8x8 Inc (EGHT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 third-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Joan Citelli, 8x8's Director of Investor Relations. Ms. Citelli, you may begin.

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 2016 ended December 31, 2015.

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 limitations, 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'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.

Thank you, Joan, and welcome, everyone, to 8x8's third quarter of FY16 earnings call. I will begin with a high level summary of our accomplishments during the quarter, and then turn the call over to our CFO, Mary Ellen Genovese, who will cover the financial results and metrics in greater detail.

I am pleased to report another very strong quarter for 8x8, where we continued to see meaningful adoption of our cloud communications services by large businesses, a persistent and growing pipeline of enterprise opportunities, and the expansion of our international footprint with initial global deployments of some of our recently announced multinational enterprise customer wins.

Our total revenue in the third quarter of FY16 grew 29% year-over-year, to $53.2 million. For the 23rd consecutive quarter, 8x8 remained profitable on a non-GAAP basis, posting healthy non-GAAP net income of $4.3 million, or 8% of revenue.

Service revenue from our mid market and enterprise customers grew 53% year-over-year and now accounts for 50% of our total service revenue, compared with 42% of total service revenue one year ago and 48% in the prior quarter. This is a leading indicator of our ability to not only attract, but also rapidly onboard the largest, most discerning businesses who have decided to abandon their costly and cumbersome premise-based communications infrastructure systems and PSTN dial tone in favor of a cloud-based alternative.

By becoming 8x8 customers, these businesses experience productivity gains via our feature-rich solutions, realize operational advantages by working with a single global provider, and enjoy significant cost savings which, in some cases, adds up to millions of dollars per year as compared to their prior communication systems. And they receive a single, predictable bill at the end of each month.

There are four key areas of the business I'd like to provide an update on today. First is the continued progress we are making adding larger businesses to our customer base. New monthly recurring revenue, or MRR, sold to mid market and enterprise customers and by our channel sales team increased 94% year-over-year and accounted for 58% of total new MRR booked in the quarter, compared with 43% of new MRR booked through these sources in the same period last year. All of our sales team performed very well during the quarter, including our inside sales SMB team, which, while primarily focused on sub-50-seat opportunities, continues to sell efficiently to larger customers with well over 200 seats.

Examples of noteworthy mid market customer wins during the quarter by our direct sales team include two large aerospace and defense companies, one signing up for over 1,000 virtual office seats and another for a combination of over 400 virtual office and virtual contact center seats, a leading UK-based private equity and investment firm with a 900 virtual office seat deployment, a prominent software-as-a-service finance and billing provider with over 750 seats, and a major publisher in the education sector with a combined deployment of over 500 virtual office and virtual contact center seats.

Our partner Insight also brought us several key wins, including a regional office of McDonnell Douglas Helicopters, a McDonnell Douglas subsidiary that produces helicopters for commercial use, and Phoenix NAT, a global IT service provider offering cloud, dedicated server, co-location and infrastructure as a service technology solutions. Other channel wins included SR Labs, a provider of enterprise-grade market data and trading technology, and Roberts Home Medical, a healthcare equipment and service provider in the Washington, DC, metropolitan area, Maryland and Virginia. Of our top 10 deals this quarter, four were sourced through our direct enterprise sales organization, four came through our channel partners, and two came from our UK sales team.

Our pipeline of enterprise opportunities remains strong, with several proof-of-concept deployments underway and new additional prospects of this magnitude emerging. According to Gartner, the mid market and enterprise segments are forecasted to see the highest growth going forward, at 25% and 40% to 45%, respectively.

In addition to MRR bookings from new customers, we continue to see meaningful revenue contribution from existing customers who are expanding the size and/or composition of their deployments. For example, online lending leader Social Finance added 178 virtual office and 135 virtual contact center seats to their existing deployment of 340 seats. Enterprise virtualization and storage company Nutanix is also building upon their initial deployment, as is Regus, who has just put in an order for an additional 357 new locations on top of the original 140 locations announced last quarter.

These are all great businesses that are thriving in today's economy, and I am pleased that our services are enabling them to optimize their productivity and growth by giving employees the technology and tools to communicate and collaborate whenever and wherever they are working.

The second key business area I'd like to highlight is the continued effectiveness of our rapid and comprehensive global deployment methodologies. During the quarter, we successfully completed a large proof-of- concept deployment of our combined UC and contact center solution for the large multinational aerospace and defense corporation I mentioned earlier. We also completed initial global deployment of our services at 58 Regus sites and 16 out of approximately 120 international locations of the 7,000-plus employee customer win we referenced last quarter.

These global deployments are extremely challenging, as there are many processes, policies and regulations far more complex than in the US that must be considered. A unique deployment methodology, which is enabling our enterprise customers to quickly put our services to work on a global basis, continues to be a key differentiator for 8x8.

A third initiative we continue to invest in is our technology innovation, which extends our track record of delivering the industry's most advanced, reliable and integrated global cloud communications platform. 8x8's innovative enterprise communication as a service solutions delivers the highest quality global voice in the industry, packaged in a powerful, continuous communication experience from desktop to mobile. These solutions enable companies of all sizes to solve critical business needs and modernize their infrastructure with world-class business communications, contact center solutions, conferencing, collaboration, and advanced analytics.

With the issuance of two new patents this quarter, for a total of 114 awarded patents, 8x8 continues to drive its technology leadership position in the cloud communications industry. We are differentiating ourselves through the combination of our virtual office and virtual contact center federated architecture, along with analytics and other communication applications that run on top of a globally available platform. Our patented Global Reach geo routing capabilities, our integrated pure cloud unified communications, and our internal big data environment allows us to continue to offer what, to our knowledge, is the industry's only end-to-end SLA for service availability and call quality over any network, public or private.

We are developing some exciting new product offerings planned for introduction in the current quarter and beyond. These include our new Virtual Office web conferencing solution, which features a clean, modular user interface along with high definition video and audio and integrates with popular productivity tools to deliver instant, continuous communications.

Virtual Office enables customers to seamlessly move from instant messaging to a voice call to a multi-party video conferencing and collaboration session, all in one desktop and one mobile application. Other solutions require two or more applications to enable users to escalate from instant messaging to a phone call to web collaboration.

The fourth and final area I'd like to highlight today is our global reach initiative. Our work here remains a high priority for the Company, with our nine international data centers serving customers in over 140 countries. We have partnered with several global IT service organizations to assist in the deployment of our customers' international locations and are working closely with our partners in Australia to deliver our services to the APAC market. In the United Kingdom, we have integrated the 8x8 solutions and DXI sales team under one 8x8 UK umbrella, and I am very pleased with the traction we are seeing there.

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

Thank you, Vik, and thank you all for joining us on the call today. In my prepared remarks, I will cover highlights from our income statement, key operating metrics for the quarter, and a summary of our balance sheet. Finally, I will end my prepared remarks with an update to our full-year financial outlook.

As Vik mentioned, financial results for our third quarter of FY16 were very strong, with total revenue of $53.2 million and service revenue of $48.9 million, both representing a year-over-year increase of 29%. 50% of our total service revenue is now derived from our mid market and enterprise customers, and that portion of our revenue grew 53% year-over-year.

GAAP net loss for the quarter was negative $1.7 million, or negative $0.02 per share. Non-GAAP net income for the quarter was $4.3 million, or $0.05 per share, representing 8% of revenue. This compares to $4.1 million, $0.04 per share and 10% of revenue, in the same period a year ago.

Our GAAP net loss includes a write-off of $640,000 of intangibles related to our legacy Zerigo business. 8 x 8 acquired Zerigo in order to extend its legacy managed server business to sell in virtual private servers and hosted DNS services on a monthly basis. The Company ceased selling these services to new customers in the third fiscal quarter, and year-to-date revenue from existing Zerigo customers was de minimus.

GAAP gross margin was unchanged at 72% from the year-ago quarter. Our GAAP gross margin, after a one-time charge of $440,000 related to Zerigo. On a non-GAAP basis, gross margin improved 160 basis points from the year-ago quarter, to 75%.

GAAP service margin remained unchanged year-over-year at 80%. On a non-GAAP basis, service margin was 83%, an increase of 190 basis points year-over-year. This increase is directly attributable to the many active programs we have in place with our carriers and vendors to find efficiencies and cost savings.

GAAP sales and marketing expenses increased sequentially in the third quarter of FY16 by approximately $900,000, primarily due to our planned investments in channel enablement, our enterprise sales team, and demand generation. In addition, we also had a one-time charge of $200,000 related to Zerigo.

We expect a higher level of sales and marketing expense in our fourth fiscal quarter, given to the additional expenses related to the Enterprise Connect trade show in March, higher commissions, and deployment expenses related to our recent global customer wins. Our GAAP tax benefit for the quarter was $557,000 and our non-GAAP tax benefit was $231,000.

Turning our attention to key operating metrics from the quarter, new monthly recurring revenue, or MRR, sold to mid market and enterprise customers and by our channel sales team increased 94% year-over-year and now accounts for 58% of our total new MRR booked during the quarter. This compares with 43% in the year-ago period.

As Vik mentioned earlier, our SMB sales team continues to see good success selling to larger businesses. In the December quarter, new monthly recurring revenue from 1,000-plus MRR deals sold by the SMB team more than doubled from the year-ago period. Our land and expand sales strategy continues to generate significant revenue from existing customers. Our new MRRs sold to existing customer represents approximately 50% of our total MRR booked during the quarter.

Average revenue per business customer was $369, an increase of 21% compared with the same period a year ago and $9.00 sequentially. Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 1.2%, compared with 1% in the same period last year. Historically, our third fiscal quarter has the highest churn, and we expect this to return to our average of 1% or lower in the fourth fiscal quarter.

Cash, cash equivalents and investments were $155 million at December 31, 2015, compared with $149 million in the previous quarter. Cash flow from operating activities was $8.3 million in the third fiscal quarter, and capitalized expenditures, including capitalized software, were $1.7 million in the quarter, or 3% of revenue.

During the quarter, 8x8 repurchased approximately 66,000 shares of our common stock at an average price of $8.27 per share under our approved stock repurchase plan. Since July, 2014, the Company has repurchased approximately 3.9 million shares of common stock at an average purchase price of $7.83. With an additional $15 million approved by the Board in October, 2015, the remaining authorized repurchase amount at December 31 is approximately $19.6 million.

Turning to our full-year outlook, we are once again reviving our FY16 revenue outlook upward to a range of $205 million to $207 million, which represents a 26% to 27% increase year-over-year from our previous outlook of $204 million to $206 million. Due to the strong growth in our service revenue, we are also increasing our guidance for non-GAAP net income as a percentage of revenue to approximately 6% to 7% for the full fiscal year.

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

Thank you, Mary Ellen. Let me remind you that we remain in the early stages of a tremendous market opportunity, with current adoption rates by midsize and large organizations at just 3% worldwide, according to Gartner. Needless to say, this is a very exciting time in our industry, and many customers and service providers alike will benefit from the technological shift to cloud-based communications that is now taking place.

With the strength of our core technology, years of experience operating a secure and reliable network, and deep familiarity with the requirements of businesses of all sizes, 8x8 is well-positioned to continue leading the charge as more and more multinational enterprises transition to our solutions.

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, Needham & Company.

Thank you very much. Good afternoon. Nice quarter. Just a quick one for you.

Nice to see the additional work that you're doing for Regus. Could you talk about this? When do you expect to deploy Regus in its entirety? And maybe walk us through how to think about the number of seats this could potentially represent.

I prefer not to go into great detail. The key part is Regus is a phenomenal company, and they are growing at a fantastic growth rate. And so our hope is, we hope to never be fully deployed, because they will keep growing. The pace at which they are deploying is accelerating for us. As I indicated, I think we had an order for, initially, 140 locations, and we had deployed 58 locations of that, and that was last quarter, and this quarter they've already given us an order for 350 locations, with more to follow.

So don't want to get into the specifics, but again, we love our partnership with them. They're a phenomenal partner.

Okay. And just to clarify again, and apologize if this is something I've asked before, but of the locations that you haven't deployed yet over at Regus, none of these are impacting new MRR, right?

So we actually -- they do. They do. So when we get the order is when we recognize the new MRR. So we haven't booked any more than the orders, than the sites that they have given us to deploy.

Okay. Got you. And then just another question here for you. Can you talk about -- so obviously, last quarter was great from a LSN win standpoint. How are some of those wins impacting pipeline formation and sales cycles? Have you seen any impact already on some of the deals that you're working on? Thanks.

Yes. That's a great question, Michael. Because the analogy I think I used at your conference is with technology adoption, it's almost like a herd of cattle stampeding. First, two, three, four cows go, and then right after that, a whole herd follows. And I think we're heading in that direction.

Because it is quite interesting, when you look at the type of customer wins we reported. I think when you started covering us a couple of years ago, a 1,000 customer win was a huge deal in the cloud industry.

As you're noticing, this quarter we're reporting some of the most well-known names in the industry that are adopting cloud and they are going cloud first. So I think what's starting to happen is it's becoming more and more familiar, it's become more and more the go-to technology, which is causing our pipeline to get bigger and bigger.

Thanks so much. Appreciate it, guys.

George Sutton, Craig-Hallum.

Thank you. Vik, when I first started covering you, a 50-seat deal was a very big win. So it's fun to watch this really get going.

I wanted to spend a little more time on what you have termed the tip of the iceberg relative to the mid market, in particular. If you had to put a perfect crystal ball out there for the next couple of years, how quickly do you see this developing? As you look at the size of your pipeline, how quickly does that develop in your view, versus necessarily the deals that we're hearing about?

I mean, it's developing faster than I thought. By the way, I wish I had a perfect crystal ball. There was a lottery for $1.5 billion that I would've loved to be able to predict. But I think that we have kind of characterized it, I think when we talked about two quarters ago, I think I alluded to the fact that there was a pipeline of 10 whale opportunities, and my goal over the entire fiscal year was to close one or two. We closed three in the first quarter alone, right after making that statement, and we are in proof of concepts with several others, as I alluded to in my script.

And so we are starting to see the pipeline definitely expand, and there's an interesting characteristic. Global companies are increasingly looking for one vendor to go to. Because if you think about it, if you have one vendor, you get one predictable phone bill for all your international location, you get four-digit dialing, you get the ability to text, chat, do a level of collaboration with video conferencing, document sharing, et cetera, and you start to feel like a company. And in some of these global multinational companies, it could be millions of dollars of savings in hard savings, as opposed to just synergistic savings.

So I think you're going to see, as more and more enterprises adopt the system, you're going to see demand accelerate, because it's no longer that risky technology. It becomes, why wouldn't you go cloud? So it's becoming more and more cloud first. It's just happening now.

And that's why I hate to predict uptick and stuff like that and tipping points, because I've always found that they are great when you look at it from the rear view mirror. But generally, I feel pretty good about the fact that the market is now moving much more towards the mid market enterprise. And we're very fortunate, due to the hard work of some very, very smart people, our team helped position us for where the puck was going to be, not where the puck was, and we're positioned for the mid market enterprise because of a couple of years of investment and hard work.

That's great. And one question for Mary Ellen. And I will admit some naivete. So with a large deal like Regus, or anyone you're turning over to a third-party implementation shop, how is that being booked? Is that being booked -- is the implementation work direct with that customer and the partner, or does it flow through you? I'm just trying to understand when we see scale on your cost structure from these larger deals.

Yes, in this particular case with Regus and with the other customer with the 7,000-plus employees, we are contracting directly with third-party teams throughout the world to help us deploy. So that's a relationship that we have with those deployment agents. So we get billed, and then in many cases, we actually invoice our customers for the deployment. So that's something that we're in control of.

Now there may be cases in the future where the channel partners or other partners actually have a direct relationship with the customer and then they take over, and that's a relationship between the customer and the third party. But right now it's third party.

Now Regus will actually start deploying on their own. We're training them. Soon they'll start deploying on their own. We're doing it now, but they'll be trained to do it on their own.

And as that all occurs, that's when your incremental margin starts to pick up more quickly, is that reasonable?

Yes, I think that's reasonable. Remember, our deployment services now are in sales and marketing, so we'll start to see some leverage on that in the future.

Okay. Thank you.

You're welcome.

Nandan Amladi, Deutsche Bank.

Hello. Good afternoon. Thanks for taking my question. So Mary Ellen, you addressed this a little bit in your prepared remarks. What are some the factors that drive churn, both in the SMB and, more interestingly, in the mid market and large enterprise? And why do they vary so much through the year?

So there is a little bit of seasonality in our business in the third fiscal quarter, and the reason being is that we do have a conservative approach to calculating churn. So we look at the revenue generated from the customer last quarter versus the revenue generated for the customer this quarter, not including any add-on. So it's just gross.

And in the third fiscal quarter, our usage is down. Here in the US, to a lower extent, but in the UK, to a larger extent because more of our revenue comes from usage in our 8x8 solutions business, Voicenet, if you will.

So churn is a big factor in our third fiscal quarter. In addition to that, end of year you might see some small business customers going out of business or involuntary churn, as we clean up and make sure that only the paying customers move forward with us into the new fiscal year.

Thank you. And one other question for Vik, if I might. As you start to sell these larger and larger deals, how do you delineate which specific customers you are calling on between you going direct and a reseller going, perhaps, to the same customer?

I think it comes down to, as you know, most of our activity on the direct is still inbound, so if a large enterprise reaches out to us directly and/or a channel brings an enterprise to us. So everything is kind of happening with people approaching us. This, by the way, represents a great opportunity for us, because we are only now getting to the point where over the next few months, we're going to start focusing on outbound, because we think the market is ready for outbound, market demand generation.

But so far, it depends on how the customer gets to us. If a customer gets to us through directly and contacts us or comes in through our website and asks for an inquiry, that's typically approached by a direct sales team. If the customer contacts a channel and then the channel introduces us to them, it's approached through the channel sales team. So that's essentially how, it's almost self-selecting.

And then over time, as I said, we're getting ready to start doing more of an outbound demand generation, because I think we're starting to get the level of traction. We have the case studies, we have the credibility that we can now go out and get to customers on our own.

Thank you.

Amir Rozwadowski, Barclays.

Thank you very much. Building upon the prior question in terms of churn, so it sounds like, Mary Ellen, there's no real change in terms of how you see churn trajectory, outside from a seasonal perspective going forward?

That's actually true. Because what I didn't mention before is the holidays in the UK is a significant event. They're pretty much shut down the last two weeks in December. And since usage is a bigger part of their revenue, that has an impact on how much revenue we get from that particular customer in our third fiscal quarter.

So I think you're going to see that trend if you go back to Q3 of FY15, or 2014, you would've seen a churn of 1.5%. Last year in the third quarter was our highest, was at 1%. And now this 1.2%.

So it's more a factor of the usage, especially as it relates to the holidays, for us, Thanksgiving and Christmas, and in the UK, the last two weeks of December they're normally shut down. So I don't see that as a -- that's going to happen every third fiscal quarter, so we should see our numbers in our fourth fiscal quarter go back down to 1% or lower. There isn't anything that I'm concerned about, as far as churn goes.

Excellent. And then one follow-up, if I may. We 're continuing to see steady growth in your non-GAAP service gross margins, and I know you had talked on a prior question about how to think about the leverage in the business model going forward.

How should we think about it from a non-GAAP service gross margin perspective? It seems as though you're continuously that tick up, but obviously starting to see larger and larger wins coming through the pipeline and execution along those lines. Where can that trajectory ultimately go?

That's a good question. We're really pleased with the 83% and 190 basis points improvement from our last prior quarter. We're really focused. At the heart of it, we're a frugal company and we really focus on where we can cut costs. And at the same time, we want to invest in areas where we think we're going to get a nice payback. So I don't know how high that can go.

And remember that we don't have our larger, the whales that we had announced in our second fiscal quarter. There really isn't much revenue in this quarter relating to them at all. For Regus, this quarter was mostly a planning quarter, if you will, and we've just started to deploy. We got 58 sites done. By the end of next quarter, we'll have significantly more sites done. So we'll start to see more of that revenue start to flow through in our fourth fiscal quarter.

But I do believe that we have some opportunities still, for instance, our new acquisition of DXI, their margins are 70%. So we think when we start working with them, we'll be able to improve them significantly, which will have an impact on our consolidated numbers. So I can't put a number on it, but I do think that we will be able to continue to find some leverage.

Fantastic. Thank you very much for the incremental color.

Dmitry Netis, William Blair.

Great. Thank you. Excellent quarter, guys.

Thank you, Dmitry.

Thank you. A couple of technicals and then maybe a bigger picture. On the very impressive inorganic 94% new MRR bookings number from the mid market, is there any way to take out DXI and see what the organic number might look like? I'm sure it's pretty impressive, too, but you've given it to us last quarter, I was just curious what it is this quarter, as well.

Did you want that for total service revenue, or you're looking at that --

For mid market.

Okay, for the mid market. That was 66% without DXI.

Great. Excellent. Thank you. And then on the ARPU, it was up $9.00. What's the bigger play there? Is it just the larger customers you're bringing in? Is it the wider service offering that you have maybe with the attach rates going up on the analytics side?

Anything you can speak to that, as well as maybe that new Q1 launch you have where you're going to have that web conferencing solution. What should we expect ARPU do at that timeframe would be helpful, too.

It's hard to predict the future. On an organic basis, we did actually have an increase of $13.00 sequentially. So that's very, very nice. And a lot has to do, of course, with the new customers that we're bringing in, and we're able to deploy them quicker and quicker. So we're getting the revenue benefit of that.

In addition, we're starting to bundle more and more packages, so that enables us to charge more on a monthly reoccurring revenue basis, because it's including a couple of not only the unlimited extensions, but we'll throw in the VO analytics, but then we can charge more. So we're finding more and more customers are opting for those bundles as opposed to buying on an a la carte basis.

And Dmitry, one more point on this one. This is the part that I am most excited about. This quarter, as you recall in the way I approach the world, I think in terms of singles, doubles, et cetera, which is our core sweet spot, the 1K to, let's just say, 50K-type MRR deals, and then the giant whales, the home runs that you keep hitting every once in a while.

This quarter, with no whales, as you can see across the board, very, very impressive new MRR growth, very impressive ARPU growth. So that's the kind of way you want to build a business, almost as portfolio management.

We have our SMB team firing on all cylinders and they are able to close the sub-50 deals You're starting to see our sweet spot starting to really grow, which now represents 58% of our new MRR, growing organically in the 66% to 70-odd% range. And then on top of that, every once in a while you hit a whale or two that kind of gooses that growth rate. And so you're building this very broad-based portfolio business where each of these things play a role in basically making sure that you have steady growth.

Right. That's a good point actually. That's pretty noticeable that you didn't hit any of the whales but still did quite impressively well this quarter.

Take out the word quite. I like just the word impressively. (Laughter)

It's the market today. Okay. And then the last high-level question, as you brought up that 25% growth for the entire UCAS segment and some of the industry estimates out there, is that how you guys thinking about your future growth for the next several years, certainly maybe outperforming the market, at this stage? But is that the right number to think about for your growth rate going forward for the next two, three years?

I mean, it's a good starting point. We have not provided any guidance for FY17. But as you've pointed out, I think you and I had that conversation, organic growth continues to tick up, which is the right thing, from our perspective. And we continue to close larger and larger deals.

So I think that's a reasonable approximation. But we haven't provided any guidance, so I don't want to give you forward-looking statements about FY17 or beyond. But we feel good about our growth rates.

And applying the growth rate to service revenue, because we have a great app for the desktop and a great app for the mobile devices, and so we want to encourage our customers to not necessarily have to have a desk phone. So apply those percentages to service revenue only, not total revenue,

Great. And Vik, just to kind of follow up on that organic growth, it was 22%. What was it this quarter?

23%.

23% on service revenue.

Got it. Very good. Keep up the good work. Thank you.

Thank you.

Mike Latimore, Northland Capital Markets.

Great. Thanks a lot. And also, excellent quarter there. Just to follow up on the market outlook and the 25% rate, are you using that as an organic rate or is that with some acquisitions that that would be the rate?

So going back to the first comment that I made to Dmitry, I gave you Gartner's numbers about the fact, the main point I wanted to get across directionally is that larger enterprises, mid market and larger enterprises, are growing faster than smaller businesses. So a company which is more biased towards larger enterprises is inherently poised to benefit from it.

I'm not giving guidance for next quarter just yet. And so I think we feel good about where we are. I think you're starting to see the traction in the business. But we provide guidance next quarter. And as I said, we feel very good about our business.

That make sense. And then on the channel, any color on what percent of the bookings are coming through the channel or how fast it's growing or anything like that?

Channel is phenomenal. They are growing right now probably the fastest of all our various go-to-market strategies. I believe this quarter 4 out of our top 10 deals were channel, 4 were direct here, and 2 were UK direct, I believe.

So we are starting to see channel become a more and more appreciable part of our business. And as you recall, we only have a handful of channel partners. Over the last few years, we had done addition by subtraction where we had reduced the number of channel partners and then focused on them. And we're seeing great traction.

You saw some of the results we had with CDW last quarter. This quarter, you're starting to see some of the results we're having with Insight. So you're starting to see broad based, our channel is starting to perform, and we think it's going to be a huge, huge growth driver for us.

Great. And just last question on the service gross margin, do contact center sales -- and I guess some of these whales, as well -- do those help or hurt or are they neutral to gross margins?

Well, contact center certainly helps. So the more and more contact center, that's going to help. But we're doing pretty good on our Virtual Office, as well. Again, we're running a really tight ship. We're very, very efficient in what we do. We love to negotiate with our largest suppliers. And the more and more business we pull through the carriers, the more and more leverage we have to negotiate price.

So I'm very pleased with what we've accomplished this year to date from a cost savings perceptive, and we're going to continue. That's just who we are. That's the skills that we have. It's important to us to generate a profit. And in order to invest in sales and marketing and continue to grow the Company, we're saving money elsewhere in the Company.

All right. Thanks a lot.

Nikolay Beliov, Bank of America.

Thank you. Hello. This is Joyce Yang for Nikolay. Congratulations on the great quarter, guys. I just wanted to ask about the competition in the large deals and what you're seeing there, and also if you're seeing anything related to the Microsoft Skype for Business impacting the marketplace?

So the large ones, primarily the people we see is Cisco, Avaya, and legacy on-premise vendors. Every once in a while, we'll see different cloud companies. But it's primarily displacement of the legacy vendors.

We have not seen Microsoft in at least our target segment. We play in the mid market and small to mid enterprise. I think Microsoft is not playing there, per se. And our understanding is, initially they are more of a domestic play versus trying to be an international play, and we are much more global. We are increasingly seeing global companies, which could be anywhere from 200 people to 7,000, 8,000, 10,000-type people that have multiple offices, and our ability to deploy globally and then seamlessly connect together and do it all over the top on a public internet, I think is a huge differentiator for us.

Got it. And thank you for one more for follow-up. Mary, I want to quickly ask if you could break down for us how the mid market MRR flows into the mid market revenues. What are the puts and takes there?

Oh, okay. The mid market customer, so the non-whales, we're starting to deploy very, very quickly. We have a methodology. So we can, for the smaller customers, the smaller mid market customers, we are able to do no touch, or very little touch, guided on boarding. So it's all over the phone. So we can turn our revenue, our book to bill, in as quick as two weeks. The longest lead time there is really supporting the numbers, if we have the port numbers.

For the mid market accounts, we're really starting to operate like a machine, and we're starting to deploy quicker and quicker and able to recognize revenue quicker and quicker. We like to recognize our revenue within 30 days of when we book the order.

And then it ranges. So the larger accounts could be anywhere from two months to four months, and then enterprise can go up to six months. I think it's consistent with what we've said before.

Got it. Thank you so much.

Catharine Trebnick, Dougherty & Company.

Hello. Thanks for taking the question. Vik, can you describe a little bit your competitive, the competition in terms of your global reach? Are you seeing different competitors in different regions? And how does that stack up against maybe your smaller wins in the North America region? Thanks.

It's different. So the larger, the global ones, we will see different people than we will for just pure domestic or even just domestic in UK. So we've got different types of competitors. Typically for the larger deals, you see on-premise, people like Cisco, Avaya. And as I said, our ability -- and I think, again, this is school of hard knocks -- our ability with this geo locating algorithm, so you can get low latency calls around the world, putting together global infrastructure, the ability to get local numbers, the ability to provide local support, that's starting to be a nontrivial differentiator. It's a work in progress.

But I think that is definitely making us very unique. Because if you are any company of any size that has more than one or two locations in the US, and you are outside the US, the ability to stitch everything together in one seamless communications platform that is one stop shop from call center to video conferencing to audio, I think becomes extremely compelling. And so I think that's where we start to see nontrivial traction for us.

My other question is, would you say if you have a global customer, would they maybe perhaps have a different PBX system in the UK versus Australia? And is that an advantage then for the fact that if they would come to an over the top player like yourself?

Absolutely. You could not have written my script better. That is exactly what is the differentiator.

What happens with these companies is they have a PBX with one provider in, say, Australia or Singapore or UK, then a totally different PBX from a different provider here. And then 8x8 comes in, says, we'll do the same for you everywhere. One company, one bill, one vendor, one throat to choke, so to speak. And that becomes extremely compelling. And it opens up the next paradigm of productivity, because now you can have a global view.

And I also wanted to emphasize this federated architecture we've come up with, which is truly a follow the sun customer support model, because in essence, you can do the administration at the global corporate level, but you have local medial servers all over the world, so you can have very optimum call quality and very low latency communication. So that architecture that we have put in, not just for our call center but also for our PBX, I think is a huge competitive differentiator.

I think, as you've heard me say, and I apologize if I sound very animated, we are a company of techie geeks and we take pride in our technology. And I think it's starting to be noticed by our customers.

All right. Thank you very much. Good quarter.

Thank you.

Greg Burns, Sidoti and Company. Mr. Burns, if you could check your mute button.

Mike Crawford, B. Riley.

Thank you. With the large whale and elephant-type accounts that you're chasing, and it sounds like you're pretty happy with the expanding pipeline there, and you're in some proofs of concept. Are these largely sole competitions where they're testing you out, or are these more like bake-offs where they might also be testing Cisco or Avaya or something like that, as well?

Both.

Combinations?

Yes, combinations. Let me make sure I'll be clear. There are some that we've got -- we are in several proof of concepts. Some of them are, they are basically told us, okay, you look like the right one, let's just make sure that this all makes sense, and it's kind of a process to finalize the requirements and test whether the solution makes total sense, because neither of us wants to proceed forward until we have complete closure on whether it's the right solution. In others, it's a bake-off.

So it is quite interesting to see how the number of whale opportunities has increased quite dramatically. And proof of concept is a part of most of these sales cycle, and we actually love it, because that becomes a way for us to show -- that's when you get past the hype. That's when you can actually show what your stuff does and how it is better. And so we love and encourage customers to do proof of concepts.

Okay. Thank you. And then the next question is in two parts. When you're moving to this more of an outbound demand generation push, how do you think that's going to affect your subscriber acquisition costs?

And also, do you think that's going to enable you to continue this phenomenal growth in MRR, which I think for mid market and enterprise companies has grown from $700,000 a month to maybe $1.3 million a month now.

I won't comment on specifics on the numbers, because we don't comment on our numbers. I do appreciate that comment phenomenal, because that is a term I used for our team. We can do better, by the way. But I am very pleased. There are some very good people working really, really hard, and a lot of the stuff that they are doing is really making a difference. And so we're very pleased with that.

So going back to your, I think, comment in terms of MRR growth, I think the key thing from our perspective is, we believe that right now we are still an inbound company. So if you think about it, we literally sit here waiting for people to call us or get into our website. We are the ultimate, we wait for the phone to ring, so to speak. Sometimes the phone's rings electronically, sometimes it does it through email, sometimes a channel partner calls us.

Now we are starting to get a profile of the right kind of customer. We had always anticipated doing outbound marketing. I just held off on it, because we didn't want to do it too quickly and then find out we burned money without the kind of adequate return.

But it's starting to feel like we should be able to go out and do that now. And it is anticipated in the guidance that we have provided you, that expense is anticipated in the guidance that we have provided you for the full year.

And I think as far as the cost of acquisition, at first, as we're starting up, it will be a little bit higher. But I think over time, it's going to be much lower, because it's going to be a higher quality customer that we're going to find.

Great. Thank you.

Thank you. And this does conclude today's Q&A session. I would now like to turn the call back over to Mr. Vik Verma for closing remarks.

Thank you all for listening in on today's call, and we look forward to providing continued updates on our progress at our upcoming investor conferences and meetings. Again, thank you very much.

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

Thank you.