8x8 Inc (EGHT) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 8x8, Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Thank you, Vicky, and welcome, everyone, to our call. Today, I'm joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's fourth quarter and fiscal 2017 financial results for the period ended March 31, 2017. The earnings press release, which was issued today after market close, and an accompanying slide presentation are available on the Investors section 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, expects, plans, anticipates, predicts, forecasts and expressions which reflects something other than historical fact, are intended to identify forward-looking statements.

These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the Risk Factors sections of our annual report on Form 10-K, 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 to analyze our financial results and believes they are useful to investors as a supplement to GAAP measures in evaluating the company's ongoing operational performance. Please refer to today's release for a reconciliation of GAAP to non-GAAP financial performance and additional disclosures regarding these measures.

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 review 8x8's fiscal 2017 fourth quarter and full year results. During my commentary today, I'll provide an update on the UCaaS market and competitive landscape, the progress we've achieved in our key growth initiatives and our strategic goals for fiscal 2018. Then I'll turn the call over to our CFO, Mary Ellen Genovese, for a more detailed discussion of our financial results and annual guidance.

Business communications has become the next frontier for cloud transformation. Despite early rumblings from larger vendors seeking entry into the market, today's competitive landscape remains fundamentally unchanged, characterized largely by a handful of cloud providers vying to displace legacy systems. We believe businesses will overwhelmingly choose a pure cloud solution due to the increased efficiencies, flexibility and scalability enabled by over-the-top cloud-based technologies. We also believe that our technology ownership integrated, communication platform and industry-leading quality, global service delivery and support capabilities will keep 8x8 ahead of the curve as more and more enterprises seek to partner with next-generation cloud providers.

Fiscal 2017 was a year of great progress for 8x8, as we achieved several key technology and operational milestones while continuing to build upon our position as the leading pure cloud communication provider to the enterprise business segment.

For the full year, we posted total revenue at the high end of our guidance of $253 million and non-GAAP net income of 9% of revenue. We expanded our mid-market and enterprise customer base to approximately 3,000 corporations, with 10 ranked in the Fortune 500.

Our overall service revenue in fiscal 2017 grew 23%, while service revenue from our mid-market and enterprise customers grew 37%. 56% of our total service revenue is now derived from these larger, higher LTV customers. I'm pleased with the progress that global teams have made throughout the year executing on the strategic growth initiatives we have focused on. As a reminder, these include: one, increasing adoption by mid-market and enterprise customers; two, enriching our product portfolio with new features and services; three, building an effective worldwide channel organization; and four, enhancing our global operations to support our multinational customers and partners.

First, we continue to enjoy excellent transaction moving up market. Mid-market and enterprise customers comprise 2/3 of the monthly recurring revenue booked during our fiscal fourth quarter and 62% in fiscal 2017. During the fourth quarter alone, we closed 19 large enterprise deals, 10 of which chose us for a combined Virtual Office and Virtual Contact Center solution, which continues to win us sizeable new accounts. We're seeing particularly robust growth in the enterprise segment of our business. As I mentioned earlier, service revenue from mid-market and enterprise customers as a whole grew 37%, but if you drill into this customer base further, we find that the segment occupied by our large enterprise customers, those with a minimum billing of $10,000 in monthly recurring revenue, or MRR, has grown the fastest at an annual rate of 84% and now represents more than 20% of our total service revenue. This data underscores the effectiveness of our investment in building an industry-leading enterprise-grade service offering and our success meeting the requirements of some of the largest corporations that are transitioning to the cloud.

One great example of our continued success in the large enterprise segment is the expansion of our partnership with Regus. This expanded agreement leverages our market-leading Global Reach network and includes coverage for 13 additional countries with our full suite of services from the 8x8 Communications Cloud. To date, we have already deployed 20,000 unified communication seats in 4 countries for Regus, plus 500 contact center seats, and this expanded agreement with Regus has the potential to grow to hundreds of thousands of users.

I want to highlight a number of other notable recent wins in order to provide greater insight into why customers choose 8x8 and how we are differentiated in the marketplace. A large enterprise deal that closed in the fiscal fourth quarter was Brookfield GRS, an international relocation company based in Toronto, Canada, with 17 locations worldwide. In this win, we differentiated ourselves through our market-leading Global Reach coverage, along with our differentiated 8x8 Communications Cloud. This deployment will include over 3,000 Virtual Office and Virtual Contact Center seats in EMEA, South America and Asia. This is also a good example of how we win against other cloud competitors who do not offer a fully owned and integrated VO/VCC product.

LifeWorks, a global engagement and wellness company serving over 15 million users worldwide, was another large win in the fourth fiscal quarter where our superior voice quality, faster time to deploy and a better user interface convinced them to select the 8x8 Communications Cloud for their locations across the U.S., Canada and U.K. We also secured the business of Live Oak Bank, one of the largest originators of small business loans in the country, for a combined Virtual Office and Virtual Contact Center win for over 1,000 users and room to grow. This customer win displays another cloud vendor and is a testament to 8x8's superior deployment capabilities and the care and attention needed to deploy enterprise customers that have more complex needs.

Last quarter, we described how certain large enterprise customers prefer to enter into a master sales agreement and pursue scheduled location and end-user deployments thereafter. We're excited to be seeing the service adoption coming from the MSA agreement we signed with a Fortune 50 healthcare provider in the third quarter of fiscal 2017. This most recent opportunity for a 13-location practice takes advantage of both our Virtual Office and Virtual Contact Center solutions and is on track to save the customer roughly $3 million in annual cost savings. Key elements to this win include our superior voice quality, along with attractive economics versus legacy on-premises PBX systems.

Outside the U.S., our 8x8 Solutions business in the U.K., which we acquired in November of 2013, is thriving with a 41% year-over-year increase in service revenue in fiscal 2017, when measured in their local currency. We have built a significant and rapidly growing presence in the U.K. with over 2,200 customers based in that region. One example of a notable large enterprise 8x8 Solutions win during the quarter was Oxford University press, the largest university press in the world. In a highly competitive process, 8x8 was selected over 8 other vendors to update the communication system and support global customer service. We will be transitioning its agent to our dedicated Virtual Contact Center solution, with initial deployments beginning in June.

The common theme in all these cases and the reason we are winning these enterprise deals is because CIOs are beginning to understand that all cloud communication services are not alike. They are learning, in many cases by trial and error, that it is what's under the hood that matters most when deciding who to partner with for mission-critical real-time communications. These customers looked under the hood and performed deep analysis of our service and technology.

8x8's global call quality and service delivery capabilities are unrivaled. This is due to the strength of our core technology and the continued emphasis we place on delivering outstanding quality of service to our customers. A recently completed study by The Tolly Group, a leading global provider of IT testing and third-party validation services, concluded that under both normal and adverse network conditions, 8x8's Virtual Office consistently ranked higher in call quality than our other major cloud competitors, delivering a superior voice quality experience for both on net as well as PSTN calling.

These large enterprise customers are not only choosing us above the competition, they're also growing with us. Land-and-expand is core to our strategy, and this quarter we had a number of significant expansion orders from existing customers. Some of these include: over 3,000 new Virtual Office seats for Essentra; 1,900 seats for Gerber Collision; 2,100 seats for Zendesk; 1,100 seats for Platform Specialty Products; and 1,500 Virtual Office and Virtual Contact Center seats for Christie Digital. This add-on business speaks volume from a customers' satisfaction standpoint and is reflected in our low gross revenue churn rate of 0.7% in fiscal 2017.

Moving on to the second pillar of our strategy, our R&D and engineering teams have been busy throughout fiscal 2017 on several key platform infrastructure and product development initiatives that set us further apart from providers who do not own or manage the underlying technology of their solutions. One major project was the architecting of our new micro services platform, admin portal, desktop and mobile client and back-office components to enable end-to-end workflows for coding, ordering, provisioning, configuring and billing our expanding mid-market and enterprise customer base.

Another initiative was the launch of the new 8x8 Communications Cloud platform of first-in-the-industry solution, which combines unified communications, team collaboration interoperability, contact center and real-time analytics in a single open platform. A key component of the 8x8 Communications Cloud platform is Sameroom, an interoperability technology we acquired earlier this year that an enterprise scaling platform with a -- fully integrated with our sales automation system -- sorry, enables -- I apologize -- Sameroom, an interoperability technology we acquired earlier in the year that enables cross-team messaging and collaboration in the enterprise. So regardless of whether our customers use Slack, HipChat, Spark or one of the many other collaboration applications in use today, we provide the translation layer.

On the contact center side, we upgraded all our Virtual Contact Center customers to a more advanced unified platform and completed the U.S. launch of ContactNow, an intelligent, easy-to-use cloud contact center solution for teens.

8x8's suite of award-winning omnichannel cloud contact center solutions provides companies of all sizes with a complete range of contact center capabilities, including advanced analytics, quality management, and workforce management integrated with advanced unified communications and collaboration services. Revenue from Virtual Contact Center grew 28% during the fiscal year and accounted for nearly 20% of the new monthly recurring revenue booked in the fourth fiscal quarter. The pace of innovation at 8x8 has accelerated dramatically, and we're continuing to receive new patents, with 13 awarded in fiscal 2017 and 131 to date. This is a direct result of the expanded resources we've allocated to R&D and the invaluable expertise of our full-time engineering teams, including the agile development teams working out of our offices, includes Romania.

Our third area of focus has been maximizing the effectiveness of our global channel network to ensure that our partners are motivated and well prepared to transition their customers to 8x8. We recently signed an agreement with Jenne, a leading value-added distributor of technology products and solutions, to bring 8x8's integrated cloud communication, contact center and team collaboration solutions to mid-market and enterprise customers through a value-added distribution model.

In fiscal 2017, we enhanced our partner enablement offerings with a new global web portal, extensive sales and technical training resources, and marketing and lead generation support. We also announced new relationships with partners including CarrierSales, Telarus, Packet Fusion, along with several additional international partners and an expanded relationship with CDW in the U.K.

8x8's global channel team has doubled in size over the past year to meet the demand for our services on a global basis, and we plan to continue building out the segment of our sales organization throughout the year.

Fourth, we made tremendous progress enhancing our global systems and customer support capabilities to better serve our more than 6,000 multinational customers. We're now live with all our customers on Salesforce Service Cloud, an enterprise-scalable platform that is fully integrated with our sales automation system. We've also moved all of our global support centers onto a common Virtual Contact Center tenant, enabling us to seamlessly route calls across U.S., U.K., Romania and the Philippines. With this capability, we can now send inbound calls to whichever contact center is open, giving us true follow-the-sun capability. The ability to support all our unified communications and contact center customers via a single global support network is a significant differentiator in our space, as our primary competitors have to rely on their vendors in order to provide support for their individual offerings.

8x8 has grown to become a highly efficient global organization with over 1,000 employees spread across 7 global offices. In fiscal 2017, we added more than 200 employees to our organization, along with 2 outstanding senior executives to the leadership team: Jeff Romano, Senior Vice President of Global Services and Support; and Dejan Deklich, Senior Vice President of Global Research and Development. And I'm very pleased with the contributions they have each made to the business in such a short period of time. I'm also very excited to welcome Rani Hublou on board as our Chief Marketing Officer effective this past Monday. Rani brings tremendous knowledge and expertise to 8x8, and we are thrilled to have her on board.

Looking at fiscal 2018 and beyond, we are more excited and energized than ever to transform communications for businesses of all sizes and believe we can offer the greatest value to larger global enterprises whose infrastructure and requirements are most complex. To that end, we will continue to invest in maintaining the highest quality service and support for mid-market and enterprise customers while expanding our reach through new marketing and channel initiatives to businesses that are still burdened by legacy systems. Product innovation will remain a high priority, and we will be maintaining an increased focus on our Virtual Contact Center solution, which we believe has far more potential now than in the past. We're also excited to be bringing our new ContactNow solution to the U.K. -- the U.S. market to fill the existing customer service void that exists in smaller businesses with informal and nontraditional contact centers.

M&A will also continue to be a key element of our strategy, with technology tuck-ins such as Sameroom and Quality Rocket and acquisitions that broaden our global footprint such as Voicenet Solution and DXI being the focus.

With that, I'll turn the call over to Mary Ellen for a more detailed discussion of our financial results and our outlook for fiscal 2018.

Thank you, Vik, and thank you all for joining us on the call today. My commentary will cover a highlight from our income statement, key operating metrics from the quarter, a summary of our balance sheet and our updated guidance for fiscal 2018. These will be based on non-GAAP results unless otherwise noted, and I remind you to refer to the tables in today's earnings press release for a GAAP to non-GAAP reconciliation.

For the fiscal 2017 fourth quarter, total revenue was $66.5 million. Service revenue of $62.7 million grew 20% year-over-year. Adjusted for constant currency and the discontinuation of the noncore voice message broadcasting segment of our DXI operations, which we announced in the third quarter of fiscal 2017, our service revenue grew 24%. Service revenue from our mid-market and enterprise customers grew 32% year-over-year and 38% on an adjusted basis. 56% of our total service revenue is now coming from these larger business customers compared with 50% in the same period last year.

Product revenue, which constituted approximately 6% of total revenue in the fourth fiscal quarter, declined 26%. We hope that this trend continues, with more and more of our customers opting for desktop and mobile apps in place of the desk phone.

Gross margin for the quarter was 79.1% compared with 74.1% in the same period last year. Service margin in the fourth fiscal quarter was 84.5% compared with 83.2% year-over-year. Product margin in the fourth quarter was negative 9.2% compared with negative 18.3% in the same period last year. We continue to see improvements in these margins due to lower per minute costs on inbound local and toll-free traffic as well as outbound domestic call terminations, lower subsidies on handsets and a more favorable mix between subscription and product revenue.

Quarterly net income was $5.1 million or $0.05 per share and is 8% of revenue, compared with $3.2 million or $0.03 per share, representing 6% of revenue in the same year-ago quarter. Our non-GAAP net income for the fourth fiscal quarter excludes noncash charges and acquisition-related expenses of approximately $800,000. A small portion of this relates to our acquisition of Sameroom in January 2017, and the remaining portion is related to legal and accounting fees associated with an acquisition target that we ultimately passed on.

Sales and marketing expense, which also includes customer service and deployment costs, were $34.7 million or 52% of revenue in the fourth fiscal quarter compared with $29 million or 51% of revenue in the same year-ago period. The increase in sales and marketing expenses was primarily due to increased salaries associated with additional headcount.

Turning to annual results for fiscal 2017. 8x8 posted total revenue of $253 million, at the high end of our guidance, despite currency headwinds of $4 million and the discontinuation of a noncore product of $1.4 million. This represents an increase of 21% year-over-year and 23% on a fully adjusted basis.

Service revenue for fiscal 2017 was $236 million, an increase of 23% year-over-year and 25% on a fully adjusted basis. Service revenue from mid-market and enterprise customers grew 37% year-over-year and 42% on an adjusted basis.

Pretax income for fiscal 2017 was $22 million or 9% of revenue. Our non-GAAP effective tax rate for fiscal 2017 was approximately 38%. Our cash taxes for fiscal 2017 were approximately $0.5 million. Gross margin for the full year was 77.1% compared with 74.4% in fiscal 2016. Service margin in fiscal 2017 was 83.8% compared with 82.6% in the same period last year. Product margin was negative 12.2% compared with negative 18% in fiscal 2016.

Turning our attention to key operating metrics for the quarter. Average revenue per mid-market and enterprise customers grew to $4,494 compared to $4,083 in the same year-ago period. Average revenue per business customer was $426 compared with $385 in the same period a year ago. Gross monthly business service revenue churn on an organic basis, that is, excluding DXI, was 0.7% compared with 0.4% in the same period last year.

During fiscal 2017, we saw an increase in number of new enterprise customers signed initial contracts for a portion of their planned deployment followed by the addition of many more seats and services over a period of time. Companies such as Regus, Essentra, Gerber, Zendesk, and the Fortune 50 healthcare provider we announced last quarter are examples of businesses that are ordering and deploying services in this manner. We also added another customer of this type during the fourth fiscal quarter, a Fortune 150 supplemental insurance provider who had selected our Virtual Contact Center solution over 2 major cloud vendors for their independent sales agents.

New monthly recurring revenue from mid-market and enterprise customers and by channel sales team comprised 66% of the total new MRR, monthly recurring revenue, booked in the fourth fiscal quarter. Our bookings from mid-market and enterprise declined 7% on an adjusted basis compared with the same period of fiscal 2016, when we posted greater than a 200% increase in bookings which resulted from 3 large enterprise wins and a very large order from Regus. However, we saw an increased momentum in our mid-market and enterprise business in our fourth fiscal quarter and so our bookings increased approximately 40% sequentially.

I would also like to note that we have only scratched the surface with some of the large enterprise customers we added in fiscal 2017, and we see significant upsell opportunities in these enterprise accounts. We believe the other quarterly metrics that we provide, specifically the growth of our mid-market and enterprise service revenue and percentage of total service revenue from mid-market and enterprise customers, are more representative and useful measures of our progress moving up market as opposed to the new monthly recurring revenue bookings metric we provide. This is because we are finding more and more frequently that our largest enterprise customers are entering into MSAs with little or no upfront commitments. Also, our recently launched ContactNow service in the U.S. will largely be a pay-as-you-go model.

Cash, cash equivalents and investments were $175 million at March 31, 2017, compared with $163 million at the end of fiscal 2016. Cash flow from operating activities was $66.3 million in the fourth fiscal quarter, and capital expenditures, including capitalized software, were $3.9 million in the quarter or 6% of revenue. For the full year, cash flow from operating activities was $28.5 million compared with $23.6 million in fiscal 2016.

Capital expenditures, including capitalized software, were $14.4 million or 6% of revenue in fiscal 2017, compared with $7 million or 3% of revenue for fiscal 2016. The increase in capital expenditures was due to global expansion and support for new product introductions.

On May 23, 2017, our Board of Directors approved a new share repurchase program, authorizing up to $25 million in repurchases of the company's outstanding shares of common stock. Given our strong balance sheet and history of generating positive operating cash flow, management and board believe that based on the current price of our common stock, this $25 million share repurchase is a prudent use of our capital, allowing us to increase shareholder value, offset dilution attributable to our stock-based compensation plans, and yet maintain sufficient liquidity to invest in strategic growth initiatives, including acquisitions.

Moving on to our guidance for fiscal 2018. We expect full year service revenue in the range of $280 million to $285 million, representing approximately 19% to 21% year-over-year increase. We expect total revenue in the range of $296 million to $300 million, representing approximately 17% to 19% year-over-year increase. Adjusting for the currency headwinds, which we anticipate mostly in the first fiscal quarter of 2018, and revenue from our noncore voice message broadcasting segment of our DXI operations, we expect fiscal 2018 service revenue growth in the range of 20% to 22% and total revenue growth in the range of 18% to 20%.

We expect our full year non-GAAP pretax net income in the range of $21 million to $26 million or approximately 7% to 9% of revenue. Our estimated non-GAAP effective tax rate is expected to be approximately 36%. Our cash taxes are expected to be less than $1 million. That concludes my prepared remarks, and we will now open the line for questions. Operator?

(Operator Instructions) And our first question comes from the line of Nandan Amladi with Deutsche Bank.

So as your enterprise fees becomes bigger and bigger, when would you consider breaking out mid-market from enterprise rather than reporting the combined number?

Probably within a year or so. If you go back to our strategy, Nandan, we've talked about this. We started off as a SMB play years and years ago and then we went after these really giant enterprises and then -- we seemed to get quite a bit of traction there and now we've started to almost come down and start to cover the mid-market and the smaller enterprises. But 20% of our business is now these large enterprises paying more than $10,000 in monthly recurring revenues. They are the ultimate test of your product, and I had hair before I started to go after all of these $10,000-plus monthly recurring revenue-type customers. And so we'll continue to start to fill out the mid-market and enterprise. So, in essence, we have a range of offerings that basically spans the entire group and is very effective. So probably towards the end when I think enterprise continues to become -- or large enterprise continues to become a bigger and bigger element of our business, we'll break it out from small, medium and enterprise.

And for the follow-up question on the channel approach, a few years ago, you took this approach of narrowing down your partner channels into sort of more concentrated larger partners. You're continuing to add partners now. So has there been any change in thinking or are these now focused more on geographies and more so than on perhaps segments?

No. Actually, no change in thinking. I mean, I always believe less is more with regard to partners. Our channel -- the revenue from our channel doubled in the last -- from the last year. So in 2017, it was double what it was in 2016. What we are starting to see is now a new type of channel, particularly the folks that used to service Avaya and Mitel and all the rest, and we are transitioning more and more towards channel partners that can basically be self-sufficient. So they can sell, they can support, they can deploy, and that's part of what we are looking for. And that's part of the transition we are making as a company because that is what will truly increase our footprint, because what you'll then be able to do is really enable the channel partner, the channel partner will then enable the customer, and you're there to provide support to the channel partner and periodically to the customer, but it's less up -- day-to-day support per se. So that's the type of channel partner that we are continuing to add. And I think we've been very successful in that area because that gives us the opportunity to keep moving up market.

And our next question comes from the line of George Sutton from Craig-Hallum.

Vik, you mentioned that Regus could ultimately become a 100,000-seat customer. I'm curious if you could explain that process, how that would happen. And within the same context, I'm curious if you think across your enterprise base, and end market and enterprise base, what percentage do you feel you are penetrated?

Okay, so a couple of questions. So let's start with the Regus one. So one, just to make sure that we're very clear, it's hundreds of thousands, not just a 100,000. They have already deployed 20,000. So the way Regus is working out, and it's a phenomenal partner, Regus' goal is to start providing a bundled voice service for all of their tenants in all of their offices. And the idea is to start with initially, these 17 countries. We already had 4 plus another 13. And then the idea then, we will have the ability to upsell additional services ranging from Virtual Meeting, Virtual Contact Center, ContactNow, team collaboration, et cetera, on top of that. So Regus is going to essentially fund the baseline, which is go out and deploy voice, our core voice platform, to every one of their tenants over time, and then the idea is to kind of move up from there. So that's their plan, that's their intent. So we're very excited about the future. And as I said, they've been a very good partner. We went through a couple of months' process, we want -- that where we had started the U.S. deployment. They looked at us then to truly expand it globally. They're never easy to negotiate with, but we feel very good about the future with them.

One of the things -- if I can ask strategically, you did face some fees for an acquisition you didn't go through with. What is the takeaway strategically? Is it that you are actively looking? Is it that you're showing discipline? Is there anything else that we should be taking away from that?

Yes, so we are actively looking. So we have a very significant pipeline of candidates we look at. And from time to time, you get that letter of intent phase, the due diligence phase. But one of the lessons I have always learned through acquisition is you have to make sure that there are no surprises at the end of it, and we have to be extremely disciplined, because otherwise, acquisitions look great and then you have to kind of deal with them after the fact. And for us, acquisitions is very key and core to basically adding to the DNA of the company. I think in January, we rang the bell at NASDAQ, and I look back, and I think the last 4 acquisitions, I think senior executives from all 4 of those acquisitions were there. And I think we've 70-ish percent of the people from all our acquisitions still be part of the company. So we try to be very, very disciplined, and we're not afraid to pull the plug, however long in the process we are if we feel the price is not right or we see something that bothers us. And so we'll continue to look, but we'll continue to be very disciplined. We want to be very careful with shareholder money.

And our next question comes from Jonathan Kees with Summit Redstone.

I'll start with my follow-up first. Of the 19 large customers you won in the quarter, out of curiosity, how many of them were VO, VCC and Analytics? Or how many of each of those?

Yes, I think 10 out of the 19 were VO and VCC, and I think a couple were VCC only. But I don't have the other breakdown in front of me, but 10 out of the 19, because that's starting to be the key reason for our strategy. The larger customers are looking for one throat to choke or one hand to shake, and so the ability to have an integrated solution, particularly VO and VCC, which is the contact center as well as the voice platform, becomes critical. The other element is these guys are very focused on support, so they want one vendor that can do the entire support for the entire platform. So the larger the enterprise is, the more we are finding that the fact that we have these integrated offerings is becoming a huge differentiator.

No, that's generally is a big plus with you guys and what sets you apart. My second question, I guess more strategic is, as you talked about it this quarter and you start talking it about last quarter, a lot of your larger customers are coming in with that master service agreement, where there's no commitment for -- upfront commitments for further business, but you see a lot of potential there. And it -- in the end, you get more money or just as much as money as if you -- if they bought these system in a lump sum upfront. Are you still seeing that with a lot of your enterprise customers in the last -- since last quarter? Has anything changed in terms of your projections there with the master service agreements?

No, as a matter of fact, as I had mentioned on the call, we had another customer just like that, a Fortune 150 customer, who also did the exact same thing, spent a lot of time with us, had narrowed us down among a number of competitors and chose 8x8. But again, it's a master service agreement, and then we'll continue, they'll release orders as we go, and that one's for Contact Center only. We're seeing a lot of upside, I think, just from the customers that we had booked in fiscal 2017, the enterprise customers we had booked. There's a lot of upside, certainly with Regus, with the Fortune 50 company, now with this Fortune 150 company, and a number of others where this is their style as we continue to move up market, as we continue to go into the enterprise as we had mentioned last quarter. This is more normal. This is the normal way that they do business which is get all the [Ps and Cs], get the MSA done, and then start to release orders. And we've made some traction in this quarter with a Fortune 50 company, and we expect to continue to make significant traction in fiscal '18 to service these customers. And like I said, we've just barely scratched the surface; there's a lot of upside here.

And our next question comes from the line of Meta Marshall with Morgan Stanley.

A couple of questions. First, if you could just kind of give some early customer reception or just kind of how many customers are evaluating Sameroom? And then second, just how you are evaluating kind of some of the early investments and branding initiatives, are there certain metrics that you guys are looking at or certain ways that you're looking at continued spend on some of the more branding spend?

Okay, I'll do the Sameroom one. I think it's several hundred already that are either evaluating, and we also have some of the best known brands that are already starting to use them to basically -- including actually some of our competitors are using them to tie their own chat systems together. So we view that more and more as an integrated offering with our VO, and so we'll be starting to -- but we're also considering starting to do that just as a stand-alone basis, which is the way we currently sell them right now. But that pipeline looks quite interesting, and part of the trick for us is how we use that as a way to penetrate larger and larger customers because that deployment model is so easy for people to start using that then, after that, how can we drag on virtual meetings and Virtual Office right after that. That's one of the key areas that we're spending time on. But currently, we're going in either stand-alone Sameroom or very shortly we'll be going with an integrated Sameroom with Virtual Office. But in both areas, particularly in Sameroom only, we're seeing quite a bit of traction. With regard to branding and other initiatives, you are looking at the CMO that was very happy to relinquish the CMO. I'm not a marketer; I've been CMO since January of this year. And so Rani is just on board. I will let her kind of comment on it. We will be very targeted. We are not a mass marketing company, so we always try to tie -- and Rani's background is such that we intend just to tie everything that we do on advertising branding with a particular segment and make sure we measure the ROI. And we'll be able to give you more color on it, probably in the next 3 months or so. But she's just been on board for a few days.

And our next question comes from the line of Catharine Trebnick with Dougherty.

A quick thing on the VCC. You had said that 20% of the new MRR for Q4 was from that. What is the total percent of total revenue you're doing with the contact centers?

Contact centers is almost 20%, I think just shy of 20%. And we're seeing that, Catharine, as a very, very attractive business. One, I think, as I indicated, that business is growing 28%. And we are starting to -- I think, if you look at Dejan Deklich's background, he used to be the CTO of Merced as well as, I think, was the CTO for workforce management at NICE before being head of all of cloud engineering as well as, I think, the general cloud business for Splunk. So this is an area he has a lot of expertise in. But one, we see VCC as well as ContactNow stand-alone as very compelling. ContactNow, we believe, is disruptive. And then the second element is, as integrated with VO, they make sure that there is something that is truly differentiated, particularly for large enterprise customers.

Okay, one more question. I didn't hear the full answer in the -- when someone else asked it. But 2 years ago, you guys had roughly -- you were going to focus on your 10 master agents, and it looks like now you're really expanding internationally. I noticed there's couple of new partners, even before [I wrote my note up] , internationally in Europe, and you've done a really good job in the U.K. I mean, what do you attribute some of the success in the U.K. and getting some of the newer partners up and running there? And then, what is really the plan for the partner program? Is it to really expand, add another 100? Or is it to be more focused and really try to drive a certain amount of revenue through a certain portion of them?

So a couple of things. Thank you, Catharine. So one, the goal is to always be focused because -- hopefully, you've seen this, we're disciplined about everything that we do. So we had a pretty much of a standing start in channel almost 2 years ago. And so then, we did almost a subtraction of channel partners to a few master service agents. We found quite a bit of traction from them. They have been excellent for us. Now we're starting to move up the stack. One, we're just starting to take some of these channel partners and they're starting to become truly global. But increasingly, we are heading up the value-added reseller model where we are looking for the channel partners that can do the entire suite. It's good for them; it's good for us. Because -- good for them because deployment, professional services, building an analytics practice using some of our technologies, we have the ability. Remember, we have cross-platform analytics, your contact center, your texting, your messaging, your Virtual Office, is all integrated together and you are able to get consolidated analytics. That is absolutely valuable to businesses. So value-added partners that can learn enough about it to provide some level of consulting in value-added services becomes more and more valuable to us, because what it allows us to do is not have to scale up our professional services or deployment organization. They become essentially the people that train our channel partners who can then go out and service their customers, and we are there as experts if and when needed. So increasingly, that is becoming more and more of a go-to-market strategy for this company. And particularly, as we move upmarket, that tends to resonate with our customers as well. So that's the main plan of our channel. We will always have less channel partners than the people who announce thousands of channel partners. I just think they'll be extremely effective, and we'll make money for our channel partners because we'll invest in them the same way they'll invest in us.

And our next question comes from the line of Rich Valera with Needham & Company.

Just a question on your mid-market MRR new bookings. You mentioned they were down year-over-year over a -- off a very difficult comp. But I think you mentioned a sequential number, which was around 40%. Just wanted to clarify that number and talk about how maybe we should best think about the business since that number seems to be coming less -- maybe less of an indicator for the business given the shift to MSA-type deals?

That's exactly right. So it was a sequential increase of 40% -- or approximately 40% from Q3 to Q4. So we are really pleased with the traction we received in our fourth fiscal quarter. And I think we went into it in quite a bit of detail last quarter and a little bit of detail this quarter. We don't believe -- we'll still continue to provide that metric but we don't believe it's a key metric anymore to actually measure our key strategy, key strategic initiative, which is moving upmarket. And the key metric there is we always disclose the service revenue, the percent of our service revenue that's coming from mid-market and enterprise customers and we also disclose the growth rate of those customers, that portion of our revenue. So that, I think, is a better metric to measure us by than this new MRR from mid-market and channel business.

Got it. And just a clarification on your -- the tax rate and your non-GAAP net income, Mary Ellen. In fiscal '17, as I understand it, there was very little tax embedded in that guidance number. And you actually ended up having very little tax for the year, kind of a nominal number. And now you called out this 36% pro forma tax number this year. Is that actually embedded within your non-GAAP net income guidance this year?

No, no. And Rich, thank you for that question. It is a little different than the way we displayed our non-GAAP metrics in fiscal '17. But going forward, as required by the SEC, we must tax-effect our non-GAAP pretax income. So we didn't do that in fiscal '17 because we were halfway through the year, and we had given guidance on a non-GAAP net income basis that was not tax-effected. We disclose what we had anticipated our cash taxes to be which, as you noted, is very small, it's $0.5 million. Going forward, we expect our cash taxes to also be very small, less than $1 million, probably somewhere between $0.7 million and $1 million at the very highest. But we have to tax-effect it. So the non-GAAP tax rate for fiscal 2018 will be 36%. So we will give you -- each and every quarter, we'll give you the pretax number, our non-GAAP pretax number. And then we'll also give you a tax-effected non-GAAP number, and we will compare that to fiscal '17 in an apples-to-apples comparison. In fiscal '17, our tax rate was approximately 37.8%, I think, it was 38%, rounds up to 38%. We expect that to be 36% in fiscal '18. Again, I just want to make clear that it is a noncash number. It's just what's required by the SEC. When you disclose non-GAAP numbers, you must tax-effect it. That make sense?

So the non-GAAP net income guidance range you gave though, that effectively just includes your cash taxes, is that correct?

That's correct, because that is a pre -- no, I gave you a pretax number. And the cash tax number is very -- you have to add the $1 million on top of that. The cash is less than $1 million. But I gave you a non-GAAP pretax number.

Oh, okay. So we need to add onto our guide.

Yes.

And our next question comes from Nikolay Beliov with Bank of America.

Just wanted to clarify something. The metric you guys provided, customers with 10,000-plus MRR, 20% of total services revenue in the fastest-growing segment, 10,000 in MRR. In what count of number of seats that would translate? My back of the envelope math shows around 400 seats leveraged but just wanted to confirm that.

It changes, depends on the seats. But yes, so that number is only monthly recurring revenue. So I guess, it's probably at 400, 500?

About 500.

It all depends on whether they have Contact Center, did they buy Analytics. Do they buy -- what is the various Virtual Office systems that they are buying? Are they just buying Virtual Office with voice, are they buying it with Virtual Meeting, are they buying it -- so we have various bundles. So 400, 500 is a reasonable number.

What's your best guess when 20% of services revenues is going to be customers more than 1,000 seats? Are we a year away from there, 2 years?

Say that question again.

When 400, 500 seats is going to go up to 1,000 seats, like 20% of the subscription revenues is going to be 1,000 seats and plus, are we a year away from that or maybe a couple of years from there as you're going upmarket?

I'll tell you what is quite interesting, and Nikolay you followed us for a long time, as I was preparing for this earnings call, I was starting to get a list -- I was looking at a list of customers. The number of customers that I think -- I just picked a random sample of recognizable names, and you saw the number of 1,000-seat customers, it's almost becoming more and more commonplace for these 1,000-seat customers. So we're probably a couple of years away from it, but we are now 56% of our business is mid-market and enterprise; 20% of our business is greater than $10,000 monthly recurring revenue. So I think our SMB business, our small business grows in the mid- to high single digits. So you'll continue to see that the crossover happen if these growth rates continue, which we have no reason to believe they won't.

And Mary Ellen, I had a question for you. When I look at the organic constant currency trajectory in subscription revenues, you guys started accelerating in Q4 '16. You grew 25% then. And then the trajectory has been 25%, 25%, 25%, 28%, 24% the most recent quarter and you're guiding to basically 21% in the midpoint. Just trying to understand the puts and takes here. Is this a classic example of enterprise pipeline building up but not getting enough revenues yet to sustain the acceleration of the revenue growth rate? Are we seeing a pause here as you view the enterprise pipeline and could we potentially see a reacceleration in fiscal year '18?

Good question, Nikolay. It's actually a combination of a couple of items. So in the third fiscal quarter, I think we had mentioned that there was some much -- there was higher professional services than we normally see. And in addition to that, we had 1 or 2, because it was our calendar year-end, one times worth of items that didn't repeat itself, obviously, in fiscal -- in our fourth fiscal quarter. So that's one of the reasons. The other reason is, you're right, as we get more and more of our enterprise business like, for instance, Regus, right, we can deploy as quickly as they want to deploy. So when they say go, we go. We can deploy very, very quickly. So it is basically when the customer wants to go. And there are going to be -- with some larger customers, there may be some starts and some stops. GameStop is a perfect example where it was go as fast as you can until you hit the retail, until you hit like September time frame, then stop and reengage with us in February. So that's what you're going to see when you work with enterprise customers. And then the other reason is that we put a lot of focus on our ContactNow product that we wanted to release here in the U.S. So we took resources from our U.K. and brought them here to train our teams on how to sell that issue. And then don't forget, we do have the PaaS impact. We're no longer selling the PaaS from our discontinued basis, and we did have quite a bit of headwinds from a currency perspective.

And I think we'll continue to see -- going back to your larger question, these enterprise customers are very interesting and their buying behavior is quite interesting. They spend -- they torture you for 3 to 6 months to kind of negotiate all the terms of the contract, but once they start buying, you become "the approved vendor," which means every division can start to buy from you. That process tends to accelerate. So you will see growth continuing to accelerate through FY '18. And the other thing is, for us, our focus has been primarily enterprise, now starting to be more and more mid-market, but we have not focused on the small portion of our business. And it just -- it is that, as a company, we feel we're geared for the large enterprise and enterprise where we have huge differentiation. And so as you see the small business become a smaller and smaller portion of our revenue, the growth rate, over time, should start to normalize towards the growth rate of our mid-market and enterprise as opposed to the drag that small business has been on our overall growth rate. So it would be -- it's a mathematical exercise. The key for us is to continue to accelerate our enterprise and large enterprise business and keep executing. And then, over time, I think the growth rate will take care of itself.

And lastly, Mary Ellen, from me. Can you please comment on the seasonality for fiscal year '18? You provided the annual guidance. If you can comment on the revenue and margin trajectory throughout the year that will help us with the modeling that will be very helpful.

The seasonality across the year for fiscal '18?

Yes.

From a revenue perspective?

Both revenue and margin perspective.

Okay. Typically, our best season is in our third fiscal quarter and our first fiscal quarter -- or actually, our third fiscal quarter is where the highest peak is because of the usage, especially in our U.K. businesses and on our contact center businesses with their heavy, busy travel initiatives, but we typically don't see a lot of seasonality outside of that to be honest. You should see growth throughout the year. Each and every quarter, we should continue to grow as we have in the fourth -- in fiscal '17.

And our next question comes from the line of Will Power with Baird.

Yes, I just want to come back to the 19, I guess, mid-market enterprise wins in the quarter. I know you talked about contact center as, obviously, a differentiation. But Vik, as you kind of step back and you look at these RFPs, and I know you've referenced competing against 8 folks, and 1 in the U.K., bake-offs of sorts. I mean what are the 1 or 2 things that you think are really helping you differentiate yourself and win these deals? Is it the global capability? Is it QoS? And where does pricing fit in on that?

Actually, that's a great -- and it's -- the 19 ones that I referred to are large enterprises and not mid-market. We won a whole bunch more mid-market wins. So the key part there for you is so there's -- what I'm finding are that there are 3 key themes that we're seeing. Increasingly, global is something -- because again, people can talk a damn good game on global; they can put press releases out. Global is hard, and making sure that your customers have the ability to make phone calls to every part of the world and that the voice quality is good is critical, and so that is a key element. The #2 element we find is this integrated platform because the fact that we own all our technology and we're able to provide both VO and VCC becomes a huge differentiator. We hear horror stories about people who have sometimes gone with competitors where they'll talk about the fact that support becomes increasingly difficult because they are not sure who they're dealing with. And in one case, I mean literally is one throat to choke. And then the third area that we find becomes increasingly important is our deployment. We do, I think, a bang-up job of white-glove deployment for all our core customers. And then, in addition to that, I think we -- I referenced this Tolly report because it was something I was curious about. I wanted to benchmark our voice quality in both good networks and adverse networks against all our key competitors, and we found that we were very far superior with regard to all -- both under good circumstances, where we were better but not by a lot, and really crappy network conditions, where we were better by a huge amount. And so I think that report is available, and we released it this morning. So people can look at it. But those are the 4 or 5 fundamental reasons why we win. And another one that also becomes increasingly important, particularly at the large enterprise level, is security. And again, the ability to own every element of your technology allows you to provide significant security much better than if you were kind of cobbling together 3, 4 different vendors' products. I mean it's one -- I think the classic example is, IBM PCs were always harder to secure and were always subject to penetration because the weak points were all the integration between all these various technologies, where Apple was always difficult for people to penetrate and was always much more secured, so that again becomes another key reason why we win.

And our next question comes from the line of Dmitry Netis with William Blair.

I have a couple of questions; maybe I can load it up in one. I just want a clarification on the LeChat and how much contribution was there in the quarter and maybe what you think it will contribute in 2018. And then, secondly, Vik, you talked about the win rates and some of the deals you may not be able to see and opportunities within to work on kind of digital marketing and lead generation and doing it better and better. What -- where are you now on win rate? And where do you think you exit 2018? I know that's more of a qualitative question, but is the win rate improving? Are you seeing more deals as a result of your marketing and lead generation efforts come your way? Can you just comment on that? And then my last question would be on Regus. If you could maybe explain what happened there and why that customer kind of put only 1.5 years since you won it went for rebid. And what's caused them to kind of enter the new process? And is that now kind of part of this MSA agreement? Or are they not an MSA customer? What's the pricing potentially of that deal? As you won it this year again, is it more competitive pricing than it was a year ago, 1.5 years ago, when you first won it? So those are the 3 questions I have. If you can address them by one by one that would be very helpful.

Dmitry, that has got to be the longest question, in multiple parts, I've ever had. So let me see if I can remember all of them and make sure I answer them. So step 1, LeChat, which is basically Sameroom, so very de minimis revenue. I mean, we bought the company, essentially they have very, very little revenue, and that's not necessarily our focus for them. I mean, we want to get revenue off it -- on it because we do think it's a compelling product because, think about it, it ties multiple people's chats together. And some of the most visible brand names that you know are using it as part and parcel because it basically is almost the equivalent of a freeware where people are initially downloading it and paying a de minimis amount. So we actually view it as more of a penetrate and radiate strategy. It gets so much traction because people love the product that it kind of almost creates a little bit of a viral effect. So I don't necessarily want to make a lot of money from their product. I want them -- the key goal is how can it be used to then drag in all of our various other products. And then we're also tying it in as to our Virtual Office system where it provides a differentiated capability with Virtual Office. So long story short, it has very little revenue but it has great differentiation, particularly at the enterprise customer levels, as well as the ability to provide huge differentiation for our Virtual Office across-the-board. So that's I think question #1. I believe question #2 was about marketing. So a couple of things. I mean, there's -- I think I'm not a subtle guy, and I've telegraphed, I think for the last 2 or 3 earnings calls, that we were not necessarily great at marketing. And that's the reason why there are some changes in our marketing organization. I was the acting CMO for marketing since January, and I can tell you unequivocally that I was completely incompetent. And so now I have somebody who's competent. I expect that you'll start to see more of a presence from us. We have great pride in the fact that when we are in a deal, particularly larger, more complex deals which are not just driven by hype, we believe, more often than not, we win. Now the key is we win 0% of the deals that we're not in. And there's a lot of deals that we're not in. And that has been one of the weaknesses of this company, and that is one of the weaknesses that we need to address. And so that's part of why we're making some of these various changes in marketing. And I've been -- as I said, I try to be nonsubtle about it. And the fact that, I think, I've been telegraphing this for probably the last 2 to 3 quarters, and I acted on it this time. So that's with regard to your second question. And then, your third question was Regus. Regus is an amazingly fun customer and not necessarily that different than large retail-type customers. And I think, as you would find, they were very happy with us. And then, of course, it is not unusual for competitors to say how they could provide X, Y or Z, and what -- they had asked for certain concessions from us. And it is not inappropriate for Regus to constantly look outside and see if they're partnered with the best. And they went through a very rigorous exercise. And I think if you see from the quote that, I think, Andre Sharpe, the CIO of Regus, made, he did a very detailed survey and presented it to their CEO as well as Board of Directors and concluded 8x8 was superior. And you know what? He was right. I wholeheartedly agree with Andre. And it was a great validation. And on the basis of that, they expanded the scope of our agreement. But in addition to that, what they did is they allowed us then, in addition to just the core voice services, now they have basically deployed our Virtual Contact Center where every sales agent from Regus making an outbound call to go solicit new business for Regus is using our Virtual Contact Center. And then, on top of that, they now want to use this as a way to create a business where they can go to every one of their customers that already have built-in voice and start to offer Virtual Meeting, team collaboration, Virtual Contact Center, ContactNow for teams, et cetera. So it becomes a very powerful way for Regus because they have approximately 200,000 to 300,000 users but they have approximately 1 million people that basically were former Regus users but use just the "offices on a periodic basis." So that's what they want to do. So I have great hope for the future. I don't want to make that as any form of guidance, and I want to set your expectations that they have deployed 20,000 seats. That's a lot. And these are 20,000 paying seats. It's not some speculation. There's approximately 20,000 seats and 500 contact centers. And I think they expect to deploy significantly more than that. And then how far it goes, I have great hopes, but I'm not willing to commit to anything.

And our next question comes from the line of Mike Latimore with Northland Capital.

The Fortune 150 customer, how many Contact Center seats or what's the kind of addressable market there for Contact Center seats? And then, second, did you say that the channel revenue doubled in the year?

Yes. The channel revenue approximately doubled year-over-year. I don't have offhand how many Contact Center seats was that Fortune 150 customer, so I don't, unfortunately, have that number offhand. But I mean, again, another great brand name. Again, rather than -- and to give you guys a perspective, I don't want to just make it pure puffery about 8x8. This is a fascinating trend where larger and larger enterprises are going over-the-top. They are not going in with just hybrid cloud, anything like that, these guys are going over-the-top, and they're basically going out and feeling that it is secure in our business and insurance company. These are starting to be -- we've had some luck, I think, with financial verticals, which surprised me because that tends to be the last to go towards cloud. So what is starting to happen is, increasingly, cloud communications is becoming mainstream. And the part that I am very excited about is, very systematically, 8x8 has put in all the pieces from a technology perspective because the next barrier is going to be the ability to provide comprehensive analytics which cover all forms of real-time communication in a company across the globe and provide it in dashboards to senior management. That helps to make the transition where communication is no longer a utility but it becomes a value-added business. That's the exciting stuff. That's how the next really giant companies are going to get built. And it's a long way to go, but I think step by step, we're getting there.

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

Once again, thank you all for listening in on today's call. We have a busy few weeks ahead presenting at a number of conferences, including BAML, Craig-Hallum, Baird, Citi and William Blair, and we look forward to meeting you -- meeting with you at one or more of these events. Thank you very much.

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