8x8 Inc (EGHT) 2017 Q2 法說會逐字稿

EventID. Good day, ladies and gentlemen, and welcome to the second-quarter 2017 8 x 8 Incorporated earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Joan Citelli, Director of Investor Relations, you may begin.

Thank you, Operator, and welcome, everyone, to our call.

Today I'm joined by 8 x 8's Chief Executive Officer, Vik Verma and our Chief Financial Officer, Mary Ellen Genovese to discuss 8 x 8's second fiscal-quarter of 2017 financial results for the period ended September 30, 2016. The earnings press release, which was issued today after market close, is available on the investors section of 8 x 8'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 anticipate, 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 10-K in our quarterly reports on form 10-Q and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties.

The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. I would also like to note that during this call we will provide financial information that has not been prepared in accordance with generally accepted accounting principles.

In addition to our GAAP results, management uses these non-GAAP financial measures internally in analyzing our financial results and believes they are useful to investors as a supplement to GAAP measures in evaluating the Company's ongoing operational performance. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. This reconciliation has been provided in the financial statement tables included in our earnings press release.

And with that, I'll 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 discuss our second quarter of FY17 results.

We will follow the same format as in the past. Beginning with a high-level summary of our accomplishments followed by a more detailed discussion of the financial results and metrics by our CFO, Mary Ellen Genovese. 8x8 continue to execute very well in the second quarter of FY17, with year-over-year increase of 24% in total revenue to a record $63.2 million. And 23% increase in service revenue to $57.7 million. We also witnessed strong organic growth in service revenue from our mid-market and enterprise customers of 36% year-over-year.

Revenue from these larger customers now accounts for over 53% of our total service revenue, compared with 48% one year ago as we continue to see good traction moving up market. A combination of healthy cash flows, strong margins, and disciplined financial management led to our 26th consecutive quarter of profitability on a non-GAAP basis with non-GAAP net income of $5.3 million or 8.84% of revenue.

With the digital transformation and communications now being embraced by larger businesses, the benefits of our differentiated enterprise communications as a service solution are becoming even more apparent in compelling, beyond the significant cost savings they inherently deliver.

Last month at our annual CIO forum the IT executives at our top Global enterprise customers spoke about the tremendous improvements in productivity, customer engagement, and overall business performance they are experiencing with a fully integrated stack of Cloud communications, contact center, and analytic solutions. With our Global pure Cloud footprint, enterprise class features and industry-leading quality reliability and security, these customers are finally able to focus their attention on improving their core business rather than managing a complex communications infrastructure.

8 x 8 is taking this value proposition even further by leveraging the power of Cloud for Global real-time communications and actionable analytics to enhance business productivity and performance. Our solution is not just a replacement for legacy premise-based PBX and contact center systems. More importantly, it is a complete data and analytics platform that automatically captures communications data throughout your organization.

Combine this with Richard relevant context from internal and external sources and derives actionable insights to accelerate business workflows and improve the business outcomes. It is the combination of our technological expertise, the integration of our services on a single platform, our ownership of the underlying technology and data, and the 86 million analytic reports we collect each day that gives us the unique ability to bring this vision to life. Our new line of business sales acceleration product, which I'll discuss in a moment, is a good example of this.

Let's review the progress we've made in the key strategic focus areas of our business: increasing our footprint in the midsize of enterprise market segments, enhancing our Global service delivery and support capabilities, and developing innovative new features that enable customers to derive even greater value from our core communication solutions. First, as I mentioned previously, we continue to see good traction moving up market with the addition of over 100 new mid-market and enterprise logos, as well as the expansion of our offerings with existing accounts.

65% of the new monthly recurring revenue booked during the quarter came from these larger customers and our Channel sales team. While this is derived primarily from midsize accounts with 500 to 1,000 users, we continue to see a strong pipeline of large enterprise deals are in the proof of concept stage with many of these prospects.

Earlier this month we were awarded a contract with GMC holdings, a worldwide health and wellness retail chain, calling initially for the deployment of our virtual contact center solution to their help desk contacts call centers. Our integration with Zendesk along with our robust reporting and analytics capabilities were key to this high-profile win.

The enterprise retail segment is increasingly becoming a strong vertical for 8 x 8 with other customer wins that include GameStop and the 1000+ location National office supply retail chain we announced last quarter. Our growing adoption in this segment has been due in large part to the strength and flexibility of our data analytics platform to provide unique insights into consumer behavior and enable dynamic handling of each call or interaction.

The Boyd Group, one of the largest non-franchise collision repair centers in North America chose 8 x 8 to replace their aging premises-based systems with our virtual office, virtual contact center, and virtual office analytic solutions, initially for over 600 users in corporate,, headquarter, and across 50 location US locations expanding to another 2500 users in 250 additional locations. A leading provider of rehabilitation products worldwide selected 8 x 8 for a 500-feet combined virtual office, virtual contact center deployment with quality management and workforce optimization.

Gerber Scientific, the parent of companies that supplies software and hardware systems for a variety of industries, chose 8 x 8 to deploy both virtual office and virtual contact center services to over 500 users in 13 Global locations. Our virtual contact center solution was selected by a leading integrated retailer that operates full line and specialty retail stores across the United States for initial 180 feet deployment in US locations.

Another contract with one of the largest independent power producers in the US was finalized during the quarter calling for over 850 virtual office seats in corporate headquarters with expansion potential to 28 additional locations. While some of these larger customers may start off with small initial deployments, historically they continue to grow us adding seats and services as their needs evolve and they begin to understand the full business potential of our solutions.

During the quarter our account management sales team booked well in excess of $50,000 each in additional monthly recurring revenue with both Regus and Autoeurope. SPS Commerce and home point financial each add nearly 500 virtual office, virtual contact center and real analytic seats. And Nutanix added nearly 200 additional virtual office and virtual contact center seats. Approximately 50% of our monthly recurring revenue each quarter comes from add-on services sold to existing customers.

Our integrated virtual office, virtual contact center solution continues to differentiate us from competitors, helping us win and retain these larger accounts. Six of our top 10 deals closed in the second quarter, called for both virtual office and virtual contact center deployments.

Two of our top 10 deals were for work virtual contact center only services. Illustrating the tremendous value this offering is bringing us not only just as part of an integrated solution, but as an increasingly competitive standalone service with significantly higher ASPs then voice and UC services. Revenue from our virtual contact center offering has been accelerating steadily over the past several quarters.

Moving on to our second area of focus. Ensuring our customers receive the highest quality service and support on a Global basis, I am pleased to report that our new customer support center in the Philippines is now live, and an additional support center in Cluj Romania is set to go live by end of the calendar year.

These new technical support operations outside of the US will expand our 24/7 worldwide support capabilities, while favorably impacting our margins through reduced customer support costs. Additionally, all of the three data centers we announced earlier in the quarter, Amsterdam, Brazil, and Singapore, have gone live and are supporting customers and end-users based in those regions.

I'd like to note that as we continue to deploy our services to increasingly larger businesses with users spread across the Globe, we are not simply building a Cloud-based infrastructure to enable communication and collaboration between various endpoints. That is Cloud communications 1.O, which 8 x 8 has proven to do very well.

As I mentioned previously, we are building a powerful real-time communications and data analytics platform that gives us the framework to develop a myriad of Cloud-based applications to help businesses achieve higher levels of business performance. Imagine how much more value a business can derive from its communications when, instead of disconnected systems and end points, all employees utilize a common app on their desktop or mobile device that is tied to the company's internal data and monitored in real time to unlock and distribute valuable information across the enterprise.

On the research and development front, I'm pleased to report that our new Cloud native quality management solution, a product developed by a Cluj, Romania team, which has expanded to 75 full-time employees, is now available as an add-on service for our virtual contact center solution. This tightly integrated offering enables contact centers to maximize agent performance and customer satisfaction in a simple and painless fashion.

Unlike legacy quality management products that are still being used by many contact centers today, 8 x 8's quality management solution leverages Cloud technology combined with deep virtual contact center integration to deliver an easy to install, use and manage framework for monitoring and improving the quality of our customer's contact center operation. Customers are already reporting call center improvements such as a 20% reduction in onboarding time.

15% increase in age and performance and a 5% increase in customer satisfaction scores within just the first few weeks of use. We believe our quality management solution offers significant advantages over competitive offerings, delivering simplified set up and management at a fraction of the cost of existing alternatives.

I'm also very pleased to announce that our virtual office for sales solution, which I referenced earlier, is now available to 8 x 8 customers and prospects. This unique and powerful application doesn't just retrieve CRM records for manual updating, it streamlines the entire sales process with built-in easy integration across all virtual office connected devices, including mobile. The solution creates a constantly updated view of communication activities, rich with context from salesforce.com providing detailed analytics on team, individual accounts, and individual account performance.

With features like automated call logging and coal relation of real-life sales activity to opportunity value and revenue, this will enable teams to focus more on customer engagement, closing deals and how the functions work together to influence pipeline progression, rather than on record keeping an annual reporting. As we mentioned before sales is the first line of business we are targeting with a focus on the acceleration and optimization space.

And we're currently developing solutions for other functional business areas such as finance, HR and relevant verticals such as retail. We believe the business value provided by these analytic solutions will enable us to continue driving healthy service margins and further differentiate us from low margin basic communication services providers.

Last but not least 8x8, was once again honored this past quarter to be named a leader in Gartner's Magic Quadrant for unified communications as a service worldwide for the fifth consecutive year. We were also named a challenger in Gartner's Magic Quadrant for contact center as a service North America for the second consecutive year.

These are the tremendous endorsements of the strength of our Company and products and the continued progress we're making developing and delivering the industry's most advanced enterprise Cloud communications solution. I'd like to thank our 1000 employees worldwide for their dedication and hard work that is keeping us at the forefront of our industry.

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

Thank you, Vik, and thank you all for joining us today.

Let's begin with some highlights from our income statement. 8x8 posted strong top and bottom line results for the second quarter of FY17. All the numbers being reported this quarter are organic follow the June 2016 anniversary of our DXI acquisition. Our total revenue was a record $63.2 million, an increase of 24% year-over-year with service revenues at $57.7 million an increase of 23% year-over-year.

On a constant currency basis, total revenue increased by 26%, and service revenue increased by 25% year-over-year. On a year-to-date basis, our total revenue increased 25% year-over-year and our service revenue increased 24%. On a constant currency basis both total revenue and service revenue increased 26% year-over-year.

Service revenue from our mid-market and enterprise customers increased 36% year-over-year. This is 40% on a constant currency basis. We continue to see a greater percentage of our revenue coming from larger mid-market and enterprise customers each quarter with over 53% of our total service revenue coming from these larger customers compared with 48% in the same period a year ago.

Non-GAAP net income for the second quarter of FY17 was $5.3 million representing 8% of revenue compared with $3 million representing 6% of revenue in the year ago quarter. This is 8 x 8's 26th consecutive quarter of profitability on a non-GAAP net income basis. On a GAAP basis, we posted net income for the quarter of $27,000 or $0.00 per share. Our GAAP gross margin was 73.7% compared with 72.9% in the same period last year.

On a non-GAAP basis gross margin improved 60 basis points from the year ago quarter to 75.3%. GAAP service margin was 81.2%, compared with 80.4% in the same period last year. On a non-GAAP basis service margins improved 63 basis points from the year ago period to 83%.

Non-GAAP sales and marketing expenses in the quarter were $31.6 million, or 50% of revenue compared with $24.9 million, or 49% of revenue in the same year ago period. The increase in sales and marketing expense was due primarily to additional headcount of deployment engineers and sales professionals, increased market and leads gen expense, and consolidation of our worldwide sales and support systems under one unified salesforce and service Cloud platform. Our GAAP tax benefit for the quarter was $15,000 and our non-GAAP tax impact was $109,000.

Turning our attention to key operating metrics from the quarter, new monthly recurring revenue or MRR sold to mid-market and enterprise customers and by our Channel sales teams, increased 30% year-over-year and represented 65% of our total MRR booked during the quarter. On a constant currency basis new MRR, sold to mid-market and enterprise customers and by our Channel sales teams, increased 40% year-over-year and represented 67% of our total MRR booked during the quarter.

You may recall that in the year ago quarter three of the largest enterprise deals in the company's history closed simultaneously, which contributed to exceptionally strong MRR growth that quarter. Our average revenue per business customer was $409 compared with $360 in the same period a year ago. Average revenue per mid-market and enterprise customer was $4351 compared with $4053 in the same period a year ago.

Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 0.6% compared with 0.7% in the same period last year. Cash, cash equivalents and investments were $170 million at September 30, 2019. Compared with $149 million in the same period last year. Cash flow from operating activities was $6.9 million in the second fiscal quarter, compared with $2.5 million in the same period last year.

Capital expenditures were $5.4 million, representing 8.5% of revenue, compared with $1.3 million or 2.5% of revenue one year ago. The increase in CapEx was due to the capitalization of software expenses related to our ongoing investments in R&D, development of our back-office systems, the launch of our service platform in three additional data centers, and upgrades for contact center infrastructure for our next generation analytics and the implementation of our Easy Contact Now infrastructure in the United States.

Effective this quarter, we are discontinuing the non-core voice message broadcasting segment of our DXI operations, due largely to the emergence of a more challenging regulatory environment in the UK for customers using these services. Voice message broadcasting was a standalone legacy DXI business operated separately from our Easy Contact Now business, which is our simple to use solution for outbound and blended call centers.

We had anticipated a gradual wind down of our voice message broadcasting business over several years. By accelerated in the wind down we anticipate $1.5 million of impact on our revenue in the second half of this fiscal year.

Additionally, the British pound continues to depreciate against the US dollar and we now anticipate an additional $1.1 million impact on our revenue. Despite these headwinds of approximately $4.4 million for the full year, we are increasing our FY17 annual revenue guidance to a range of $251 million to $254 million from our previous revenue outlook in the range of $249 million in the range of $249 million to $253 million. We are maintaining our full-year non-GAAP net income guidance in the range of $16 million to $20 million, representing non-GAAP net income as a percent of revenue of 6 1/2% to 8%.

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

Thank you, Mary Ellen.

I am very proud of the pioneering role 8 x 8 continues to play in the development, adoption, and deployment of digital communications worldwide. As more and more eager new market participants are beginning to realize, delivering real-time communications globally in a reliable, secure, high-quality manner is no easy task and we are very fortunate to have made the necessary investments over the years to be in the position we are in today.

However, I'm even more excited about 8 x 8's role ushering in the next generation of integrated Cloud communications and data analytics technology, which will further enhance the value businesses derive from our solutions.

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

(Operator Instructions)

George Sutton Craig-Hallum

Thank you. Nice results, guys. So, Vik, you spent a fair amount of time on the analytics service and I want to make sure we put it in the context. If we look forward a few years, how large might that represent an opportunity? For example, your current ARPU for our customers just over $400 a month. Can you give us a sense of how that might get expanded through this service?

Sounds good, George, this is something I think we've been hinting at and been working at for several years. Here is what we realized or we've had -- our customers helped us realize, we should give them the credit. We can't take it. But if you are talking about a enterprise today, the one thing that every person that is an employee of the enterprise has is typically a mobile phone. And one of the biggest things that we provide is you can have an app on the mobile phone, which with the Company provided phone number is resident, which gives them access to the Company's directory as well as any relevant CRM and ERP system.

What that tells you is we are at the nexus, So think about a Global Company. Every real-time interaction, every outbound call, every inbound call, every text message, every video conference, along with the relevancy CRM our back-office system or LinkedIn or whatever context is available to us. How valuable is that?

Increasingly we are seeing that over time we will become more and more focused on these specialty apps, the one that we just talked about for salesforce analytics is quite fascinating, it takes away -- any time a salesperson calls a prospect it will immediately update salesforce.com on whether -- how long the call was, who was called, whether it was a commit, a pipeline or a best case category and all the information is entered automatically and this person can be on their cell phone. They don't even have to log into salesforce in order to do that, but when they log in the information is automatically updated.

So increasingly we see that as becoming more and more critical because we literally are at the hub of any type of real-time communication. More and more I think you'll start to see us leading with those apps. It's early days. We have released the first two or three of those type of apps.

We released Analytics 1.0 about a year ago. Which gave our customers a chance to play with stuff and candidly this is what they suggested. We kept hearing from our customers, if you can take our sales team and tell me on a daily basis which of my salespeople -- how long are my salespeople on the phone, who are they calling, when are they calling? This person that they're claiming that they're going to commit and close this quarter, when was the last time they call them? At the same time, is that person that they are talking to, to try and close a deal this quarter calling support because they're unhappy about something?

We want that integrated view. It's a dashboard that we can come in every day and look at and help prioritize our activity. We basically piloted it initially with our salesforce. We then started beta tested it with several customers and will be releasing it to customers this quarter.

And that one will be in the $75 per seat. Again, we are evolving the company to sell more and more of these high-end value-added applications and the communications increasingly will be become the drag along. It will take two, three, four years but increasingly we see communication as tightly integrated with these kind of capabilities. Because if you think about it, who has that -- how valuable is information about every person that called into your company?

Let's use a HR application. If suddenly a lot of competitors are calling in to poach your employees and you can kind of track that down they can be directed to the nearest police station or whatever else is relevant. I am joking, by the way, on that one. But we have that ability today. That kind of tells you how this whole market is going to evolve because, as I said, all that data comes to us first.

Fascinating potential. Just one other question for Mary Ellen, relative to your out-performance on non-GAAP income this quarter, you suggested and you did guide for the numbers to be unchanged for the year. So clearly you're taking that excess and you're investing it somewhere. Can you be somewhat specific as to where you're investing the incremental profitability?

Yes, absolutely. One of the areas that we want to continue to invest that we started to invest was in modernizing our systems. So, we've gone live on a new Cloud ERP system this past quarter. As we mentioned, we went live on the Phase I of our service cloud. We've unified the entire -- all of our global sales teams and service teams under one salesforce instance and one service clouded instance. We want to continue to develop and continue to move forward on these types of modernizations that were back-office systems.

Originally, our back-office systems were built for an SMB business but now 53% of our revenue is enterprise and we need to do things differently. So, there's a big focus on that. So that's where some of our dollars are going.

And certainly we want to continue to develop our team on the mid-market side. We're seeing great traction on Channel. We're going to bring in some additional Channel salespeople. We're going to be invested in modernizing and continuing to increase our Legion Engine.

There is a lot of business out there we believe we are at the forefront for the enterprise accounts, especially the Global accounts. We believe that we're uniquely qualified to capture the market. So we are we going to continue to invest.

Super. Thanks for the detail. Good job.

Thank you

Dmitry Netis, William Blair

Thank you very much, guys, very nice quarter.

Thank you, Dmitry.

I have a couple sort of metrics questions. One is on the Channel side. I think, Mary Ellen, you mentioned the traction there. Can you qualify, as far as the growth in that segment, in terms of the amount of revenue that the Channels is bringing in?

And then secondarily, if you could talk about the International as a percent of revenue. Where it is today -- where it was last quarter, potentially, or a year ago? Have we seen improvement on that front as you kind of went out globally with your platform.

Okay, good. Let me take that second part of the question first. The international part of our revenue last quarter was roughly about 12% of our revenue came from our international operations. About a year ago it was approximately 10% of our revenue came from international operations.

Today we are looking at 10% -- most current fiscal quarter was 10%. But that's mostly due to the significant decrease year-over-year in the pound versus the US dollar. If you actually look in constant currencies over 8x8 solutions business that we acquired in December of 2013, that company has been growing well over 30% year-over-year in constant currencies.

So we're doing very well in the UK operation. Unfortunately with this significant decrease a year ago the average exchange rate between the pound and the US dollar was a $1.55 compared to an average exchange rate in this past quarter of a $1.31. So you see the significant decrease there on exchange rates. But the core businesses are growing very well in local currencies. Now on the Channel side, as you know we don't break out our Channel revenue separately, but as we have said it's the fastest-growing segment of our sales team. Our Channel business is going very nicely and we don't break that out separately but it is growing very nicely.

Okay. I think the numbers I recall you guys talked about last couple quarters was a triple digit, so are we still there or close to that number? Anything you could --

It fluctuates up and down depending on -- They tend to build some of our largest deals. It will fluctuate up and down but increasingly we're finding that Channel is becoming a bigger and bigger portion of our focus because we really do think we have a different shaded offering and the fact we can now start to offer analytics as part of our communication solution is something our Channel partners are very excited by.

We've had a couple of Channel partners, particularly in retail, their better than our -- no disrespect to our direct sales team which is fantastic, but in some instances because of the relationships that they have, they are actually acting almost like surrogate inside or direct salespeople. So we see more and more focus on Channel going forward.

Okay. Very good. And then, if I may, one other question I had was on the mid-market MRR growth which decelerated somewhat. Can you, sort of, qualify that? It sounds, Mary Ellen, you mentioned this could of been a tough comp with the three big deals booked a year ago. So I guess I'm referring to that 30% MRR growth in terms of bookings as a percent of total bookings. Could that number essentially spike up going forward because of the easier comps or is that, sort of, the steady-state we should be expecting here going forward?

Again, that was 30% is what I had announced at our mid-market new monthly recurring revenue bookings. However, again, a large piece of our revenue is coming from the UK and, again, they are doing very well. So in constant currencies that was 40%. So that's 40% actually compares very nicely to last quarter on an organic basis which was 36%. So we're in the ballpark.

Certainly a year ago quarter that number on an organic basis was much higher but, again, we had closed significantly -- we had announced three big deals last quarter, right? We had announced the Regus, we had announced NetSuite, that was a year ago quarter excuse me, and the one customer that has 7000 employees, Global Employees. I

would suspect in the mid-30s to 40% is a reasonable organic growth rate in the mid-market. And you're going to see that fluctuate up down because we are -- we have a very nice pipe line. We're going to close big deals and they can be a little -- we're focused on the mid-market, of course, but when those big deals come up that's going to increase the numbers then the next quarter you may not get a big deal. I think, comparatively speaking, we are doing great compared to the large comps that we had last quarter -- a year ago quarter.

Fair enough. And maybe, Vik, one last one for you. Just competitively speaking, what are you seeing -- if you could qualify your take on the competitive environment as far as maybe Microsoft Skype' s business sort of changes that we had seen there over the past quarter. Have you seen any traction there? Or have the competitive environment against Microsoft ease potentially and on a comp's side, I was just going to say, there's been a fair amount of consolidation there's as well. Whether that's impacting you positively or not? I am just curious.

Actually, yes and yes. The comment on Microsoft is quite interesting because it does seem like -- again, I don't speak for competitors, I mean, Microsoft is an amazing company led by an amazing CEO, but we don't see them Skype for business. And it seems like the press from Skype for business also seems to have gone down.

We were at a recent Gartner event and I don't think they were present or if they were, it was a very small presence. So, again, I stay paranoid but I haven't seen much Skype for business and they're not the ones that we typically face.

Going back to your comment on contact center, we are thrilled about that because as I said little by little I think I very deliberately inserted statement about the contact center is starting to grow very steadily. I mean, those growth numbers for our contact center are comparable to right around -- they are faster than our revenue growth rate. So that's the very good news, right?

So their high 20s low 30s, which is starting to feel good because were being able to sell it now as a standalone product. And we now have this integrated contact center offering on one platform. So we have global tenants. So, basically the follow the sun contact center.

We have the fact that our virtual office and virtual contact center is fully integrated and now we've got this quality monitoring software that is delivered purely on the Cloud on up Percy basis with no or very little professional services so that's something that we think is now starting to give us something that is truly differentiated. It also helps a lot of the folks we compete with are being acquired. So we appreciate that.

Excellent, keep up the good work, guys.

Thank you

Thank you

Catherine Trebnick, Dougherty & Company.

Thank you. This is Jack Ripple on the line for Catherine. One quick question for Vik. Can you give us some additional color on upcoming release of Easy Contact in North America? How does this further shape your relative -- contact center opportunity in the region and assuming this is a lower ASP then VCC, does is impact margins at all?

No. We don't anticipate it impacting margin material but here's the part -- it's a significantly higher ASP then virtual office. So keep that in mind because virtual office represents approximately 80% of our revenue 20% of our revenue is contact center.

This Easy Contact Now solution, that's the reason we bought DXI, it's an awesome product. We are now starting -- we always start with we drink our own bath-water or drink our own champagne or there's some analogy like that, but we've been piloting with our own sales team and it's essentially a nontraditional contact center with the ability to do outbound calling as well as inbound calling.

It enables our customers to be TCPA compliant and the efficiency that they're getting is phenomenal. I mean, literally the ability to get an entire lead list. And you go out and you start dialing them and then the right lead gets connected with the right agent with the right context and the efficiency is significant.

So we are on track to release it in January. And, again, the intent is you start off with that and then you can couple it, over time, with our sales force analytics function where you can then tie into every activity of every salesperson on an aggregated basis so you can get supervisory level looks, as well as, individual agent looks.

Performance of inside sales agents and how what they're doing is correlated to customers by category of customers and by amount of revenue he generates and by the time you anticipate closing him. We will be able to provide this entire complete and comprehensive solution that will optimize the operations of inside sales teams and so we view this as -- I don't anticipate it having a negative impact on our margins. I anticipate it helping our margins going forward.

Great. Thank you for taking my question.

And just by the way, we're using it internally as well and with great performance.

Got it. Congrats on the strong results, guys.

Thank you

Amir Rozwadowski, Barclays Capital

Thank you very much and very much appreciate the color on the Microsoft side. There has been some -- at least in concerns that came up several quarters ago as well as some of the premise -- larger premise based companies out there making a bigger push in a marketplace. I was wondering if you could give us a little bit of an update on the competitive front from that side.

Then, in thinking about the competitive landscape, you folks have done a remarkable job with expanding your product suite organically in terms of developing additional applications and additional functionality into your product base in order to up-sell them to customers. Have also selective about inorganic applications in order to improve the product suite. As this market continues to mature and we've seen still a fragmentation in the marketplace, is there an opportunity to bolt ahead of your competition thinking about things inorganically in order to do so? Thanks very much.

Thank you, Amir. We see competition from different folks. We have not seen a concerted push into this market from any of the big names. We've seen announcements but we haven't seen it really impact any of the customers that we are in on a day-to-day basis.

Having said that, I just always operate on paranoia. I respect everybody. There are good people out there. I'd like to think what we have is frankly significantly better and it's tough that we have spent a lot of time and energy and some amazing engineering talent to build.

Global communications, where you have high quality, high reliability, the ability to recover anytime that there is a fault, local number dialing capability, toll-free numbers, the ability to do emergency calling and then tie all of this stuff so you have one unified view of all the data flow and all the information globally in an enterprise is pretty difficult to do. We've got 12 data centers out there. So, I'd like to think we have something unique and then the fact that we architected it in such a way that every endpoint is collecting data and sending that data to a big data environment or big environment out here. You have got 86 million interactions that we are actually logging every day.

We think those things help differentiate us and the fact that we now provide these very niche applications that basically leverage the fact that we have the first access to the real-time communication interactions both inside and outside the company, starts to really provide greater and greater value to our customers. So we think that's a pretty sustainable thing. The other thing I'm very proud of and I apologize if I sound like a proud papa, our engineering team is awesome. Those guys are freaking amazing and I am sure those are probably not the right choice of words but they are great people. And so the thing that we've been able to do is we architected our platform in such a way that it really is -- we have a very efficient engineering team. I think you look at what we spend on engineering versus what some of our competitors have to spend to even do half of the kind of products that we have and it tells you what we have here.

So the ability to do bolt-on acquisitions and keep adding to that platform, through this architecture, we think is a huge opportunity. I think you're seeing it in Quality Monitoring which is the company in Romania that we bought that I would personally tell you is probably the best acquisition I've ever done in my career.

They were six people. They are now 75 people. They have become a core engineering function in Cluj Romania. And the people we are getting are on par with anybody we would get in Silicon Valley, if not better. And they are very cost effective. And so we're very pleased with that and we've basically built out a very significant facility in Cluj Romania to keep evolving that.

What I think we've got is we've got such a low engineering cost compared to everybody, we have such a robust platform that the more applications we can keep adding to our platform that leverage our real-time data, the greater, you know, value we can provide to our customers. So we think that's a very sustainable and very core advantage and we can build very big company on the basis of that.

It seems like the way we should think about it then, is really sticking to organic development and bolt on acquisition is really the primary focus of the strategy at this point.

Right. That is a primary focus. From time to time we may be opportunistic if the right opportunity presents itself but ultimately I think that strategy is working and the goal is to keep doing these bolt on acquisitions which either enhance our global footprint or add key functionality to our core platform that we can then turn into an integrated product offering for our customers.

Thanks very much for the inventive color and, again, congratulations on the results.

Thank you

Nikolay Beliov, BofA Merrill Lynch

Hi, thanks for taking my question. Mary Ellen, I missed the call from currency subscriptions revenue growth, I think on a reported basis was 23%, what was it [technically] adjusted?

For the revenue -- subscription revenue?

Yes, subscription revenue, correct.

For second quarter is was 25%.

Okay, so it looks like the trend of subscription revenue acceleration is continuing and the reason I'm asking is last quarter for the year you said subscription revenues organically is going to be flat in terms of growth rate versus last year in product. And product revenues is going to be flat too. Maybe you can update us on the second half of the year that would be great.

Yes, no, we give guidance. As you said we increased our guidance. Certainly we have some headwinds and we had that one discontinued piece of our business that we're going to be winding down. But if you look at it from apple to apples comparison, we would expect certainly to continue in the 23% to 25% to 26% range from a subscription revenue perspective.

We don't see any deceleration as we continue to move upmarket. Some of these big customers that we acquire are going to take longer to deploy. But we're still continuing to focus again on the market and our SMB is no going strong. And those that deploy that revenue deploys very quickly.

The only thing I'm afraid of, quite honestly, is the deterioration of the US to the pound to the US dollar. Hopefully, it won't get much worse than where it is today.

Got it then and one question for you, Vik. What is your strategy in collaboration, especially for system collaboration, I think you had an update on the product maybe early in the summer. What you think -- are you going to be offering functionality at some point in the future?

Great question. Dmitry will have something to show you in the not-too-distant future.

Okay, thank you.

Stay tuned, in other words.

I think the phrase I've used in the past is stay tuned.

Mike Crawford, B. Riley

Thanks, it is nice to see the application integration in the works you're providing. What do you do for customers that want to integrate communication into their own application platforms?

We have the APIs to enable people to do that. That's part of the reason -- this is one of the things, our API that we have developed are intended to control your entire PBX. It's not supposed to be simple widgets that I allow Mike to call Dmitry or Mike to call Mary Ellen and it's just a simple thing like a Uber driver calling another customer, something like that. Our thing is you control the entire PBX.

So examples of we do with our APIs that some of our customers -- actually retail customers are now leveraging is -- for example, if you have high-value customer and they call the core line not even just the customer service line, and is not one where there is a contact center sitting there. It can be based on the number. It can be directed to different things. I'm using more as a analogy but high-value customers can be directed to a totally different line than, for example, somebody that may go to a general line.

So that's one part and then as part of that you have to integrate to somebody's back-office system so you get that context in that data. Because, again, the platform we have provided, we've done this over time, is every call inbound and outbound, every message inbound and outbound, every video conference inbound and outbound, including how long, who, what was a number and then we have residents in our Cloud-based system. Now we just need context. It's easy to get context.

You could reintegrate to LinkedIn which gives you complete context, which, by the way, I now understand why LinkedIn was so valuable. Because you get that context with okay this person is ABCDE, you can then look -- hook into somebody else's database system that says customer ABCDE, if they call they are a big spender, therefore send them here. Or, this customer calls a lot send them here.

So those are the kinds of things you can start to do because now it's no longer communications 1.0 which is we're not just going in and saying rip out PBX we will provide you a phone system that is cheaper, better etc. et cetera and has more functionality. We're saying, we will provide you all of that but what we are providing you is data that allows you to look at buying patterns and behavior.

One of the fascinating things one of our retail customers discovered -- actually, in this particular case it was a restaurant chain, is that reservations were being made between a certain amount of time. I can't remember if it was 6 to 9, which is apparently or, sorry, 5 to 7 which was also the time when they had a whole influx of customers so the phone would keep ringing.

And when they started to see those patterns they were able to, kind of, go in and staff differently and make sure that there was a dedicated person taking reservations at those times. Then at different times you are seeing no calls come in. So those patterns. So now you have all of this data particularly when you tie it to the context of the customers back-office systems so increasingly that's our focus.

So what is it that, like, a Twilio could do that perhaps you couldn't do or is that not the case?

One, I have tremendous respect for Twilio. What they have done is go after very simple messaging. Say I want to send broadcast message to the football coach. I will let everybody on my football team know that there's going to be two a day practices or something. So you can program that.

What they've done, the elegance of what that company has done is make it very easy for non-technical people or people who don't have necessary all relevant skills sets to be able to go in and do that. That's why they tell the large developer communities et cetera.

For global communications were high reliability, quality, compliance, security, et cetera is critical, I think we do that better than everybody else. We can do a Twilio does, we don't do it -- we don't have that developer community but we are not targeting a developer community. We are targeting professional services organizations that can go in and control your entire PBX so that they can drive business value.

Imagine a large global hotel chain and let's just say in the Philippines you get a 911 call that is made out of your hotel. It would be good for the security office and corporate headquarters to be alerted, right? You may not rely on the local employees to do that.

You could set those kind of rules up with our system. So basically imagine any inbound and outbound call with regard to how it is disposition, where it goes to, how it's recorded, how it's tabulated, we give people APIs to control. Think about focus on professional services and enterprise and not focused on the casual high-volume developer community. We are focused on the complex systems where we think we can provide very differentiated high-margin business.

Great, thank you.

Jonathan Kees, Summit Research Partners

Great, thanks for taking my question and my congrats also on the quarter. I wanted to I guess ask a higher level question in regards to the traction you had with mid-market and enterprise, certainly it's a larger part of your revenues now. Usually they have a bidding process, and I guess, if I can ask, can you give some color in terms of your win rates in terms of these bids as they've gone up over time?

Yes. More often than not it's competitive. One of the things we need to get better at is being able to finally starting to invest. Pretty much all our demand generation has been very simple. It's all inbound. We get called by somebody and then we participate.

I would say there are a lot of things to do well as a Company but I will tell you we can do a lot better in the generation and marketing area where we can get more recognized. Having said that, as you can see from our revenue, we have great upside if we could start to get that part of our business better and we are starting to invest in that area.

Typically, I would say our win rate, I don't have exact numbers in front of me, but I think if we are in the process, I would tell you more often than not it's deftly more than 50% I would say it's significantly higher than -- we very rarely lose if we are in a very competitive bidding process but I don't have the exact number with me right now.

It sounds like now there is room to grow there in terms of rate but it has already been pretty high to begin with. I also notice you didn't talk about any of those big seven or Big Ten in which you've already had seven and there was three more that could still be announced or talked about later so I guess that's still something to be stay tuned for.

Let me ask you in regards to the competition, not so much from Microsoft, I am sure it's the same thing where you're winning a lot of this from Legacy and from those who can't have the global services and the Cloud solutions that you're providing. But more what is your -- how are you fairing against your pure Cloud peers? And how has that been going and, again, ex-Microsoft.

I feel pretty good about that -- if it's a global deal, if there is an integrated platform, if it is on the larger side, I think we will win significantly more than we will lose. So I feel pretty comfortable that if we are in the mix -- I think several of our competitors doubt the fact that they get deals where they are uncompeted, God love them, that's great. That's one of the things we aspire to, in other words, I think if we competed we'll be in a very good position.

As part of our investment in demand generation I want to make sure I start to get some of those deals and/or make sure I'm at least in the mix. Actually, I don't mind the competition I just want to make sure that we are there so that all the un-competed deals, step-by-step go away because if they are competed deals, we feel very good about our chances.

So if you just show up you have a high chance of winning. So, good luck with that and I hope more of that to come.

Thank you

Will Power, RW Baird

Great, thanks, just a couple of follow-up questions. You all -- Vik and Mary Ellen both talked about some of the contact center traction. Sounds like some very nice trends on that front. I guess I'm just wondering thinking about the higher ASPs, what that actually means for the margin profile of the company going forward? Both thinking about gross margin impacts in operating margins?

Good question, Will, so as you know out of our top 10 deals, six of the top 10 deals this quarter was Channeled with -- I'm sorry, it was Contact Center as well as virtual office and we've been averaging about that same number of around five or six for the last couple quarters. We are definitely moving up.

In many cases we used lead with virtual office and then bring the contact Center in. Now we are able to actually lead with Contact Center during the virtual Office in. Obviously the more and more contact center of the higher the service revenue is for -- because it's a purer software.

So we're doing -- I don't know exactly where it will be moving into future years but I would suspect we have done a very very nice job on our service margins and improving our service margins and I would expect that we will continue to do that. And part of that success will come from more and more contact center revenue including the Easy Contact Now that we bring here to the US that will be available in January.

Don't forget some of the newer decision-support analytics engines that we're bringing to market such as the sales force analytics, such as quality monitoring etc. I think we started this process of transforming the Company about two to three years ago and it is amazing.

In order to sell a core telephoning service particularly selling a core telephoning service to SMB, going up market where you're selling a complete comprehensive solution with analytics and decision support software and the ability for business process improvement and productivity enhancement, it's a very different skill set and we have been moving our sales team -- I think we brought in a whole slew of amazing direct salespeople. And we've been augmenting our Channel team. We've augmenting by bringing onboard a comprehensive professional services system the knows how to go in and do business process consultanting.

So that process we have been doing and evolving to it now you are starting to see that the products are heading in that direction also. So it will take us a few quarters to kind of just continue this evolution but I think we feel good about where we are.

Okay and, Vik, maybe just to follow up on the previous API commentary, the opportunity there. It sounds like you think you're well-positioned there. I guess I'm just curious is or bigger opportunity to push a more aggressively? To add more dedicated folks there? Or is that more of a one-off inbound professional services more for customers looking for particular solution? I'm just trying to understand -- (multiple speakers)

It's very valuable strategically. The key there -- but, again, we are going at a slightly different. I'm not trying to get $0.10 for every message or anything like that. That's not us. We are much more about we want to charge high ASPs for customers and provide them very significant value at a per [seat] basis.

Our model is either subscription or adding elements of pay as you go but generally it's a subscription-based model. So we see APIs as very core to that. On the one hand APIs are very critical because they been critical for winning some of our larger retail customers because you have to integrate with the back-office systems and your -- they also want -- everyone of them wants customization of various business rules and could you do it in such a way that if the CFO calls it gets routed immediately to these seven people.

They all start to be very custom rules and we developed a language called Script 8 that has been in process for some time. We will demonstrate it to you guys. We will not release it formally for probably a quarter or two but we will show to you guys in the next few months.

But we are now finding that that push is going to increase. And so we're looking -- we will unveil a lot more on this in the next quarter or two but API is a very significant portion of our strategy but the target is around enterprises as opposed to the developer community.

Got it. That sounds great, thanks

(Operator Instructions)

Mike Latimore, Northland Capital Markets

Great, thanks. Just on the enterprise market, can you talk a little bit about the pipeline there? Maybe how much it's changed since the start of the fiscal year?

Pipeline looks very strong. As a matter of fact we are continuing to see it increase. We've got a few things going that I'm sure we will be able in a position to talk about a little bit later on. But the part that has changed and it is quite dramatic and I think, Mike, you followed us for a long time. You followed the space for a long time.

You can just see in the logos we're announcing and it starts with people almost having a Cloud first mentality. Which, I'm very grateful for. I just wasn't used for the last year to two years. So we are increasingly starting with people who actually want to talk about Cloud and then the part that is been fascinating is the level of communication particularly at our CIO levels that we are now starting to interact with, has changed with this concept of being able to have hard-core communication data on a global basis with all the relevant context and what can I do to make business decisions.

I think increasingly that's becoming our focus and we see that becoming something that Legacy PBX have no hope in hell of doing. And because of that we think of the Cloud trend for enterprises will continue to accelerate. So we feel good about that space. Which is why -- I think you'll see it. You're seeing now that that's what, 65% or 67% constant currency of our new bookings.

So, we're increasingly seeing that the larger customers are adopting and the other part that we're seeing is that Channel is starting to become comfortable with selling Cloud to the extent you're not having to do the same level of hand-holding you used to do previously and then the ability to sell these value add services through the Channel becomes even more valuable to us. So I think from that perspective we see good things happening at the enterprise level.

And just on the deployment of the enterprise deals, you have one. Were there any major tranches of deployment in the quarter and a quick update on deployments of this bigger deal?

No, actually, all moving forward across the Board. All good. Some moving very fast and pushing us. There was one customer where 4500 seats were deployed. I think that was actually one of the CIOs that made that comment to me, 4500 seats were deployed over a two or three day period. Over the weekend.

I'm very fortunate. We got some amazing employees. We have about 1000 people which I think tends to be smaller than most but we have some amazing people here and the fact that you can get 4500 seats deployed over a weekend, is pretty amazing.

And so, I think we are continuing to see deployment steadily and then we brought onboard a professional, you know, professional services -- Global Services person named Jeff Romano and he's just added another layer where he's building this whole global model with support centers at different parts of the world and, kind of, continued to add greater program management capabilities etc. So, so far so good.

Thank you. This does conclude our question-and-answer session. I would now like to turn the conference over to CEO, Vik Verma for closing remarks.

Thank you all for listening in to today's call. We look forward to meeting with you over the coming weeks and updating you on the current quarter results in January. In the meantime, have a very happy holiday season. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect and everyone have a wonderful day.