8x8 Inc (EGHT) 2013 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the 8x8, Incorporated Q2 fiscal 2013 earnings conference call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today, Ms. Joan Citelli, Director of Corporate Communications. Ms. Citelli, 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 second quarter of fiscal year 2013 ended September 30, 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 10K 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.

Thank you. 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 an overview of our second quarter of fiscal 2013, ended September 30, 2012, 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's top-line revenue grew 33% during the quarter to a record $26.4 million, up from $19.8 million in the same period a year ago. Non-GAAP net income during the quarter was $3.7 million, or $0.05 per share, compared with $1.7million, or $0.02 per share, in the same period last year.

Revenue from business customers, which now represents 96% of total revenue, increased approximately 41% year over year, compared with the quarter prior to the acquisition of Contactual. To give a more apples-to-apples comparison, if we included pre-acquisition revenue from Contactual from July 1, 2011 to September 15, 2011, year-over-year revenue growth from business customers would have been 25%.

Average monthly service revenue per business customer increased for the 5th consecutive quarter, growing to $256 in the September quarter, compared with $250 in the June quarter and $207 in the same period a year ago. We are consistently adding approximately $10 in monthly ARPU from our business customer base every six months as we continue to sell more services to our existing customers and also sell new services to larger businesses.

The average lines and services count for new customers who subscribed to 8x8 services in the September quarter was 14.7 lines and services, up from 14 lines and services in the June quarter and 12.4 in the same period last year.

Dan is going to provide you with additional detail on our margins, but we were very pleased to see service margins improve this quarter to 76%, up about 100 basis points from the prior quarter.

During the September quarter, we experienced a one-time churn event which essentially had no effect on revenue churn but did impact our net subscriber adds. Approximately 400 $20 per month, one-line "Find Me-Follow-Me" and "One Number Access" customers which we acquired in 2008 from a company called Avtex Solutions changed providers during the quarter based on an administrative decision made by the affiliate that managed these individual business accounts. The affiliate notified us of their cancellation after moving these customers to another one-number access service provider. With this one-time event, we recorded a churn rate on customer count of 2.4% for the September quarter. However, if you remove the effect of this one cancellation, our monthly customer churn would have been 1.9% for the quarter.

Despite this event, monthly revenue churn, including all cancellations during the quarter, including Avtex, was at an all-time low of 1.0%. While we were sorry to see the Avtex customers go, we had little opportunity to up-sell them in the future, and we remain focused on further improving our churn rates for our larger, target PBX and contact center customer base who can fully benefit from the range of hosted voice and cloud services that we offer.

I'd add that these churn metrics do tend to move around quarter to quarter and do not always improve in a straight line, like the improvements we have seen in recent sequential quarters. But, we do expect long-term trends on these metrics to continue to improve.

We ended the September quarter with 30,498 business customers.

Our mid-market and channel sales groups brought in 12% of our new monthly recurring revenue sold in the quarter compared to 9% in the first quarter of 2013 and 7% in the same period last year. Our channel partner program expanded during the quarter with 103 partners under contract as of September 30, 2012. This program is growing and we are pleased with the relationships we have built thus far, as many of these partners are actively quoting and engaging with new prospects, and they are excited to be offering our cloud-based alternatives to legacy approaches to the market, particularly as they now realize they will make more money by selling our solution due to its revenue tail, as opposed to a one-time equipment sale.

On the product side, one of the most important technology developments we readied during the September quarter was the enhancement of Virtual Office Mobile, our mobile PBX offerings for smartphones and tablets. We deployed these new offerings on our production network at the end of September and announced the availability of these latest offerings for all of our subscribers on October 3rd. Virtual Office Mobile eliminates platform fragmentation and allows users to take their office extensions with them and minimize phone tag, conduct voice and video calls over 3G, 4G and Wi-Fi, record calls on demand, access PBX features such as call transfer, conferencing bridging and directories, see status of co-workers and send and receive instant messages and faxes.

According to recent Frost & Sullivan data, 84% of companies have remote workers who spend at least 25% of their time away from their desks, so the availability of our business communications services on these increasingly popular mobile businesses devices supports this growing trend. We are working on broadening these initial offerings with additional unified communications capabilities.

The Company was also issued 2 new patents during the September quarter relating to our Virtual Contact Center technologies.

On our balance sheet, 8x8's cash, cash equivalents and investments totaled $40.1 million at September 30, despite the large capital expenditures that we incurred during the quarter from the construction and relocation of our corporate headquarters to a larger facility in San Jose, California.

Dan will have additional details on the financials related to our move, but I am happy to report that we successfully and seamlessly completed this move from Sunnyvale to San Jose in August, without any disruption to our employees or customers, due to the use of our own cloud communications technologies. There's nothing like providing your own testimonial as we migrated two large call centers and our 350 employees to our new location without missing a beat in our communications systems. If you have not yet visited our new facilities in San Jose, I would encourage you to do so.

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

Dan?

Thank you, Bryan.

As Bryan mentioned, revenue growth for the quarter was strong with approximately 25% organic revenue growth from business customers compared to the same period last year. Non-GAAP net income for the quarter increased 119% to $3.7 million, or 14% non-GAAP net income as a percentage of revenue, from the same period a year ago. For the six months ended September 30, 2012, non-GAAP net income increased 96% to $7.1 million from the same period a year ago.

GAAP net income was $1.7 million compared to $832,000 in the same period a year ago. Income before the provision for income taxes during the September quarter was $2.8 million compared to $854,000 in the same period a year ago. Fiscal year to date net income was $10.4 million compared to $2.8 million for the first six months of fiscal 2012. Year to date income before the provision for income taxes was $17.2 million compared to $2.5 million in the same period a year ago.

Service margin improved to 76%, compared with 75% in the first quarter of fiscal 2013, but was still down from 77% a year ago in the second quarter of fiscal 2012. As we stated last quarter, our goal is to get service margins to 80% as quickly as possible. To achieve this goal, we have entered into commercial agreements with new network vendors and are optimizing our network and network operations activities.

Overall gross margin was 68% compared to 67% in the first quarter of fiscal 2013 and 66% in the second quarter of fiscal 2012. Gross margin increased due to an increase in product margins from negative 45% in the second quarter of fiscal 2012 to negative 22% in the second quarter of fiscal 2013.

The Company's cash, cash equivalent and investment balances are very strong at more than $40 million. The Company does not have any debt.

Capital expenditures were $3.7 million for the quarter. $3.3 million of these capital expenditures were tenant improvements on our new office building. Our landlord reimbursed us for $1.7 million of these improvements during the quarter. Year to date, capital expenditures have been $4.7 million, with $3.7 million in tenant improvements. Beginning the third quarter of fiscal 2013, we will be back to our historical capital expenditure as a percentage of revenue of approximately 2%.

Business subscriber acquisition cost per service was strong at $89 compared to $97 in the first quarter of fiscal 2013 and $101 in the second quarter of fiscal 2012.

Revenue churn was a record low at 1%, compared with 1.9% in the same period last year and 2.3% in the prior quarter. Customer count churn was 2.4%.

Adjusting for the cancellation of approximately 400 low-end customers Bryan discussed, which represented approximately $9,000 per month in recurring revenue, customer count churn would have been 1.9%. This monthly churn rate is up compared to our record low of 1.7% in the first quarter of fiscal 2013, but down compared to 2.1% in the second quarter of fiscal 2012.

As we continue selling to larger customers, we believe that revenue churn is a better indicator of our revenue and customer retention than customer churn because our smaller customers cancel at a higher rate than our larger customers.

We have added revenue churn to our selected operating statistics table to provide investors an historical view over the past five quarters. A recent review of reasons for customer cancellations in the first 30 days of service shows that more than half of the cancellations are for issues within our control that can be addressed by streamlining our on-boarding processes and properly setting customer expectations at the point of sale. This data gives us confidence that there is additional room for a reduction in churn in the future, but I would like to remind you that churn does not always decline linearly quarter over quarter.

During the second quarter, we migrated more than 96% of the legacy Contactual customer to 8x8's CRM and billing systems. This will result in increased efficiency, an enhanced customer experience and lower cost to service these customers. Approximately $900,000 of the sequential increase in accounts receivable is due to this migration because we invoiced these migrated customers later in the month as we took additional time to review each invoice for accuracy. We expect this to be a one-time event and accounts receivable growth to revert to historical increases in the December quarter.

That said, we expect to see accounts receivable grow faster than revenue over time, because we will have greater percentage of our revenue on invoice terms rather than credit card billing as we provide services to larger and larger customers.

Cloud data represented 4.7% of the Company's revenue in the quarter.

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 our prepared remarks on the Events & Presentations section of 8x8's Investor website at investors.8x8.com.

As a reminder, we will be hosting a West coast analyst demonstration of our cloud-based offerings on Monday, October 29 at 10AM, noon and 2PM at the Bently Reserve, 400 Sansome Street in San Francisco. We will also be presenting on November 13th at the Stephens Fall Telecom and Media Conference in New York. We look forward to seeing you at one of these events.

With that, we will be happy to take any questions you may have for us today. Janine, if you'll open the line for any questions.

Thank you. (Operator Instructions) Mike Latimore; Northland Capital.

Very nice quarter. So the organic growth rate looked very strong. Is the kind of environment or dynamics you're seeing there, does it support that kind of growth rate sort of through the rest of this year?

So, Mike, this is Bryan. We don't have guidance going forward. But I will say, through the end of September we haven't seen really any change in the macro environment out there. We don't see any change in the competition that we're coming up against, really no change in pricing or any other issues that might affect things. We continue to see the weakness that we've seen for more than three years now with business closures as being the number one cause of churn, and didn't see any improvement in that. Maybe after the election we'll see something there.

But I just don't see any macro changes that should affect our ability to keep the organic growth where we've been historically.

Great. Do you have a number for ARPU of gross adds in the quarter, or a rough range?

Yes, Mike, that's a number that we don't disclose. But ARPU for new adds is higher than our average of $256. So that's what's pulling ARPU up quarter over quarter. And as Bryan mentioned, the average new customer subscribed to 14.7 services this quarter compared to 14 a year ago and our overall base is at 10.6. So --

14 in the prior quarter.

Yes, 14 in the prior quarter, sorry, and 10.6 across our entire base at the end of the quarter we just reported.

What was the employee headcount at the end of September and where might it go in the December timeframe?

So it's right at 350. And we're hiring, I would say, as aggressively as we can. If you go on our website you'll see the number of [recs] we have open to hire. The flip side to that is, you know, Silicon Valley traffic is getting worse and worse day by day. And I don't think it has anything to do with the San Francisco Giants in the playoffs.

So we're seeing more people lured away by other opportunities, so we have to hire more than we had to hire a few years ago just to keep the growth up. And that's kind of the challenge, again, that's starting to come back into the Bay Area. Don't get me wrong; I'm not complaining about an improvement in the macro environment. But I'm just saying it's becoming a competitive environment again for very, very good talent, which is what we seek to hire here.

Okay. Just a last question -- what percent of revenues came from the managed server hosting in consumer?

The managed hosting side, which we call cloud data, represented 4.7% of the Company's revenue. And revenue from residential customers was 4% of the Company's revenue.

Okay. Thanks a lot.

Greg Burns; Sidoti & Company.

Just a question about the gross adds -- you've had a lot of gains on the churn side of the business, but gross adds have been relatively stable for the last couple of years. And given that you're bringing on the new sales channel and you're up to 106 channel partners, I would expect you would start to see that number go up. So I'm just trying to understand what you need to do to kind of fill the funnel a little more and get the gross adds going higher from here.

Yes, Greg, this is Bryan. So I was actually very pleased to see our mid-market and channel team basically exceed their internal goals for the quarter. We mentioned the increase from 9% of new sales to 12%, which I think is very healthy for a sequential quarter-over-quarter growth.

We've started to do a lot more events and different activities with these channel partners. We've had several events with several partners during the quarter where we cosponsored events. We've been kind of ferreting out the nonproducing partners and we've signed up some, I think, pretty exciting partners, including one nationwide partner that we're not ready to announce yet, but we will in the near future.

And I would say just at a -- we focus on growth, on new customers coming in the front door equally as we focus on churn, and appreciate you taking notice of the tremendous impacts that the churn initiatives have had on our growth. But we are in the process, and we're pretty far along the path, of implementing some new growth strategies. And those growth strategies really focus on three priorities.

Our highest priority remains focusing on our inside sales team, which is selling both our Virtual Office and our Virtual Contact Center products to small businesses. Our second priority is to continue to push the growth in this mid-market and channel effort at these larger opportunities. And our third focus is really to grow our federal and government sales. And I can't give you more details on what we're doing there. We think it's extremely sensitive from a competitive perspective. But we are very focused on that, equally with the focus that we've talked about in previous quarters on churn.

Okay. And then I guess when I think about the inside sales and the traffic you generate from internet advertising, I mean, are you really kind of maxed out on the number of customers you can bring in the door and it's going to really depend on how quickly the channel develops? Is that how to think about it? Or is there additional gains you can make on the internal sales and internet advertising also?

I don't think we're maxed out. Marketing and kind of some enhancements to our marketing programs is part of those growth strategies I just mentioned. And, again, I can't give you any detail yet, because we're still in the [formative] stages of rolling this out. But we really think that beyond just waiting for the indirect partners to start pulling their own section of the rope on the growth strategy, we really do think that our inside team can continue to make inroads and grow quicker than it's grown or failed to grow, depending on which quarters you're looking at in terms of new gross adds.

So that's our number one priority in the Company. And that's what the majority of the employees here are focused on.

Okay. And I was looking at your website and I noticed you were offering -- had some special pricing offers for Virtual Office, Virtual Office Pro. Is that in reaction to anything you're seeing in the market or is that just something you normally do throughout the year? Any kind of insights into that would be helpful.

Hi, Greg. This is Dan Weirich. The promotions that we have on our website are fairly constant. We have various different promotions over time. But the promotional pricing that you're seeing on there today is very comparable to what you would have seen a year ago or six months ago. So it's not in reaction to anything specific.

But it's typically based on some sort of discount off of list price and we tend to price deals differently based on the geography where the customer's coming from. So in some geographies around the United States, telephony expenses are much higher than in other geographies, so we provide our sales people tremendous flexibility in their ability to price, as well as, as volume increases for customers, meaning more employees and larger customers, we can tend to provide volume-based discounts to new customers.

Okay, thank you. I'll hop back into the queue.

Dmitry Netis; William Blair & Company.

Couple of questions. On a breakdown between the hosted PBX and the Contactual, can you give us what the breakdown was this quarter?

Yes, so we're not providing that breakout. And the primary reason is, is that's it's entirely -- well, 96% of the customers as of September 30 were migrated onto 8x8 systems. Many of those customers are buying 8x8 PBX services as well. Had a decent amount of success in selling PBX solutions into these folks. But all of those customers are buying the telephony solutions into their call centers from us, which is the toll-free calling in to the call centers as well as the outbound calling capability. And so these customers have been completely migrated onto systems and we'd have to break it out into product lines at that point to provide you that information.

But the main figures to focus on is 96% of the Company's total revenue is coming from business customers. And the only item that we've broken out is just this cloud data component, which is the only non-voice-related services, is 4.7% of the Company's revenue.

Okay. All right.

So when we talk about the 25% year-over-year growth, we're referring to the 96% of the Company's revenue.

Okay. And were you able to at least tell us, that 25% organic growth, how is it relative to each of the businesses? Is it about the same for both or -- ? I know you're not splitting it, but are you able to -- I think last quarter you said 23% is what your cloud PBX and Contactual grew for the quarter over quarter -- or, I'm sorry, it was year over year, I think, was the number that you gave, and now it's 25%. So it grew nicely. And I think last quarter was about the same for both businesses, the PBX, the Contactual. Would you care to tell us whether it's about the same again this quarter?

Yes, I mean, all that we can really tell you is that 96% of our revenue from business customers grew 25% year over year.

It's really being sold transparently as just an additional -- it's almost like the customer is signing up for an additional checked box that they want some call center seats. So we've migrated the networks together. We've now migrated all of the billing and back office systems together and it's really one unified service, which is why we're not trying to differentiate between them. It's just another capability you can buy. And you can buy one seat of it or you can buy 150 seats of it. And the functionality is the same.

Okay. All right. I'm sort of getting to that same point, because I'm noticing your ARPU is growing nicely and that's probably from Contactual adding -- Contactual seems to be doing well, is what it boils down to. Your net adds, however, were below last quarter's. And last quarter was actually a nice number. You printed, I think, 1,242 net business customer additions. This quarter I see 585 if I'm doing my math right.

So this is the reason for the question, is, Contactual seems to be doing well. Is it the cloud PBX that's sort of trailing? Because most of your net adds are not growing as fast as one would expect. I mean, last year you were somewhere in the 1,000 to 1,200 net adds range across -- well, probably even going back to December of 2010, so last, I'd say, 6, 7 quarters. And now this quarter it fell to 585. So what's going on there? Could you give us some perspective on that and how it might sort of trend going forward?

Yes. So we mentioned that we had one affiliate. He represented approximately 400 customers. And if you look in the second footnote on our Selected Operating Statistics table, we specify that as 411 customers. So adjusting for that, gross adds are -- or net adds are up in excess of 900 customers.

A year ago the 3,176 gross adds included 250 customers acquired from Contactual, so you can see that in Footnote 1 of the Selected Operating Statistics. So if you adjust for both of those, the change in gross adds was 10 year over year. And the item that we keep kind of reiterating is, is that a year ago the average customer was signing up for 12.4 services. In this quarter it was 14.7. So the number of services, the ARPU of the customers coming in the door is going up almost every single quarter fairly consistently. And it's not because contact center is doing better than PBX. I mean, both of the businesses are sold in tandem and they're effectively one and the same and they're growing at very comparable growth rates.

Okay, thank you. That's helpful. And I just have one last question, on the service margin. Dan, would you give us sort of the bridge between the last year's 77.5% and this year's 76%? So that's roughly 50 basis points -- or 150 basis points of downward change in the service margin. It has improved from last quarter. So if you could comment or give us perspective, what drove it quarter over quarter -- and what drove it higher on the quarter-over-quarter basis and lower on the year-over-year basis, that would be great. Thank you.

Yes, so in the year-over-year basis why it declined was it was -- we mentioned last quarter and we made significant investments over the last 18 months or so on building an East Coast presence for our network infrastructure. Every quarter that we add more revenue we're essentially spreading that cost over a greater component of revenue, which results in expanded gross margin so we're more fully utilizing our fixed costs is one of the reasons for the increase in the most recent quarter over the June quarter.

But the reason for the decrease year over year is that there's a lot more fixed cost today than there was a year ago related to this network infrastructure. And also, that is coupled with what we mentioned a quarter ago, that some of our network expenses had increased for kind of a multitude of reasons. And we have since entered into multiple commercial relationships with network vendors to bring on additional coverage and reduce pricing, and just a lot more vendor diversity.

The prime vendor that we entered into a relationship with during the quarter is Verizon. It's a contract that covers a wide variety of services. And they have an extremely comprehensive offering and will be a huge backup as well as kind of diverse vendor for Level 3 Communications, who's been the Company's biggest vendor for quite some time and became a larger vendor when they merged with Global Crossing a year ago.

So those are a lot of the activities that we've had in place.

Got it. When will you start seeing the benefit of Verizon being on board in terms of termination costs improving?

We think that we start seeing improvements almost immediately. We have reiterated that our goal is to get to 80% service margins as quickly as possible. Our compensation of our executive team is based on hitting that figure as soon as we can, which means this fiscal year. And I can tell you that we are working day and night to hit that figure. And it relates to many, many things in the organization, and signing a Verizon contract is just one component of many.

Okay. And then the fixed costs for the network infrastructure, do you see that diminishing going forward? Or is it going to probably stay at the same sort of rate that you've seen over the last couple of quarters as you were building up your data centers?

Yes. So, the investment in the data centers is done. And so the improvement quarter over quarter that that represented, we'll be seeing a similar improvement in future quarters. Just think of it as unutilized real estate and you're using 50% of it and the next quarter you're using 55% of it. So you've got revenue running over a greater percentage of the fixed infrastructure.

Yes, Dmitry, I think Dan mentioned to you we expect CapEx to kind of go back to our historical levels. We're kind of through the operations buildup and we're also through the move of the corporate headquarters, which was a big source of the CapEx this quarter.

Okay. And I guess -- sorry -- my last question would be, if you were to take that 160 basis point improvement -- sorry -- it's actually -- it's really 100 basis points improvement quarter over quarter, right?

Correct.

So how much of that is related to termination and how much is related to the fixed cost network infrastructure?

I mean, there's a lot more components than just termination of our business. So we can't provide the exact details of what else it is. I mean --

But I think you can characterize it as most of it is the customer base growing into the operations investment we previously made. There's none, or very little -- the vendor we talked about is not on line yet. So that had no impact on the improvement.

Right. That makes sense. Okay. Okay, so it's got to the outbound costs, which is the rest of it, right? So the inbound termination partner, which is Verizon, not on board yet so you're not seeing the benefit of that yet. But you're still incurring some outbound charges, aren't you?

Well, we're just incurring improvements in our operations efficiencies. So essentially we've got larger customers coming in. There's additional ARPU we talked about. And there's -- think of it as essentially there is no net new investment in operations to support those customers.

Okay, very well. All right. I'll jump off the line. But thank you very much and keep up the good work.

Follow-up from Greg Burns; Sidoti & Company.

Just wanted to dig into the acquisition costs. They're down this quarter but the number of lines keep on going up, so it seems like you're getting efficiency somewhere. Can you just talk about what's driving that?

Yes, Greg. It's Bryan. We saw some efficiencies I think in our advertising during the quarter than the previous quarter. But this is a number that historically it's always been in this kind of $90 to $100 per service or per line range. Even going back to the days when we were selling home phone lines, it cost between $90 and $100 in advertising to get a new consumer customer signed up.

So it varies, but we really don't worry about it or pay attention to it as long as it kind of stays bound in that range of kind of $90 to $100 per service. So I wouldn't read too much into it. Some of it's an effect on timing, some of the different marketing programs we're running. Some of it just kind of -- it moves around. So it's a significant improvement as a percentage of the figure, but it doesn't really -- our payback is still 6 months on these customers. So I think that might be a better macro number to look at. And if suddenly we go to 8 or 9 months to pay back a business customer, then we'll have a reason why that is.

Okay. And in terms of the churn, do you have any more buckets of customers like this that are at risk of kind of these one-time churn events? And could you just comment on the linearity that you saw in the quarter? Thank you.

Yes. So, the answer to your first quarter is no. I don't think we have another affiliate which is administering this many different individual businesses, or at least have control -- we certainly have channel partners that have brought in this many businesses. But they don't kind of run the administrative function of selecting which service provider those businesses are using. So we believe this is a unique situation and you won't have the kind of weird hiccup and customer churn that we had to explain this time.

Having said that, revenue churn kind of is to me a much more important metric. But appreciate your patience in kind of ferreting through the differences there.

I'm sorry -- second question?

Just linearity that you saw throughout the quarter.

Oh, yes, linearity. And that's the other thing. We talked about some growth earlier in the call. And the month of July historically has always been tough. We did very well a year ago July. And I can't really explain any difference in kind of our approach to the month. July -- this year the 4th fell on a Wednesday, which meant I think effectively you kind of lose the entire first week of July. And if you could the number of business days and where the weekends fell it was just a particularly brutal month. So we did get a very slow start to the quarter as we sometimes do in these summer months. But other than that, I would say linearity was -- there was nothing unusual about it.

Okay. Thank you.

Mike Crawford; B. Riley.

As the market starts to mature a little bit, are you still competing mostly against people, businesses moving away from old wireline services? Or are you seeing more or less of any of these other private startups, like a RingCentral or a Vocalocity?

Hi, Mike, it's Bryan. I don't think we -- I think the majority of our new adds are still king of migrating away from a circuit switch solution that might be powered by anything from a Nortel to some other aging kind of PBX infrastructure.

It's interesting, because we are seeing, I would say, more in the larger customers, the mid-market base, coming to us with maybe an Asterisk type of system which is a public domain software that a lot of IT staffs like to utilize. And they may have started with that or had that for a number of years and they're seeking something that's maybe more enterprise quality or more turnkey solution that doesn't involve the same administrative costs that they're having to sink into managing the Asterisk platform themselves.

We're also seeing a lot of these mid-market customers come to us with Cisco Call Manager refreshes. And these may be Call Manager platforms they've had for a number of years. And from an expense, both on the administration side -- but, again, as you move forward with these licensing models to get the latest and greatest features and unified communications and support the latest devices out there, a lot of these vendors are requiring a very significant capital renewal in order to get the latest and greatest code on that platform. And we believe some of these large vendors are in that cycle right now. So I think in the mid-market it's very interesting to see that.

On the call center side we continue to see people that are using ShoreTel call center products that are, again, looking for a more enterprise-grade call center product. And that's been a great source of leads for our Virtual Contact Center team.

So it's basically the same competitive dynamics, but we are seeing -- I've seen a lot of them and we just came back from a mid-market CIO forum event last week in Florida where we saw literally dozens of very large mid-market customers with kind of these refresh problems. So we're hoping that that is a new trend.

Okay, thank you.

Thank you. I am showing no further questions in the queue. I'd like to turn the call back to Mr. Bryan Martin.

Okay. Thank you, Janine, and thank you, everybody, for joining us today. If you're not already a customer, I would encourage you to go to our website, look at our many diversified business cloud services. You can find that at www.8x8.com.

With that, we'll conclude today's call. Go ahead, Janine.

Ladies and gentlemen, thank you for attending today's program. This does conclude the conference and you may all disconnect. Everyone have a great day.