8x8 Inc (EGHT) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 third-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Joan Citelli, 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, Vik Verma, and 8x8's Chief Financial Officer, Dan Weirich, to discuss our results for 8x8's third fiscal quarter of 2014 ended December 31, 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 Vik, I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitation expressions using the terminology: may, will, believe, expects, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact, are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the Risk Factor sections of our annual report on Form 10-K, in our quarterly reports on Form 10-Q, and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law.

Thank you. And with that, I'll turn the call over to Vick Verma, Chief Executive Officer of 8x8.

Thanks, Joan. Welcome, everyone, to our earnings call for the third quarter ending December 31, 2013. I'd like to review some of our high-level financial results and business activities for the quarter. Following my remarks, Dan Weirich, our CFO, will discuss the results and metrics in much greater detail. We'll then obviously be happy to answer any questions you may have for us today.

This has been a very eventful and productive quarter. We had record revenue and record number of new services sold. Total revenue for the third quarter of FY14 grew 24% year over year to a record $32.7 million. Gross margin came in at 71%, with service margins at 81%. Our non-GAAP net income was $2.5 million, representing 8% of revenue.

Five noteworthy points about this quarter that I'd like to cover for you. First, as I mentioned, we sold a record 61,286 new services in the December quarter, which is a 38% increase from the 44,366 new services sold in the same period last year.

Second, the average number of services purchased by new customers during the December quarter was also a record, increasing 20% to 20.4 from 17 in the same period last year. This progress reflects our success selling to larger customers, as well as the channel.

Collectively, the mid-market contributed 35% of new monthly recurring revenues sold during the quarter, a 57% increase compared with the same period last year. Two examples of recent mid-market customer wins include a financial services provider, Merchant Warehouse, and cloud-based time-tracking software provider, Replicon, both of which subscribe to our cloud telephony and our contact center services, and have upwards of 300 users each, distributed across multiple locations in the US and abroad.

Third, we are very pleased with the acquisition of UK-based Voicenet Solutions, which closed at the end of November 2013. The integration is proceeding on plan, and we're on schedule to begin selling the full range of our unified communication and collaboration services there starting early February. This will enable us to broaden our mid-market and distributed enterprise customer base within the UK and Europe.

Fourth, we continue to build on our global reach initiative. After completing our London data-center buildout in September, we went live this month with our Hong Kong data center, and are on track to open our data center in South America in March 2014 time frame. As mentioned before, we intend to extend our services to existing customers, and also pursue new customers leveraging these global platforms.

Finally, we raised approximately $126 million in a well-oversubscribed stock offering during the December quarter. This, along with our previous cash position and strong cash flow, provides us with a very, very solid balance sheet, which not only helps when competing for large mid-market deals, but also gives us significant fire power to pursue complementary businesses and technology assets around the globe.

As I have stated before, we remain committed to profitable growth, and anticipate that we will maintain non-GAAP net income as a percentage of revenue in the high-single-digit range.

With the progress that has been made on all of these fronts, 8x8 has the right elements in place for sustained growth. One, a full suite of unified cloud communication and collaboration applications. Two, an internally developed software platform which incorporates the highest levels of security redundancy and reliability, and is protected by 92 issued patents. Three, a profitable and capital-efficient business model. And last but not least, a management team that collectively offers the broadest and most extensive expertise in the industry.

With that, 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.

Thank you, Vik. We reported a 24% increase in revenue for the third quarter of FY14. Revenue from business customers increased 26% year over year, and represented 99% of total revenue. Service and gross margins were strong, with service margin at 81% and gross margin at 71%.

Contribution margin, defined as service margin less billing and customer service expense, was strong at 63% in the December quarter compared with 63% in the same period last year. Payback, defined as the number of months of contribution margin to pay back the customer acquisition cost, was 6.7 months.

Non-GAAP net income for the quarter was $2.5 million, compared with $3.8 million in the same period a year ago. Non-GAAP net income per diluted share was $0.03 for the quarter, and non-GAAP net income as a percentage of revenue was 8% of revenue in the quarter.

Business subscriber acquisition cost was $92 per service, compared with $97 in the same period a year ago, and $94 in the second quarter of FY14. Monthly business service revenue churn in the quarter was 1.5%, compared with 2.3% in the same period a year ago, and 1.2% in the first two quarters of FY14.

Revenue churn in the December quarter generally tends to be higher, and we expect this metric to return to the levels reported in the first half of FY14 in the March quarter. Monthly business customer churn was 1.6%, compared with 1.6% in the same period a year ago.

Business customer average monthly service revenue per customer was $274, a $22 increase over the same period a year ago. The average number of subscribed services per new business customer increased to 20.4 from 17, a 20% year-over-year increase. This trend is occurring due to the increased adoption of our cloud-based services by larger customers.

Revenue from our mid-market customer base, which we define as companies with 50 or more users billing more than $1,000 in monthly recurring revenue, represented approximately 37% of our recurring service revenue in the third quarter.

We closed the acquisition of Voicenet on November 29, 2013. Voicenet represented under $800,000 in revenue in the month of December. Voicenet incurred a non-GAAP net loss of approximately $170,000 in the month of December, and has gross margins of roughly 39%. With the launch of 8x8's service platform in the UK, we will not be disclosing Voicenet-specific metrics in the future.

Capital expenditures for the quarter were $636,000 or 1.9% of revenue. The capital investments in our global reach initiative began in the second quarter, and will continue through the remainder of the fiscal year.

Our cash, cash equivalents, and investments increased by $113 million during the December quarter to $174 million. During the quarter, we raised $126 million in a stock offering, received $3 million from the sale of our dedicated server hosting business, utilized between $18 million and $19 million to purchase Voicenet, and generated $2.6 million in cash from operations.

Given the market opportunity that exists, and the success we have had to date, we have increased our investment in sales and marketing, and research and development, with the goal of continuing to drive strong revenue growth. We remain committed to profitable growth, and anticipate we will maintain non-GAAP net income as a percentage of revenue in the high-single-digit range, or between 6% and 9% of revenue.

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

Thanks, Dan. As we close our remarks, I'd like to reiterate that we are very pleased with our progress and positioning, and are excited about the opportunities for growth that lie ahead, both domestically and internationally. We believe now is the time to continue to drive up market, increase market share, and invest in growth to extend our lead in this emerging cloud-based unified communication and collaboration industry.

With that, we will be happy to take any questions you may have for us today. Operator, please open the line for any questions.

(Operator Instructions)

Our first question comes from Amir Rozwadowski from Barclays. Please go ahead.

Thank you very much, and good afternoon, folks.

Hello, Amir, how you doing?

Well, Vik, wanted to follow up a bit more on the market demand environment. Clearly, if we take a look at the metrics that you folks delivered for the fourth quarter, pardon me, the calendar fourth quarter, we're starting to see pretty healthy adoption amongst the mid size enterprise arena.

Can you provide us with a little bit more color in terms of the adoption rates that you're seeing? Are these new customers coming into the market exploring cloud-based solutions? Are they competitive wins that you've been looking at in the marketplace? A little bit more color there would be helpful, and then I do have a follow-up.

Okay. Yes, it's almost, I think you and I have had this conversation, you're almost starting to see the inflection point where more and more customers are coming to us literally saying hey, I was in the CEO's office. And he said I need to get into the cloud, and we need to use it to basically save costs because all these legacy systems that we have are way too expensive to maintain. They're not flexible. They don't have the feasibility et cetera, et cetera. So then they come to us, and more often than not, they spend a lot of time on making sure that the system is compliant. That it's secure, and that it's reliable, and [fall] tolerant, and all of those things.

But we are seeing that the number of folks coming in there, as you can see from the numbers, has been upticking quite significantly for us. Too early to tell, but it definitely feels like there's a shift going on where people are viewing cloud more and more as the way to go for services that we provide. And you're starting to see the sales cycle shorten for those type of customers.

That's very helpful. And clearly, you folks have been vocal about your positioning in terms of investing in the business in order to capture the opportunity on the other side. First and foremost, how do you feel about today in terms of that sort of accelerating growth opportunity?

And then the second part is, we see that 8% net margin -- adjusted net margin today. I know you guys have focused on this band of 6% to 9%. How should we think about the investment trajectory over the near term? Are we going to -- is this somewhat of a floor for you folks, or is there going to be a pick up in investment in the first half of 2014? Would love any sort of granularity you might be able to provide.

So two elements. This is a fun job. You're starting to see a massive shift take place where people are going, we need to go cloud for telephony. We need to go cloud for virtual contact center. We need to go cloud for collaboration systems. So, it's a very exciting and fun job.

So I think the question you asked is how do I feel about it today versus three months ago, I'm pretty darn happy that I have this job. So that's the first one. Obviously a biased opinion, but the best job in America. Second comment, I think the 6% to 9% that Dan articulated is what we see as the range for non-GAAP net income for the foreseeable future.

Great, thank you very much for the incremental color.

Thank you, Amir.

Thank you. And our next question comes from Michael Huang from Needham & Company. Please go ahead.

Thanks very much. Just a few questions for you. Wanted to ask a question around the contact center. I know that you've noted a couple nice wins with a couple larger mid size customers in the quarter. But was wondering, generally speaking, what was the attach rate of contact center to the customers that you signed up in the quarter, and how is this trending?

Yes. So we're not breaking out the exact attach rate of contact center. But collectively, our virtual office product in our contact center we're seeing tremendous momentum in selling those together. We're also seeing significant momentum on just selling the contact center as a standalone product. But we really differentiate significantly in the mid market and distributed enterprise on selling the combined virtual office and virtual contact center product.

Got you, okay. And maybe you could just talk about the pricing environment. What are you seeing in terms of direction of pricing trends, both for hosted PBX and contact center, especially as you guys push a market? Is that favorable for pricing or not?

We haven't seen much change in pricing for quite some time on the subscription fees that we charge to customers. It just depends on the deployment that we're doing on how we price it, specifically in the mid market. And some folks are more sensitive about contact center pricing, and some are more sensitive about our virtual office pricing.

And so we have the luxury of being able to move one and down and one up. But overall, the blended trend is there's little to no change in the pricing environment today.

Great.

And Michael, this is Vik. Some additional color on that is, I think as you and I had talked, mid market seems to be less sensitive to the price, because they are basically replacing an existing legacy solution. And as you saw in some of our presentations, there's such a dramatic difference that I think we're finding that there's less sensitivity on the mid market to the exact price as there is in the SMB market.

Great, okay. And then last question for you. So I wanted to clarify, so that ending business customer metric looked pretty strong and was up notably quarter-on-quarter. I'm wanting to clarify, does that include Voicenet customers, or was that just a really good quarter for the core 8x8 business?

Yes. So it includes approximately 1,000 Voicenet customers that came to the acquisition. And then like the new sales metrics include the one month in December of the Voicenet sales force, their marketing and sales efforts.

Got you. Okay, great. Thanks guys.

Thanks, Mike.

Thank you. And our next question comes from Kash Rangan from Merrill Lynch.

Hello, thank you very much. Happy New Year to the 8x8 team. I'm curious if you can break out your subscriber base organic, that is excluding the Voicenet acquisition. And I have a couple follow-ups.

Yes. So from the customer base perspective, as we just mentioned, about 1,000 of the total customers come from our acquired business. And I --

I think you said that 38% growth in the number of subscribers. I'm more focused on the subs that you provided some color there, I think it was up 38% or so. I just wanted to see if you excluded the Voicenet acquisition, what that growth in the subscriber base would have been.

So the number of services sold by the Voicenet sales force in the month of December was just under 1,000. And so excluding that, that 38% would have been a 36% growth rate. So on an organic growth rate, it's extremely healthy.

Wow. Okay, so you reported revenue growth of 24%, 25%, sorry I'm at an airport now. I don't have the numbers in front of me. But the subscriber base growth rate is accelerating. So are we too stupid to not expect this to continue that you've started to accelerate the pace of subscriber acquisition, which you can clearly see reflected in your sales and marketing costs? Some of it is reflective of the acquisition integration. But just any commentary on why this should not continue.

And I think you also mentioned that you're getting a 6.5 month payback on the gross contribution margin. How do you feel that that metric can be sustained? Especially as you bring in new salespeople to accelerate quote-unquote your sales efforts. If that can continue, I have to believe that your margins should also start to inflect. Help me understand where I'm wrong here. Thank you very much.

Yes, so on the payback, we have been in the six, seven month payback for a long, long, long time. And the primary driver of that is our contribution margin has been in the 60%, 65% range for a long time, and the cost of acquisition has been just under $100 per service for all these periods of time as well. And so we don't foresee any material change in any of those metrics.

We've got a pretty proven model of how we can go to market, and as you notice, we've been starting to make much more material investments in the sales and marketing line as you noticed in this reported period. And so we feel quite comfortable and confident in what we've been doing.

And the single biggest driver of it is the adoption of our services by larger more salvaged businesses. And the massive differentiator we have in the market is our combined virtual office and virtual contact center product, which no one else has a solution such as that. And the buyers like to look to one vendor for a combined solution, and that's where we're just in the process of investing in R&D and extending our lead.

And also, I think one of my questions was also the 36% organic growth [checking] the subscriber base. That is a sign of the revenue growth to come of the future clearly, right?

Yes, it's not always like a direct correlation to revenue growth. But listen, we had the best quarter that we've ever had in the Company's history. And if you look back at historical periods, our March quarter historically has been our strongest quarter of the year. And we have a modest little slowdown in Summer, but we feel quite comfortable with where we are today.

Okay, got it. Vik, any commentary? (multiple speakers)

Kash, this is Vik, and I'll add one thing. Look, the good news is, you're starting to see which is where we've all been focused. Mid market adoption has been the very interesting thing.

You saw a 57% increase in the [number] coming from mid market customers. The part I want to make sure I temper for you is, this nice subscriber growth, which we are very, very proud of, does not instantly transform into revenue from mid markets because the amount of time to turning it into revenue for mid market is longer than if you're turning on a 15 line customer versus a thousand line customer.

So temper that, and then not all services are exactly priced the same. So those are the two things. So as Dan said, it's an imperfect correlation, but it is correlated. Again, very pleased with the subscriber growth.

Much appreciate the color. Any color on win rate? That's it for me, thank you again for [competition].

I think Dan said it. I think you've seen this in our strategy. What makes us really unique is this Microsoft Office analogy, where we have basically cobbled together and integrated a comprehensive suite where most of the other folks have tried to come in with point solutions.

What we are finding is, when it is a [VEO] and VCC customer and it is in the mid market where compliance, security, reliability is important, we seem to win more than our fair share. So that's consistent with where we are focused, and that's consistent with what we are seeing happen. So we're very pleased with that.

Thank you. And our next question comes from Dmitry Netis from William Blair. Please go ahead.

Thank you. Good metrics all around. Wanted to focus on a couple of housekeeping items if you will. The churn, I wanted to get some puts and takes. I know it ticked up both on a revenue and customer side. So can you just walk us, I know Dan mentioned, there's some seasonality there. But if maybe you can provide some more color on what exactly going on, and what gives you some comfort that it will come down in the next quarter or two.

The other one would be sort of on the upsell side of the number of seats and services. It sounds like your product revenue pretty much remained flat, yet your number of customers or number of services and seats have gone up significantly, even if you exclude the Voicenet customers. So, just give us some puts and takes there of what's driving some of that service upsell.

And I guess the third piece I wanted to on the housekeeping side dig into was, as far as the Soft Bank relationship, and if you can provide some of the update there. What the traction there was, and what's the dollar amount that you printed in the quarter?

Yes, so on the churn piece, we do have some seasonality with our revenue and customer churn related to the SMB sector of our business, which are the smaller customers. Some of those close down their businesses this time of year, and we see the heaviest hit of that is in the December time frame.

We experienced something similar last year, we had many moving parts last year that resulted in 2.3% churn rate. But if you just look at it on a normalized basis, it was still noticeably lower than last year. And the reason that we just have confidence in it, is that we've got pretty good indicators as to what's happening in our business. And if you look last year, we went from 2.3% in the December quarter, down to three consecutive quarters at 1.2%. So, that's the primary figure there.

And the customer churn is just a derivative of that, so it's just a few more customers are shutting the doors at year-end. We typically see customers that are extremely small, like the three employees or less customers are kind of shutting their doors and things like that. But unfortunately, there's a fair number of those.

On the upsell side --

Dan, just a quick follow-up on I think last year you had some kind of abnormal event where you lost about 400 seats or 400 customers rather through that was a single distributor if I recall that caused some of that uptick in revenue churn. Was there anything abnormal again this quarter?

No. So that event you're referring to is like in the September FY13 quarter, and it was addressed, it impacted customer churn. On the revenue churn, it was six larger customers a year ago that had abnormal issues. A lot of it's related to one year after the [contractual] acquisition, those type items.

But I think excluding those, we are in the 1.6%, 1.8% range last year, and this year is 1.5%. So listen, it's something that we think that 1.2% is actually not acceptable. So it needs to be sub that, so that's where we're shooting for and where we're managing to.

Okay, so I appreciate the color.

On the up sell-side, we are continuing to see very strong up sell activity. It is very consistent with what we had in prior periods, and is predominantly driven by larger customers adopting our solution.

So we have a lot of big Fortune 500 distributor enterprises, and they've got new needs and they are becoming larger and larger customers of ours is one component of that. And just continued success of our sales team selling our services into our installed base.

And then on the Soft Bank side, we've mentioned that the Company has committed to us for a 36 month period to just under $100,000 a month in recurring revenue, and that's where they're running right now. And they're fabulous customers, and we're working extremely well together. But that's all the comment we have on them.

Okay. And that's pretty much right now focused on the Japan market, is that correct?

Correct, yes it is.

Okay, it hasn't gone outside Japan. And how many -- approximately how many customers is Soft Bank servicing at this point?

Yes, we can't disclose that information.

Okay. All right. Fair enough. And then, just maybe two more quick ones. On the OpEx side of things, clearly things are moving on a higher end of the equation. And I get the sales and marketing and how you go into market and trying to market and sell your product to a bigger base.

But on the R&D side, however, you're making investments too. Would you give us a sense of where are you investing right now? What's driving some of that uptick in R&D?

Look, standard themes. Everything from globalization, mid market features, tighter integration, much more mobile, much more user friendly. It was just standard stuff that is normal as you become more and more the defacto standard for the larger and larger customers.

So, look, we want to continue to be the market leader. We want to be known as the most comprehensive platform, which is the most secure, the most reliable of anybody else that is in our space. And we want to keep adding to the feature set so that the mid market customers, in particular, we meet their needs.

And so we keep making a list, we check it twice. And we keep adding more and more to that. So I think that's fundamentally what we have been doing, vis-a-vis R&D.

Is there an opportunity, Vik, for R&D to plateau at some point and maybe some of the OpEx move more into S&M line, or do you foresee continuing investment on the R&D side?

Yes. No I think look, I'm a big fan of making sure that you don't rest on your laurels. So to me, fundamentally there are three things that you do in a Company. You build exciting products that are cutting edge, you sell them to customers and make sure that they're providing value for the customer, and then you make sure you provide excellent support. All the rest of us are overhead.

And so I view us as investing each of them. I don't want to go into a mode where we just focus on selling, but fall behind on adding and innovating and adding new and new features. Always want to keep continuing to innovate on that area.

So at least for the foreseeable future, I think you should think through the 6% to 9% range that Dan has said for non-GAAP net income, and I think we'll be equally spending on sales and marketing as well as R&D.

Okay. Well, thanks for that color. And then just fit in one last question, and then I'll cede the floor. As far as the competitive environment, I was just wondering if you could comment on the incumbent carriers and whether you're seeing any increased activity on their part as it relates to the hosted UC market?

And then I guess the better maybe question would be if there's any change in terms of the percentage of new customers coming from the top tier carriers that you had seen over the past couple of quarters or maybe this quarter. Thank you.

Look, here's what we're seeing. We're seeing activity, but it seems to be more directed towards the lower end of the marketplace. We're not seeing it quite as focused on the higher end of the marketplace for us.

From my perspective I think, look, we are the market leader. For us what we've got to do is play our game. Discipline, keep moving forward, keep matriculating the ball down the field. And there will be -- competitors come, competitors go. We're almost the equivalent of the Stanford football analogy. Keep running the ball forward, throw short passes, keep on scoring touchdowns. Life is simple.

But from the incumbents coming in with a hosted UC offering, we don't see anything in the market.

Okay thanks, Dan, that was my question. Thank you very much.

Thank you. And our next question comes from Raghavan Sarathy from Dougherty & Company. Please go ahead.

Good afternoon, and thanks for taking my questions. Congratulations on a strong quarter. Just a couple of questions from my end.

On the subscriber acquisition cost per service, Dan, you touched on this. It was down year-on-year about 5%. I would think that it would gain efficiency as you move up market, particularly you sell PBX and contact centers. So can you give us some color on whether we should expect continued decline, or is it we should think of more in the low $90 range?

We have always talked about it as being approximately $100, because our high is roughly $110, and our low is approximately $90. And but we've put up many, many, many consecutive quarters of sub $100. So we are doing more and more investment, as you can see, in this most recent period.

So some of that investment is in advance of sales activity. So I'm still totally comfortable with the approximately $100 figure. You can see our return on these investments is exceptional return.

But it's something, frankly, that at this point is whether we don't have internal goals to get it down to $90 or something like that. Our goals are growing the revenue as fast as possible, and if some of that requires a little higher cost acquisition, it's something that we're more than happy to go after it that way.

Okay. And then on the sales and marketing trend, you've been clear that you're going to invest. So we are seeing a material uptick in it looks like on the headcount. Can you give us some color about how should we think of the hiring plans, or how should we think about that line in terms of investment?

Is the bulk of the investments behind you, or are you targeting as a percentage of revenue? How should we think about that?

Yes. We got down to the high single digits as non-GAAP net income as a percentage of revenue very quickly, and we were able to make the sales and marketing investments much faster than the R&D investments. So I think that on the outer periods, we still need to increase our R&D as a percentage of revenue to a higher level.

And today, it's moved from roughly about 8% to about 10% and we think it needs to be closer to 12% or so. And the sales and marketing is pretty much, I would say it's -- where it is today is kind of fully invested from the standpoint of a percentage of revenue. But as revenue grows, we'll be continuing investment in that group.

Okay. And then one final question. On the G&A expenses, if I take out the stock based comp, it was largely flat. So was there a material uptick in stock based comp that drove the G&A expenses, or maybe [wisenet], or can you give us some color on that?

Yes. So we had a executive depart the Company in October, and it represented about $1.1 million of that. And we had two executives, one of those being Vik, join the Company in September, and you can read in his comp package that he had six-month RSU vesting on a grant, and so we took the full quarter of that this period.

We'll have a couple of months in this March period. And so that's why in the second paragraph of our earnings release, we said that approximately half of the stock comp is related to management transitions. So you could think of stock comp maybe on a more normalized basis at $1.5 million a quarter.

Okay, great. Thank you.

Thanks, Rag.

Thank you. And our next question comes from George Sutton from Craig Hallum. Please go ahead.

Thank you. Guys, I did hop on late, so I apologize if I'm asking anything that's been asked. But I was curious, you've got another quarter under your belt relative to looking at the M&A opportunities out there. And wondered if you could update us in terms of what you're thinking there, what you're seeing, how much activity and opportunity there might be, and how much competition for that opportunity?

Yes. So as you know, we closed Voicenet end of November. And then with regard to additional M&A, we're looking at two key areas. One is obviously for geographic diversity, so finding the right area where we're putting infrastructure, and looking to buy the equivalent of additional Voicenets.

And then also, key technology we can use to basically bolt on to a platform. We're not in a hurry to do anything. We want to be very disciplined with the money that we've raised, and we've got ongoing activity. And beyond that, we don't comment on that.

Okay. You also with Voicenet, obviously, have a little better understanding of the UK market opportunity. Can you give us a sense of how big that opportunity is relative to what you might have expected when you entered?

We did due diligence on Voicenet for I think almost, I can't remember, the eight, nine months time frame. So let's just say there are no surprises, and we're feeling good about the UK opportunity. We think that was a great acquisition for us. The team there is fantastic, and we see the market is developing exactly as we anticipated.

Okay, perfect. Thanks guys.

Thanks, George.

Thank you. And our next question comes from Greg Burns from Sidoti & Company. Please go ahead.

Just had a question about the inside sales force and the productivity you're seeing there. I know you brought in some new management a couple quarters ago, and we're looking to put the systems and the processes in place to be able to scale that organization and get more productivity out of it. So I just wanted to see if the productivity is where you want it to be, and if there's any improvements you can make going forward. Thank you.

Hello, Greg, thanks. So, the inside sales group you're referring to is what we call our SMB sales group, and it is performing very, very well. It had a very, very solid quarter, and it's got exceptional leadership. And the productivity improvements are there, and we performed extremely well compared to prior periods. And we expect that there will be further improvements in productivity from that group.

Okay. And lastly, I missed it, but of the 2,100 net new customers, what number of that is coming from Voicenet?

Approximately 1,000.

1,000 customers, okay. All right. Thank you.

Thank you. And our next question comes from [Mike Latimer] from Parkland Capital. Please go ahead.

Yes, hello. Good evening. On the contact center side of things, how many seats on average are your contact center deals, roughly?

Approximately in the 40-ish range is the average deployment, but they span from -- we've got deployments that are like a 200 person business, and they have a five seat contact center opportunity. Up to multiple hundred seat contact center opportunities.

Great, okay. I got it. And then the --

But if you look at -- sorry, Mike. But if you look at our Replicon press release in December, I believe they were roughly 400 or 500 virtual office seats, and 48 contact center seats. It's a decent representation of what a combined deal looks like.

Right. And then, I assume the revenue per new service sold has been relatively consistent the last couple of quarters. It's not changing much, is it?

Not significantly. We are having more and more success selling some of our software-based solutions, like our unified communications product which encompasses our meeting product, and those type solutions. And so those are definitely sold at a lower average revenue per service than a physical telephone line.

But yes, if you just look at it from just how is it doing relative to prior periods, that drags it down a little bit as we're more and more successful. But then we're offsetting it a bit with more and more contact center seats, which are sold at roughly five times the average.

Right. Okay, I got it. And then, how is the sales cycle and implementation timeline on the mid market deals versus the SMB deals? Ballpark on that?

Yes. So sales cycle on mid market, distributed enterprise, and implementation are longer. We have seen on the sales side more and more anomalies, where sales opportunities close in less than 60 days. And I wouldn't say it's a trend yet, but we have multiple examples of opportunities like that. Most of them are like six months or so, very roughly speaking on the sales cycle compared to the SMB is 30 days.

On the implementation, SMB is anywhere from one to four weeks. And the mid market and distributed enterprise could be anywhere from 60 to 90 days to six months or so, depending on the deployments. Some of the deployments are staggered, so they'll do office by office by office, which could stretch into many, many, many months.

So, we do have an element of what we call delayed billing. So it's monthly recurring revenue that we've booked that the billing is suspended, because the customer is not installed yet. And so that has been growing, and the change between September and December is roughly about $50,000 in monthly recurring revenue increase quarter-over-quarter.

So it's not huge yet. So I think that over time as that grows, it could stagger the revenue growth just a bit as think of it more as backlog.

Thanks.

Thank you. And our next question comes from Mike Crawford from B. Riley & Company. Please go ahead.

Thank you. You've seen -- you've experienced a lot of success growing revenue with top customers once you've landed them up selling them with different products, I think growing some 2000% for your Top 25 customers in the last 2.5 years or so. And I'm wondering if your approach is to use the same sales contact to farm existing customers, or do you split your sales group into more hunters and more farmers?

Very good question, yes. I actually like the idea of you always have a primary point of contact with the customer, so that there's a familiarity as well as a level of trust that gets established. And then we have support people that basically help make sure that you do the care and feeding of the customer, and keep bringing the opportunities up.

So we have a customer success team, as well as a account executive, and those people partner together. It's very similar to the salesforce.com model.

Okay, thank you. And then also, I was hoping you could help a little bit more with the math, given that contribution margin remains pretty consistent and around 65%. Yet, you have this net target of 6% to 9%. So, I don't think that you expect services sold in each period to continue to grow exponentially.

Are there more items that are being excluded from that contribution margin, or is there any -- can you help me further with that math?

Yes. So we have 81% service margins, and the way you get from 81% down to 63% is there's roughly 18% in our sales and marketing line that is related to billing and customer service. And so the calculation for contribution margin is just simply our service margin less customer service and billing.

And so if you take -- look at our sales and marketing line, and take 18 points out of that, that's the folks that are working on maintaining the customers and to some extent, working on add-ons and upsells when they extend their business relationship with us.

Okay, that helps. Thank you. And then, last question relates to international market. As you're going to start deriving more revenues out of UK into Europe, Hong Kong, Singapore, and eventually South America, do you expect similar economics to what we've seen domestically, or slightly lower levels of profitability there?

Yes. When you're outside of the sub scale size, we think that the economics are very, very similar to what we're reporting here in the United States. The Voicenet business that we acquired has a gross margin of 39% in the month of December compared to the consolidated Company with 71%.

So you can just see there that there's two elements there. One, is the business is sub scale. And two, it's on a third party platform, and third party everything. So, we are putting in our technology and we'll be marketing services on our platform beginning in February.

And we'll begin a fairly long, you'll find it's a year migration, years migration on to our platform. And so there will be margin expansion there, as well as many other areas to expand margin. But if you just were to go and add a new customer in the month of February on to our platform, the margin profile of that customer will be extremely close to the figures that we reported on a consolidated basis today.

Great, thank you very much.

Thank you. And I'm not showing any further questions. I would now like to turn the call back to Vik Verma for any closing remarks.

Great. Well thank you, everybody, for listening to us, and also for all your questions. For reference and convenience, we have posted a transcript of our remarks on the Events and Presentation section of our Investor website at investors.8x8.com. I look forward to meeting you all in the coming months at the upcoming financial conferences and other investor events and industry events. Again, thank you, and Operator you can close the call. Thank you.

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