8x8 Inc (EGHT) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. And thank you for standing by. And welcome to the 8x8, Inc. fourth-quarter and year-end fiscal year 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference may be recorded.

Now it's my pleasure to turn the call over to Joan Citelli, 8x8 Director of Corporate Communications. Please go ahead.

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 full fiscal year ended March 31, 2012. 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 Factors sections of our annual report on Form 10-K, and our quarrel 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 afternoon, everyone. I'd like to begin by providing an overview of our fourth quarter and full year fiscal 2012 results, which will be followed by Dan's discussion of the financial details. We will then open the lines for any questions you may have.

8x8 closed its fiscal year ended March 31, 2012 with a solid quarter, fueled by strong new sales for our business communication and cloud data services. I'm pleased to report that total revenue for the March quarter increased 33% year-over-year to a record $24.2 million. While revenue from business customers increased 44% year-over-year to $22.8 million, or 94% of total revenue.

For the full fiscal year, total revenue was a record $85.8 million, a 22% increase over revenue of $70.2 million for fiscal 2011. In fact, if we had announced our year-end numbers prior to the April 21 publication of the San Jose Mercury News' Silicon Valley 150, which annually ranks Silicon Valley's 150 largest publicly-traded companies by revenue, 8x8 would have been included on the list for the very first time. For now, we'll have to be satisfied with our inclusion in the Russell 3000 Index this year. But it's a great sign of our future potential that we have become one of Silicon Valley's largest technology companies with our emerging cloud communication and data cloud service offerings.

8x8 added approximately 1,000 net new business customers in the March quarter. And ended the fiscal year with 28,671 business customers. All of the trends and metrics we referenced in last quarter's call regarding the adoption of 8x8 cloud communication services by larger mid-market businesses continued their respective growth and trends in the March quarter, with average monthly revenue per business customer growing to $244 per month, versus $204 per month in the same period last year,and the average business customer subscribing to 9.8 lines and services versus 8.0 lines and services in the same period last year. The average new customer we acquired during the March quarter subscribed to 13.6 lines and services.

As a pure play cloud communications service provider, with proven success serving larger mid-market and government organizations, 8x8 is extremely well-positioned to meet the escalating demand for hosted solutions from the mid-market segment, which I believe we can more effectively address than competitors that came from serving the very low end of the market and premise-based competitors who may be developing hybrid solutions. Some examples of mid-sized organizations that recently began using 8x8 services include the Los Angeles County Economic Development Council, transportation industry services provider TMW Systems, the Indiana Public Retirement System, classroom furniture manufacturer Virco Manufacturing Corporation, and Irving Materials, a Midwest supplier of building materials to the construction industry.

We were pleased to see an improvement in product margin for the fourth consecutive quarter from negative 24% in the December quarter to negative 15% in the March quarter. This is a result of our continued focus on selling higher-quality end points at higher price points to these larger mid-market customers. Gross margin was 68.4% in the fourth quarter, with service margin coming in at 76%.

Cash, cash equivalents and investments were $24.4 million at March 31, a significant increase from $21.9 million at the end of December, and $18.4 million at March 31 of last year. This increase in cash, cash equivalents and investments included $956,000 of stock that was repurchased during the March quarter. Cash, cash equivalents and investments increased $6 million in fiscal 2012, which included share repurchases totaling $2.9 million for the fiscal year.

8x8 employed 336 employees and consultants at March 31, 2012, not including our outsourced customer service team in Santa Maria, California. And we have run out of space at our corporate headquarters in Sunnyvale. On April 27 we executed a new lease for a 105,000 square foot facility in San Jose.

We will have about twice the space in this new corporate headquarters facility as our current facility, and our move is scheduled for August 2012. We will utilize our own cloud services to minimize the disruption and impact of this move. And Dan will also cover some financial impacts that we expect to see from the move into the new facility and our ongoing expenses once we're there.

8x8's non-GAAP net income percentage of revenue for fiscal year 2012 was 12%, and we remain committed to achieving profitable growth in fiscal year 2013 and beyond. We continue to see competitors that are struggling to deliver solutions such as ours. And in my opinion are vulnerable because of this fact. And we are confident that with our proven technology base, high recurring service margins, and phenomenal cash flows, we are in an optimum position to take market share from these competitors and grow faster.

We were fortunate to hire a highly talented and well-qualified Vice President of Customer Service in February. We have long stressed the importance of our California-based customer service team and the positive effect they have on our business customers. But I want to site a couple of examples of how this plays out in real life.

In March, I received the following letter from a program manager at one of our federal government partners which read, and I quote. Dear Bryan. We had a notably wonderful experience today. Eric, who is an 8x8 employee, provided training for our Federal customer and, Rayna, who is another 8x8 employee, helped fix an issue for them. Not only did the end user rave about the quality of service these folks provided, I'm raving about it. I'm a former professional trainer and I was truly impressed by Eric's tremendously detailed knowledge of the systems and his care for the end user. He's passionate and competent, writ large. Rayna did a thorough job of researching the issue, which was complicated, and did a wonderful job of walking the customer through the fix and testing. I cannot tell you how happy I am to write this. End quote.

Last week I had the pleasure of personally meeting this same program manager who relayed to me a new story about how our most recent government customer had encountered a last minute emergency with a poorly-planned deployment by a legacy provider. That agency turned to our integration partner less than one month before their move into the new facility, who in turn looked to 8x8 for a solution. We collectively delivered full turnkey communication solutions to this agency, which consisted of a greenfield data circuit and 78 virtual office extensions in 21 days, start to finish, most of this time dominated by the provisioning delay of the new high-speed Internet data circuit that went in to light that facility.

If a high-speed Internet circuit had already been present in the facility, we would have provisioned this mid-market customer start to finish, from the moment they contacted us to when they were fully deployed, in less than 10 days. This type of cycle time is unheard of in the traditional on-premise industry approach to serving customers of this size. And needless to say, our government partner is still thrilled with our services and 8x8's support.

In summary, fiscal 2012 was a successful and pivotal year in 8x8's history. As we executed upon a number of key initiatives that contribute to our long-term strategy, vision, and goals. I'm particularly pleased with the two acquisitions, Zerigo and Contactual, which we completed and successfully integrated into our Company and product portfolio. The great progress we made enhancing our services, network operations and support organization for larger mid-market and government customers, and the customer retention activities we put in place, which resulted in decreasing churn over the course of the year.

I'm extremely excited about 8x8's prospects for growth in fiscal 2013 and beyond, which will be driven by greater awareness of the benefits of cloud-based technologies, increased mid-market and government adoption of our services, a growing and productive third-party channel organization, and the prospects for global expansion that we are currently pursuing with several new partners. 8x8 offers the most extensive and complementary set of hosted communications and data solutions to the SMB, mid-market, and distributed enterprise customer. And we will continue to lead the way with our technology platforms and innovative new services.

With that, I'm going to now turn the call over to Dan Weirich, the Company's CFO, who will walk you through our detailed financial results, provide additional business regarding our Business. Go ahead, Dan.

Thank you, Bryan.

All of the key indicators of our business were record or near record-setting this quarter. Service margin remains strong at 76%. Our 12th consecutive quarter with hosted service margin greater than 75%. For the full fiscal year, service margins were 77%. Throughout fiscal 2012, we made significant infrastructure and personnel investments in our operations team, which is included in our cost of service revenue line on our income statement. We did this to build more redundancy into our network. As these infrastructure investments near completion, we expect that service margins will begin an upward trend through fiscal 2013.

GAAP net income for the year was $69.2 million. This included a tax benefit of $62.1 million, primarily associated with a release of a deferred tax asset valuation allowance in the fourth quarter. The March quarter was negatively impacted by the 100% write-off of a $356,000 strategic investment in Stonyfish that we made at the beginning of fiscal 2011 related to the sale of our former French subsidiary.

We are introducing non-GAAP metrics this quarter for the following reasons. The $62.1 million tax benefit is very unlikely to recur in the future. And including a benefit this large makes it difficult to compare our current to historical operating results. Second, stock-based compensation expense is difficult to predict and is affected by market factors that are largely not within control of management. The third reason for introducing non-GAAP metrics is amortization of acquired intangibles is a non-cash expense that we do not consider part of ongoing operations when assessing our financial performance. And the final reason is acquisition related and facility exit expenses can be large dollar amounts that make comparisons with our historical operating results difficult.

We have defined non-GAAP net income as net income for GAAP plus loss on investment, non-cash tax adjustments, stock-based compensation, amortization of acquired intangible assets, acquisition-related costs, and facility exit costs. We believe that such exclusions facilitate comparisons to our historical operating results and to the results of other companies in the same industry.

For the fourth quarter, our non-GAAP net income was $3 million, a 32% increase compared to the same period last year. Non-GAAP net income per diluted share was $0.04 for the quarter, compared with $0.03 in the same period last year. Non-GAAP net income percentage of revenue is 12% in the fourth quarter, compared with 12% in the same period a year ago.

For the full year, non-GAAP net income was $10.3 million, a 46% increase compared with non-GAAP net income of $7.1 million in fiscal 2011. Non-GAAP net income per diluted share was $0.15 for the full year, compared with $0.11 in fiscal 2011. Non-GAAP net income as a percentage of revenue was 12% in fiscal 2012, compared with 10% in fiscal 2011.

Capital expenditures were at the bottom end of the software-as-a-service universe range at 2.3% of revenue in the fourth quarter, and 2.7% of revenue for the entire fiscal year. In the September quarter this year, we will be relocating our headquarters from Sunnyvale to San Jose. As Bryan noted, we will be doubling the square footage of our headquarters, which will result in an annual operating expense increase of approximately $1.2 million per year compared with the expense we incur in our current facility. We expect to incur capital expenditures net of tenant improvement dollars provided by the landlord of approximately $2 million, and a one-time relocation and facility exit expense of between $350,000 and $500,000 in the first half of fiscal 2013. Working capital of $23.7 million increased $12.3 million over the past year.

Cash flow from operating activities for the year was strong at $9.2 million, compared with $8.6 million in fiscal 2011. Our reported churn was a record low of 2%, with 53% of our cancellations due to business closure and economic environment reasons. Revenue churn in the quarter was 1.6%.

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

Okay. Thank you, Dan.

For your reference and convenience, we have posted a transcript of these prepared remarks on the events and presentations section of 8x8's investor website which is at investors.8x8.com. We have a busy month ahead of us in terms of investor events. For those attending, we are presenting at B. Riley's 13th Annual Investor Conference in Santa Monica on May 23, Craig-Hallum's Ninth Annual Institutional Conference in Minneapolis on May 30, and Benchmark's Third Annual Investor One-On-One Conference in Milwaukee on May 31. Please contact your representative at these firms if you would like to schedule a meeting with us at any of these events.

With that, we'll be happy to take any questions you may have. Operator, please open the lines.

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

You did mention in your prepared remarks something about global plans. Could you elaborate a bit on that, please?

Yes. Hi, Mike, it's Bryan. We, through the acquisition of Contactual, have acquired a significant number of customers with primarily call centers. But, again, some of these are starting to buy telephony services from us, as well, that are in locations that are outside of the US. As you know, historically, 8x8 has only provided telephone numbers, and in some regulatory and tax senses, services within the US. I think the transaction rapidly accelerated our desire to expand into some of these international markets. Some of the customer concentrations are in places like the Philippines, the UK, and Canada. And so, we have been engaging rapidly with partners in those markets, so that we can offer local services, localization of the services, and maybe even better feet on the street as we develop these markets, so that we have support and salespeople in those markets. And so, that's what the reference was to.

All right. Thank you. And then second question's really in two parts. You say that you're pleased with the progress with the channel, but it's still a small portion of the revenue. First, can you quantify what portion of the revenue you're getting from the channel today? And maybe where you would like to be for the current fiscal year?

Yes, it's still a small percentage of contribution of new MRR. I'll see if Dan can give you a less than some percent. While he's looking that up, the channel has basically been up and running, let's call it, for a year now. And we're at a point where we're starting to get some steady deal flow. The channel partners that we're signing up, I think, are of a much better quality and credibility maybe, and financial backing, than some of the partners we signed up in the very early days when we started this effort last spring. And so, yes, I'm still convinced this is the right way to get in front of these mid-market customers and quote our services, because we just don't have the brand recognition or familiarity that a Cisco or Avaya or Mitel have, to have these types of customers calling us. So, we're starting to close those deals, and we're still making progress on that.

Do you have a number?

Yes. So, in the quarter, Mike, MRR, what Bryan said -- it means monthly recurring revenue -- in the quarter, from our channel side, it was approximately 6% of the Company's new bookings.

6% of new bookings. Okay, thank you. And then, maybe you don't want to talk about what the goal would be for next year. But one thing for modeling purposes, I'm curious as to what trend we should expect for SG&A, given the number of hires coming in, as well as the number of conferences sponsored, which looks like to be a pretty full slate for the remainder of the year.

We're very popular. The conferences are relatively inexpensive, fortunately. So, I don't think that's going to have a material impact on SG&A.

You want to comment on the other?

Yes. As you can see, compared to the December quarter to the March quarter, we've included a new table on the non-GAAP reconciliations. It's the last table in the press release. And our non-GAAP net income percentage of revenue in the December quarter was 16% of revenue, and it was 12% in the March quarter. So, you can definitely see that we've invested more in this most recent quarter.

Our goals are to continue to invest in various product, sales and marketing related areas to accelerate our top-line growth. What we're seeing is, we see absolutely huge interest in what we're doing. Every day and every month things are getting better in the marketplace. Many of these premise-based providers are hitting 52-week lows, and they're continuing to come out with announcements that they're missing their numbers. Because many people are looking at cloud-based solutions, and seeing that there's no CapEx required, and that's a way that they could potentially go. So, we're seeing strong momentum in larger and larger businesses. And it's reflected in our ARPU figure, which is up $5 sequentially. And this is a big shift that is occurring, and we expect it's going to last many years.

We're not providing guidance as to where the investments are going to go. But we definitely are looking to hire, as you can see on our careers page on our website. But all the investments will be into profitable growth.

Okay. Thank you. And then just final point of clarification. By conferences, I meant NetSuite, SuiteWorld, which you're at now, GSA Expo coming up, Exchange Solutions, IT Expo, these types of events. That's what I was talking about.

Yes, so, those are all types of conferences where we can reach the mid-market customer base that we're targeting.

And channel partners.

All right. Thank you.

Mike Latimore with Northland Capital.

Great results there. Just on the product margin, service margin too, is this a pretty reasonable product margin? It's improved a lot. Is this where we should think about it going forward? You talked about -- you've invested in some of your network, and you might see some leverage there. Where could service margins trend going forward?

On your first question on the product margin, it improved roughly 10% in absolute terms from the third quarter to the fourth quarter, from negative 24% to negative 15%, approximately. And we think for the foreseeable future, it's still going to be a subsidy amount. And, frankly, we don't have a great visibility into whether it's going to be negative 15% or negative 25%. If you look at that in absolute dollar terms, it's a very small figure. It's that delta. But I would say it's somewhere in that range.

On the service margins, we have a goal internally to get it to 80%. And we see no reason that we cannot get service margins to 80%. Unfortunately, I don't have a hard timeline on that. But that's what we're shooting for.

Got it. And then, the churn continues to be very strong, and improving. And you just hired a very top-notch customer service person. Is there much more room for them to improve churn?

Mike, this is Bryan. I've been very impressed with what Eric's been able to do in the short time he's been here. Really brings an enterprise-class focus and discipline, and knowledge of processes to a customer service organization that, to be perfectly honest, was built out of grass roots and home grown. And so, I actually think that, as that organization and our on-boarding in general get better, we've been able to hire a senior executive who's focused solely on the on-boarding process of these new customers. And ways to optimize that, and get them up and running even quicker than we are today. I think you will see most of that impact improve our churn in the first 120 days of a customer's life, which is where, if you look at the traditional waterfall charts that we've talked about in the past, that's where most of our churn comes from anyway. We continue to focus on that. And we continue, I'm pleased to report, to make progress on it. And I see a lot of improvement yet to come in that area.

Great. How did Contactual perform in the quarter?

Contactual performed very well. We're starting to see some good success on cross-selling the product into 8x8's base. Bryan listed roughly about six companies in his prepared remarks. And two to three of those purchased pretty significant contact-center deployments during the period. I believe one was an 87-seat contact-center deployment, one was approximately 30. And I believe there was another one that was in the 40 range. So, very good success there. And on just going straight to market with the contact center side, we're doing extremely well, and added some fairly impressive logos during the quarter.

Great. Just last question. What roughly will the cash tax amount be for the quarter going forward?

It is going to be in the range of about $15,000 to $25,000 per quarter.

Good. Thanks a lot.

George Sutton with Craig-Hallum.

Bryan, I was wondering if you could expand upon your suggestion in your prepared comments that competitors are vulnerable. I just wondered what you were referencing there specifically.

Hi, George, good afternoon. I was looking through these deals that we listed, just to give you maybe a little more color on some of these. TMW is a large transportation infrastructure company. And they had a bid out to replace a Cisco platform in seven locations. The initial order was about 500 extensions, but we expect that to grow. And so, we were able to replace that. And the reason they were replacing that was really for cost savings, and especially the reduced load on the IT staff that they were employing internally to support that. So, they just viewed this as a way to outsource all of that, and free up that staff to go work on other priorities that they have internally that the IT people can work on.

Virco was another one I mentioned where this was a competitive RFP-like formal bidding process. We submitted written bids. We did live demos, and we're head-to-head in that deal against, amongst others, Avaya, ShoreTel and Mitel. This was three locations -- two in Arkansas, one in Torrance, California -- 470 extensions. Again, this was another one that Dan mentioned used our contact center.

So, again, if you ask Virco why they were replacing their existing system -- number one, they wanted to get the whole company in all these locations on a single system. And number two, it was cost savings. We just see the knowledge of these cloud-based services, and as Dan mentioned, the CapEx advantages really starting to resonate with these mid-market customers. When we can provide a better service for a lower monthly operating price, free up your IT staff, and not have you invest in CapEx, I think in this market environment, with what these businesses are really trying to do with their spending, it's resonating very well.

And so, we've seen some moves during the quarter. We saw one of the on-premise providers buy a very small regional player, similar to 8x8, with a very point solution for hosted PBX. Didn't really go into some of the other areas that we serve, and the breadth of our service offerings in conferencing and video and call center and so forth. But we just see this mid-market customer really starting to come to us. And that's a significant difference from where we were just a year to two years ago.

On the competitive angle, furthering that a little bit, [Cross] Consultant had very complimentary things to say in their report. I'm wondering what kinds of follow-through you've seen from that.

I can tell you the last few months, not only our sales phones have been ringing off the hook, but the investor interest and analyst interest and people from Gartner that have been coming through our facility here, we've just really seen an uptick in the interest level. I'm waiting for the formal Frost & Sullivan report to come out. But based on the presentation that they made public at the Enterprise Connect show down in Florida a few weeks ago, we had permission to use that data. It should be loaded up on our investor page. So, if you take a look at our new investor deck that we'll be presenting next week at these conferences we're going to, we've got that data included in there.

And, yes, I thought it was extremely complimentary, and I think it's extremely correct. I think they got the analysis right. I'm glad to see the right data getting out into the market versus some of the claims I've seen from analysts that may not have done their homework.

If your phones are literally ringing off the hook, that could be a hardware problem, so you may want to check that. (laughter)

No, in the SaaS world, it's not a problem. We can actually take all those calls. But no, the interest level's been extremely high, so we think that's a great thing for the Company and for our shareholders.

On the V cloud, you had, I believe, deployed that this quarter. Could you give us an update on that?

Yes, you're talking about the enterprise cloud product that we based on the Vblock?

I'm sorry, Vblock.

No problem. When you say V in front of something, that's usually what it's referring to. Yes, we're seeing very good interest in the platform. We're continuing to on-board customers onto the platform. We're actually starting to do some work in regards to putting some of our core technology platforms, like the call center, on to the Vblock platform.

That Vblock's actually sitting out on the East Coast in our federal facility, if you will, in Ashburn, Virginia. And we're getting some certifications done around that facility later this year that will open us up to even more government bids, and ability to serve those needs. Again, with the demand we're seeing on the contact center side of the house, we wanted to make sure we can support those customers under those certifications out of that facility. And we believe that platform's going to be great to deliver even some of those voice services. We're seeing good cross-over there. We're seeing a good mix. And again, it's very nice to be able to go into any customer meeting, and have something to sell them and offer them.

Last from me. Relative to your corporate headquarter move. Dan gave the economics behind it, in terms of the cost. Could you just give us a sense of what this may enable you to do that you might not have been able to do, other than the obvious, with your old headquarter?

If you visited us any time recently, it's a common complaint. There's nowhere to park here. And there's nowhere to park behind the building, across the street, and there's nowhere to park down the street. And I had a Board member even, we had an in-person meeting all day yesterday, the Board member had to park so far away, he was asking -- are you sure it's safe to leave my car out there? I said -- yes, it should be fine, that's where I'm parked.

So, number one, in the old days, as a chip company, we were always looking for warehouse space and a sunken dock where we could ship chips. The move this time, and the search for the new facility, really focused on parking spaces and things like cafeteria space. And, to be very frank, restroom facilities because the line to the men's room here can get long at lunchtime, as well. We accomplished what we think will be all of those needs -- the ability to significantly expand our headcount. We're making a major investment in this facility. We'll be upgrading our knock. We signed a seven-year lease there, so we expect to be there for some time.

It's also in a corridor that, number one, has the capability for future expansion, should we ever outgrow it. Which is a problem I'd love to have. And the other thing that's very attractive about it, it's served by the light rail that the county provides here. That drops you off half a block from the front door to our facility. So, we're looking forward to getting in there, and alleviating some of the cramped living conditions that we're all dealing with here.

Perfect. Thanks, guys.

(Operator Instructions) Greg Burns with Sidoti & Company.

A question about the breakdown of your revenue between Virtual Office and Virtual Office Pro, or maybe the percentage of customers taking each service?

We don't provide granular detail to that level. But I'll just paint a little picture for you of what a customer looks like. Typically a customer that's subscribing to our Virtual Office Pro product, which is a unified communications product, is typically subscribing to our flagship PBX product. And a customer like that may have five to six physical extensions. That's actually when you have a physical telephone that you can make and receive telephone calls from. And you have voicemail, and all the feature and functionality of a PBX.

And then on top of that, they typically buy services. A customer may buy two of the unified communication services for the head of the company and the office manager or someone like that. And then they'll buy a fax line and maybe a toll-free number and a virtual number that comes in to their PBX. So, that's like the voice that answers the phone when you call a business. That's the makeup of what a 10-service customer looks like.

Does that help you?

Yes, it does. And thinking more broadly about the opportunity to cross-sell, you talked a little bit about that with some of the contact solutions that you outlined. But just more broadly, to cross-sell and up-sell the 20-plus subscription services you now have in-house, do you feel you have the infrastructure in place or the systems in place to do that effectively? Or is there ways you could enhance your ability to do that going forward?

On the cross-selling and up-selling, we definitely have a lot of room for improvement there. We have our inside sales centers broken up into two groups. We have account executives, which is a little bit more than 50% of our inside group. And they're the folks that are responding to the leads. So, these are businesses that we've never done business with before. They're trying to add new customers.

And then we have an account management group that takes over the account a number of months after they've initially become a customer. And the account management group is responsible for add-ons, up-sells, cross-selling, et cetera. And so, what we typically see is the initial point of sale, 60% of the monthly recurring revenue is subscribed to at the first point of sale. And then over the next year to 1.5 years, we see the customer add on the remaining 40% of their total monthly recurring spend. Some of them buy a system, try it out, and realize this thing's good to go, and they deploy it across the whole company. And some of the customers are deploying across the whole company, and then they start adding features and functionality.

For example, one of these customers that we mentioned today, TMW Systems, is a company who signed up in the summer of 2011. It's a multi-hundred-line deployment. They are the customer who subscribed to more than 50 contact-center seats in this most recent quarter. So, that's an extremely good example of a customer who deployed the PBX, unified their organization across seven or so locations, and then we were really strong with an up-sell of an extremely high-margin contact center solution on top of that.

Okay. And then between, say, your communications solutions and your hosted cloud, have you been able to cross-sell between those two services?

We are actively doing that, and it's going both directions. So, we'll have customers that might be a $200 PBX customer, and then they become a $20,000 a month managed hosting customer. And we've seen it vice versa, as well.

Switching gears to the government space, how big is the GSA and the NASA contracts? How big are those bid platforms?

The networks contract is roughly $20 billion. And then the WITS-3 contract is $3 billion. And I believe the vast majority of our wins have been on those contracts.

Okay. And just more generally, how is that space evolving for you? Are you seeing increased demand for hosted in the government space?

Yes. We had a new logo last quarter. We had a new logo this quarter. And we are seeing significant increase in activity there. And we have a huge number of bids out there waiting to hear response from. The number of bids we have out there is a much larger number than we had out there three months ago, or four months ago when we last spoke.

Okay. And then, in terms of the quarter, could you just maybe talk about the linearity? We're pretty deep into the first quarter now. Any color you could give on the first couple months of this quarter?

If you go back and look at our historical company count or customer count chart, we're in the range of 1,000 net new customers per quarter for a long time -- 20, 25 quarters straight. And it's not changing.

Interest and sales are strong. I made the reference to ringing off the hook, so we're not seeing any weakness in our new sales.

Okay. Great. Dan, did you mention the percent of sales coming from hosted services, and the number of channel partners you currently have signed up?

When you said hosted services, I believe you're referring to our cloud data product?

Yes, correct.

Okay. That represented 4% of the Company's revenue in the fourth quarter. And then the number of channel partners was 82 at the end of March, and that compared to 54 at the end of December.

Okay. Great. Thank you very much.

Thank you, Mr. Burns. And at this time, it looks like this does conclude our time for questions and answers. I'd like to turn the program back over to Bryan Martin for any additional or closing remarks.

Okay, thank you. And thank you, everybody, for joining us today, and for listening to our presentation. If you're not already improving your business communications and data services with our solutions, I encourage you to learn more about what we can do to help you improve your business, as well as 8x8's many diversified cloud services. We have all that information up on our website at www.8x8.com.

With that, we will conclude today's call. Thank you very much. Go ahead, operator.

Thank you, sir. Ladies and gentlemen, again, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may log off at this time.