8x8 Inc (EGHT) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the 8x8 third-quarter fiscal 2015 earnings conference call.

( Operator Instructions )

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Joan Citelli, Director of Corporate Communications.

Thank you, and welcome, everyone, to our call. Today I am joined by 8x8's Chief Executive Officer, Vik Verma, and our Chief Financial Officer, Mary Ellen Genovese, to discuss our results for 8x8's third fiscal quarter of 2015, ended December 31, 2014. 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, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factors sections of our annual report on form 10-K and our quarterly reports on form 10-Q, and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties.

The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you. And with that, I will turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you Joan, and welcome, everyone, to 8x8's third-quarter of fiscal 2015 earnings call. This was another strong quarter for 8x8, and I believe we bolstered our industry leadership position in several key areas, notably our expanding presence in the midmarket, our talent, and our technology.

As you can see, from our fiscal 2015 third-quarter results, the momentum we generated in the first half of our fiscal year continued with strong 26% year-over-year growth in total revenue to a record $41.4 million and 27% year-over-year growth in service revenue to a record $37.8 million. Driving this growth is the continued midmarket adoption of our cloud telephony contact center and unified communications services we saw during the quarter.

New monthly recurring revenues sold by midmarket and channel sales teams increased 42% year over year and represented 44% of new monthly recurring revenues sold in the quarter. Revenue for midmarket customers now represents 42% of total service revenue compared with 38% for the same period a year ago.

Our non-GAAP net income results for the third quarter of fiscal 2015 were equally strong at $4.1 million, or 10% of revenue, compared with $2.5 million, or 8% of revenue, for the same period last year. This is the 19th consecutive quarter in which 8x8 has generated non-GAAP net income alongside increasing revenue, and we remain committed to profitable growth and strong cash flow.

Since our last earnings call, 8x8 has made significant progress in a number of key areas. First, I'm pleased to announce that we have rounded out our senior management team with the strategic hiring of two executives following the appointment last October of Mary Ellen Genovese as Chief Financial Officer.

In November we brought onboard Enzo Signore as Chief Marketing Officer, and earlier this month we named Puneet Arora as Senior Vice President of Global Sales. Enzo brings over 20 years of marketing, product management, sales, and business development experience to 8x8, with industry-leading communication and technology vendors such as Avaya, JDSU, and Cisco. Puneet comes to 8x8 with a successful track record building, leading, and scaling sales organization for SaaS and enterprise software industry leaders such as salesforce.com, Oracle, and most recently LivePerson.

Particular areas of focus of our marketing and sales effort going forward will be increasing brand awareness and adding more rigor to our demand generation and sales processes. I am thrilled to have Enzo and Puneet join the 8x8 executive team. And I'm confident that their background and experience will be invaluable as the Company enters its next phase of growth.

Second, as we announced last week, 8x8 achieved a new technology milestone with the awarding of its 99th and 100th US patents. We believe our patent portfolio is not only a market differentiator and proof of technology innovation, but more importantly a display of the dedication of our team to envision, develop, and deliver industry-leading communication technologies that enable our customers to grow and prosper.

Third, the deeper level of integration between our virtual office and virtual contact center services, which I referenced during our last earnings call, is now complete. Our research, development, and engineering teams have been working hard over the past 18 months to architect a cohesive cloud communications solution that seamlessly ties telephony, unified communications, and contact center users across the enterprise with single sign-on, shared directory, shared presence, integrated chat, and integrated call flow and routing.

By integrating these two software technologies to form a common underlying core platform, 8x8 has uniquely positioned its offering to extend the customer engagement, analytics, and reporting capabilities of the contact center throughout the enterprise. In the coming weeks and months, we will be announcing additional new services and capabilities that will enable businesses to derive far greater value from 8x8's unified communications and contact center as a service solutions, beyond a simple replacement of their legacy communication systems.

Our combined virtual office/virtual contact center solution continued to bring us some big wins this quarter, with 5 of our top 10 deals in the US subscribing to both services. Two notable wins from our channel team, including MHM Services, a 350-seat, 38-location virtual office deal brought to us by our partner CDW, and Lantronix, a global leader of secure communication technologies brought to us by our partner TBI that will be deploying both virtual office and virtual contact services across their entire global enterprise.

Our UK team is seeing good traction from its acceptance as a supplier on the UK government's G-Cloud 5 framework, and last quarter closed 100-seat virtual contact center deal for a leading systems integrator that provides professional services to central governments within the UK. In addition to the success our midmarket channel and UK sales teams are experiencing, our SMB group had record bookings in the month of December, and are now more focused on larger deals. The productivity of our SMB reps has increased 12% year over year.

Fourth, we've taken the time over the past few months to learn how we can better support our customers' business growth initiatives. In October 2014, we held our first Executive User Forum that was attended by the CIOs and heads of IT at some of our top midmarket accounts. The purpose of this event was to listen to our customers' business needs and issues, and identify ways 8x8 can be a better partner.

During the 2.5-day event we learned how important it is to have reporting and analytic data, as well as integration with critical business applications like salesforce.com and NetSuite. This, along with other detailed customer feedback, will continue to help guide our product road map. We also learned that these customers viewed the TCO, total cost of ownership value, speed of deployment, and flexibility of 8x8's services as a significant competitive advantage.

Additionally, last month we invited 4,400 customers to participate in a survey designed to uncover what areas of their business were positively affected by the deployment of our solutions. Thanks to 8x8's proven high availability performance with 99.997% uptime for the past two years, 87% of our midmarket customers with more than 500 users reported improved service availability and reliability with 8x8's services over their previous solution.

51% of the customers surveyed reported receiving a 55%-plus reduction in dedicated communication IT resources. Overall, we learned that 8x8 value proposition and customer satisfaction grows with larger and more complex accounts.

Fifth, we announced the continued expansion of our global presence with the launch of our service platform in a top-tier data center in Sydney, Australia and the establishment of a partnership with Entrust ICT, a Australia-based provider of wholesale communication technologies to leading system integrators and service providers. A highly available, reliable, and secure global communications network continues to play a significant role in the increasing adoption we are seeing in the midmarket. With the opening of this latest facility in Sydney, 8x8 now maintains eight data center operations in five regions of the world: United States, Canada, United Kingdom, Hong Kong, and Australia.

Our progress during the quarter is part of a clear trend of 8x8's successfully moving upstream into larger deals with a focus on delivering business value. Certainly this did not happen overnight and the effort was nontrivial. This undertaking involves significant investments in time, training, and product development to help us meet the communication needs of the midmarket customer segment.

The results of these investments is that we are signing increasingly larger deal in the midmarket segment. Our average monthly recurring revenue per order from our direct midmarket customers more than doubled year over year, largely driven by increasing success in selling a combined virtual office and virtual contact center product offering to our customers. As a result, we're winning larger deals, generating better margins, and seeing less churn as compared to a year ago.

While many providers can deliver VoIP dial tone, the midmarket base requires a broad range of services to grow their business. These are services 8x8 already has in place today in the form of a complete interoperable solution. Before I turn the call over to Mary Ellen, given our strong performance in the third quarter we are maintaining our guidance for annual revenue growth of approximately 26% in fiscal 2015, and we continue to expect non-GAAP net income as a percentage of revenue in the 8% to 10% range for fiscal 2015.

With that, I'll now turn the call over to Mary Ellen, who will provide you additional detail on our financial results.

Thank you, Vik. As Vik noted, financial results for our third quarter of fiscal 2015 were strong, with a 27% increase in service revenue and a 26% increase in total revenue compared with the same period last year. 44% of our new monthly recurring revenue sold in the quarter came from our midmarket and channel sales teams. Revenue from this combined segment now accounts for 42% of our Company's total service revenue, compared with 38% in the same period last year and 41% in the previous quarter.

We remain intensely focused on expanding our penetration in the midmarket, as the lifetime value economics of these customers is approximately 40 X that of a small business customer. Average revenue per customer across our entire customer base was a record $305, up $6 sequentially and $31, or 11%, compared to the same period a year ago. Monthly business service revenue churn was 1% in the quarter compared with 1.5% in the same period a year ago.

Our GAAP net income was $444,000, or $0.01 per share. Non-GAAP net income was strong at $4.1 million, $0.04 per share, representing 10% of revenue, compared with $2.5 million, $0.03 a share, and represented $0.08 per revenue -- 8% of revenue in the same period a year ago.

Gross margin was strong at 72%, similar to prior quarter. Service margin was 80% and product margin was negative 11%. This compares with 71% gross margin, 81% service margin, and negative 34% product margin in the third quarter of fiscal 2014. We saw a significant improvement year over year in product margin due to less discounting to smaller customers.

Our net customer additions were lower this quarter compared with our historical results, primarily due to the end of life reduction of very small ITEL Connect customers, which we acquired in 2008, and an emphasis on the part of our SMB team on selling larger deals. We expect this trend to continue as our SMB team focuses on large deals and continued reduction in our previously acquired ITEL customers.

Our sales and marketing expenses increased sequentially from fiscal Q2 by approximately $1.1 million due to higher commissions related to our SMB group, tradeshow expenses, and increased headcount in our midmarket deployment team. We expect this trend to continue in fiscal Q4 due to expenses relating to our key industry tradeshow, Enterprise Connect, in March and the addition of two senior executives.

We capitalized approximately $600,000 in R&D expenses this quarter, and expect these projects to be completed by late Q4. In addition, we expect fringe benefits to increase across the board in Q4 as we restart Social Security and 401(k) matching expenses for all our employees. These increases are included in our full-year guidance of 8% to 10% non-GAAP net income.

Cash, cash equivalents, and investments were $187.9 million at December 31, 2014, compared to $174 million in the third quarter of fiscal 2014. Cash flow from operating activities was $13.8 million year to date.

Capital expenditures were $2 million in the quarter, or 4.8% of revenue and $4.5 million, or 3.8%, of revenue for the first 9 months of fiscal 2015. Our increase in capital expenditures is primarily due to an upgrade to our core network and equipment to the next generation 10-gig infrastructure to support our future growth.

We are also deploying additional hardware and systems to accommodate our new product features, such as virtual office, VCC integration, and big data analytics. Lastly, we are investing in back-end systems to accommodate the additional complexity of serving our midmarket customers.

As Vik indicated, we are reiterating our guidance for annual revenue growth of approximately 26% in fiscal 2015, with non-GAAP net income as a percentage of revenue in the 8% to 10% range for this fiscal year. We are building a Company focused on sustainable, profitable growth.

This concludes my prepared remarks, and I will now turn the call over to Vik.

Thank you, Mary Ellen. In summary, we had a strong quarter, characterized by continued growth and profitability. We're finding success in the sweet spot of the market where others aspire to go. We believe we have a significant head start on the competition, and we intend to leverage this and bolster our competitive advantage in 2015 and beyond.

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 )

Nandan Amladi, Deutsche Bank.

Hi, good afternoon. Thanks for taking my question. So Vik, my first question for you. Your hiring of a new CMO and a Chief Sales Officer, and your Head of Sales, what are they planning to do differently than what you've done in the past?

Okay. So let's start with -- I mean, basically we are changing the Company over the last 1.5 years or so to increasingly go after the midmarket and larger and larger accounts. And so as part of that, we're trying to bring in folks that are much more from that area and that expertise who can really drive growth in that particular segment. As you know, we did not have a Head of Sales. You're looking at him, I mean, or talking to him.

I was the acting Head of Sales. And I wanted to do that for about a year or so to get a sense of exactly what were the various levers. But Puneet comes from a SaaS background where he can really put all of the efficiencies in place so he can get a tight integration between our SMB team, our midmarket team, our channel team, our UK team and so we can get all of the efficiencies and much more structure and predictability in the way we keep growing our sales business.

Thank you. And a short follow-up. On the contact center plus telephony and unified communication, I think you said 5 of the top 10 deals bought these bundles in this quarter. How penetrated do you think you are at the moment? And how much demand is there in the end market to buy a bigger bundle?

We think it's very significant in the sense that, I mean, if you just look at the overall market, midmarket, I think it's less than 8% penetrated, I would say it's even lower than that, just in the US. And globally I would say it's even lower than that. We are finding increasingly people want this one-stop shop integrated solution. And the reason it's important is, for example, if you call a traditional call center, and you run -- and the agent runs into a particular problem, they literally have to say, Tier 2 or somebody else will call you back.

With this integrated telephony you have access to the entire company's directory. And so you are able to have first call resolution. In addition to that, you're able to have extension-to-extension dialing, not just with call centers, but making sure that in essence every person in the company is connected and has the right relevant amount of data that is available to the contact center agent.

So we're starting to see that this can be transformative to businesses and it can give a non-trivial amount of efficiency to them. As a matter fact, I think you saw that 55%-plus of our customers were saying that they were able to materially decrease their IT expenses by using our systems. So we think we're in an early stage of a very significant market. And we think the on-premise vendors are ripe for disruption, and we feel that this combined interoperable platform that we have put together positions us beautifully to do it.

Thank you.

Amir Rozwadowski, Barclays.

Thank you very much, and good afternoon, folks.

Good afternoon.

Good. Vik, I wanted to touch base on sort of the tail end of that question in terms of the opportunities that you are seeing in the midmarket, particularly as it relates to the opportunity to generate profitability. If I look at this quarter, we saw notable pick-up in your gross margins for the business. And I know that structurally the incremental gross margin, or the incremental cost for adding on additional lines and additional larger customers are quite favorable. How should we think about that progression going forward?

I mean, clearly you folks are making some investments right now to improve the distribution and improve the penetration into the midmarket base. But how should I think about sort of the longer-term arc of the profitability of the Company?

So you're -- I think in the nicest possible way, Amir, I think you're trying to get me to commit to guidance for FY2016, which I'm not prepared to do. (Laughter) But the part I will tell you, so let's start with the gross margin. What I would tell you, and I'm very pleased about this. I mean, as you're seeing, service margins and gross margins are trending very nicely up. And what I would tell you is I think we have a little more headroom there. And so little by little every element of the Company is getting better. And we feel very good about it.

And so I'm not willing to provide guidance for FY2016 at the current stage. We will make sure that we do the right balance between growth and investment. And I think we are committed to profitable growth. But as I said, the overall engine of the Company is starting to get better across the board and we're starting to see more cash thrown out from our customers. And also about 50% of our existing customers are buying our stuff and that, I think, is a good thing because it absolutely reduces your sales acquisition cost.

Very helpful. And then if I think about sort of the competitive landscape right now, I mean, clearly you folks are making an incremental -- an increased amount of traction into sort of this midmarket. Are we seeing a shift in the competitive landscape? Are you seeing sort of more than a larger portion of business is coming your way as you are starting to get increased sort of validation with this type of customer base? And I guess lastly, are you butting heads with those that may be in the larger part of the market moving sort of down into the midmarket?

So I think the simplest one is, a rising tide lifts all boats. I think we are in a secular shift where larger and larger enterprises are going cloud, and definitely cloud telephony, cloud contact centers. So I think all of us are benefiting from that. So right off the bat, that's very, very helpful. And that's a very large installed base, as you know, that have chosen initially on-premise because of that was the only available technology.

And what we're finding is we are able to now sell to those type of customers without having to convince them to go cloud. They are already starting with, okay, we're going to go cloud. Now let's talk about feature functionality. So that's, I think, a good move and I think that helps all of us.

I mean we butt heads with different people, but we like to think we are step-by-step differentiating ourselves on the technology front. I mean, the patents are issued patents, it's not pending patents. Those are patents that we've actually received.

The technology that we are talking about is stuff that we made available to new customers and is available for general -- available also to existing customers in the next three, four months. And so one by one we're starting to roll out all of these feature functionalities based on this platform. And you'll continue to see accelerating feature functionality that we think will help us differentiate from the competition.

Very helpful. Thank you very much for the incremental color.

Thanks, Amir.

Michael Huang, Needham.

Thanks very much. Happy New Year, guys. Just a couple questions for you guys. So first of all, I know that Puneet has just taken the reins here, but was wondering if you could share your initial thoughts around pace of sales hiring through next year? I mean, are you likely to be more aggressive around sales hiring, or is there more of a focus on productivity? What's the lower hanging fruit?

So, I mean, I have just a general bias towards productivity in the sense I think we are finding, and you just, I think, saw it. Just on the SMB team, with an amateur like me running sales, we were starting to see 12%, 13% productivity improvement. Midmarket, and channels I think are starting to see the same. So my sense is that you will see rotation. You'll see different people, but I don't anticipate massive increase in pace of hiring. What I see is we're bringing in onboard a SaaS expert who has built integrated sales teams with inside/outside channel, field, international sales teams. And I think has the expertise to do that and can help get the most amount of productivity out of our existing sales team. We will increase expenses, but I don't view it as dramatic increases.

Got you. Okay. That's great. Now with respect to the net add metric, I know it's not quite as relevant given the fact that you're investing disproportionately and moving upmarket. Could you at all share either qualitatively or quantitatively kind of how the midmarket and enterprise net ads are looking, and how is that trending, maybe relative to previous quarters?

I mean, we're relatively comfortable with -- across the board. I think the net adds -- keep a couple things in mind. Part of it is the cleanup that we're doing. So we have looked at -- we bought a company a few years ago, ITEL Connect. And they were one line-type customers on their own platform. And little by little we have given them an option to either move onto our 8x8 platform, unified communications, which is more expensive or move out. And so that was a nontrivial -- a subtraction to our gross adds.

Same thing is we have biased the sales teams towards selling larger and larger deals. And we are seeing that that is actually working for us. As I indicated, December was the most that our SMB team has booked from a MER perspective. And what we are seeing is that the smaller midmarket deals can actually be booked by our inside sales team. That's great.

So that's why you can get more productivity because they're selling larger deals. And so in essence you'll start to see that trend continue where our focus is much more towards selling larger deals, both with our SMB team as well as our midmarket team. And then just a general cleanup of some of the legacy customers that were on their own unique platform, which are one, two lines either being migrated to one common platform or basically not having their contracts renewed.

Great. Thanks very much. Appreciate it.

Dmitry Netis, William Blair.

Hello. Thank you very much. Nice quarter. Wanted to kind of clarify and then ask a couple of questions. One is the -- when you talk about SMB group, you're talking about midmarket, right? Those are the customers that are above 50 lines?

No. So SMB is the under -- traditionally our SMB team has sold the under 50 lines. Our midmarket distributor enterprises has sold greater than 50 lines. And then channel obviously has sold it through indirect. What we're finding is we are seeing that the SMB group, that 50 lines constraint which was based on historical fact and that's just been the way we've done it, we're finding that we can move them up where they are starting to sell bigger and bigger deal that we would have traditionally had sold through our midmarket channel. We are able to sell without any touch through our SMB team. So to me, that's a great trend. And we'll be experimenting with how much more we want -- how much bigger deals we want the SMB team to sell.

Okay. That's helpful, because I thought of the kind of under 50 as an inside sales group now. We have a new terminology, so that's helpful.

No, no. Sorry. Yes. It used to be called -- about a year ago it used to be called IVOS. So SMB and IVOS is the same thing.

Okay, great. So now you gave a productivity number for that team, which is up 12%. I think you said either 12% or 13%, I didn't catch it right but it's in that range year over year. So you are doing quite well, I guess, on that front. Do you have that same number for the midmarket team, or what the productivity there is? And I know you've been doing investments all along. And just trying to gauge how that is tracking actually in the last couple of quarters, or specifically this quarter.

Yes. I don't have the number offhand. I think it's -- we can circle up, I guess, the next time we talk. I think they're fine in the sense, but keep in mind midmarket is relatively new creation. So several of them are on ramps, et cetera. But SMB team is a relatively mature team. And what we're finding is that we are able to get much more productivity out of that existing team. And so that's why I highlighted that number, because that team has been in place for some time.

Okay. And then as I focus more on the midmarket again, I think at the time, maybe a quarter ago, you had about 1,200 customers in that team. Is there anything new to report there?

I mean, obviously keep adding to the customer. We have not updated the overall customers, but that customer base is moving along nicely. And the way to look at that number is 42%. I think last quarter 41% by revenue, our service revenue was coming from the midmarket customer. This quarter it's 42%.

Okay. Great. But also if I look at how your midmarket grew, and I went back a couple quarters, I think it grew in Q1 94%, it grew 59% in Q2. I think the growth was 42%, if I'm not mistaken, this quarter. So the trend's a little bit kind of sideways to declining. And I understand you're working off a smaller base in the past, now you have a higher base. But how should we think about that growth, I guess, going forward? And I don't specifically ask for the guidance here going into 2016, but if you look at the 2016, what's the range that you are going to be comfortable with going forward in the midmarket?

So two quick comments. So one, with regard to comparison, remember this quarter has a comparison to a portion of UK. We did the acquisition of Voicenet in November of last year. So this -- so that -- so this is not an apples-to-apples comparison since you've got a portion of UK that is included in that number that basically impacts the growth rate downwards. So that's one part.

The second part is remember the way we define this metric, and we will relook at how we want to define this metric, we define this metric as sales made by our midmarket and channel team. And I think I just told you, one of the things that we instituted last quarter is we created this concept of tiering where the top agents in our SMB team, we gave them a hunting license to go after the smaller midmarket deals. And they were quite successful. That, those midmarket deals sold by our SMB team is not reflected in that 42% growth number.

So we will have to relook at what the right metric is, because the way we define the metric, and I wanted to make sure we were consistent with the metric so we could always do an apples-to-apples comparison, we define the metric as the deals sold by the channel as opposed to the type of deal that was sold. And so, as we see SMB starting to sell more and more midmarket deals, it allows me to get midmarket to sell more and more enterprise deals.

George Sutton, Craig-Hallum.

Thank you. Relative to the channel, I appreciate you mentioned a couple of wins. I'm wondering if you could speak more holistically from an update perspective on the channel? In terms of how much support you are getting? What the funnel looks like? What the breadth of partnerships looks like? That would be helpful.

Great, George. A couple of quick thoughts. One, channel for me has been addition by subtraction. I think we had a bias towards signing up a whole lot of channel partners. What we did over the last six, nine months is we've been reducing the number of channel partners and concentrating on a few. And we're starting to see the fruits of that. Insight, for example, has been a great partner and is putting significant purpose. CDW, TBI, a bunch of these other folks.

I think channel has significant headroom. And I'm starting to -- the word I would use is green shoots. I'm starting to see a lot more interest from channel. I think we're now got the marketing mindset. Enzo, as you know, comes from Avaya, and they do a lot of work through channel. So the whole concept of enabling a channel, which was somewhat foreign to us, making sure that they have all of the right training, the market development funds, co-selling with them, et cetera. Those are things that as a Company we didn't know how to do well. We have now brought in that expertise.

So I actually think my prediction, a couple of years is I think channel will be probably the largest form of revenue that we get. But don't view that as a prediction. That is just a gut right now. But we're seeing a lot of headroom in channel.

Okay. And as an unrelated follow-up, can you give us a sense of how conversations are changing, now that you have worldwide delivery capability? So before a lot of these additions over the last 12 to 18 months, how has that conversation with the customers changed?

I think people are coming to us. And somebody made a comment about Puneet, and as well as Enzo. The part of the mindset has been we were essentially -- we started out as an SMB company, and a lot of the time it was inbound calls coming into us either through paid search or web or whatever, and we did almost no outbound. That's one element.

But what is -- the two ways that things have changed, people are actually seeking us out, that are channel partners. We are getting channel partners from, I'm sure you can guess some of the various competitors that are out there that are on-premise who are basically trying to create cloud practices. And larger and larger channel partners are coming to us with the idea of investing. And so they are courting us, which is unusual, which was -- it's new to us. So we appreciate being courted much more than having to do the courting. So we've seen that change over the last six months or so.

And then the second thing, as I said, we're still amateurs. And I don't mean to -- this at all pejoratively, because we've been continuing to grow at the rates that we've been talking about, doing the stuff, our midmarket was done as SMB-plus. Little by little we are learning how to become a midmarket company, which means everything from outbound to branding and all of these other activities. And we have now put the team in place that comes from that background and can go out and help us in that area.

So again, I never want to tell you everything is done. It's a work in progress, step by step. But I think we're continuing to make good progress in the areas, and the market is coming to us.

Okay. Helpful specificity. Thank you.

Mike Crawford, B. Riley & Company.

Thank you. Switching gears to the big data service, when is that going to be available for customers?

End of this month.

Okay. So it's already --

A version of it, yes. No. A version, and we'll keep adding to it. We'll have the first baseline coming out this month, which will give you data analytics, the -- you literally will, as a customer, will know across your entire network where each call is taking place, how many calls came in, where they went, how many were answered on the first ring, second ring, et cetera. So we are starting to -- we see great opportunities in big data and analytics. And I think you'll see Version 1 coming out, as I said, end of this month or early next month. And then a steady stream of new additions over time.

And then secondly, as you're interacting with larger and more sophisticated companies, are you finding many of these customers and prospects are coming to you regarding connectivity, or are they happy to keep that separate from the unified communications conversation?

So far they've been actually very satisfied. I mean, the two parts, and we have, we believe with all of our expertise, that we have been able to show to ourselves as well as to our customer that over-the-top connectivity gives you comparable call quality to an MPLS network. So, it's something we're very proud of. And it's, I think, because of our technology that we're able to do that.

Several customers do want MPLS, and we partner with companies to co-sell MPLS. So we basically go to the customer and we bring in a preferred MPLS partner. And then we basically provide over-the-top as a backup, as well as going over the MPLS network. We haven't found the need to resell MPLS network at this stage. And we don't think we will.

But, so far I think customers have come to us and have been content with, okay great, just give us over-the-top and we don't need a dedicated MPLS circuit, once we show them that the call quality is very comparable. And two, when they do want MPLS we are able to bring onboard a series of preferred partners that we've already built in all of the various interconnects with. And we have found that customers are satisfied with that. And that's, bluntly, the way we're going to market for the foreseeable future.

Okay. Thank you.

Greg Burns, Sidoti & Company.

Good afternoon. Now that you've had your Voicenet in-house for a little over a year, can you just talk about where -- how that acquisition has fared relative to your initial expectations? And maybe what your view is on expanding your operational footprint into new geographies?

Yes, great question. So one, and I think you rarely hear CEOs tell you this about acquisitions, but I am thrilled. I mean, from a numbers perspective, they have exceeded our expectations, particularly on new MER. We're seeing a lot of adoption happen in the UK market. I think you saw us make an announcement a few quarters ago of G-Cloud, and now they're winning deals through G-Cloud, which is as it essentially the GSA contract equivalents for the UK government. They're winning deals with universities, they're winning deals across the board with law firms, and larger and larger customers are coming to us there.

And the part -- and they are fully integrated. So the not-so-good thing was it take took us longer to integrate than I originally envisioned. But I think that always ends up being the case. But they're fully integrated, they're totally on our platform. They only sell, or almost exclusively sell 8x8 services and have been for the last four, five, six, months. Their order entry system is integrated with us, their provisioning system is integrated with us, all of their various alerts, et cetera are now integrated with us. So it's been a tremendous learning experience of how to go out and get a -- do geographic expansion with somebody who had a legacy platform, transform them to our platform, and do it without really missing a beat.

It took a lot of work, so I don't want to give you the sense that it was easy. I think we are almost like a duck where the feet are paddling like crazy, but it looks very serene on top. There's a tremendous amount of lessons learned that we are going to now use as essentially the input at how we're going to go do geographic expansion. We wanted to make sure we really fully understood what it would take to make our product work, what it would take to make our back office systems work to bring somebody like that seamlessly onboard because they're whatever, 10,000 miles away. And now we believe we can do that for others, and do it relatively painlessly.

Okay. Thanks. And just going back to the net add metric, it sounds like focusing more on the midmarket, that might be a little lower than historically going forward. So how should we think about ARPU? Will that kind of break out of that $5 to $6 incremental range? Should that start increasing at a faster pace, given the move upmarket?

Very likely. I won't commit to it right now, but very likely. We think it'll start moving in the right -- up and to the right, and I think more than historical.

Okay. Thank you.

Mike Latimore, Northland Capital.

Thanks a lot. In the midmarket, obviously, it's over 50 is how you define it. What is the overall average customer size in the midmarket, though, at this point?

So our average ARPU is, I think, close to $4,000, if I -- yes. Between $3,500 and $4,000 for midmarket. So that's, I guess, the way to look at it.

Okay. Great. And the -- you talked about, I think, 5 of the top 10 deals had contact center. Is that also a decent proxy for the overall midmarket bookings? Sort of 50% from contact center, or what would be the broader metric there?

Yes, I think that's reasonable. I think we don't break it out, but yes, that's reasonable. What we're finding is that a nontrivial portion is both. And then the remaining is almost equally split between, this is for the midmarket, between VO only and VCC only. And then we spend quite a bit of time that the VO only guys, we help convert them to VCC and the VCC only guys, we help convert to VO. So we are increasingly seeing a transformation in communication where bringing contact center-like functionality to the entire enterprise is a pretty disruptive technology for business communications, and we feel customers starting to adopt that.

Then just last question on UCS, I guess. Are you seeing much use of video conferencing and sort of mobile apps in your -- among your customers?

Yes. So about 40% of our customers use mobile apps. So mobile apps is definitely attention-getting. Video has been interesting. Video helps us with demos and is a great check-the-box, but we're not seeing that much adoption of video. We offer it obviously, and people use it. But it tends to be they use it a few times and then they don't use it. They tend to use voice only. I don't quite know why, but we would love for them to use more video. But so far we have not seeing the massive uptick in video adoption.

Okay. Thank you.

Catharine Trebnick, Dougherty.

Thanks for taking my question. Congratulations. Nice print. Can you talk a little bit more on the type of customers in the vertical markets? And the reason I'm asking that, are there some vertical markets, maybe healthcare or manufacturing, that might be more prone to adopting? And so have you done any segmentation or selling in the midmarket focused on the vertical markets? Thanks.

Yes. So our HIPAA and medical is a big deal. As you know, we provide the most comprehensive out-of-the-box robust HIPAA solution out there without anybody having to really read the fine print and worry about all of the exclusions. So medical is a very important segment for us. Surprisingly, legal, law firms is quite a big one. Recruiting is a pretty big one. So recruiting firms, law firms, medical firms, even financial services.

So there are three, four, five verticals that are adopting, but it's been -- we haven't quite -- I think medical being the largest, but we haven't quite found it that one vertical that just is blowing everything out. What is very heartening in all of this is little by little, all the midmarket customers are saying, I got to go cloud. And because of that we are seeing quite a few different verticals almost all adopt at virtually at the same time.

Okay. And then the other question is that -- no. That's all right. It's -- I got to go. Thanks. I appreciate the help.

Thank you, Catharine.

Okay. You're welcome.

I'm showing no further questions at this time. I would like to turn the conference back to Mr. Vik Verma.

Thank you, folks. In summary, we had a strong quarter and we appreciate all of you joining us for this call. We look forward to seeing you at different tradeshows, as well as financial conferences, in the future. Thanks again.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.