8x8 Inc (EGHT) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Joan Citelli, Director of Investor Relations. Please go ahead.

Thank you operator, and welcome, everyone, to our call. Today I'm joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's fourth-quarter and FY16 financial results for the period ended March 31, 2016. The earnings press release, which was issued today after market close, is available on the Investor's 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 using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical facts, are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor section 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 fourth-quarter and FY16 earnings conference call. 8x8 posted an outstanding fourth quarter of FY16, with a 32% year-over-year increase in revenue to $57.3 million. Service revenue from mid-market and enterprise customers increased 54% year over year. Mid-market and enterprise customers represented over 50% of 8x8's total service revenue.

I'm happy to report that for the first time in the Company's history, revenue from our mid-market and enterprise customers exceeded revenue from our SMB customers. For the 24th consecutive quarter, 8x8 remained profitable on a non-GAAP basis, with non-GAAP net income of $3.2 million, or 6% of revenue.

These results capped an exceptional and noteworthy year for 8x8. We not only exceeded top-line revenue expectations while maintaining profitability, we also demonstrated our ability to make early inroads in the global enterprise cloud communications market. For FY16, total revenue increased 29% year over year to a record $209 million, while services revenue grew 30%. Non-GAAP net income was $15 million, or 7% of revenue.

Throughout the year, we witnessed a growing pipeline of enterprise accounts, while simultaneously expanding our SMB and mid-market customer base. We also continued to see increasing contract value of existing accounts, with measurable add-on service revenue. As larger global organizations with mission-critical communication needs begin transitioning to the cloud, we find ourselves optimally positioned to meet the requirements of these selective and complex customers, with a differentiated enterprise communications-as-a-service offering.

This is a direct result of the core investments we have made in our technology, quality of service, security, reliability and global capability, as part of a multi-year strategic focus to move upmarket. We have built a truly global, hyper-scalable, cloud-unified communications and contact center platform that is powering the communications infrastructure worldwide for businesses of all sizes. Whether you're an SMB operating out of one location, or a large multi-national enterprise, our multi-tenant services platform -- which is housed in nine international data centers -- enables businesses to operate as one unified entity, while delivering the highest quality of service in the industry.

These capabilities are becoming increasingly important, as more and more globally distributed enterprises move their communication infrastructure to the cloud. Unlike many cloud business services, a distributed platform enables users to utilize services from our data centers worldwide automatically, based on their current location, without any user intervention.

I'd now like to provide an update on our progress in the fourth fiscal quarter on the key initiatives we have in place to ensure our continued leadership in the enterprise cloud communications industry. These initiatives include, one, increasing the adoption of our solutions by mid-market and enterprise customers. Two, advancing our technology and service offerings. Three, successfully deploying our global enterprise customers. And, four, enhancing our global reach capabilities.

First, to give you an idea of the growing adoption we're seeing from mid-market and enterprise segment, the fourth quarter of FY16 was by far our most successful quarter yet, relative to new bookings. Revenues sold to mid-market and enterprise customers, and by channel sales teams, grew 208%, and accounted for 66% of the total new monthly recurring revenues sold in the quarter.

Beyond NetSuite, Regis, and the 8,000-seat customer win from the second quarter of FY16, we closed some additional so-called whale deals in the fourth quarter of FY16. These included previously announced Movement Mortgage, a fast-growing privately held mortgage bank, with an initial deployment of 4,500 Virtual Office seats. And Auto Europe, an international car rental service provider, with a deployment of 600 Virtual Office and 300 Virtual Contact Center seats.

Today I am pleased to announce another major customer win our team brought onboard in the fourth fiscal quarter -- GameStop, a global, multi-channel video game consumer electronics and wireless services retailer. GameStop came to 8x8 through our partner Simplify, following a very competitive and selective process that included a comprehensive proof of concept.

They selected 8x8 for a variety of reasons, including our superior global capabilities, our integrated full-featured contact center solution, and our advanced analytics package, with a custom API for use at the retail store level. The combined Virtual Office, Virtual Contact Center deployment for GameStop is being used across 4,100 US locations and the company's corporate headquarters. This customer win is an excellent example of the value large enterprises attach to having an integrated contact center solution within their communication infrastructure.

You may recall that earlier in FY16, I indicated we had a pipeline of approximately 10 very large global opportunities, and that we would be pleased to close two of these by the end of the fiscal year. As it turns out, we actually closed six. Additional smaller enterprise wins from the fourth quarter included a 2,000-seat deployment for one of the largest networks of dental care providers in the United States, and a 1,000-plus-seat deployment for a global diversified producer of high-technology specialty chemical products.

Six of our top 10 deals in the quarter purchased our combined Virtual Office and Virtual Contact Center solution. This technology advantage continues to serve as a strong differentiator for 8x8, and a compelling value proposition for customers looking to simplify their communication infrastructure with best-in-class cloud-based communication, collaboration, and customer engagement capabilities delivered over a single, integrated platform.

Of the top 10 deals signed during the quarter, five came through our channel partners, four were brought in by our direct sales force, and one came from our 8x8 solutions team in the UK. Our indirect channel continues to play a significant and growing role in our overall sales strategy and our model of working closely with a select number of partners to provide them with the necessary knowledge, tools and training is producing increasingly favorable results, particularly with larger customers.

The fourth fiscal quarter was also strong in expansion revenue from existing customers. We booked and deployed over 1,000 additional Virtual Office seats for our customer NetSuite, approximately 500 additional Virtual Office seats for Veracode, over 400 seats for Home Point Financial, and 350 combined Virtual Office and Virtual Contact Center seats for SPS Commerce.

This kind of activity is indicative of how our customers are growing with us, either by expanding the size of their current deployment, or adding new types of services. Of our top 10 expansion deals, 5 were Virtual Contact Center seats, 3 were for Virtual Office, and two were for both Virtual Office and Virtual Contact Center.

Moving on to our second priority, the continued expansion and enhancement of our integrated communication software suite. Our R&D and engineering teams have been working on some innovative new services, and the features that we unveiled in March at Enterprise Connect conference. The first, our new Virtual Office Meetings product, is a completely redesigned, high-definition video conferencing and collaboration solution that enables secure, continuous communication from any device, anywhere in the world. What this means is that the user can schedule meetings, initiate instant collaboration on the fly, and transition IM conversation into a meeting without having to open a separate application -- just a single click from the desktop or mobile app.

This latest generation of Virtual Office Meeting incorporates industry-leading video technology that continuously optimizes video streams, for unmatched fidelity over variable networks and devices. Virtual Office Meeting also enables mobile users to collaborate immersively with high-definition video, and share content from their mobile devices via cloud applications such as Dropbox, iCloud and Google Drive.

We also unveiled next-generation capabilities for our Virtual Contact Center solution, including innovative cloud-native quality management, powerful analytics that monitor and improve the customer journey. And a pre-built CRM integration tool that allows contact center managers to configure and tailor the agent and customer experience without requiring professional services.

These enhancements offer a high level of integration and flexibility that enables even the smallest of contact centers to enjoy improved customer engagement and agent productivity benefits that were previously available only to large contact centers, at a much higher cost. Our R&D priorities for FY17 include further enhancing the business value of our solutions with deeper analytics and line-of-business applications and integrating additional collaboration tools within our platform, to provide customers with the most comprehensive and seamless global communications experience available.

The third area I'd like to address is the progress we have made with our enterprise customer deployments. NetSuite continues to grow with us and to date, we have deployed over 3,000 seats in the United States and Canada, nearly 700 in Australia and the Philippines, and over 200 in the UK. Additional deployments are being planned for Canada, the Philippines, Czech Republic, Uruguay and Singapore.

For a 8,000-seat customer, we deployed 1,450 seats across 29 sites, including the United States, Australia, Hong Kong, Japan, and nine countries in EMEA, and are planning an additional 97 international locations. We are also installing our Virtual Contact Center solution for this customer's call center agents in the US, India and China.

Regis, as you may recall, has a footprint of 3,000 locations in 900 cities and 120 countries. To date, we have deployed 128 locations in the United States and Canada, and eight UK locations, and are in the solution design phase for over 200 Virtual Contact Center seats in 18 countries. We're approximately 20% complete with all of Europe's deployment of nearly 600 Virtual Office seats and over 300 Virtual Contact Center seats. We expect this initial deployment to be completed over the next eight to ten weeks.

I am extremely pleased with the quality and speed of our customer deployments, and want to thank our employees for all of their hard work in this area. Our proficiency here is another tangible benefit of our technology ownership. We are constantly improving the performance of our software, and not solely relying on horsepower from new hardware.

We're developing our own proprietary tool to expedite customer implementations and isolate issues, and constructing scalable methodologies to deploy customers quickly and successfully. We have also just appointed Jeff Romano, a seasoned global services executive from companies such as Model N, Birst, Saba and Navis, to the newly created role of SVP of Global Service and Support.

Moving on to our fourth strategic priority, our global reach initiative, we have been broadening our presence in service delivery capabilities to support our customers who are currently operating in 114 countries. We now have 27 international carriers, emergency call-in services in 21 countries, local phone numbers in 83 countries, international toll-free numbers in 122 countries, and two global and 15 regional end-point distributors. We also have launch plans in place for additional data centers and media hubs in at least three more strategic locations throughout the world.

8x8 has the industry's largest global footprint, with local dial-in numbers and nine existing data centers serving customers on six continents, enabling low-network latency and the best possible voice and video quality for a truly mobile and distributed workforce. Not only do we provide enterprise cloud communication solutions such as softphone, IM/chat, global directory, presence, mobility and video conferencing, and international calling services. We also enable extension-to-extension dialing capabilities, with a continuous communication experience to effectively collaborate from anywhere in the world.

In summary, FY16 was a very busy and productive year for 8x8. We are not only seeing growing adoption of our solutions by businesses of all sizes, we're also gaining increasing recognition for our achievements by top-tier market research firms, including Gartner's Magic Quadrant, for both unified communications as a service and contact service as a service. And IHS Infonetics, who recently ranked 8x8 in the number-one position in its annual Cloud UC Service Provider North America Scorecard report for the third consecutive year.

8x8 is paving the way for the transition all businesses will inevitably be making to cloud communication. We have built a solid and profitable business developing and delivering the industry's most comprehensive suite of secure, reliable and integrated global cloud communication solutions. Our mission for FY17 is to continue to execute and build upon this momentum.

With that, I'll turn the call over to Mary Ellen for a more detailed discussion of our financial results, and our outlook for FY17.

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 indicated, 8x8 posted excellent FY16 fourth-quarter and full-year results, with revenue that exceeded expectations, continued profitability for 24 consecutive quarters on a non-GAAP basis, and outstanding performance by our mid-market and channel sales teams. Total revenue for the fourth quarter of FY16 grew 32% year over year, 27% organically, to $57.3 million. Service revenue grew 30% year over year, 25% organically, compared with 23% organic growth in our fourth fiscal quarter of 2015.

Non-GAAP net income for the fourth fiscal quarter was $3.2 million or $0.03 per share, representing 6% of revenue, compared with $4.9 million in the same period a year ago. The decline in non-GAAP net income year over year is the result of planned investments in sales and marketing to execute on our strategy of moving upmarket. These investments are accelerating our revenue growth, especially in the mid-market and enterprise segments of the market.

For the fourth fiscal quarter, GAAP gross margin was 72%, compared with 73% in the same period last year. Our non-GAAP gross margin remained unchanged from the year-ago quarter at 74%. GAAP service margin was unchanged year over year at 81%. On a non-GAAP basis, service margin increased 100 basis points to 83%, compared with 82% in the fourth quarter of FY15.

GAAP sales and marketing expenses, increased sequentially in the fourth quarter of FY16 by approximately $3.7 million, primarily due to an increase in benefits as we restart FICA tax in the new calendar year. And our planned investments in industry conferences such as Enterprise Connect, higher channel and in-house commissions due to strong sales performance in the quarter, deployment expenses related to our recent global customer wins, and our continued proof of concept in the enterprise segment.

For the full year, total revenue increased 29% year over year to $209.3 million, surpassing our guidance of 26% to 27% revenue growth. And service revenue grew 30% year over year. Organically, both total revenue and service revenue for FY16 grew 23% year over year.

FY16 non-GAAP net income was $15 million or $0.16 per share, representing 7% of revenue. This was at the high end of our non-GAAP net income margin guidance for FY16 of 6% to 7% of revenue. FY16 GAAP net loss was $5.1 million or negative $0.06 per share.

GAAP gross margin for the full year was 73%, compared with 72% in FY15. Non-GAAP gross margin improved to 74% in FY16, from 73% in FY15. GAAP service margin in FY16 was 81%, compared with 80% in the same period last year. And non-GAAP service margin grew to 83%, compared with 81% in the same year-ago period. Product margin was negative 18%, compared with 12% in FY15.

Turning our attention to the key operating metrics for the quarter, as Vik mentioned earlier, this was 8x8's best quarter yet in terms of mid-market and enterprise bookings. In the fourth quarter of FY16, new monthly recurring revenue sold to mid-market and enterprise customers, and by channel sales teams, grew 208% year over year, compared with a 94% increase last quarter and a 35% increase in the same period last year. 66% of our new monthly recurring revenue sold in the quarter of FY16 came from these customers, compared with 58% last quarter and 40% in the year-ago period.

Our service revenue from mid-market and enterprise customers in our fourth fiscal quarter increased 54% year over year, compared with a 34% year-over-year increase in the fourth quarter of FY15. Our mid-market and enterprise customers now represent over 50% of 8x8's total service revenue, compared with 43% of service revenue in the year-ago quarter.

To elaborate further on this important metric, more than half of the Company's service revenue, and 66% of the Company's new monthly recurring revenue, is coming from a segment of our customer base which has a lifetime value of approximately 35 times that of an SMB customer. And this portion of our revenue is growing at a rate well-above industry forecasts.

Our land-and-expand sales strategy continues to generate significant revenue from existing customers, with monthly recurring revenue sold to existing customers accounting for roughly 50% of all new monthly recurring revenue booked during the quarter. Average revenue per customer across our entire customer base grew 20% year over year to $385, and $16 sequentially. Gross monthly business service churn on an organic basis was 0.4%, compared with 0.5% in the same period last year.

Cash, cash equivalents and investments, were $163 million at March 31, 2016, compared with $177 million at the end of FY15. Cash flow from operating activities was $8.2 million in the fourth fiscal quarter. And capital expenditures, including capitalized software, were $2.4 million in the quarter, or 4% of revenue.

For the full year, cash flow from operating activities was $23.6 million, compared with $21.2 million in FY15. Capital expenditures, including capitalized software, were $7 million or 3% of revenue in FY16, compared with $6.6 million or 4% of revenue in FY15.

In FY16, 8x8 repurchased approximately 1.4 million shares of our common stock at an average price of $8.02 per share, under our approved stock repurchase plan. The remaining authorized repurchase amount at March 31, 2016, is approximately $19.6 million.

Moving on to our guidance for FY17, we expect full-year revenue in the range of $249 million to $253 million, which represents a 19% to 21% year-over-year increase. We expect our product revenue to be flat year over year, and our organic service revenue growth for the year to be comparable to FY16. We expect our full-year non-GAAP net income in the range of $16 million to $20 million, which represents non-GAAP net income as a percentage of revenue of 6.5% to 8%.

When building your FY17 models, I would like you to consider the following factors. First, if you recall, we recognized approximately $1.5 million of revenue from an accelerated technology license payment in the first quarter of FY16, and revenue from that source ceased after that quarter.

Two, our product revenue, which historically has grown in the high-single-digit range, grew more than 20% in FY16, largely benefiting from some of the large deals we closed during that period. We are expecting an increase in adoption of our mobile and soft clients in FY17, and therefore, projecting flat product revenue year over year.

With respect to our non-GAAP net income guidance, we plan to continue to invest in R&D and sales and marketing in FY17, to maintain the lead we've established in our industry and further penetrate the market for cloud communications, focusing on the very attractive mid-market and enterprise segments. We anticipate these investments to be front-end loaded, and expect operating margin to improve in the back-half of the fiscal year.

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

Thank you, Mary Ellen. In closing, we had a very strong FY16, thanks to the diligence and dedication of our US, UK, Romania, Canadian and Australian teams, now more than thousands strong and growing. As well as the support and confidence of our customers, who are entrusting 8x8 with their mission-critical communication requirements.

We are excited and energized by the market trends and industry dynamics that have emerged in the cloud communications sector over the last 12 months. And are looking forward to partnering with more and more businesses to provide them with the communications and collaboration tools they will need to succeed in the 21st Century.

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 there, thanks for taking my question. So Vik, you said the 208% in the mid-market bookings, also 66% of the MRR came from mid-market. How was the split between the bookings by sales teams? I know you gave us a number of large deals that were brought in, but can you give us a sense for how the bookings actually split up?

We don't normally disclose that. We lump enterprise and channel together. 208% compares to 94% in the previous quarter -- this is the year over year growth. And I think 66% compares to 58% from the previous quarter. Channel grew probably the fastest of all of them, it was well-over triple-digits. And, you know, enterprise sales. Also our UK team is hitting the ball out of the park.

So this was a quarter that there's nothing I can even complain about. So across the board, people did a phenomenal job, including SMB.

Thank you. And as we look ahead to that segment of the [coming barbecue piece], how much attention will you continue devoting to the SMB segment?

Actually, quite a bit. Because I think one of the trends we are seeing is that our SMB teams, which are actually really impressive folks, are starting to close bigger and bigger and bigger deals. And so we are creating multiple tiers of folks, so they can start closing deals without getting on an airplane, or without even seeing the customer remotely.

And so what it does is, what used to be often closed by a mid-market team, we are basically moving them up to enterprise-level deals. What used to be mid-market, we're starting to have our SMB start to close. So the core teams stay the same. The overall size of deals keeps increasing across the board.

One other point to that is, is that we are, in fact, as you know, investing in enterprise-grade capabilities. Which actually we give not only to our large enterprise customers, but we give that same voice quality, that same reliability, that same compliance, that same quality of voice, to our SMB customers -- and they love it.

Thank you.

George Sutton, Craig-Hallum.

Thank you, and great job. Vik, we talked about the enterprise part of the market sort of being the tip of the iceberg in the past, and you had laid out those 10 large opportunities that you saw at the time. I'm wondering, now that you've seen those come to fruition, can you give us a bit of an update in terms of what you're seeing in terms of those large opportunities?

Yes, no, actually, George, the interesting thing is -- I think I'd use the phrase: don't ever use me to predict the future. Because I always know tipping points after the fact. So if you remember, with great trepidation, I laid out our plans that we saw approximately ten of these so-called whale opportunities, and we wanted to close one or two. And we closed six in the year.

So that kind of gives you a sense. To the extent we will not be calling them whales any more. Because what's happening is, they are starting to be more and more commonplace. The size of deals has just jumped up dramatically across the board, and we're seeing greater and greater adoption.

And the thing that's quite interesting is, when you start looking at these very complex global companies, with their desire to go in and create this unified communication and collaboration platform, we're uniquely positioned. We've built up this hyper-scalable platform which allows you to ensure that no matter where you are, you basically have a distributed data center that you can have your employee tethered to, and have the same level of voice quality, a common directory, a center -- which I don't think other people can do.

So the thing that's happening is that these larger companies which in the past had viewed this as: are we ready for cloud? Are now saying: are we ready not to be in cloud? Because it represents anywhere from 35% to 50% cost savings, not to mention significantly enhanced feature functionality. So we're starting to see that pipeline definitely accelerate.

Okay, great. And just curious what you think about this. Obviously during the quarter, we saw lot of M&A, when you look at inContact and Polycom and Nexmo -- lot of broad deals within what we would define as unified communications. Could you give us a sense of what you're kind of updated thoughts are relative to being a consolidator in this market? What products might you need?

Sure. From our perspective, you know, one, we look -- again, I can't take credit for this -- but we look like geniuses. There is absolutely no substitute for owning your own technology. Remember, we own our own contact center, which is now approximately 20% or so of our total revenue.

So between DXI and contractual acquisitions we did in the past, and we have spent the time to integrate them together as part of our core platform -- you are starting to have, you know, particularly the contact center piece, you're starting to have complete ownership over the technology. And imagine if you're a competitor, or some of the others, where you don't necessarily own the technology, and the person you're partnering with just disappears, because they're part of somebody else's company, and their strategic priorities may change.

So we find this concept of building this one-stop shop increasingly more important. We make judgment calls as to what technologies we see as being provided by multiple players, so we just need to partner -- and what technologies we see as critical, which we absolutely must own.

Contact Center was a key element of our strategy there. Quality monitoring was a key element of our strategy. We look at different other things that I probably won't tell you about here. But there are different key technologies that we believe we can integrate into our core platform, and provide them as value-added services or add-on services to existing customers, as well as new customers.

Perfect. Thanks, guys.

Dmitry Netis, William Blair.

Great, thank you. Good to see you guys putting substantive revenue piece in the flywheel; we're kind of getting to work here. So that's all good.

Couple of questions. On the organic side, Mary Ellen, I think you actually called this out, but I'm not sure I caught it. Just to clarify -- on the service revenue, you said it was up -- what, 25%?

25% in the fourth fiscal quarter, compared to last year's fourth fiscal quarter. 25%.

And I think that's off of 23% last quarter. Is that fair?

Correct.

Okay. And then on the organic growth of the mid-market MRR, what was that number relative to that 208 number for the total kind of inorganic revenue?

That was well-over 150% on an organic basis.

Okay, I knew it was big, but I just wanted to get that number, too. So that's appreciated.

Okay, you're welcome.

Okay. And then as you talk about the MRR -- I'm sorry, the mid-market opportunities, and you're coming into this fold of 66% of bookings and over 50% in revenue. Can you define sort of the average, you know, MRR per customer in that segment, you know, average amount of seats for that segment? Something to kind of give us a little bit of visibility into that?

Versus just kind of the total average ARPU that you give out there, which improved quite nicely, up $16 there. And the churn obviously went down, and that probably a function of the bigger deals that are stickier. But yes, just if you could answer the sort of the average MRR per customer in that bucket, the average number of seats of per customer in that bucket, that would be great.

Okay. Well, Dmitry, I don't break it out on an average ARPU by seats. But I can tell you that the mid-market ARPU -- so a mid-market and enterprise customer is -- the average revenue per customer is about $4,100, compared to last year at this time, it was $3,800. So it is growing very nicely as well.

Okay, very good. Okay, great. And then the GameStop deal, is that your largest deal? I mean 4,100 locations, maybe a little bit of color there? I mean, GameStop is an 18,000-employee company. So are we going to see 18,000 seats, over time, deployed?

Yes. So it starts at 4,100 seats and all of the --

4,100 locations.

4,100 locations. Yes, so all of GameStop for the US, and now they're moving to international. Over time, it will be everybody. And yet, no, it is not our largest deal. So that's the part that is so exciting. I don't know if you caught it in my statement, but I talked about our smaller enterprise deals are 2,000-plus customers. So GameStop, even after the 10,000-plus seats, is not our largest deal anymore.

Excellent. What would be the largest? Would it be the NetSuite? Or Regis?

No, Regis is up there. There are others that are getting up there. So as I said, I think we -- you have followed us for a long time, Dmitry, so you have seen how this last year, the size of the deals has just exploded.

Okay, good. Last question I have on the contact center -- I think, Vik, you mentioned 20%, give or take, now is part of revenue. You know, clearly that's a key differentiation for you that is fully integrated into one robust sort of platform. When you go out and source deals, farm deals, I mean, when do you sort of start to think that you've got to lead with your contact center, as opposed to leading with the Virtual Office, and then maybe up-selling the Contact Center to your enterprise customers?

Now.

Okay.

No, I'll give you the most interesting one. Look at Auto Europe. We led with the Contact Center, and they dragged in 300 Contact Center seats, and they dragged in Virtual Office. We are seeing that we can take on in contact, and in a way, this actually represents good things for us. Because, you know, in a stealth mode, we have been growing the Company very steadily, and actually at pretty significant levels, and without people noticing 20% or so of our revenue is Contact Center.

And we are leading often with Contact Center and we are winning, and at a time when the market is a little disrupted, and we own our own technology. So VCC, as I indicated, is totally integrated with our VO. ECN is in the process of being integrated with our core platform. This is a very good position for us to be in.

And any metric you want to put in terms of growth there, just specifically focusing on VCC? I know I'm getting very --

(laughter) By the time I'm done, you'll have each employee's salary. No, we don't disclose that. But it's growing at market.

You're happy with that growth, and is it growing beyond that 25% organic growth that you --?

Let me make a couple of points. One, quite solidly, we don't break it out. But I am never happy with growth. So unfortunately, as the sales team always gives me -- I'm always focused on more growth, as long as it's done profitably. So we see headroom in our Contact Center. We see headroom in other parts of our business, as well.

Okay, very well. On that note, congrats, and keep up the good work.

Thank you.

Amir Rozwadowski, Barclays.

Thank you very much, and good afternoon, folks. I wondered if we may talk a bit about the competitive landscape? You know, through the course of the last quarter, there have been some concerns about the entrance of some larger, well-financed companies making a bit more of a push into the unified communications space. But on the flip side, if we take a look at your results, and particularly the momentum you're seeing in the mid-market and the enterprise arena, we're continuing to see that growth.

Perhaps you can kind of bridge the gap between the two. Is it sort of a perception of how big this enterprise market is in terms of some of those concerns? Or particularly the segment within that mid-market and enterprise arena that you folks are nimbler or better-positioned to target? And just would love to hear sort of your thought process around that.

Okay. Two key words. So one, $50 billion market. And we're one of the early entrants, and we have built a complete and comprehensive solution before anybody else kind of woke up to this space. So I think we have a non-trivial lead and a level of credibility.

Two, global is truly unique. And companies struggle because they have architectural constraints. If you support global customers through a centralized server, you know, you have a fundamental issue with call quality and overall performance of your system. We architected our system to be a distributed system, such that you can have people at all parts of the world tied to different data centers, and have the most optimum call quality. So I think we have some non-trivial advantages.

And don't forget the fact that we have integrated contact center, the analytics, the one-stop shop. Now you add video, a few other things. So I think there are other companies out there that have portions of it. But as I said, between the concept of architecture, between the concept of global, and the fact that the market is 3% penetrated at $50 billion, and we were one of the very first, if not the first, to the party, with this complete comprehensive offering. I think we are seeing significant traction. Because people are not going to wait. And I think we're also easier to deal with.

That's very helpful, Vik. And then if we can take a look at your guidance, your initial guidance, for FY17. You know, I recognize that some of the commentary you had made around some of the equipment revenues and how to think about that. But if I think about the cadence of some of the business activity that you folks are seeing at the moment, particularly this continued migration upstream to larger contracts, faster deployed contracts.

You know, there does seem to be an implied tempering of the growth rate, in terms offer the initial outlook. I wondered if we should read into anything on that in terms of your expectations for demand? Or is this more of a initial bar that you're setting for the course of the year?

Yes, I think the way to start with -- and Mary Ellen can give you more color. The way can you think about it is, I think you've seen year-by-year, quarter-by-quarter acceleration. And I think we're guiding service revenue at a comparable rate to what we ended FY16 at, on a base of revenue that is 30% bigger and this is the first quarter. So you know, read it as -- this is our best look at, you know, what we see. But good things are happening, and if things get better, we'll tell you.

Excellent. Thank you so much for the incremental color.

Okay.

Nikolay Beliov, Bank of America.

Thank for taking my questions, and congrats on a nice performance. Hey, Vik, when you came onboard about more than three years ago, I believe, you were talking about accelerating the business, and that's been happening. And guiding subscription revenues the same growth rate as last year, is why you have confidence that acceleration is going to happen across [I think we said] 2017. And you spoke about some of the business activities, you came out the way, kind of like ensure that the deal is going forward. As that acceleration that is happening, how do you think about the long-term [thought] growth margin profile of the Company? And what are the puts and takes here?

No, actually, you captured it, right? And so you have watched the way the acceleration has been happening. And as you said, we are starting the year guiding on a 30% bigger base of revenue, which included an acquisition. We're still guiding at a rate that is comparable to what we ended 2016 in. And so I think the part from your point is, I see this continuing for a while.

I don't want to, you know -- we only guide for one year. This is a 3% penetrated market. And I think as you and I have talked, ownership of your own technology, and this concept of combining all of this into this one suite, and then making sure you architect it properly so you're not tied to a centralized server and you're trying to serve global customers, right? Which inherently creates problems. I think that concept, and I think makes us quite differentiated from everybody else.

And global is hard. It is literally very easy to put global on a slide. I mean, it is one of those -- it only takes four or five words, or letters. But doing it, understanding all the regulatory environment, understanding the shipping environment, understanding customs, making sure you understand call quality, latency, et cetera, is very, you know, very difficult. And I think we've done a good job of really moving the ball forward there.

And if you think about it, these global customers -- forget just enhanced functionality and productivity improvement, and all of these other things -- they see actual operating cost improvement. And so what if we can give you significantly enhanced capability and we can decrease your operating costs? That becomes very, very compelling. And we can deploy it very quickly, as you can kind of see with some of the customer wins that we have talked about.

So I see this continuing for a while. I think good things are happening, and never kind of look, you know, beyond, you know, our headlights. But I feel good about where we are. We've got some awesome people on our team. We've got some people who really know this space, who know how to deploy this stuff, and that are experts in their field. And we're very fortunate.

Hey, Vik, I appreciate that. And I just wanted to pick up on a previous question, and let's call them by their name -- Skype business. They launched a big marketing campaign about five, six months ago. Are you actually seeing them in the marketplace? Are you competing with Skype's business and your business?

I haven't seen them. But again, I operate always -- I worry about everybody. But I think you have to be tied to an exchange server, which means you have to have a centralized server to do a global employment. I think we're much further along in terms of feature functionality, integrated, contact center -- this is where you and I have talked about ownership of a contact center becomes the jewel in our crown. And we made this decision three, four, five years ago. And the process of integrating it has not been trivial, but I think we are there.

So I think we have some good stuff going on. We have not seen them that much. I'm sure even if we see them, we're fine. Particularly for global, large-distributed enterprises, we will take on anybody, and we will win.

Got it, thank you on that color again.

Yes.

Mike Latimore, Northland Capital.

Yes, thanks. Impressive list of customers there. That's great. On the churn, churn was excellent. What is kind of a good churn number to think about going forward here?

You know, Mike, that is really hard to predict. I would say definitely modeled around the 1% mark. The churn, as you know, is going to be impacted by usage, as it was last quarter. In the third fiscal quarter, we were a little bit higher than what we normally are. This quarter, as the new year started, usage was up. Plus, as we continue to move upmarket, we would expect our churn to come down. But for now, I would say 1%, until we start seeing that consistently be below 1%.

This year, from a year perspective, we're 0.8%. Now remember, this is a gross churn. So we include all of our cancellations, and we don't offset that with any up-sell. So on a gross churn basis for the full year, we were 0.8%. So I would model 1 % for the year, and expect it to be maybe slightly below that or slightly above that.

Okay, thanks. And then I know you don't provide ARPU per individual user subscriber, but is a web meeting coming out in analytics, and maybe seeing more of these enhancements on the contact center? Do you think you could see an upward trend in that kind of revenue per individual user?

Yes, absolutely. Eight out of our top 10 customers are taking analytics, right? Six of our add-on deals are with analytics. So the analytics product is doing extremely well. And as you know from what we announced at Enterprise Connect, we are continuing to invest in our analytics product, with the new Customer Journey, and then also what we have now introduced with our new quality management system. So absolutely, analytics is going to be a big driver. We just released and did the GA on our new Virtual Meeting with HD mobile -- HD video, and we believe that's going to be a big seller as well.

And then just last question. You mentioned that more customers are looking to do mobile-only end points, or at least have a bigger chunk of their end points in mobile only, I believe. Can you just provide a little more color on that, you know, how big of a churn was that?

We made significant investment in Virtual desktop product, as well as our mobile product. And we're encouraging our customers, especially our large customers, to start to use that. Because we feel it is more of an intuitive way for people to do business. They're typically on their laptop working anyway when the call comes in. It is easy to answer that call from your laptop, your desktop, and not have to worry about a hard phone.

The quality of our soft client is excellent. So we're encouraging our customers to at least try a soft client, as opposed to investing on the product side. As you know, we don't make money on the product side. Last year, we subsidized about 18% of the cost on our hardware. So it's a win-win for both sides, if we can encourage them to do so. And the investments that we made, I think the customers will be delighted. They won't have to pay for phones, and we won't have to subsidize anymore.

And think about the compelling value proposition for a customer. Imagine a large insurance company or real estate company -- employees will always use their cell phones. But if essentially you have an app which has that quote-unquote, office phone running essentially as an app on their cell phone, so the physical divide they're using is a cell phone. But the soul of the cell phone is the same as your Virtual Office app, with the Virtual Office phone number, which that Company owns. If there is ever any turnover of the employee, the company keeps the number. And, oh, by the way, you can update the number.

You can also -- any interaction that the employee has with their customers, with one click, can be updated on salesforce.com or some other CRM. You have the ability to have complete records of all of these things. So this becomes an extension of your CRM tool just complete ownership, end to end, of the customer by the Company, as opposed to the individual. This is a phenomenal trend that is happening, and I think we're right at the forefront of it.

Okay, thanks.

Catharine Trebnick, Dougherty & Company.

Hi, good afternoon. This is Jack [Rokelfling] in for Catherine. I have one quick question for Mary Ellen. You've [prepared a markie] talked about improving operating margins in the back half of the year. Can you provide more color on the rate at which we model this change at? Do you see gradual improvement in the bottom-line leverage? Or do we foresee an inflection point, whether that be in back half of 2017 or into 2018, where we're really going to see the top-line performance flow down?

Yes, I think in the second half of this year, if you look at our guidance, we gave 6.5% to 8% for the full year. I'm expecting that in the second half of the year, we'll be slightly above 8% maybe in the third fiscal quarter, and higher than that in the fourth fiscal quarter. But in the first two quarters of the year where we're doing most of our investment, as I mentioned, front-end-loaded, it will be less than the 6.5%.

Great. Thanks for taking my question.

You're welcome.

Mike Crawford, B. Riley & Company.

Thanks. With V Meeting, I believe you're offering that free to customers that select VO Pro add-on bundle. Is that still coming in at a tax rate of around 25% of new sales, or is that increasing?

I think that is increasing. And what we offer right now is, we offer the meeting, all the meeting capabilities essentially, and all the collaboration capabilities. But then we have portions of it that are an up-sell. So certain things we offer free, certain things are up-sell that are enhanced features they did not have before with their earlier Virtual Meeting product.

We've completely and fundamentally redesigned the product. We're starting to see of an attach rate. And Mike, I know you use our stuff periodically. But the main point being, where you can go seamlessly to video, chat or phone with the click of one button, without having to open up multiple apps. And then you can have a conference call with four or five, six people, where your device is your iPhone, and you and you see four or five images on the phone. Or the ability to document-share from your iPad or your iPhone or your Android phone to anybody that is part of this conference call.

We're starting to now get to seriously cool stuff. So we think we will see increasing attach rate with that. Early days; we just introduced this product. But yes, we see -- we hope that, that will have a significant attach rate beyond the numbers that you saw in the past.

Thanks. The follow-up then would be regarding those add-ones. For example, I believe HD video is an option that you're listing for around $10 per month per user. And I guess, it is early, but is it too early to tell how many people are taking HD video?

Too early to tell, but we're starting to see particularly larger customers love HD video. It's actually surprised me how much video is starting to become pervasive, particularly for the larger customers, right? Because it's become -- and it shouldn't surprise you. Because if you think about it, if you're a truly global Company, the video people have had video experience through tele-presence. Here you're doing it few dollars, and suddenly it becomes something where, if it is intuitive, people start using it, then they can see what the person they're talking to looks like and the facial expressions. So the attach rate, particularly for the larger customers -- I mean, early days, but we're being kind of heartened by it.

Great. Thank you.

Greg Burns, Sidoti & Company.

Good afternoon. You mentioned on your road map for investments in 2017, going up through line of business and self-service. I was just wondering what is the road map for the timeframe of expanding the DXI capabilities that you acquired globally this year?

Yes, so around October-ish timeframe we're starting to beta it. But yes, we're loving it. If you ever -- I don't know if -- we've not shown you the demo, because we're just -- but if you have a chance, we'll show it to you. It is seriously cool, because in the sense, you can literally go in and you have the ability to have a tight integration with the CRM system. You can have very detailed drill-downs out of every telephone call you made, who you made it to, when did you made it to them, did you make it in time, did the customer respond, did you enter the information into your CRM, how long did you take to enter the information into the CRM.

And I've said, the way we're using it, which is always -- we have a philosophy of, you, you know, drink your own champagne, I guess, is the best politically correct way to say it. We are starting to use it for monitoring our own sales force. And it has been fun. I think our sales managers particularly love it, and they have had good feedback on it.

Okay, thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to Vik Verma for any further remarks.

No, I think from my end, thank you all for listening in on today's call. We are -- we look forward to providing continued updates on our progress at our upcoming investor conferences and meetings. Thank you again.

Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.