8x8 Inc (EGHT) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

Please note that today's conference is being recorded.

I would like to hand the conference over to Joan Citelli, Director of Corporate Communications. Ma'am, please go ahead.

Thank you. And welcome everyone to our queue, 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 fourth fiscal quarter of 2014 ended March 31, 2014.

If you have not yet seen today's 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 Factors 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 Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan.

And welcome, everyone, to 8x8's fourth-quarter and FY14 year-end earnings call. I'd like to begin by reviewing some of our high-level financial results and business activities for the quarter. Following my remarks our CFO Dan Weirich will discuss the results and metrics in greater detail. We will then be happy to answer any questions that you may have for us today.

As you can see from our Q4 results, this has been another strong quarter for 8x8. Total revenue for the fourth quarter of FY14 grew 29% year over year to a record $35.8 million. And non-GAAP net income for the quarter was $3.3 million, or 9% of revenue. This is the 16th consecutive quarter in which 8x8 has generated non-GAAP net income alongside increasing revenue.

The number of new services sold during the quarter, as well as the percentage of new monthly recurring revenue sold by our channel and mid-market teams, were also record-setting as they have been throughout FY14. This record fourth quarter capped a very productive and eventful year for the Company, as we posted both strong revenue growth and non-GAAP net income quarter after quarter, while successfully executing the strategic initiatives that further solidified our leadership position in this rapidly growing market.

First, we have made great strides expanding into the mid market, as illustrated by our growth in this segment over the previous four quarters. While others target the mid-market segment, 8x8 has proven to be a leader in this space and the provider of choice for these customers.

In Q4 our channel and mid-market sales grew approximately 47% from a year ago and comprised 39% of our new monthly recurring revenue. We continue to see very good traction moving up market as more and more mid-sized and distributed enterprise businesses are transitioning to cloud-based communication services, and recognizing the importance of the reliability, security, international scalability and breadth of service 8x8 provides.

Second, we delivered several product innovations to better service our mid-market customers, including branch office and web switchboard capabilities for distributed enterprise customers, and out-of-the-box integration with complementary service providers such as Zendesk, NetSuite, Teleopti, and Noasoft. We continue to see more mid-market customers looking for a single provider to deliver a broad range of communication capabilities that include cloud-based telephony, contact center, mobile apps, and web conferencing. 8x8's comprehensive offering is ideally targeted to meet these needs, and we believe this is one of the primary competitive advantages 8x8 holds in the market.

Third, we established global capabilities in Europe and Asia, and completed our first acquisition of an overseas cloud services provider. After completing our London data center buildout in the December quarter we went live with the Hong Kong data center in the March quarter.

We also established a complete operational footprint in Europe with the acquisition of Voicenet Solutions, now rebranded as 8x8 Solutions. The integration of Voicenet is largely complete and we began selling the full range of our unified communication and collaboration services this past February. Earlier this year we announced a significant win, Belfast City Airport that was brought on by our UK channel partner, and we're looking forward to extending the strong channel operations already in place in the UK.

Fourth, in FY14 we successfully raised $126 million of capital through a secondary stock offering. Our cash, cash equivalents and investments now total $178 million, up from $52 million at the end of the prior year. Together with our history of positive cash flow we have a solid financial footing from which we can continue to scale and expand.

With substantial progress on these four strategic initiatives over the past year -- our mid-market expansion, product innovation, global expansion and capital raised -- I am confident that 8x8 is better positioned than ever to take full advantage of the evolution we see in the market with our combined virtual office unified communication and virtual contact center solutions. As we continue to expand both domestically and internationally in FY15, we plan to increase revenue by approximately 25%, and maintain our non-GAAP net income as a percentage of revenue in the high single-digit range, which we have previously defined as 6% to 9%.

As Infonetics Research recently declared in its 2014 North American Business VoIP Services Scorecard, and I quote -- 8x8 is the decisive leader in the VoIP market, building on a solid financial position over the past two-plus years, and on its continued focus on service enhancements and geographic expansion.

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.

Think you, Vik.

We reported a 29% increase in revenue to the fourth quarter of FY14. Revenue from business customers increased 31% year over year and represented more than 99% of total revenue.

Service and gross margins were strong, with service margin at 79% and gross margin at 70%. FY14 revenue increased 24% compared to FY13, with gross margin increasing 71% in FY14 from 69% in FY13. The contribution margin from business customers, defined as service margin less billing and customer service expense, was strong at 64% in the March quarter, compared with 64% in the same period last year.

Non-GAAP net income for the quarter was $3.3 million compared with $3.8 million in the same period a year ago. Non-GAAP net income per diluted share was $0.04 for the quarter. And non-GAAP net income as a percentage of revenue was 9% in the quarter.

Full-year FY14 non-GAAP net income was $14.1 million $0.17 per share, compared to $14.7 million or $0.20 per share in FY13. Monthly business service revenue churn in the quarter was 1.2% compared with 1.2% in the same period a year ago and 1.5% in the prior quarter. Full-year revenue churn declined to 1.3% in FY14 compared to 1.7% for FY13.

Business customer average monthly revenue per customer was $287, a $31 increase over the same period a year ago. The average number of subscribed services for new business customer increased to 19.6 from 18.1, an 8% year-over-year increase. This trend is occurring due to the increased adoption of our cloud-based services by larger customers. This figure increased to 18.9 for all of FY14 compared with 15.9 in FY13.

Channel at mid-market sales comprised a record 39% of new monthly recurring service revenues sold in the fourth quarter. For the full year we saw new monthly recurring revenue sold by our channel and mid-market sales teams increase to 34% of total sales in FY14 compared to 25% in the prior year.

As we have become more successful moving up market, our time to install these larger customers is increasing. While our small business customers install in less than 30 days with service revenue recognition beginning within a month of the sale, our mid-market and distributed enterprise customers take between two and six months to install on average. As an example, there are currently approximately 75 signed customers totaling roughly $3 million in annualized recurring revenue that we are not yet billing since their deployments have not been completed.

Capital expenditures for the year were $772,000, 2.2% of revenue, and $2.9 million for the full year, also 2.2% of revenue. Our cash, cash equivalents and investments increased to $178 million during the March quarter from $174 million in the prior quarter and $52 million at March 31, 2013. Cash, cash equivalents and investments, excluding our November 2013 financing and our acquisition in the UK, increased $19 million in FY14. As Vik indicated, we remain committed to profitable growth of approximately 25% and anticipate full-year 2015 non-GAAP net income as a percentage of revenue will remain in the high single-digit range, which we define as 6% to 9% of revenue.

Beginning in the first quarter of FY15 we will only be providing the following business customer selected operating statistics -- total business customer, average monthly service revenue per business customer, and monthly business service revenue churn. We believe these are the most important statistics in our model by which our progress should be measured. As we move up market, statistics such as gross business customer additions and monthly business customer churn are no longer relevant because they place equal weight on a customer that subscribes to one service and a customer that subscribes to 500 services.

In addition, we began bundling our services in the fourth quarter. A number of services will become a less relevant metric to monitor our progress in the future.

That concludes my prepared remarks. And I will now turn the call back over to Vik.

Thank you, Dan.

In summary, our record fourth quarter capped a very eventful year for the Company. We continued to have strong revenue growth in earnings, while successfully executing strategic growth initiatives such as the expansion of our mid-market customer base, the establishment of our global footprint in Europe and Asia, an acquisition in the United Kingdom, and $126 million capital raise. We have all the elements in place, including compelling service differentiation an international presence, and a financial war chest to further capture increasing worldwide market share for cloud communications and collaboration services.

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

(Operator Instructions)

Michael Huang from Needham & Company.

Hi, guys. This is Michael Turrin sitting in for Michael Huang. Hope you're doing well. Obviously you are seeing great growth in the mid market here. I just want to ask, is there anything one-time or seasonal in nature driving that growth? Or should we expect this level of growth to continue?

There's nothing in our model that is one-time or seasonal.

Okay, great. And then it would be great if you could provide an update on virtual desktop and how that might be trending versus expectations.

As you know, VDI is not core. Our primary product offering is virtual contact center and virtual office. We are doing VDI through selected strategic partners who are reselling our services and white labeling our services. So, we are not modeling any, anticipating any appreciable revenue from that for the foreseeable future.

Okay. Just one more. Can you provide an update on the competitive environment you are seeing, and some of the pricing? Thanks for taking my questions.

We do see competition but our pricing has generally remained unchanged. We feel very confident that, I think as you can see, we are now actually providing forward guidance on revenue of approximately 25% for the year. This is despite the fact that a significant percentage of our mid-market customer, or a significant percentage of our revenue, is now coming from mid-market customers. So, for us, I think we are feeling pretty good about the competitive environment. And we have not seen any appreciable pricing pressure.

Great. Thanks for taking my questions.

Amir Rozwadowski from Barclays Capital.

Thank you and good afternoon folks. I just wanted to dovetail on that last comment you made in terms of that 25% year-over-year growth expected in FY15. If we think about the trajectory of that through the course of the year, it seems as though you folks have been gaining, or at least adoption has been improving as receptivity for cloud-based systems has picked up. Should we expect that to be fairly linear in terms of growth or do you expect a much more back half-weighted year? How should we think about that progression?

Hi, Amir, it's Dan. We expect more of it is weighted to the back half. So, we've made the initial investment beginning in the October-November time frame we communicated to investors, bringing estimates down to the 6% to 9% of revenue from a non-GAAP perspective. We are starting to see the fruits of that investment in very strong sales and very strong pipeline.

And, as we've noted, for the first time we are beginning to accumulate a bit of a backlog. These customers just don't install in a month or a week, they install in two to six months. So, it gives us tremendous visibility.

And, as Vik mentioned, this is the first time we are providing forward-looking guidance regarding revenue. And we've got a tremendous amount of confidence behind that. But it's more second half where more of the acceleration will occur.

And so, in thinking about the acceleration, you folks had spoken about the fact that you are investing in the business to help drive some of that acceleration going forward. Just trying to understand the thought process around that high single-digit net non-GAAP net income margin. And when we should start to think about the possibilities of returning to prior net margin levels and generating leverage off of some of those investments.

Our contribution margin, which we define as service margin less customer service and billing expenses -- you could think of it as free cash flow on a customer -- is 64% of revenue. So, there's enormous leverage in the model. Frankly, we were a little bit ahead of our expectations from a non-GAAP perspective this quarter at the 9% figure, primarily because we exceeded our internal expectations on a gross margin in the period.

We have, as we stated in the past, an aggressive sales and marketing and product headcount investment, as well as R&D investments, predominantly in personnel. The only guidance we are providing is throughout this fiscal year is the continued in the 6% to 9% range. It most likely will not be linear throughout the year. The main driver on that is our ability to achieve our internal hiring plans, and with things such as R&D it doesn't always go as planned on some of the more difficult hires. So, there could be some up and down in the margin throughout the year.

But the primary thing that we view is, are the core metrics of the business -- which would be service margin, gross margin, contribution margin -- are those items increasing or maintaining the levels that could result in meaningful free cash flow at later stages in the business model. But we look at the model. We're at 10%-ish market penetration and our pipeline is enormous. It's never been better. It's just not at a point today that we are going to target exactly a date that we'll be back to historical profitability levels.

Thank you very much for the incremental color, Dan.

Nandan Amladi, Deutsche Bank.

Good afternoon. Thanks for taking my question. Vik, you embarked on a more aggressive growth strategy late last year. Dan mentioned that you have a pretty strong backlog, about $3 million in recurring revenue, that's waiting to be deployed. Are you happy with the pace of additions since you took this new approach? And how does that 75 customers, $3 million a year compared to, say, a year-ago period?

Okay. Let's address it in two steps. One -- Dan, do you want to just give him a little bit how much the backlog has changed on that 75 customer?

Yes. Nandan, I will give you the figure from six months ago because one year ago we frankly had none. Six months ago it was in the neighborhood of $0.75 million of backlog. So it's gone from $0.75 million to $3 million of backlog. If you look at the customer size, it's 75 customers, and we are at $3,500 in recurring revenue on average each. So, these are very nice-sized smack dab in the mid-market type customers.

And, Nandan, just generally, I think Dan said it quite well, we are seeing the pace of adoption in the mid market definitely be as strong as we've ever seen in the history of the Company. In Q4, 39% of new monthly recurring revenue came from the mid-market end channel. That's pretty significant. That number has grown 47% from a year-ago period.

And, so, as you continue to look at what we're seeing, larger and larger customers -- and we're talking about older guard type customers, customers that you wouldn't traditionally see as migrating to the cloud -- starting to migrate to the cloud. You will see midwestern companies that may be doing chemicals or something else like that, that basically will come onboard and say -- we are looking for technologies that can help us outsource all of our telephony, all of our contact center solutions because we don't want to deal with the day-to-day problems. We have issues with disaster recovery and all of the other things.

So, we're starting to see the overall cloud market for telephony and contact centers become mainstream. And just the time from the original inquiry to the time of sale has definitely started to shrink quite materially for us.

Thank you. And a quick follow-up -- the emphasis on channel sales versus international expansion and the way that you've allocated the sales and marketing dollars.

They're two-fold. As you know, we invest in direct, as well as channel. Internationally, our international subsidiary -- this is the UK solutions, 8x8 solutions in the UK -- they sell both direct and through channel. We try to be evenhanded because we never want to be hostage to a particular sales avenue. And, again, we're seeing a significant growth in all. Both our direct sales for mid market and channel sales for mid market are growing very significantly.

Thank you.

Greg Burns from Sidoti & Company.

A question on that last comment in your prepared remarks about bundling services beginning in the fourth quarter. Could you just give us a little bit more color on what that refers to and how that changes how you're going to market with your services going forward?

Yes. We sell a wide variety of different services. And it could be services from a seat in our virtual office product to a contact center seat to toll-free numbers to fax numbers to unified communication solutions. So what we've done is started to roll some of these into one service plan. Whereas prior to this most recent quarter they were all line itemed on an invoice and they were bought all a la carte. And this is just a bundling element to our solution. You can go deeper than what I just mentioned where it could be bundled with a contact center seat, just bundled totally into a virtual office or PBX seat.

It's not really changing so much the go to market but it's changing just some of the communication from our sales force to prospective customers. And, so, what it's done is the figure of a service is, over time, will start to become less relevant.

Many of these metrics that we have provided for years and years started at times when the business was being invented. And we've just gotten to where there is just a few metrics that are the primary drivers of the business. And those are the metrics that we are going to be disclosing on a go-forward basis beginning in the first quarter of FY15, which we announce in July.

Okay. So, going forward a little different definition of what a service is, or it becomes less meaningful as a new definition. Does that imply that ARPUs go higher if you're bundling more into one seat? Should we see ARPUs be higher per customer going forward?

You mean the ARPU figure which we have in the quarter we just reported as $287? Whether we are doing bundling or not doing bundling, the ARPU would still be the $287, because the definition of that is what is the average subscription-based invoice of a customer, is the $287. And our mid-market customers on average pay in the neighborhood of $4,000 a month, on average. It represents 39% of the total service revenue of the Company. It's growing at a much faster rate than our SMB base. It's been the primary driver of the delta and the $287 from the prior-year period.

Okay. And lastly, the acquisition costs in the quarter, I think, were the lowest I've seen since I've been covering the Company. Was there anything in particular driving that? And should we expect that to get back to more normal levels in the coming quarters?

We just were extremely efficient in the quarter. Everything was clicking. Typically our strongest quarter is always the March quarter. Almost all the costs are variable so it's not like there's fixed costs that bigger quarters drive the leverage. Everything was firing on all cylinders in the quarter and, as you can see, performed a little better. The subsidy, which you can see in the product margin, was a little bit better. We were just more effective across the board.

Okay, thank you.

Ragh Sarathy from Dougherty & Company.

Good afternoon. Thanks for taking my questions. A few questions from my end. Dan, from the ARPU side, in the first three quarters we have seen about $5 to $7 sequential increase this last quarter. It's really twice that amount.

I was wondering if you could give us some color on whether you have a larger customer going live. What drove nearly twice the sequential increase we saw? And, then, a second part of the question is, the 25% revenue growth, how should we think about ARPU growth in that overall growth rate that you are projecting?

We increased ARPU $13 sequentially. Between $5 to $7 of that increase is related to incorporating a full quarter of the UK acquisition. So, we picked up December in the prior quarter and picked up a full quarter in this most recent period. The average customer in the UK is $500 to $600 a month, so it's in the range to double what legacy 8x8 customer base is. So that was a bit of the driver.

On a go-forward basis, we definitely think that it's a metric we're going to continue to report. It's a very important metric. Historically we've been in the $5-ish range. It's a metric that we are not going to give much guidance on.

One, it's just hard for us to tell you on a quarterly basis. On an annual basis it is a little bit easier to tell. You can just see that we've got sitting in backlog right now 75 customers that are $3,500 each. How we do in mid-market sales is going to be the big driver on that. We think we've got a long ways to go on this on a multi-year period.

So, on an annual basis, is there a reason why it shouldn't increase at least $20, $25 when you move to up market?

We've been consistently putting up roughly the $5 on a just organic basis, and we don't see any reason that that would be changing.

Okay. And then my second question is, on the average number of services subscribed per new customer, you had very strong growth, 20% in the first three quarters. There's a bit of a deceleration in the current quarter, about 8%. Can you give us some color on whether that's what you're referring to the backlog? I'm wondering why the deceleration there.

Are you referring to the average number of subscribed services per new business customer?

Yes.

One of it is what I just mentioned -- we started rolling out bundling this quarter. So, that is one component of it. But this has nothing to do with this backlog I'm mentioning. For example, some of these customers that we haven't installed yet and are not live, all of them are represented in our sales figures. The number of services sold, the average number of services, businesses, is booked in the quarter.

So, the backlog is reflected in that figure of 19.6 that you referred to.

Some of that, yes. Some of the backlog is represented by new deals that were sold in the quarter.

And, as Dan said, Ragh, I want to emphasize, the change has more to do with bundling that anything else.

Okay. And then final question is, a lot of the statistics of the metrics you disclosed are geared towards the new customers. So, maybe you can give us some color around maybe in a cross-sell lot, maybe upselling to the existing customers as you move into mid market. For instance, what percentage of the [MRR] is actually coming from existing customers, and how that is trending. Or is that an opportunity?

Actually, so, I think you picked up on a lot of interesting things, Ragh. As you point out, this is the first time that we have provided forward guidance on revenue. And you've also picked up on, I think, one key thing, which is, despite the fact that our mid-market and channel represents a significant percentage of our new monthly recurring revenue, we are still confident in forecasting a 25% revenue growth rate. So, this is literally, the time of deployment is changing from one month to two to six months, and despite that we're able to show you, or predict, approximately a 25% growth rate.

The second element of that is mid-market customers tend to -- and I think we've shared this before -- they tend to buy, upsell a significant portion more than our smaller business customers. So we see that the overall upsell opportunity will be increasing. So, there are opportunities to mine our existing base, particularly as we keep increasing the overall mid-market customer base. And, so, the opportunity to upsell, provide additional services is a key element of our strategy. Which is why we are creating this comprehensive suite of products, because you want to ensure that we can get more and more wallet share.

One interesting trend that we are seeing, which I think is pretty classic when early markets start to become more mainstream, is more and more of our customers, mid-market in particular, are looking for one throat to choke for a whole suite of communication and collaboration services. They'll come to us and say -- we want cloud telephony. Then they'll come and say -- hey, you guys do also this contact center stuff on the cloud? Then they'll come back and say -- do you do virtual meeting on the cloud, can we do web conferencing, can we do mobile?

And it's an opportunity to keep upselling that we now have a dedicated team that goes after our mid-market customers, make sure we solve all of their respective problems, make sure that they have a single point of contact, and then come up with an opportunity to upsell all additional services to them.

Okay, thank you.

Dmitry Netis from William Blair.

Thank you. Good continued progress, guys, especially on the bottom line. The question, I guess a clarification, backward-looking clarification, I'm trying to reconcile the growth number you put up, there were a lot of 29% and 31% numbers given out. But I look at the top line, it was 24% growth, hard-coated numbers. So, can you explain where the 29% is coming from? I might have just missed it.

Dmitry, 29% is quarterly. So, fourth quarter 2014 over fourth quarter 2013. 24% is full year.

Sorry -- quarterly -- on a year-over-year basis you grew 24% top line.

For the entire year. And then 29% is Q4 to Q4. So just three-month period.

Okay. I'm not seeing that for some reason but I'll follow-up with you off-line.

Just to make sure we're on the same page, March quarter 2013 to March quarter of 2014 grew 29%. All of 2013 to all of 2014 grew 24%. So, the fourth quarter grew 29% compared to the fourth quarter of the previous year. The overall year grew 24% compared to the overall full previous year.

Yes, I see what you mean. I'm just not seeing that in my model, for some reason. Okay. I'll follow-up with you off-line. Maybe there's a problem there.

Anyhow, okay. I wanted to dig in more on the Voicenet part of the business, just how much of that was in the revenue this quarter and whether that exceeded or met your expectations. If you could comment on that.

On the UK acquisition, we mentioned last quarter we're not going to break that out on a go-forward basis. The business performed well. It was pretty much just in line with expectations. Integration going pretty well. And we are extremely positive on it. And we've got many multi-country deployments. And having that asset is very good for us.

Are you growing the run rate that you had seen when you picked up the asset, which if I do the math it's about $2.2 million a quarter, or so? Is that the run rate you're seeing today or have you exceeded that run rate?

The UK business, as we disclosed in December when we acquired the company, we had a conference call and disclosed about 13% growth rate, is what the UK was growing at. The growth rate doesn't accelerate overnight but we are definitely working to get that growth rate up. We've got essentially everything in place to get that moving, and started marketing on 8x8's platform that we have in London in February. It's looking very good there.

Okay. So, does that mean, Dan, you swapped out their Broadsoft call control or softswitch with 8x8 ones, and onboarding customers on your own organic platform? Is that what that basically means?

The existing customers, the legacy Voicenet customers, unfortunately it's not as simple as swapping them out overnight. But new customers that are procured in the UK, or US sales force sells something and it has a UK deployment, is going on the 8x8 platform that we have in London. Existing customers pre February this year on the Voicenet business are on the legacy Broadsoft platform that we effectively, from our perspective, is end of life. But we are continuing to service them on that platform.

Starting February, as Dan said, all our new sales are on the 8x8 platform, and that's fully operational down there.

And it's the same feature set as you have here in the US? Or do you have some limits in terms of features you're providing there? Or is that on par?

Similar features. That was the whole idea. If you remember the strategic rationale, we were looking for highly competent sales and support organization with the ability to basically leverage our infrastructure that we had previously put in the UK. So, it's identical.

They use pounds. By the way, their idea of pound is actually money as opposed to that hash symbol. But short of that, it's pretty similar.

Okay, fair enough. And then as I dig in on the gross margin side, when you picked it up it was somewhere in the 40%s. How has that progressed? Has that gross margin been improving? Has it helped the results in this quarter since you had a full quarter of that now? Or hurt? How do I see the gross margin trajectory there?

The business in the UK, as we disclosed last quarter, in the month of December, it generated 39% gross margin compared to the total Company in the quarter was 71%. We have moved it up a bit very quickly. We definitely have got a lot of work to do to get it up to 8x8's consolidated average. But we definitely think we've got a path to comparable margins in each location.

Do you guys have a target where you want to be by the end of the year, for example?

No. As we mentioned, we're not breaking out figures on this. It's something that we see no reason why anywhere in the world we can't be operating the business at comparable margins.

Okay, that's helpful. And then last question would be on these [mashups] you guys talked about -- the Zendesks, NetSuites. I would imagine these relationships have been -- Noasoft being another one -- these relationships have been inked, probably not over this past quarter but you've had them in for some time. How do we quantify what percentage of the new customers may be coming off of these relationships? Is there a way to do something like that? Are you willing to provide us some metric to track that mash-up resale go-to-market scheme?

We don't break that out As you know at Zendesk we started doing the December quarter, and NetSuite is more recent with our recent press release -- Noasoft, et cetera.

The key part I think you should get is it helps us get more and more of a comprehensive offering where we're able to go to mid-market customers, in particular, that have Zendesk platforms, that can then have ours, and we both help each other. Same thing with NetSuite, same thing with Noasoft, et cetera. So, across the board we're finding a lot more stickiness as we get more and more combined with these back-office business productivity tools.

Ultimately what you think about our system, particularly for the mid market, we're about business productivity enhancements. So, the more you tightly integrate it to other people's comparable and complementary back-office systems, the more value you provide to your customer. And the more value you provide to your customer, the more opportunities you have to upsell your systems, as well as maintain stickiness and lower churn. So, that's part of the key reasons why we're doing these.

Okay. And then you're getting a lot of leads out of these relationships, I would assume? Is that a fair assumption? And that's helping your mid-market growth?

It's a fair assumption. That we would not have done that without the fact that we anticipate and are getting a reasonable amount of leads from these guys.

Okay, great. Thanks, Vik and Dan. Thank you.

Nikolay Beliov from Bank of America.

Hi. Thanks for taking my questions. The first question I had is, I might have missed that, but can you give us a sense, some color around the guidance of 25% revenue growth for next year in terms of are you expecting subscription revenues to grow faster than product revenues, which accelerated last quarter? And also in terms of subscription revenues, is it more of a unit growth story or we should see some uptick in ASP per subscriber?

Hi, Nikolay. The revenue growth of approximately 25% is total revenue growth. We actually have to allocate some revenue from service over to products. So, we just look at it as a whole because just from a GAAP basis they're meshed together. We, frankly, have never talked about the delta in the two.

But overall, in a perfect world, we wouldn't even be providing product. We are starting to see some customers just use their iPhone or Android phone with our applications and not even purchasing product. I wish that everyone would do that. But that's not happening today. But I would just think of it as overall revenue growth of approximately 25%.

And on the ASP question, we are seeing good traction on our contact center product. The ASP on the contact center product is roughly 5 times what it is on our virtual office product. And, presuming that we have greater and greater success with that product, it will be a big driver in ASP expansion. The way that we really differentiate is mid-market customers that are purchasing both our virtual office and our virtual contact center product together.

Got it. Staying on this line of thought around the contact center, is that business growing faster than the voice business?

We don't break that out but all our businesses are growing at a very nice clip.

Okay, thank you. And my last question is around your international strategy and expansion. Obviously you bought Voicenet in the UK. You've been talking about data centers in Latin America and Asia. Are those on the ground yet? And do you have feet on the street in those geographies yet, or it's still too early?

In Asia we have our data center installed, operational, et cetera. On Latin America, we found a way to support some of our near-term needs, leveraging our East Coast data centers. So we're waiting on that one.

But, yes, International strategy is working well for us. As you can see, we managed to get a data center operational in London, get Voicenet over to our data center, and do that all essentially in one quarter. And Voicenet, which is now 8x8 Solutions, is doing very well for us.

And so you can expect to see a similar type of strategy evolve in Asia-Pacific where we've got the data center fully operational and we're looking for the right partner. But, again, I think as you have gotten to know me, I'm very much about making sure that when you do an acquisition you really have a plan and you have a tight way to integrate it so that it happens without a hitch. So that, I think, in essence you're able to continue to maintain your trajectory of growth, you're able to maintain your non-GAAP net income projections, and you're able to swallow the right acquisition and then turn them into a very high-performing asset. We've got a pretty significant pipeline but we always make a list, we check it twice, and we then make sure we have a plan.

Got it. Thank you.

Mike Latimore from Northland Capital.

Thanks. Nice quarter. The channel and mid market, that you report that group together, how is the channel doing relative to that group? Is it faster or slower than the overall mid market?

We don't break it out but channel has grown very significantly for us. So, yes, we don't break it out. But we are quite pleased with the pace the channel is growing.

And then in terms of new services sold, did that metric grow on an organic basis sequentially?

Yes.

Okay. And then you mentioned a lot of interest in, say, mobile end points. Any clarity on where are we in terms of percent of end points that are mobile or softphone nowadays?

About 25%.

Okay. And then, just curious, you are moving up market, I was wondering what was the largest customer you won in the quarter in terms of seats.

I don't think we disclose it but it is north of --.

The seat wins that we are having now used to be like a bluebird if we had a 500-seat win, and now it's like they are quite common.

Okay. Thanks.

But we didn't have -- to an earlier question, I think there was a question, did we have a gigantic deal that skewed some numbers. And, no, we don't have like 10,000 seat wins that are skewing any numbers.

No, what we're seeing is just a consistently larger and larger number of deals that are from the mid-market segment. Mid market and channel comprise 39% of new monthly recurring revenue for Q4.

Okay, great. Thanks.

George Sutton from Craig-Hallum.

Thank you. I feel like the guy presenting right before they say let's break for drinks. Just two questions that I don't think were really addressed. What are the gating factors to the growth that you see? You talked 25%. What keeps that from being 30%. What keeps that from being an even higher rate? You did mention the deployment from a mid-market perspective. Is there anything else we should be aware of?

That's a great question. I actually am a big fan of balanced and profitable growth. I think from the day we've first gotten to know each other, I keep using words like profitable growth.

You can always grow more. But I like the idea of maintaining a non-GAAP net income in the 6% to 9% range and still having very solid growth, because then that almost makes us the Goldilocks. 25% growth while maintaining solid profitability.

I think this is a good environment for us because we're seeing several of our competitors that have basically had a strategy of losing a ridiculous amount of money in pursuit of growth at all costs. Well, they have to rethink some of those strategies. So, from our perspective, I think what we are doing is very solid in the sense we can continue to grow well, we can maintain our non-GAAP net income in the 6% to 9%, and keep on doing this. And little by little I think we continue to distance ourselves from everybody else.

All right. That's very helpful. One other curiosity I had, when I think of your mid-market distribution capabilities today versus, say, 6 months and 12 months ago, how have those changed specifically? And then when I think of the SMB specific focus, my sense is that really hasn't changed. Is that a fair assumption?

What do you mean by distribution?

Number of salespeople, touch points from channel partners. However you think of your ability to get to the potential customers.

Our mid-market -- one, we don't break out the number of salespeople, et cetera. We are obviously growing our mid-market salespeople, but what we're seeing is the overall productivity of our salespeople in the mid market has definitely increased.

SMB -- we continue to see good growth in SMB. I think Dan said it very well. We're in a very interesting position. All our segments are growing at a pretty healthy rate. Some are growing obviously faster than others. Mid market and channel are showing the most growth, but SMB is continuing to grow at a reasonable rate, as well.

Okay. Thanks, guys.

Thank you. And now I would like to turn the conference back to Vik Verma for any closing comments.

Dan has one more comment. Go ahead, Dan.

There was a question earlier on the growth rate to the prior year. I'd just like to remind everyone, we disposed of a business on September 30 of 2013. We filed an 8-K on October 4 of 2013 that has all of the detailed financial statements of the disposed business. Possibly the question on the growth rate is that the disposed revenues, are they included in the figures on some people's models.

And, so, you can pull up that 8-K but I will just give you the figures. A year ago there was $835,000 in revenue in the fourth quarter that we had disposed of. So, it's been removed from the financial statements. And on a full-year basis in fiscal 2013, $3,828,000. So that potentially is the confusion from earlier on the call.

Very good. Thank you, Dan. Folks, in summary our record fourth quarter capped a very eventful year for the Company. We feel very pleased with what we've been able to accomplish and we look forward to a very strong 2015.

Thank you again, everybody, for listening to our presentation today. I look forward to seeing you all in coming months at upcoming financial conferences and other industry events. Thank you very much.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.