8x8 Inc (EGHT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 Inc. Q1 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll have a question-and-answer session, and instructions will follow at that time. (Operator Instructions) And as a reminder, today's conference is being replayed for replay purposes. I would now like to turn the conference over to your host for today, Ms. Joan Citelli, Director of Corporate Communications. Ma'am, you may begin.

Thanks, 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 first fiscal quarter of 2014 and to June 30, 2013.

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

Before I turn the call over to Bryan, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals including financial guidance and similar expressions including, without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties including factors discussed in the Risk Factor sections of our Annual Report on Form 10-K 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'll turn the call over to Bryan Martin, Chief Executive Officer and Chairman of the Board of 8x8.

Thank you, Joan, and welcome to 8x8's earnings call for our first quarter ended June 30, 2013.

I'll begin by providing an overview of the quarter, which will be followed by Dan's discussion of the financials in greater detail. We will then be happy to answer any questions you may have for us today.

8x8 recorded a solid start to our 2014 fiscal year with total first quarter revenue exceeding $30 million for the first time. 91% of this revenue was recurring service revenue, and 9% was product revenue. Revenue from business customers comprised more than 98% of total revenue. Year-over-year, our quarterly revenue from business customers grew 22%. We added 1,127 net new business customers during the quarter for a total business customer base at June 30th of 33,662 businesses who subscribe to our cloud services.

We also further improved our service margins in the first fiscal quarter with GAAP service margin at a record 81% and overall GAAP gross margin at 71%. Non-GAAP net income as a percentage of revenue increased to 14%.

Total new business services sold during the quarter increased to 47,353 versus 41,146 in the same period last year with the average new business customer purchasing 17.5 lines and services. Over our entire customer base, the average number of subscribed services per customer increased sequentially to 11.8 compared with 11.5 in the March quarter. The average monthly recurring revenue per business customer in the June quarter also increased sequentially by $5 per month to $268 per month, a 7% increase over the same period last year.

Business service revenue churn during the June quarter was very good at 1.2%, and business customer churn was at a record quarterly low of 1.4%. All of the churn reduction initiatives we've put in place have started to produce the results we've been expecting, and our customer satisfaction surveys are also reflecting these results.

During the quarter, we merged our dedicated contact center sales team with our channel and mid-market team as both groups are now effectively cross-selling our entire portfolio of communication services into the mid-market segment. The collective channel and mid-market group generated 29% of our total monthly recurring revenue added during the quarter compared with 29% last quarter and 17% in the same period a year ago if these sales teams' results had been merged and bucketed the same way in the past periods. Channel and mid-market new monthly recurring revenue sold in the quarter increased 73% compared with the same period last year, and we ended the quarter with 116 partners in our channel sales program.

I'd now like to provide an update on our cloud services development project with SoftBank. We have completed substantially all deliverables related to our initial development project and are working with SoftBank in Japan to integrate these services into their data center environments.

Yesterday, the Executive Vice President and Chief Operating Officer at SoftBank gave the keynote address at SoftBank World entitled, "Global Cloud to Accelerate Business," which described the capabilities of this new software cloud technology and referenced 8x8's virtual desktop interface portal as the way customers will control their SoftBank infrastructure services globally.

SoftBank also conducted a 40-minute portal workshop to demonstrate these new services on the first and second days of SoftBank World in Japan and exhibited the services at a booth at their event with live demos running on both personal computers and iPads. We expect the production release of these services to occur during the September quarter with monthly recurring billings to SoftBank following shortly thereafter.

I want to congratulate 8x8 and SoftBank's exceptional development teams for completing this large project on schedule, and we look forward to discussing additional development projects with SoftBank.

I am also pleased to report that 8x8's own global reach projects for expansion into both the United Kingdom and Asia Pacific markets later this year remain on schedule. Earlier this month we executed the agreements related to our new data center development in London, and we expect this facility to be the next global reach location to launch in production in the fall. We are very excited to be working with our existing U.S.-based mid-market customers to help them grow and expand their operations overseas while expanding our own multinational customer base.

With that update complete, I will now 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. Revenue growth was strong in the quarter with revenue from business customers increasing 22% compared to the first quarter fiscal 2013. I'd note that last year in the first quarter fiscal 2013, we benefited from an increase in recurring revenue associated with the migration of a significant amount of the telephony traffic generated by our legacy contractual customers onto the 8x8 network.

These are the same customers we picked up from the acquisition of the Softwares to Service contact center service provider, which we closed on September 15, 2011. Without this revenue benefit, our growth rate of revenue from business customers in the first quarter of fiscal 2014 would have increased compared with the fourth quarter of fiscal 2013.

In addition, compared with the same year-ago periods, overall revenue growth increased 19% in the first quarter of fiscal 2014, 18% last quarter, and 17% in the third quarter of fiscal 2013. So, as you can see, we are experiencing a very steady and robust revenue growth rate.

Service and gross margins were, again, at their highest levels in our Company history with service margin at a record 81% and gross margin at more than 70%. Contribution margin defined as service revenue less billing and customer service expense improved to 65% in the June quarter compared with 64% in the March quarter. Payback, defined as the number of months of contribution margin to pay back the subscriber acquisition cost, was 6.6 months.

As Bryan noted, non-GAAP net income for the quarter was $4.3 million, a 27% increase compared with $3.4 million in the same period a year ago. Non-GAAP net income per diluted share was $0.06 for the quarter compared with $0.05 in the same period of fiscal 2013. Non-GAAP net income as a percentage of revenue was 14% in the quarter compared with 13% in the same period a year ago.

Now the gross margin improvement is beginning to flow through to the bottom line even as we have increased our investment in sales and marketing as a percentage of revenue to 44% from 42% in the same period a year ago.

GAAP net income was down compared with the first quarter of fiscal 2013 due to the sale of a family of patents for $12 million in the year-ago quarter. This was recorded in our Statement of Income as a reduction of expense in the amount of $11,965,000. Due to the one-time nature of transactions such as this, we have deducted the benefit from this transaction from our non-GAAP net income to provide better year-over-year comparison.

Business subscriber acquisition cost per service was $96 per service compared with $97 in the same period a year ago and up $4 from $92 in the fourth quarter of fiscal 2013. Business service revenue churn in the quarter was very low at 1.2% compared with 2.3% in the same period a year ago. Customer churn was a record low of 1.4% compared with 1.7% in the same period a year ago. 54% of our customer churn cancellations were due to business closure and economic environment reasons. This tells us that our customer onboarding and support projects are continuing to improve the portion of customer churn that is within our control.

On the sales front, gross business customer additions and number of new services sold decreased by 106 customers and 3,375 services sequentially. With the exception of the last year, we have historically seen a decline in sales between our fourth and first fiscal quarters.

Capital expenditures were $466,000, or 1.6% of revenue for the quarter. The capital investments in our global reach initiatives are beginning now in the second quarter fiscal 2014. These investments are expected to have an incremental effect on our capital expenditures for the remainder of this fiscal year.

Our cash, cash equivalents and investments increased by $5.5 million at the end of the June quarter to $58 million. We have increased this number by more than $5 million in each of the past three consecutive quarters.

We continue to be well capitalized with no debt for strategic corporate development.

Finally, we expect to incur cash taxes of approximately $700,000 this fiscal year.

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

Thank you, Dan, very good. For our attendees' reference and convenience, we've posted a transcript of these prepared remarks on the events and presentation section of 8x8's Investor website at investors.8x8.com.

8x8's annual meeting of shareholders will take place tomorrow, July 25, at 10 a.m. at the Company's corporate headquarters in San Jose. We will also be presenting at the Pacific Crest Global Technology Leadership Forum in Vail, Colorado, on August 11th, and at the Oppenheimer 16th Annual Technology Internet and Communications Conference in Boston on August 14th. We look forward to seeing you at one of these events.

With that, we'll be happy to take any questions you may have for us today. Mary, go ahead and open the lines for any questions.

(Operator Instructions) George Sutton, Craig-Hallum.

Thank you. Guys, apologies up front, I'm going to miss the annual meeting.

No problem, George.

Just like everybody else will. So --

We'll give your seat to someone else.

Relative to the SoftBank opportunity, can you just give us a sense of the scale potential for that specific program?

Yes. Again, as we've commented, I think that certainly last quarter and probably even the quarter before, we expect, even with the minimums in the contract that SoftBank will become a kind of top 5 customer on a monthly recurring revenue basis. Again, the initial contract with them is a 36-month term. We have already gotten requests, and they're kind of entertaining discussions with them on follow-on projects and expanded features and the sort of change orders you would expect to see in a contract of this size.

So, again, we're very excited that we've been able to meet their requested schedule. It was one of the reasons they selected 8x8. Both the kind of breadth and depth of our technology but also our speed of execution, our ability to get them to the goal, which was to launch this service and this suite of capabilities at their World Trade Conference, which just occurred earlier this week.

So we're happy to get over that finish line with them and looking forward, hopefully, to additional opportunity as we move forward.

Thank you. Now, relative to the global reach project, you've talked about some of the data center additions you're making but nothing on the M&A side, and I wondered if you could just update us in terms of what you're seeing from an M&A perspective?

Yes, we are still actively looking at potential partnerships. Discussions are at various stages of maturity. So I don't have anything to update you with specifically today, George, other than to reiterate kind of what our strategy is. We're going to launch these global reach sites regardless of whether we have a partner in the region because our current customer base is looking to expand their existing service offerings that they use from us to these regions, anyway. And if we can supplement that expansion with some strategic M&A that would accelerate our presence in those markets, then we're certainly eager to do that.

If we don't, then we're still very optimistic that we have a very unique product that truly starts to stretch the cloud base capabilities of these services to kind of an international presence whereas historically the Company for a large percentage of our customer base has only operated here in North America.

Great. And, finally, for me, you were excited when you brought in Ben on the inside sales effort, and you've expected some improved productivity. Can you just update us with some of the changes that have been made there and what the plans are for the inside sales effort specifically?

Yes, absolutely. So Ben started here April 29th, so he just gave a 90-day update to our Board yesterday. We've been very pleased with the changes he's put in place. Some of the new sales managers and sales agents that he's hired, some of the processes I know that he's put in place have been very well received by the sales team. I would say morale is very high, and we're very excited to see what he can do. I've been very impressed at what he's been able to accomplish in a very short period of time.

So Ben and, of course, Kim Niederman, who is one of the best recruiters on the planet in terms of locating these types of individuals, we're very pleased with their progress, so far, and hopefully you'll see that translate into gross adds that are going up and to the right in future periods.

Barry McCarver, Stephens Inc.

Hey, good afternoon, everybody, and a great quarter.

Hi, Barry, thank you very much.

So I guess a couple of questions. First off, I didn't quite understand on the SoftBank opportunity -- is that expected to begin generating revenue in the third quarter, is that what you said?

It will begin -- we expect it will begin generating revenue in the September quarter, which is the quarter we're in right now -- our second fiscal quarter.

Yes, I'm sorry, that's what I meant, yes. Okay.

Yes, we should have a more quantifiable update on that as -- to confirm that that actually began billing in our next call.

Okay. And then you mentioned in your prepared remarks, the channel partner revenue as a percentage of total revenue was 29% flat with last quarter. I'm wondering, could you break out what was truly mid-market sales from slightly larger customers versus what the channel actually brought in? I'm wondering if there's any change and, I guess, any acceleration in the slightly larger companies starting to come in and take your product?

Barry, I would answer that -- let me try to answer it at a general level, and I'll see if Dan has anything to follow up on. The general -- yes, we had a tremendous March quarter with that team -- just really blowout sales, and I think there was a little bit of overhang going into this quarter just because the pipeline had basically gotten emptied at the March quarter. Our March quarter is historically very, very strong. It's usually our best quarter of the year. I think part of it is that it's our fourth fiscal quarter, and so everyone across the Company is just focused on turning in the final results for our fiscal year.

And then coupled with that, we think the companies we sell to -- at the calendar year, they'd gotten clearance for their new year's budgets, they're ready to invest for the year, they've got money to spend before it gets kind of cut back later in the year. And so that's kind of a thesis we have as to why those mid-market customers are so prone to buying in that quarter.

Sales were basically flat, as you said. I see you interpreted our remarks correctly. So whether you use the new bucketing that we're going to use from this fiscal quarter forward or you were to re-bucket the quarter we just reported -- the way we reported it last quarter, [fiscally], that group was flat. I don't think there's any concern there coming out of it. We look at the top 5, top 10 partners. They're kind of the same names on the list and kind of the same MRR amounts that they sold in the previous quarter. Just maybe slightly smaller deals so you kind of saw the erosion down to 17.5 new lines and services. It's primarily being driven by just slightly smaller sales in the mid-market team, but nothing, I think, that was too surprising in terms of the change there.

Do you have anything to add to that, Dan?

No, I think you covered it pretty well.

Okay, and then just, lastly, if I may, very strong pop in margins, particularly gross margins in the quarter. Of course, a lot of that was expected, but just thinking about how we roll out the rest of the year seasonally, is there upside in the near term to at least the gross margin side if not both here in the near term?

So on the service margin side, we have tremendous visibility there, and we feel very confident, as we stated in the last quarter, that it will be in excess of 80%. We are going to be making some investments on these data centers outside the United States in the next three quarters. But even with those investments we're confident that we're going to be above 80%.

The product subsidy side, or negative product margin, has been fairly volatile from a percentage standpoint, from an absolute dollar change, it's been fairly immaterial. But I would say that collectively with service margins in excess of 80%, it would typically result in overall gross margin in excess of 70%. So that's something we're very comfortable with.

And you brought up a good point there on the product margins, or the negative margins there. You can kind of see that it's been within a range, although it does move around each quarter. Is there anything in those product trends that would suggest that it's going to exceed the range, the high that it's been maybe over the last two or three quarters?

I don't think so, Barry. I think you're right. We've narrowed the range. We don't have these, like, wild swings like we used to, but we'll still do promotions and things that will drive it one way or the other, and, again, I think the general trend, yes, some of our mid-market customers don't want -- they don't have any budget to pay for the equipment. We work with them on that. Some of them are willing to buy the equipment at near full price, and we're happy to take that order.

I do think as a bigger mix of our new customers is more of the mid-market segment. That might help stabilize that further, but for right now I wouldn't read anything into it one way or the other, and it's going to probably keep bouncing around, hopefully within this slightly narrower range than it's been.

Mike Crawford, B. Riley & Company.

Thank you. Further, regarding the cloud services, around what percent of revenue were data services now, and where do you think that gets to once SoftBank ramps up?

We got the question, Mike, we're just -- Dan's flipping through some numbers.

Well, the SoftBank side, I mean, as we said, is -- will be for a top 10 customer from any kind of threshold measurement of materiality what we have done, to date, with the SoftBank is well, well, well below any materiality level. So we're talking well below a 5% revenue customer.

And so I would think of it as like extremely low -- one digit percentage of revenue type level of customer. And so that revenue would be kind of categorized into this data cloud type revenue, which is kind of like a non-unified communications revenue that we have today.

But let me -- the collective-like manage hosting a cloud revenue is roughly 4% of total revenue, and that compares to roughly about 9% a year ago of total revenue. So it's a business that, as we mentioned a couple of quarters ago, we had diverted kind of some of the marketing resources and kind of transitioned the model into more of this licensing type model that we've illustrated with CoSentry and the second customer was SoftBank.

And just to be clear, then, Mike, the 4% number -- there's zero SoftBank revenue in the June quarter that we just reported today.

Right, thank you. And then on the global reach, the data center [instance] investments you'll be making -- is that something that's going to be $3 million or $4 million of net investments over the next six to nine months, or is it to early to say?

No, and so we reported capital expenditures as a percentage of revenue of 1.6% this quarter. And I think on a full-year basis, we'll probably be closer to 2.5% or so, maybe 2.5% to 3%. So -- we're looking at maybe, like, for approximately, like, 1.5% of revenue would be invested in this global reach initiative from a CapEx perspective -- a little bit lower.

And then it looks like we declined a bit the following year?

Oh, yes, this is like a one-time investment. So it's sort of -- for some of you long-timers, if you recall, we put the -- expanded to the East Coast a few years ago, and we had kind of the big one-time investment and as we set up our Virginia Data Center, and then CapEx rapidly declined as a percentage of revenue, and I think of it in the same way.

All right, thanks, so the final question is any changes in any of the competitive dynamics where you're coming in against hosted PBX providers or any other maybe other service providers?

Well, I think the only change is -- I think we're winning more deals. If we're in the deal, we've got a very good chance of winning it, and it kind of speaks to the maturity of the sales team, but we know what we have to quote on a pricing professional services basis to a larger customer to win the deal. And so I think our close rate has actually improved versus where we were last year on opportunities we're in.

And other than that, the competitive landscape has been pretty stable, which is a surprising thing to say after the decade we went through in 2000 with kind of the emergence of these technologies in the early part of that decade and then the effects of the crash on the business climate in the US after 2008.

So, hopefully, it's a little smoother sailing as we continue to scale, Mike.

Dmitry Netis, William Blair.

Hey, guys, congrats again on a good quarter and pretty good metrics across the board.

Hi, Dmitry, thank you very much.

Okay, I have a couple of quick ones here. I guess the first one I wanted to see on the churn -- you've been pointing to this economic churn for a number of quarters. It's sort of been over 50%. Has that improved? I mean, have you seen macro environment improving and thereby what's driving your churn to this record low number?

Actually, if you look at it from the percentage of total cancellations, it was almost like an all-time high at 54% in this quarter but, overall, the denominator piece of the equation was smaller, so the absolute number of cancellations due to economic reasons, was the smaller number --

-- slightly smaller --

-- slightly smaller, yes, we're talking, like, maybe like 30 customers or something. So -- I would not say that it's an indicator in any respect of, like, a macro recovery in the economy. Dan and I don't hold any political office, so we're not going to trump the 30 saved businesses.

All right, fair enough, well, thanks for that. The other question I would have is, as I look at your subscriber acquisition cost, it's been sort of on an uptrend over the last couple of years. It's hit about $1,133 this past -- this quarter, the June quarter, which is about $163 year-over-year improved -- increase in subscriber acquisition cost.

So I just want to -- not necessarily that there's anything wrong with this. I understand you're selling a lot more services, but give us some puts and takes what goes behind this and why this thing either continues to grow or may stay at the levels it is at right now.

I think the way you're doing the calculation is you're just doing the -- I believe the calculation would be, like, the $96 times 11 point --

Exactly right, yes, exactly right. The total service, yes, per customer.

Okay, so the number of services -- one thing is the number of services that you're multiplying it by is just a bigger number than it was a year ago, and so the way that we tend to look at it is how much is it costing us to acquire a service that's going to generate recurring revenue to us. And so that's why we have brought it down to kind of the lowest common denominator of a service. And year-over-year, in our view, being up $4 is like flat for us, and if we go back and look at many, many years of data, the high point was, roughly, $110, plus or minus a couple of dollars, and the low point was $90, kind of plus or minus a couple of dollars. So we're in a fairly tight range, and for the last five quarters, we've been kind of just below the average there. And we kind of view the average at $100.

And so the reason why larger customers would result in higher acquisition cost is we have a meaningful percentage of our sales come from our Virtual [Pro] program, which is detailed on our website, and that is paid a dollar amount per fiscal line that is sold. And so on a 100-line opportunity, they would be paid 100 lines times that referral fee. And on a 10-line opportunity they'd be paid 10 lines times that same figure.

So -- that's one of the big drivers that that pushes it up is -- and then the subsidy piece is factored in there as well. So on larger sales opportunities the absolute dollar amount of the subsidy is greater.

Okay, that's helpful. And as far as kind of the marketing dollars going into acquiring those bigger customers, that obviously has to grow, right, going forward? And does it have to do anything with the competition being, maybe, fiercer in the mid-market versus the [FMB]? If you could maybe comment there as far as the marketing activity trying to go after the bigger customer.

If you're asking why the bigger line count deals have a higher overall acquisition cost, it's really just driven more by the sales cycle is longer, and say we invest more resources, not necessarily on the lead generation but more through the selling process -- a lot of the bigger deals we participate in have written requests for proposals that require some of the sit-down write-up whole quote and grant and kind of how we would install this and kind of get all that on paper. And so the sales cycle can stretch anywhere from, at the low end, maybe three- to six-month timeframe to we have deals that are more than 24 months and are still in process. And these are deals we believe we can close, they're just very long sales cycle deals.

So that's kind of more what drives that expense. I don't think the -- as I said in the last -- with the last caller -- I don't think the competitive landscape is really all that different than it was, other than there's a growing acceptance of these, really, customers of all sizes not just the larger customers to look at a cloud-based offering as a viable alternative or as a means of expansion or upgrading their current solution.

And the cost of lead generation -- has that been pretty consistent?

Yes, it really has, surprisingly consistent, even going back to when we started in the consumer world. So we've never really figured out the roots or the law of nature that preserves a certain dollar amount you have to spend. But it's -- I haven't seen any real material changes there.

Okay, excellent, thank you. I would have one question on the federal side, given that we're heading into this fiscal year-end on the federal -- if you could maybe give us an update there. I know you've been dumbing this opportunity down for quite some time. Is there any --

Well, yes. Well, speaking of the sales cycle -- speaking of sales cycle time -- so we always refer to some of our -- I don't want to say all of our -- some of them are very quick -- but some of our federal customers and opportunities are very special incarnations of a mid-market customer. So, yes, some of them have extremely slow -- slower than normal. They may not just do one RFP, they may do -- they may decide to redo the RFP and maybe do it a third time and respond to protests and all sorts of fun things that we get into.

Things are still slow there. I've heard other companies blame the sequester. I've heard them blame the political deadlock. People are scared to spend money in Washington -- all sorts of things. I don't think we're operating at a big enough pay grade to really comment on why, but what we observe is the deals are very, very slow, execution seems to have --

We shouldn't be expecting anything next quarter, basically, is what you are saying, right?

Exactly, yes. It is their fiscal year-end, and they do need to spend some money. There are accounts we have with the federal government where they actually prepay for a full year, but I'm not going to stick my neck out and say you're going to see any bump from federal based on what we're seeing right now in the deal flow there.

Okay, good. And then how many guys have you added? What's the headcount at the end of the quarter? The last housekeeping question here.

Our total headcount at the end of the quarter is 414 people.

Great, okay. Well, thank you very much.

Thank you, Dmitry.

Keep up the good work, gentlemen.

Appreciate it, thank you.

Ragharan Sarathy, Dougherty & Company.

Yes, hi, good afternoon. First question is on mid-market. Bryan, you talked about it -- slightly smaller deals, average number of services from new customers 17.5 The new MRO was flat from fourth quarter. But if you look at the pipeline, if you look at the productivity of the team, is the first quarter kind of the low point? Should we expect the trend to go higher from here?

Yes. I mean, visibility there -- in terms of the -- the existing pipeline is solid, there is no issue with the pipeline other than the fact we -- I think that team really cleaned their pipeline in March, and we just had a very slow April as a result. As I said, we had 116 partners, approximately half of those did business in FQ1. We saw the same kind of overall mix that 25% of the partners did, really, the bulk of the business.

So, yes, like I said, I don't read anything into that, and we are focused, as we talked about, we had our first deal out of [Insight] on our last quarter's call, and even that team has had some transitions during the quarter -- the gentleman we worked with there to set that deal up retired and left the company during the quarter, so we have a new, kind of a, raw VP we're working with. We've been very closely working with that team.

I don't think any of those changes had any disruption to the deal flow there. We've been very successful onboarding the customers coming from these larger channel partners, and I think that will yield more deal flow as they gain confidence that we can provide a very good alternative to their competitive solutions that they've carried in the past, typically on the on-premise side.

So -- that's kind of my commentary on it.

Okay. And then in terms of sales and marketing expenses, it was running between maybe about $11 million and $11.5 million the first half of last year -- that's stepped up to $13 million. If they look at the [SAC], it's flat year-over-year at $96. So where are you making these investments? Are they going more towards supporting the larger customers you're bringing in and then, sort of, how should we think about going forward?

Sure. Yes, I mean, the reason the cost of acquisition excludes payroll and related expenses. So effectively the increase is related to payroll and expenses. So sales and marketing, as a whole, year-over-year, was up $1.6 million on payroll and related expenses. That's just the bulk of the investment. It's just us hiring more quota-carrying salespeople (inaudible).

And then in terms of the churn, it was record low. Bryan, you talked of some of the initiatives paying off. Is there further room from increment -- or this is -- you know, some, yes, you know, how I should think about this?

Yes, I apologize for laughing. There's always room for further improvement on churn. So we're never happy, never satisfied. It's a very frustrating job for our customer service and onboarding team. So we are continuing -- we have some projects underway, especially on the mid-market side. A lot of the onboarding processes and tools that we utilize kind of graduated out of developments that were done for the smaller-size customers, and they're not always ideal for a mid-market customer or mid-market customer with multiple locations.

And so one of our goals here is to really drive a lot of automation and a lot of really advanced tools into making the onboarding process much easier for these larger customers. And I think that is where most of the low-hanging fruit lies, and that's where we have a lot of development efforts.

But, having said that, we're actually taking kind of a hard look at how our services are delivered to what we've historically called our micro-businesss, which are kind of 25 seats and fewer, and I think there's product improvement that can be driven into that segment that will also yield higher customer satisfaction.

I mentioned customer satisfaction surveys in the prepared remarks, and we're very closely monitoring and measuring and taking a look at what our customers think about how we help them do business, and that's given us a lot of ideas for improvement. So even at the low end of the market, I think there's room for improvement, but I think there's lower-hanging fruit with the mid-market onboarding process that's imposed currently.

Okay, just one final question. So you talked about bringing onboard the new VP of sales, inside sales, and he has put some process in place. So we can get a better understanding, so when you look at the micro-business, and potentially in underperformance, what do you see -- is it more driven because of the [up at the final issue] or it's more of a conversion issue or what are some of the factors you are looking at?

I think it's really about scaling that team and enabling us to make that team much larger than it's ever been. We've added salespeople to that team over where we were last year, but we're trying to plan for the future, where we could be doubling, quadrupling -- really, if you visit our offices, there's a lot of room here to expand productive salespeople, and we'd love to do that.

But you can't grow beyond a certain level if you're not organized and have the processes in place. So my goal with Ben and I know the entire sales team on the inside sales organization is really to drive this thing to a much larger scale than we've ever operated at before, and that's what a lot of the focus is around.

Greg Burns, Sidoti & Company.

I saw recently [BiTel] announced some partnerships with carriers, and I was wondering if that kind of wholesale licensing model is something you might ever consider in the future to expand your distribution?

Yes. I would say yes selectively. We don't view it today as our core business outside of maybe the cloud data segment that Dan -- it's really become kind of our core distribution model of those technologies. But because we do own the complete end-to-end platforms that deliver our business communication services, we are certainly in a position to private label portions or the entire platform and provide a white label kind of OEM service provider channel.

And so in the past we've done that with companies like AT&T mobile, what they're calling their international product. Again, as Dan said, old-timers on the call, you remember we did a Bell South private labeled offering before -- unfortunately, just before AT&T bought them in 2005.

So the Company looks for opportunities like that. We currently white label our call center services for Bell Canada. We have other OEM kind of relationships and discussions both in place and kind of under discussion. And so opportunistically for large brands that are willing to pay very large minimums and make sure -- so that we're sure they're committed to really launching something in volume, we will happily provide our technologies via that sort of channel distribution.

Okay, and with SoftBank under your belt, can you just kind of talk about the pipeline that you're seeing for that [Derago] provisioning product or service and are you seeing more inbound calls now that you have kind of that reference customer with SoftBank?

Yes, their service really just launched, and it was kind of a soft launch in terms of production availability, but it will be production in the next 30 days or so. So I expect that, as people kind of digest what they've been able to do with our technology that will lead to that.

We're having other discussions in the heels of both CoSentry and SoftBank with other opportunities to distribute that technology but, again, nothing to update you on today.

Okay. And, lastly, in terms of -- you just discussed wanting to scale up your inside sales -- is that the size of your inside salesforce? The bottleneck you feel you are limited in the kind of investments you can make that generate leads or -- I'm just trying to understand if that's the bottleneck or is it lead generation or what is, kind of, holding you back?

Yes, I don't think our current -- our new management team for that organization feels constrained by leads. I think it's more about, again, process and having the right organizational structure, some of that being read on the management team that needs to be in place under the head of inside sales, and so we've been hiring some very exciting individuals from some very well-known brands in both the cloud and kind of telecom space. And they are now onboard in this past quarter.

They're driving some of those increases in sales and marketing costs that we talked about a little earlier on the call, but we fully expect that they're going to -- the investment in improving that management team will pay dividends that make the whole thing very, very worthwhile.

But we kind of have to put the infrastructure and the organization and the processes in place for that team to kind of take it to the next level, and we're partway through that process. I don't think we're there. We're not declaring victory, but I'm very confident that we're making very good headway at improving that overall organization and, like I said, the very positive review of the 90-day progress yesterday.

Mike Latimore, Northland Capital.

Hi, guys.

Hi, Mike.

Hi there, very nice quarter.

Thank you.

I guess on inside sales, how many -- can you remind me how many salespeople are in that group at this point?

Our inside sales group is approximately 50 quota-carrying salespeople today. And so that would be just defined as all quota-carrying people outside of our challenges market group.

Okay. And, Bryan, did you say that you would like to double that team or triple it -- is that what you said?

Absolutely. Yes, over the long term, Mike. We're not going to do it this quarter, but --

I understand you're getting the foundation in place here.

Exactly.

But, I guess, let's say a year from now, what would be -- if things go well, what would be a good number by your [amounts]?

Oh, double, probably (laughs).

All right.

But productively double. We're big on -- as you've seen on the balance sheet, kind of making cash around here and free cash flow, and so we're not just doubling it to double it, but double it very productively and profitably.

So we've, over the years, have aggressively grown the inside sales group, and then kind of less aggressively grown it. And one thing that we've learned over the years -- and when I'm saying "years," I'm talking about a five, six-year period, is that if you were to do something to the effect of, like, doubling the inside sales group in a 12-month period, that you'd tend to run into some imbalances that kind of just result in -- it's not as successful as if you would have just grown it more gradually. So that's effectively the plan.

And then on the channel partners -- obviously, there's a few that are doing the most business there. Are those still kind of the telecom resellers or has some data bar sort of stepped up here?

There is a mix of, effectively, three buckets. So it was telecom service providers, data bars, and then the smaller component is IT consultants. And the telecom service providers and the data bars are the two biggest groups of the three, yes.

I would say that -- we mentioned a couple of quarters ago that, albeit it was a smaller figure, but, I mean, we starting to see, like, good trends in recurring or repetitive sales from the data bars. And they are folks who are kind of fundamentally having to, like, change their revenue generation model because historically they've received large checks upon the sale of equipment, and ours is really more of an annuity stream rather than a big lump sum of funds.

Yes. And you grew ARPU $5 this quarter. Is that still kind of the way to think about the trend there -- sort of $4 to $6 a quarter?

Yes.

Okay. And then how many -- well, roughly, how many contact center deals are you doing a quarter now?

Contact center is -- I mean, we don't disclose and, frankly, we don't track it so much in, like, how many contact center deals we close in a quarter. And the reason being is that more often than not, when we sell a contact center, it is integrated and bundled in with the PBX. So we have had, the last couple of quarters, get success in selling to small cap public companies who are, roughly, about 8x8 size, plus or minus a little bit, and they've got a fewer employees, and they've got 250 people on the PBX, and they have 40 on the call center. I mean, that's kind of like -- that is the reason we acquired [contractual] -- 20 or some months ago, and we're just kind of -- the indicator there is where is the ARPU trend going? And the reason that it's moving up and to the right is because we're just having continual success on selling a merged hosted PBX and contact center. And as far as we know, we are the only provider to sell a fully integrated PBX and contact center product on the hosted delivery basis.

Yes, yes. And the last question, just on churn -- I know you guys are executing well in terms of onboarding and so forth -- what about just -- I mean, is it related to show kind of as your customers get bigger, the churn is going to come down some, too? Is that sort of happening?

That is, I mean, that is a function of why you're seeing churn coming down, because larger customers -- and we just kind of broadly define that as customers that spend more than $1,000 with us. As we noted last quarter represent about a third of our total recurring revenue.

Today they have a lower churn rate, and so if you just look at, like, the future revenue derived from those customers, it represents greater than 50% of our total revenue that we currently have today, because they're going to be with us for so much longer.

And I just have one clarifying point because, Mike, I know that you put it in your section. So earlier Mike Crawford asked the question about the percentage of our revenue from this cloud data business. And I believe he was asking more total revenue, and I incorrectly answered the question on what, kind of, like, the sales component was. What I answered was 9% a year ago and 4% in this most recent quarter, and that was what the cloud data represented of our sales.

On a total revenue basis, it was approximately 5% a year ago and 4% in this most recent period that we just announced. And, again, none of that had SoftBank in either period.

Thank you. I show no further questions and would like to turn the conference back to Mr. Bryan Martin for closing remarks.

Okay, thanks, Mary. And thank you, everybody, for listening in on our presentation today. We will conclude today's call by asking for your support in our social media outreach efforts. Throughout 2013, 8x8 has been driving an active social media campaign, and all of our investors, in addition to supporting us in the public markets can also support us by "liking" us on Facebook and following us on Google Plus, Twitter, LinkedIn and YouTube. So please visit 8x8.com/social to connect with us on the channels of your choice. This outreach improves our Internet search results and enables you to connect with us further on social media for the latest in product news, access to our experts, getting helpful tips from our customers in webinars, and providing us with feedback on how we can make all of our services even better.

Thank you for your assistance in these efforts and, with that, we'll conclude today's call. Go ahead, Mary.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.