8x8 Inc (EGHT) 2017 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the first-quarter 2017 8x8, Inc earnings conference call.

(Operator Instructions)

As reminder, this conference is being recorded. I would now like to turn the call -- conference over to Director of Investor Relations, Joan Citelli. Ma'am, you may begin.

Thank you Sabrina, and welcome everyone to our call. Today I am joined by 8x8's Executive Officer, Vik Verma, and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's first fiscal quarter of 2017 financial results for the period ended June 30, 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 fact are intended to identify forward-looking statements.

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

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

Thank you Joan, and thank you everyone for joining us today as we discussed 8x8's first-quarter of FY17 financial results. I will begin with a high-level summary of 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.

We're off to a great start in FY17 as the transition to cloud for business communications and collaboration solutions is well underway. And our strategic focus on broadening our capabilities to serve globally distributed mid-market and enterprise customers continues to bear fruit.

Our total revenue in the first quarter of FY17 grew 25% year-over-year to $60 million. Service revenue of $55.3 million also grew 25% year-over-year, both on an organic and inorganic basis. For the 25th consecutive quarter, 8x8 remained profitable on a non-GAAP basis with non-GAAP net income of $5.4 million.

Service revenue from our mid-market and enterprise customers grew 44% year-over-year, and now accounts for 52% of our total service revenue. While our direct enterprise field sales force and channel sales teams are driving the majority of this revenue, I'd like to note that in general we are signing up larger customers across the board, with our inside sales team continuing to book mid-market deals without ever visiting the customer onsite.

As you know, we are focused on three key strategic initiatives. One, increasing the adoption of our solutions by mid-market and enterprise customers. Two, expanding our global service delivery capabilities. And three, advancing our technology and service offerings. I'd like to touch upon each of these with a brief update on our progress this quarter.

We continued to execute well in the first quarter of FY17 on our first strategic initiative with new monthly recurring revenue sold to mid-market and enterprise customers. And by channel sales teams increasing 62% year over year, accounting for 58% of total monthly recurring revenue booked in the quarter.

Today I'm pleased to announced a new contract with a major office supply retail chain that was just awarded earlier this month. It was brought in by our enterprise sales team following the successful completion of a proof-of-concept trial last quarter. The initial 50 store virtual office deployment has already begun, and we are planning to roll out our services and over 1,000 locations nationwide.

I'd like to also mention a few new enterprise and mid-market customers that were brought on during the quarter by our channel sales team, which continues to perform exceptionally well. The first is a major workforce solutions provider with offices throughout North America. Following the successful completion of an initial proof-of-concept deployment, 8x8 was selected to replace their premise-based solution with over 2,000 virtual office and virtual office analytics seats across 500 locations.

The second noteworthy win is a 1,200 virtual office and virtual office analytics seat deployment for one of the largest dental providers in the US with over 180 locations. Third is a rapidly growing mortgage lending company with over 60 offices in 26 states for whom we will be deploying more than 500 virtual office and virtual office analytics seats. And finally from our UK team is a combined virtual office/easy contact now deployment of over 300 seats for one of the world's leading commercial suppliers of water treatment services.

Our second area of focus is building the industry's highest quality, most reliable global communication network while maintaining industry-leading service margins. As we announced earlier this week, we are in the process of adding three new data centers in Singapore, the Netherlands, and Brazil which will broaden our international footprint to 12 data centers in eight regions of the world. Coupled with our patented global media routing technology and localized telephony services this expanded network enables us to serve our many multinational customers with high availability, high quality, low latency voice capability throughout their organizations.

By the end of the calendar year we will support a total of 13 languages in addition to English for core services. Plus we will be supplementing our global customer success network in the United States and United Kingdom with new support centers in the Philippines and Romania, bringing the total number of centers to seven. Our global expertise is a key differentiator that consistently positions us favorably with prospects that maintain multiple international locations, particularly when proof-of-concept trials are involved.

Third, on the service innovation and technology front I'm pleased to report that we've rolled out our new completely redesigned virtual office meeting solution which delivers audio, web, and high-definition video conferencing at a single click and from a single client. This enables instant seamless collaboration with the ability to share content from cloud applications such as Dropbox, box, iCloud and Google drive.

Studies have shown that over a third of an employee's time each day is spent looking for information versus being productive. Virtual office meetings help solve this problem by delivering integrated communications and workflows from a single platform.

Our customer deployment and success teams continue to make solid progress rolling out our services for new customers like GameStop and Movement Mortgage as well as existing customers like NetSuite, SPS Commerce, OFX, and Regus. For NetSuite we deployed another 200 virtual office seats this quarter. For SPS Commerce over 500 combined virtual office and virtual contact center seats. And for Sydney, Australia-based OFX over 300 combined virtual office and virtual contact center seats.

We are also in the process of rolling out our virtual contact solutions for Regus in the UK, Spain, Cyprus, Denmark, Finland, Greece, Italy, Norway, Portugal, Sweden, and Malta. I believe we are well ahead of our competition in our ability to quickly transition customers over to our services thanks to our elite touch methodology, our extensive global presence, and the fundamentally solid nature of our core network architecture.

One year after the acquisitions of DXI and QSC I'm pleased to report that we have fully integrated our two UK entities under common leadership and a combined sales team now selling our full portfolio of products. QSC has been integrated with our global engineering, dev ops, and customer support teams. We now have approximately 250 employees in the UK and Romania, including an awesome UI/UX design team in London. And our research and innovation center includes Romania, which we expect will be staffed by roughly 100 employees, the vast majority of them software engineers by the end of this fiscal year.

The sales operations, global customer support and R&D resources are contributing greatly to the growth of our international customer base, as well as the speed at which we can deploy and deliver new enterprise grade features and capabilities.

With that, I'll now turn the call over to our CFO, Mary Ellen Genovese. Mary Ellen?

Thank you Vic, 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.

Financial results for our first quarter of FY17 were very strong, with total revenue of $60 million and service revenue of $55.3 million, both representing a year-over-year increase of 25%. On an organic basis adjusting for approximately the $1.5 million of revenue received from a technology license payment in the first quarter of FY16 and two months of inorganic revenue from our DXI acquisition in the first fiscal quarter of 2017, total revenue grew by 26% and service revenue grew by 25%. 52% of our total service revenue is now derived from our mid-market and enterprise customers, and that portion of our revenue grew 44% year-over-year.

Our revenue growth was driven by both new subscriptions sold to larger customers and expansion revenue from existing customers. Expansion revenue generated by customers increasing the size and/or scope of their deployments typically accounts for approximately 50% of new monthly recurring revenue booked each quarter.

GAAP net loss for the quarter was negative $0.5 million, or negative $0.01 per share. Non-GAAP net income for the quarter was $5.4 million, or $0.06 per share, representing 9% of revenue compared with $4.5 million, or $0.05 per share, also representing 9% of revenue in the same period a year ago. GAAP gross margin was 73.8% compared with 73.2% in the same period last year.

On a non-GAAP basis gross margin improved 130 basis points from the year-ago quarter to 75.4%. GAAP service margin was 81.5% compared with 80.8% in the same period last year. On a non-GAAP basis service margin improved 140 basis points from the year-ago period to 83.2%.

GAAP sales and marketing expenses increased year-over-year by approximately $8 million to $31.7 million due primarily to additional headcount of deployment engineers and additional headcount for sales professionals across all segments of our sales force, as well as the acquisition of DXI and commission-related expenses stemming from the success and growth of our channel partners. Our GAAP tax expense for the quarter was $37,000 and non-GAAP tax benefit was $44,000.

Turning our attention to key operating metrics for the quarter, new monthly recurring revenue, or MRR, sold to mid-market and enterprise customers and by our channel sales teams increased 62% year-over-year compared with an increase of 38% in the same period last year. This new MRR accounted for 58% of our total new MRR booked during the quarter compared with 46% in the same period last year.

Average revenue per business customer was $399 compared with $353 in the same period a year ago. Average revenue per mid-market and enterprise customer was $4,230 compared with $3,846 in the same year-ago period. Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 0.5% compared with 1% in the same period last year.

Cash, cash equivalents and investments were $167 million at June 30, 2016 compared with $157 million in the same period last year. Cash flow from operating activities was $6.5 million in the first fiscal quarter. And capital expenditures including capitalized software were $2.3 million in the quarter, or 3.8% of revenue.

I'd like to note that as a result of the recent weakening of the British pound we are estimating a potential impact to our consolidated revenue of approximately $600,000 per quarter for the remainder of FY17 due to the conversion of our UK revenue at a lower rate. Despite this we are reaffirming our FY17 guidance of annual revenue of $249 million to $253 million and full-year non-GAAP net income in the range of $16 million to $20 million, representing non-GAAP net income as a percent of revenue of 6.5% to 8%.

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

Thank you, Mary Ellen. 8x8 continues to make great progress across all of our strategic initiatives while building a coveted reputation as the only provider capable of delivering enterprise-grade cloud communications across the globe. We have established a solid foundation for continued growth. And are well-positioned with a competitive differentiation and successful track record to capture an increasing share of the demand for cloud that is yet to come.

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)

Our first question comes from the line of George Sutton from Craig Hallum. You line is open.

Thank you very much. Again, nice results guys.

So Vik you specifically referred to proof of concept being an area where -- if you get into a proof of concept, particularly in your global situations, you come away as the winner. Can you give a little more perspective on what is happening with other vendors? Why are you winning in those cases?

I believe we have a comprehensive solution that works in tough network environments. And I think, as you know, we are a Company of techie geeks and we have built a really solid technology.

I think you probably notice we don't use the term, but the terminology that was formally known as whale, we announced our seventh one today, which is -- which came after a pretty extensive proof of concept in a few things that they were going through internally. But we seem to have a very good track record that once we can go in, deploy our technology, show the customers the value of our solutions, show the fact that we take our commitments to customers very seriously, good things happen.

Now, one of the other reasons I know you've been winning relates to the call center -- your integrative call center capability [and our] contact center capability. Can you talk about, with all the M&A that's been going on in the space, has that changed your go-to-market plans, your pipeline, your close rates, anything like that?

No actually the strategy is working in the sense that I'm actually increasingly pleased. I think if you think back, George, over the last couple of years we're fundamentally transformed the business from essentially an SMB business to a mid-market business, where mid-market is now the vast majority, or the majority of our revenue. And it represents the fastest growing segment of our revenue. A key element of that is the fact that we are the one-stop shop communications platform.

Part of the reason, we are going out and really investing in building out this global network -- and by the way, all the expenditure that we are talking about is all planned and part of our guidance, is we want to build the premier real-time global communications network platform. And for us a network platform means voice, video, SMS plus the integrated call center, plus over time a contact center, and plus over time the ability to do line of business applications, et cetera.

For example, of our top 10 deals, once again 5 out of our top 10 deals bought both our virtual office and virtual contact center. And you're also seeing, I think, 6 out of our top 10 deals also bought our analytics solution. I think this is the thing that we have been able to kind of do is build this out and continue to build this low latency global communications network, and keep building on top of that. And that's why I think we win.

Super. Thanks, guys.

Thank you. Our next question comes from the line of Nandan Amladi from Deutsche Bank. Your line is now open.

Hi, good afternoon. Thanks for taking my question. So first question is for Mary Ellen.

I think the question we'll get tomorrow is about the guidance. In spite of a significant beat, over $2 million from consensus, you're not raising guidance. Obviously you've said the FX impact clearly is a big part of that. Were there any other factors that you considered?

No, not really. Nandan, it's first quarter. So it's still early days within the year. We are seeing strong demand.

However, we want to be cautious as it relates to how the pound and the US dollar trade. We expect that might be a $600,000, as I had mentioned in the script per quarter impact. We don't know for sure, of course. The pound's been -- suggested that it might go down as low as $1.20, but it seems to be holding pretty well at the $1.32, $1.33 mark.

So I think we're just being -- we're just staying with our guidance. We think it's strong guidance. And again, the demand is strong and this is early days.

Thanks. And a follow-up or Vik.

With all of these global proof of concepts that appear to be getting larger in size, do you feel like you have enough services staff appropriately placed in those geographies? And do you really need to have many people onsite when you do these proof of concepts and eventually deployments?

No, actually -- I mean we don't. And that we brought onboard, as you know, a new Head of Global Support and Global Delivery, Jeff Romano, who has a track record. Larger customers require a different level of service than SMB customers.

We built up a lot of various tools, et cetera. So I don't expect to have a lot of people onsite, and then we're leveraging out localized partners where we can to basically provide support. And then now you're seeing that we are now seven data centers around the world.

The part I'm proudest of, and I think as you reflect back, because I think you've followed us for a couple of years when we started on this journey. Our Company was essentially an SMB Company which was primarily domestic. And over two years with very few people really noticing, we managed to build a global company focused on mid-market and enterprise.

And now as you look at it, we keep announcing bigger and bigger deals. And it's now like a consistent metronome to the extent I think last quarter I indicated I would not be highlighting whales anymore because that -- whales becomes ordinary course of business. Now getting bigger and bigger deals is part and parcel of our daily operating rhythm. And I think we'll continue to mature as a Company.

The goal is to be able to provide as personalized a service as you can with the least amount of touch. And that's one of the secret sources that we are trying to develop, which is bringing tools where you have automated ways to test out people's networks, different things that we can do, different tiers of people that can provide different levels of support.

That's part and parcel of growing up as a Company. And I think we're making good inroads into that.

Thank you.

Thank you. And our next question comes from the line of Dmitry Netis from William Blair. Your line is now open.

Great. Thank you. Very nice quarter.

Thank you.

Maryellen I have a (multiple speakers)

The term you're looking for is awesome.

I will let you say that Vik. All right. The kind of ties to the question about the full-year guide.

I get the currency effect, which sort of explains the thought process there. But also if I look at the service versus product revenue split, Maryellen, it seems like product came a little bit of ahead of expectation this quarter.

And if so, what are you thinking kind of as we go through the year? How should we be modeling this? And maybe that sort of plays into that full-year guide as that kind of ramps down as we go through the year. But help us understand that a little bit.

No, that's very true, Dmitry. As we had mentioned last quarter, we don't expect our product revenue to be as significant this year as it was last year.

In this particular quarter we did have some of the -- we're not supposed to call them whales anymore, but some of the whales that we did book in our fourth fiscal quarter did roll into shipments this quarter. So we shipped product to Regus, we shipped product to Movement Mortgage, we shipped product to GameStop. We had a quite a few larger customers that we shipped product revenue to.

I think again our focus is to try to, again, really work with our customers and potentially get more and more of our customers using our virtual desktop, which we have spent a lot of engineering dollars focused on and we really believe it's a high-quality product. And so we'd like to see that ship. Because as you know, we don't make a profit from our product revenue.

I think that does have something to do with (multiple speakers). I think that our guidance for the full year on product will be very similar to what we saw product last year, but as a percent of overall revenue it's lower.

Well, what do you think that percentage is on a year-over-year basis?

We are forecasting that's going to be flat year-over-year on a product basis. And that our service revenue, as we had said last year -- last quarter, excuse me, will continue to grow on the same average as last year, which was 23% on a service year-over-year growth.

Okay. That's helpful. All right, very good.

Then my next question on the sort of just this big deal, the whale deal, Vik, that you guys won. It was nice to see that come in in the quarter. Can you talk about maybe the number of seats? I know you mentioned 1,000 locations, 50 stores. How many seats approximately that entails?

And also whether this was a competitive bid? And if so, who were you up against?

Competitive bid. We don't typically talk about who we are up against.

We just this week just closed this. And so -- you know the company. And so at the right time we will give a lot more information on it. But it's one that has been in the works for -- this is one of my original 10 whale pipeline. And they did a little detour where they were involved in something and then they came back.

And we think this is a great opportunity, and a great opportunity to really go in and deploy. But also opportunities for strategic alliance. But beyond that I don't want to give you too much more details on the seats because I think you'll figure out who they are right after that.

Okay. And then last question real quick. On the balance sheet you have $167 million now.

What do you plan to do with that cash, Vik? Just kind of gives an overview of your thought process there.

Again, you know my views on acquisitions. I like to do them very carefully because we need to make sure that they get integrated very tightly into the Company and add value.

I feel like we've spent a good amount of time digesting both the QSC and DXI, and I'm feeling good about both. And I think one in particular, the QSC, has been an absolute home run for us.

And so we are seeing a lot of other opportunities in various technologies as well as in geographies. And so we have an active M&A pipeline of tuck-in acquisitions, is the term I use, which is relatively small acquisitions that either integrate with your platform and provide additional capabilities and/or give you a bigger geographic footprint. And that's where we continuing to focus.

And I like to do them at a certain rhythm. I don't want to get ahead of our headlights because, again, the goal of an acquisition is it sounds great going out and doing deals, but you want to make sure you tightly integrate them and you get success out of them. And so far I think we've been doing a good job of that.

And what's your view on the C-pass and U-cast colliding? I mean, certainly Vonage had executed a deal here and Twilio came out. And there's a big tone around that the two markets maybe kind of merging.

What do you think? Is that the case? Has it hurt the U-cast side of the market just yet, or if not maybe this was an --

Not even close.

Okay.

Not even. Think about what we're trying to do, and I think that makes us truly different.

We are building a global communications and collaboration capability. So think about it. We're going to have one of the premier platforms and networks for global communications and collaboration.

It's a very -- and for full PBX and contact center functionality. And then little by little we are exposing all the APIs, except our APIs and not just a simple as making telephone calls or two-factor authentication. Our APIs will give you the ability to access right at the endpoint, and also the ability to modify call flow. So it gets very sophisticated because we are able to do all of this on a global basis.

Add one more thing to that. Access to all of this data that flows and the ability to do analytics with it once you get the right API. So that's our vision. We think that's very different than a simple cloud telepathy type application where you do peer-to-peer type communication.

We are going after a very different type of market. We think it's a much more lucrative market. And the complexity of this market, the ability to have local dial plans, the ability to have toll-free number capability in different countries, the ability to do emergency services in different countries, and then I'll set expose all of that as APIs becomes truly differentiated.

So we think we're in an awesome position. And we feel comfortable with our strategy.

Okay. Thank you very much.

I would like to understand that vision over the course of the quarter a little better. But it sounds like you are on the right track. Thank you very much.

Our next question comes from Rich Valera with Needham & Company.

Thanks very much. Vik, first a question for you on where do you stand with your channel strategy?

As I understood it you kind of took -- undertook a plan to kind of pare down your channel partners to sort of higher quality, more strategic ones and your in the process now, I think, of adding some -- gradually adding some strategic channel partners. Can you give us a sense of where you stand on that and how that's sort of progressed relative to expectations?

Phenomenal. Those guys are absolutely phenomenal.

I've never quite understood that addition by subtraction could prove that effective. Channel is by far the fastest growing segment. And channel is truly global for us.

For example, some of these Australian deals are coming from CSG, which is our Australian channel partner. We are seeing global success with all the channel. And the goal is to step and repeat.

The key here for all of us is, we want a limited number of channel partners but then hug them tight, provide them all the support that they need, make sure that their customers' customers are successful. So we don't want this approach where we're going out and signing thousands of channel partners just so you can have a notch on your belt. What we're trying to do is pick targeted number of channel partners and then give them tremendous amount of attention. And again -- not early indications, but channel has been by far the fastest growing segment of our business and we're more and more bullish about channel.

Do you have any planned additions, not that you can necessarily mention them now, but in the relatively near future to sort of bolster that further?

Yes.

Got it. That's great. And then just one for Mary Ellen, if I could. Again on the guidance, but I wanted to just ask you about your net income guidance.

You outperformed there pretty dramatically by roughly $2 million, I would say versus the consensus, yet you maintained the $18 million to $20 million of net income for the year. Can you talk about, one, how much currency impact -- currency has impacted that net income, or how much you estimate currency to impact that for the course of the year? And if there any other factors that would cause this to be substantially lower than the first quarter as we move through the year?

No, actually currency in this particular case is going to help us just a little bit because as you know we're naturally hedged in our UK operations, and even in the Romanian operations. So we're naturally hedged. And we have a slight loss over in the UK operations. So now we have less of a loss, if you will.

Got it.

The real reason for the same guidance on a non-GAAP net income, Rich, is that we truly believe that we are the leaders in this market. This market is very large. It's underpenetrated, and it's growing very nicely.

We find ourselves very nicely positioned. I would say uniquely positioned to capture more than our fair share of the market. And so we are going to reinvest into our R&D and into our sales and marketing.

We're still going to maintain the profitability that we committed to the Street. We're good stewards of the shareholders' money.

We have been profitable now for 25 consecutive quarters. We still intend to be profitable. But there's a large opportunity out there for us and we need to invest, and we're going to continue to invest because we think that's going to continue to help us grow our revenue.

Rich, I can add a little more color to it. I gave our team a challenge, because we gave our guidance, as you know, of 6.5% to 8% of non-GAAP net income as a percentage of revenue at the beginning of -- or at the end of last year, which actually was about two months ago. And the challenge I gave our team is, because there was 50 projects, or more that they all felt were worthy and they were all on the chopping block outside Mary Ellen's office.

And we said, great, outperform and any extra money we'll find a way to fund. And that's generally the tack we're taking.

We want to be good stewards of the shareholders' money. We made commitments about 6.5% to 8%. We're going to honor that commitment, and any excess over that, what we're trying to do is plow into the business so we can continue to grow faster and faster.

That's helpful color. Thank you both.

Thank you. Our next question comes from the line of Nikolai Beliov from Bank of America. Your line is now open.

Thank you for taking my questions, and adding my congratulations on nice results in the quarter. Vik, from a competitive standpoint what you seeing in the marketplace? And if you can specifically comment on what Skype Business is doing out there, and maybe Cisco and Via?

Yes. So look, the good news is, as I think you and I have talked Nikolai, I actually find the fact that we have bigger people entering this space heartening because too many times I have heard people keep describing a market as huge, but if large competitors are not paying attention to it, then is it really real?

This tells me this market is real because one of the largest on-premise vendors, Cisco, is now talking about moving into the cloud. And they are the incumbent. So when the incumbent says the future is along the lines of what 8x8 does, I view that as massive validation.

Skype for Business is interesting. If you think about it, they are going through some of the challenges that we predicted, which is the idea that they have to now go evolve from a peer-to-peer network to cloud. They got to build data centers.

They cannot be tied to Ajure platform because it's not necessarily a peer real-time platform. They got to have localized data centers. They've got some work to do.

We like to think we are ahead. And we like to think what we have is pretty differentiated for everybody. And we're building out this global communications platform that we think is going to be second to none.

So we haven't seen them yet, but I always operate on paranoia that others will come. But I like to think we have a lead and our intent is to keep -- grab that and keep driving.

What about other players in the marketplace? Any changes there?

No. I mean, look, there are different competitors. And I like to think our strategy is working. I wish everybody well, until they compete with us in which case I wish them ill. (Laughter)

I want everybody to do well because it's a big market. There's a lot of -- if you add up all the players in this industry that are providing cloud-based service and getting revenue from cloud, it probably adds up to a little over $1 billion-something in a market that is $50 billion. So from that perspective there's room for a lot of different players.

My goal is to ensure that we are the top. And so we keep driving, and again, our target focus is mid-market and enterprise. And I think -- Nikolai you've known us for a while. My management team has a general view that I can only see all the things that we are doing wrong and never what we've done right.

We almost had a seance a few weeks ago where they were telling me to reflect on how far we've come. We came from basically being essentially an SMB domestic play to having 52% of our revenue now coming from mid-market and enterprise, and that is growing 44% a year. So some very good things are happening.

And I think that's the market. The mid-market/enterprise, being able to provide that globally. And the fact that we're building out this differentiated communication platform that we will then start to expose all the APIs on, we think is the winning formula.

Thank you. And my last question is around analytics.

If you can get us maybe a little bit more color, what percentage of the install do you think analytics will be applicable to in the long run? What type of ASP uplift are you seeing? And maybe can you just give us a sense of what are the most widely used use cases right now on the product?

We are seeing it, particularly away for the larger customers, and they use them in different ways. The IT may use it to basically have global IT that can look at the global health of the network and perform himself voice-over-IP all over -- and set the appropriate SLA. Local IT network -- or global IT networks like that so that somebody calls and says, something's not working, they're able to point out "hey, it's your network" versus something else. That's one.

We are seeing an increasing trend, and this is what I think is the killer app, and we had version 1.2 of that, which is people using it to look at how many calls did I get, who called, when did they call, how long did it take my people to respond, how much time did they spend on the phone, how many -- how long -- how many voicemails were left. All of that kind of call detail record, and the ability to do that for individuals spread globally by managers off-site is starting to become an increasingly part of the operations of our system.

And as part of that we'll be introducing this line-of-business product in our Q3 timeframe, which basically -- fiscal Q3 which is before -- between the October/December timeframe, which allows, for example, a sales manager to get an idea of what their best-in-class salesperson is doing, what their worst-in-class salesperson is doing, how many times a day updating CRM, is every interaction being updated on CRM. It takes essentially analytics and then ties it very tightly to CRM. And basically then allows you to be not just a monitoring function but also a compliance function. So we see that evolution happening next.

As an ASP we see it add probably 5% or so to a larger customers. It's not widespread for our smaller customers because I think they don't necessarily need the analytics per se. But the larger customers tend to kind of want the analytics and they need the analytics. And from that perspective we're seeing good uplift for our mid-market and enterprise customers.

And as they become a bigger and bigger part of it, over time I think it's going to become tablestakes. And then as I told you, this line-of-business I believe is going to be the killer app because that becomes not just a monitoring function, which is important. But a compliance function where you can ensure that every salesperson updates CRM in a certain amount of time. And if they don't, you get pinged. Those are the kinds of applications we start see coming out.

Nikolai, you're seeing that in our ARPU as well. Total ARPU moving from $385 last quarter to $399 this quarter. Year-over-year $352 to $399. So significant increases in our ARPU.

And then looking at the mid-market ARPU going from $3,800 first quarter of FY16 versus $4,200 in the first quarter -- this past quarter. So significant increases in ARPU. And a lot of that is being driven by analytics. And now we think that will continue to be driven higher with our new virtual meeting and video conferencing system as well.

That was all very helpful. Thank you.

Thank you. And our next question comes in the line of Catharine Trebnick from Dougherty. Your line is now open.

Thank you taking my question. I have two.

One is on -- towards the January/February time there was a lot of concern on Microsoft Skype for Business, et cetera. Are you seeing in the marketplace, are they at all a competitive threat? And if they are, do you see them more on the large and mid-market or more on the SMB side?

We haven't seen them yet. I would have thought they'll be -- they'll definitely go after some of the really giant deals, is my sense. And I think they'll go after the smaller deals, because in essence it can become essentially a bundled offering along with Office 365, et cetera. So in our sweet spot we have not seen them.

Have you seen competitively, would you say, do you see still on the mid-market are you still maybe replacing more legacy IP PBXes? Or would you say when you go to the deal is it some of the call providers who you see at the table?

We will see different people at the table, but more often than not the incumbent is the legacy PBX. It's amazing how much legacy PBX is out there. (Laughter) I think you know some of the common folks we've been dealing with, but you see legacy PBX across the board. And that opportunity to replace them is a great -- it's wide open, because I don't think legacy PBX can compete anymore.

Yes, and then one question, just I'd like to get your opinion. This whole U-Cast and contact center seems to have -- we've had a renaissance back in the 1980s and 1990s, I guess I'm dating myself. I wasn't around in the 1980s, but in the 1990s. Everything was sold integrated.

And then you had IP and then [Siptronking] and then UC. And now you see this renaissance where it's more integrated. And I guess I'd like to get your thoughts on the direction and how well you feel comfortable competing against more some of the pure plays with your contact center solutions.

We're getting there. The part that is interesting is -- I think the classic example is Microsoft. If you were to look at it, Microsoft Office as individual items probably did not compete that favorably. I think WordPerfect will still maintain. WordPerfect is a better word processor than Microsoft Word.

But I think if you look at the two relative market caps of those two companies, you can kind of tell whether the suite one or whether the best-of-breed solution one. I see the exact same thing happening in communications.

In essence people first and foremost say, okay, give me an integrated solution. Then they look at the contact center and say, that's good enough. And then the more bells and whistles you can add, that gives you gravy.

But they look for the fact that it's an integrated solution more than they look at, I want the absolute best-of-breed. That's the bet we made. We are seeing it pay off in spades, as you can see with our result over the last year and so.

What percent of your business is now would you say related to the contact center?

About 20%, give or take.

All right. Yes. Thanks.

Thank you. And our next question comes from the line of Mike Crawford from B. Riley & Company. Your line is now open.

Thanks. Regarding the analytics that you're going to come out to help differentiate lines of business, are you organizing your own enterprise sales channels along geography or lines of business yourself?

We are going to sell -- what we are finding, it's that same concept that Catharine just talked about, this concept of an integrated platform. So we can provide you with global telephony. We can provide your contact center business unit with our contact center software.

And by the way if your sales team is out there, we can help provide this line-of-business applications for your sales team that basically can monitor your sales team's performance as well as help them comply with the directive that management has and/or other compliance elements that are necessary. So for us it's going to be the exact same team, exact same channel. And that's a fundamental element of the way we run our business.

I think we've talked about it. I'm not a big fan of this, you have three different sales team to sell three different products to three different players. You have essentially a consolidated sales statement. If there's specialization required, you do overlays.

And that's the same thing that you do what channel. Certain channels need domain expertise to help contact center? Great, you provide them with specialists. But the core sales team, the core channel should be the same and they should be able to sell the same product because otherwise you have synergy.

And that's essentially the way we run the business. And that's what we intend to do with line-of-business application.

Okay. And then just Mary Ellen, back to the model.

So with the additional engineers being hired, and Romania, and then the expansions in Brazil and Philippines and Romania. Are we seeing then sales and marketing bump up a couple million a quarter from where you are now? And then R&D as well? Is that kind of the delta in the model to bridge your guidance?

That's correct. I mean, we will in fact continue to invest in R&D. We're having very nice success with our Romanian team. It's an agile team, and we're having very, very good success in our Romanian team.

As well as, as Vik had mentioned in his script, we're having very nice success in the UK with our DXI team. They're focused on the UI/UX. And we have a strong design team there. So we will continue to invest where we see the programs working.

So from a model perspective, I think you can look at the same model that we provided last quarter, it'll be about, on a non-GAAP basis we would grow our R&D to -- right now we're a little bit below 10%. We'd like to see that at least at 11%.

I would expect that our sales and marketing would -- right now it's 49% on a non-GAAP basis, but 50%-ish, 49% to 50%, in that category. And then the G&A I would still say would be about 9%. So certainly R&D and maybe we'd bump up the sales and marketing. It all depends.

We look at each and every project, we do an ROI, we decide here we want to spend our money. We know how much we want to deliver to the shareholders. And then we make our decisions on the projects.

Some of that will be R&D projects, some of them will be sales and marketing. Maybe sales and marketing moves up to 51%. But I think we're still staying pretty consistent with where we are from a model perspective.

Okay. Thanks. And just final question is, are there any thoughts about ever trying to bring network as well, to be a network provider as well as these suite of services?

No. When all is said and done, we are essentially an application. We run on top of the net -- the core Internet infrastructure.

We are much more around the ability to have -- even though we've got essentially -- think of us as a communications app or a communications platform running on an overlay of somebody else's third-party Internet connection. We don't ever want to basically be providing the network itself.

I think even our SIC code is being changed to reflect that. I think we now classified as a software and a service.

Applications company.

Yes, a software applications company. I think that will go into effect on July 29 as opposed to a telco or something to that affect.

Increasingly we are becoming reliant -- or not reliant, but I think it's one of the greatest advantages we have, is third-party network, network coverage is ubiquitous, broadband is ubiquitous. Our app runs on top of it. And by the way, you have no hardware per se, with the exception of the phone.

Great. Thank you.

Thank you. Our next question comes the line of Mike Latimore from Northland Capital. Your line is open.

Thanks a lot. Great quarter.

Thank you, Michael.

in terms of the suite that you offer -- in terms of video conferencing and web conferencing, are you seeing kind of consistent growth there or is there accelerated growth? How much of that do you [use to grow?]

We are seeing more. I mean, in the sense video conferencing has been almost there for, I can't remember how long.

So it always starts, but we are starting to see adoption. It has not -- it's not hockey stick. First people want initially the whole unified communication, the mobile application.

So we're seeing increasingly mobile is now becoming ubiquitous. Everybody wants just one number to reach you on, no matter the device. That's starting to be huge. We are seeing a decrease in telephones. Desk phone are definitely going down.

And we are seeing, particularly with the larger customers, video is starting to become more and more interesting, which is why we are making this one-stop shop. And even for us as a Company, every Monday morning staff meeting I have with all our global team is on video-conference. And normally would've just been an audio conference call.

We are definitely seeing the beginnings of video becoming more and more ubiquitous as a business tool as opposed to just, I'm downloading this YouTube video, dot-dot-dot. So I think that is -- we're at the right stage for video to really become much more ubiquitous.

Just in terms of the sales headcount, what in -- your absolute number, is there a percent increase? How much do you think you increase your mid-market/enterprise sales team here?

We actually don't release that information as far as what are headcount is. But we are, as you know, we're investing in our channel team and we're investing in our enterprise team. We see that there's a large opportunity and we're going to invest where it makes sense.

We're not going to necessarily put a stake in the ground and say we're going to go out and hire X number of people and stick to it. We're going to add people as we need them -- as we need them. But as long as they're bringing in revenue and hitting their quota, we're going to keep adding folks. Because the market (multiple speakers)

Got it, good. Then in terms of the office supply deal, are they going to -- I know they're going to use it internally. Will they also be a channel for you guys, or is this more of an internal?

Stay tuned.

Okay. Thanks a lot.

You're welcome.

Thanks you. And our next question comes from the line Jonathan Kees from Summit Redstone. Your line is now open.

Great. Thanks for taking my question, and congrats on the quarter. I want to add to that.

I want to start with a follow-up first. Vik, you were saying that larger customer was one of the original 10. So if my count is correct, that's 7 out of the 10, the original 10 you talked about, that you've won, which is a great ratio.

Just out of curiosity and looking at the flipside there, the one that you didn't win, when you did the deal review, why did you not win it? Was it pricing? Were they just not impressed with that global platform or that one-stop shopping? Just curious about that.

Don't know I think one kind of changed their mind and we ended up no bidding. And the other two are still in place, so who knows?

Stay tuned.

Okay. All right, stay tuned used again. All right.

Second, you talked about the currency impact. Is the international revenues still less than 10% for the quarter? And do you expect that to be the case for the fiscal year?

Our international revenues are approximately 12% for the quarter -- 12%. There was no currency impacts in the first fiscal quarter.

Remember Brexit just happened very recently. And so the average pound to the US dollar was about $1.43, which was the same as what it was in our fourth fiscal quarter. So no impact this quarter.

What we're looking at going forward, if we look at $1.4 versus $1.32, that's less than 1%. So the impact will be less than 1%.

Okay. I know you had said that you're still seeing strong demand, especially since it's over 10% now, your international revenue. For UK and for Continental Europe, you haven't noticed any hesitation or any pause in terms of their buying or their interest in buying?

No. No, actually we have not seen that yet.

Now, the good thing is with business communication systems is that everybody needs one, right? And in times of slowdown, if in fact -- if some people say that the UK may in fact go into a recession. If they do and if they're looking for cost savings, our business communication systems are a good way to save some cost. But right now we haven't seen any slowdown.

By the way, any time people do campaigns, that's good for us because in our UK, for example, we have the outbound calling capability, which is somewhat seasonal. So whenever people want to do outbound reach-out campaigns, they can leverage people like us.

So I think we see -- UK's solid. The biggest surprise to us is the pound, which again I'm sure different people have different prognostication. Brexit surprised me little bit. So we had anticipated pound would be in the $1.4 or something. And I think we're now modeling it to be a little bit lower than that.

Okay. Great. Glad you're taking that into account. Yes, Brexit surprised a lot of people.

Last question, if I may here. Your virtual office meeting, and saying it's not going be a hockey stick. But I guess to envision it to be something where it's going to be like a VCC where it's going to pull in sales of virtual office and vice-a-versa where virtual office will pull in sales of video, that kind of dynamics?

Yes we see virtual office -- so typically we see virtual office as the core, which is basically the core telephony, PBX type functionality. And then you can kind of add on the virtual meeting, high-definition video, et cetera on top of it.

We see increasingly more people asking for the high-definition video and the video conferencing and document sharing, et cetera to be included as part of it. So we see a steady uptick which then results in higher ARPU. So that's essentially how we see the market evolving.

My big thing is, I want to make sure people start to use it. Because I think once you to start to use it and you use it for a month or two, you are hooked. Because virtual meetings suddenly knowing somebody's facial expression actually matters in every communication. But the problem has always been is using the legacy system you have to fuss with this and bring in an IT guy and then he has to stand on his head and connect this cable.

If you can do it with one click, where with one click you can go from a voice call to essentially a video call, we can have 4, 5, 6 people and it can be mobile or it can be desktop, or it could be your TV in your office, that starts to become really attractive. And I think the more we can get this in people's hands, the more I think over time people will get hooked.

That's what I think is the -- I think the biggest impediments to video, which has almost taken off for the last 10 years, 15 years, has been the amount that you have to almost have a 10-minute overhead in every meeting to set up the video conferencing. If you can make it so it's idiot-proof and even somebody like me, or a CEO can set it up without calling up an IT guy, that makes a huge difference. And I think that's where we're evolving to.

Okay. That sounds very convincing. I hope that's the case.

Good luck with that. Thanks a lot for taking my questions.

Okay. Thank you.

At this time I'm showing no further questions. I would like to turn the call back over to Mr. Vik Verma for closing remarks.

Thank you. 8x8, again we appreciate all of you taking the time to listen in on today's call. And we will be -- we look forward to providing updates on our progress at our various upcoming investor conferences. Thanks again.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect.