot of basic blocking and tackling to increase our reach to those customers. So that is the portion that I think the Company can take credit for.

I do think, and this is much more on the theoretical side, but just based on some of the customers I've talked to. That people took fewer and certainly shorter vacations this year because of the economic pressures that they were feeling in their business. And we also published probably about a month ago now, the results from the survey that we kicked off in July and August to these customers. It was really a survey of new customers that had joined us from about the middle of May through the middle of August, and those results we put in the press release. And certainly we saw an increased interest in these types of cloud-based services, both for the cost savings they deliver as well as the feature sets such as the mobile capabilities that they provide.

So that is why I'm saying, I think it is a combination of a whole bunch of things going on. We also had this improved benefit of being able to sign up these larger businesses, which you don't have to sign nearly as many of them per quarter with the increased revenue that they bring on when they adopt your solution as well. I think I don't think there is 1 thing to point out, Mike, I just think it is a collection of little things. Hopefully the self-service portal that we are now -- or the Account Manager that we are making available to those customers will do its magic and contribute its little bit as well this next quarter.

Then you said you had about 40 partners at the end of September. I believe your original goal was to do maybe 10 a quarter, and I think you are on maybe twice that pace. So how many partners do you hope to have going forward per quarter?

I would still guide you to the 10 per quarter. We are trying to be very selective. We do not have all of our new partners trained yet. They haven't gone through the in-depth training that our channel program provides, and so we don't want to get too far ahead of that curve. But having said that, the interest from these partners is very, very good, and I think the demand for this type of program is very timely in this space, and it gives these channel partners a much better alternative to the on-premise or other hardware types of sales that they have traditionally done.

On our website, I believe Joan has posted an update to our corporate overview presentation, and we've added a slide in there which shows you the economics that we present to these partners and it shows them why, by selling our cloud-based services, not only will they earn more over the life of the customer that they bring to our services, that is obviously a given, given the residual nature of our program, but they will actually even earn more up front. And so those economics are posted for a typical customer target and our current pricing out there, as well as the current program we're putting out there. We are getting good traction. We just signed a very large in the Northeast in the last few days that hopefully we will be press releasing very soon. I don't have a green light to name them but we are making very good progress and we are going to continue to make progress. But the focus I think now needs to be on making these partners productive, getting them successful with their first 5 or 10 deals so that we get that multiplicative effect as they come back and really turn us on to their prospects and companies that they are working with.

Last question. Are you doing a little more of direct sales than you originally thought or was that always part of the strategy?

It is part of the strategy. I certainly think for the very large enterprise customers, we always feel better selling and supporting them direct. Just because we can guarantee that there is not someone in the middle. And I think that will change as we get some of these larger indirect partners up and running to where they can do that work for us. But in my mind it is not scalable to say, the direct sale and provisioning and support to the enterprise is what we are going to do to grow this to be a significant portion of our communications revenues. So we have to make the indirect partners successful. We can't scale the direct selling operation here, I don't think, financially, because we just can't continue to put salespeople and engineers and project managers on planes to go visit all of these customers. We really need the indirect partner to do some of that local [en crème] work for us. We'll just be in the background making sure that the cloud services are there to support that customer.

(Operator Instructions) George Sutton, Craig-Hallum

Your data cloud business grew to 3% of revenues, and you have suggested that could grow to 50% of your total over time with a fairly reasonable amount of time. Can you help us understand your level of enthusiasm for that kind of goal?

Yes. I don't have hard guidance out there. I know you have communicated in your note to your clients that general idea, so all I'm saying is we don't have hard guidance on the timing of that. But I do strongly believe because we have been selling these business voice services for more than 5 years, and we have only been in the data cloud services market, as we call it, for a little over, I guess it's coming on 1.5 years now since May of last year. We just see the difference in the level of investment we have to make to sell and provision and support a new customer. I can tell you it is much easier and simpler, and the ROI, in my opinion, in the long-term is going to be much more profitable. We don't have to port a bunch of phone numbers, we don't have to train employees on how to use their new phone or how to use their new voicemail system. We don't have to teach them how -- they used to use WebEx or Go-To Meeting and now they are using our virtual meeting service and we have to show them how much easier it is, they don't have to do anything very complicated.

We do a lot of work to get an end customer up and running and productive with all of the features and services that we provide on the communications side of the house. On the data side we are typically selling to a very technical end customer who has a very well-defined, precise set of requirements. We deliver to those requirements, we essentially give them a root password and say there you go, and we are done and out of the equation and the end customer is up and running. So more and more of our large customers in that space -- I think the bigger the customer, the more technically adept they are and so the easier they are to turn on and provision.

So I am just looking at that cycle time, and the sales cycle tends to be shorter as well because it's a much easier sales to a technical recipient. So I am very encouraged there. We are still not completely rolled out on our top-end, private cloud, enterprise cloud product yet. We are hoping to get that launched in this quarter, which will be based on the VMware Vblock combination. We have obviously announced the City of Garden Grove deal, which was our first public customer that we are able to reference with that product. But we are still working on rolling out that larger end of the solutions, and so I think once we have all of those online and can turn both these enterprise salespeople that we employ, as well as our channel partners, loose on some of those products, I think you're going to really see the revenue kick in.

Most of the increase in revenue this quarter is coming from the smaller end. Either the dedicated managed hosting service, which was the central host company we bought back in May of last year, and a little bit of contribution from the Zerigo products, which is the public cloud offering we bought in June. But we really haven't kicked on the revenues yet at the real high-end of the market, which is where I think we will get that revenue penetration coming much quicker.

Polycom reported a pretty disappointing quarter this afternoon. I know that is an important relationship for you. Can you give us an update particularly in light of that and the ViVu acquisition with respect to Polycom?

I haven't seen their numbers, so I'm not going to comment on how they did. Hopefully they are not going to increase my IT phone prices. Don't make up the shortfall on me. We still are very, very pleased with the partnership. The channel presence that they have in the worldwide communications, the IP spectrum, if you will, is in my opinion second to none. We have continued to do joint marketing and lead generation with some of their SMB programs. We continue to embrace their video technologies and a large portion, or least a very significant contribution, in terms of supporting these legacy H323endpoints that we allow to call into our Virtual Room service are powered by Polycom technology that's running in our data centers. So we are still dependent upon that technological relationship.

I think their, in my personal opinion, their IP phones are the best phones being made out there. And they have some new phones that will be coming on the next calendar year that we are looking forward to getting into the hands of our customers as well. I don't know very much about, I think you pronounced it ViVu, I don't even know the right way to pronounce it. My understanding is they acquired that for their technology, it was a very small company, maybe 14 or 15 employees, and they are going to use some of that video technology that they acquired and integrate that in with some of the intelligent core offerings that we use as part of, for instance our Virtual Room service. So beyond that, I don't know anything else about the acquisition.

But we look forward to a continued partnership with them. I noticed that they redesigned their homepage recently and they still did not include us on it. My goal is first and foremost to get 8x8 listed on their homepage. If we get that accomplished we can go from there. I think the partnership is going fine and we value that partnership and relationship.

One quick question for Dan. Are you able to break up the incremental cost from the Contactual acquisition in the quarter?

The income statement impacts?

Yes.

Yes. So we set a couple of numbers regarding Contactual. They generated $444,000 in revenue for the quarter, and that was just from September 16 through September 30. The deal-related expenses that we expensed in the quarter were $480,000. Contactual, for all intents and purposes, was generating at a break-even level. We did not continue with some of their executives. All that we've said is that on a go-forward basis the acquisition will be accretive. So I would say in this current quarter that we are in, this December quarter, it definitely is accretive.

Steve Shaw, Sidoti & Company.

I jumped on a little late, and I don't want you guys to get too specific, but can you give any color on other applications or services you might be interested in that might go hand-in-hand with what you guys have picked up lately, or something you might kick the tires on?

No. I mean, in general, Steve, I think our strategy has been to search for communications platforms and services and technologies that either are an adjunct to what we are currently delivering. And as I said in the call, the only software there that we didn't have in-house, that we didn't own and have the patents on, was basically the Contactual platform. I think that made obvious sense. We've actually been trying to acquire, we've talked with Contactual over the years several times about acquiring that technology. So I was pleased we were able to finally consummate those discussions with the acquisition. But in general, I don't think in the communications space, in my opinion, a roll-up makes a lot of sense because you just end up with multiple -- if we were just to go acquire other hosted PBX providers, you end up with multiple call platforms, you end up with multiple billing systems, you end up with multiple operations, support teams. You really can't ever move the customers you acquire onto a common platform and get the synergies on the operations side of the house. So I think what you would look for from a communications perspective is more of adjuncts to services we're currently offering that we don't offer, or maybe a deeper dive into areas that we are offering like mobile and some of the more popular services with our smaller businesses, things like call recording and some of those capabilities. We may look to expand that feature set by acquiring someone who is a specialist in one of those areas. But in general we are not looking to replace what we have, we just want to add on to what we have.

On the data cloud side, I think it is a lot more interesting to talk about a roll-up and a consolidation and an extension of what is going on with these large Ma Bell type of service providers and cable companies that are in the market, rolling up these companies, because you really are just moving and migrating data center equipment from one data center to another, or potentially obtaining data center infrastructure to the extent that you believe that, that market over the long-term is going to have some shortfalls in it. So I think our interest in strategic activities in that area is much more broad and we are looking at a lot more options there. On the voice side it is much more specific to these adjuncts that I described, and that is about the level of detail I am comfortable with at this time.

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

All right, thank you very much. We want to thank you and, again, we felt we had a very strong quarter given the historical seasonality, especially that we saw on the voice side. I want to thank you all for dialing into the call today or listening to the replay. And reiterate as I always do, that if you are not a customer of our services, we can do a lot of things for you, both increasing the functionality and capabilities for your business entity, but also saving you a lot of money, which is very important in this economic climate we are in. You can learn about our many different services by going on our website, which is 8x8.com, but we will also be happy to take your calls and discuss your individual needs and what we can do for your business over the phone. So throw that out there and with that, we will conclude today's call.

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.