8x8 Inc (EGHT) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the 8x8 fourth quarter and year-end fiscal year 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce our host for today, Ms. Joan Citelli, Director of Corporate Communications. Ma'am, please go ahead.

Thanks and welcome, everyone, to our call. Today, I'm joined by 8x8's Chief Executive Officer and Chairman of the Board, Bryan Martin, and 8x8's Chief Financial Officer, Dan Weirich, to discuss our results for 8x8's fourth quarter and full fiscal year 2013 ended March 31, 2013. If you have not yet seen today's financial results, the press release is available on the Investors tab of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions.

Before I turn the call over to Bryan, I would like to remind all participants that during this conference call any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals including financial guidance and similar expressions including, without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factors sections our annual report on Form 10-K and our quarterly reports on Form 10-Q and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you.

And with that, I'll turn the call over to Bryan Martin, Chief Executive Officer and Chairman of the Board of 8x8.

Okay. Thank you, Joan. Welcome, everyone, to 8x8's earnings call for the fourth quarter and fiscal year ended March 31, 2013. I'm going to begin by providing an overview of the quarter and full year, which will be followed by Dan's discussion of the financials in greater detail. We will then be happy to answer any questions you may have for us today.

8x8 completed a banner year for our cloud-based business communication services. Revenue from business customers was up 32% year-over-year and total revenue increased 25.4% to $107.6 million for the year. Non-GAAP net income was also up 42% year-over-year and non-GAAP net income as a percentage of revenue increased from 12% in fiscal 2012, to 13.6% in the fiscal year we just completed. During fiscal 2013, we more than doubled our cash, cash equivalents, and investments to $52.3 million, with no debt on the balance sheet. This was driven partially by the gross margin expansion we achieved this year, closing the year out by hitting our goal of service gross margins at 80% for the March quarter and overall gross margins for the quarter over 70%. These are GAAP margin figures. These margins are also the highest margins in 8x8's history as a service provider, and they are far more representative of those posted by Software as a Service, or SaaS, model-based companies rather than the margins posted by the traditional telecom providers we compete against.

As illustrated in the first line of our key metrics table at the end of today's press release, we sold more new subscriptions during the March quarter than at any time in the Company's history with 50,728 subscribed services sold for the quarter. This number accelerated throughout fiscal 2013 with approximately 41,000 new subscriptions sold in the June quarter, 43,000 new subscriptions in September, and 44,000 new subscriptions sold in the December quarter. New subscriptions sold in the March quarter were up 14% sequentially versus the December quarter and up 29% year-over-year, corresponding to the growth of our revenue from business customers over that same time period.

Sales were strong across all of our sales teams, direct, contact center, and channel and midmarket. Our channel and midmarket team experienced a particularly strong quarter as new monthly recurring revenues sold by that team during the quarter increased to 20% of total new revenues sold. This team's steady growth and progress over the last 12 months has increased the percentage of our new sales coming through this channel from only 6% of total new revenue in the March quarter last year to 20% of new revenue sold today. Along with that, looking over our entire customer base in the fourth quarter, more than 30% of our recurring monthly revenue came from customers who are now billed more than $1,000 per month. This is a very significant market development in our opinion, as in 2012, we saw a noticeable increase in the number of midmarket customers knocking on our door to learn how 8x8 can help them deploy cloud-based communications throughout all or part of their business. The payback from our investments in selling to these midmarket customers is now beginning to scale and move us towards a payback period that is similar to our small businesses sold through our direct sales force. This payback improvement is allowing us to begin to allocate a greater investment towards growing the channel and midmarket team, as their results begin to become more meaningful.

Our strategy for fiscal 2014 remains largely aligned with last year with just some minor tweaks. We will still be putting significant emphasis on selling to and servicing the small business customer. In this regard, we recently welcomed a new Vice President of Inside Sales to the Company, Benjamin Taft, who joined 8x8 after growing sales for more than 14 years at Brocade, which he joined as part of the original foundry team. At Brocade, Ben was Senior Director of Global Inside Sales Development, in charge of sales strategy and transformation, with a worldwide sales staff of more than 1,200 salespeople.

The second component of our strategy for this coming fiscal year will be to continue the channel and midmarket expansion that yielded so many promising achievements over the past 12 months. We ended March with 106 partners on our channel program and we announced yesterday that Insight, one of the world's largest providers of information technology hardware, software, and service solutions to business and public sector organizations has partnered with us to sell our cloud communication services. We're off to a good start with our newest partner having just closed a multilocation customer, Holiday Tree Farms in Corvallis, Oregon, the world's largest Christmas tree producer.

Beyond expanding our channel reach, another key component of our midmarket strategy this year will be extending our services through our Global Reach Initiative to both the Asia-Pacific region and to Europe. As you will recall, we launched all of our services in Canada in January 2013 and now have more than 50 sites in Canada turned up with these services. Many of our midmarket US-based customers have operations in these new regions we're going into and the ability to offer localized versions of our services in these countries will help us grow our multinational customer base and cement our relationship with our existing customer base with international reach.

We're also on the lookout to put some of our capital to work by seeking potential acquisitions in these overseas markets that can move us beyond our traditional US boundaries and into these regions, to grow the Company inorganically, through a local service offering with a new local customer base.

On the technology front, the Company was awarded seven new patents during the fiscal year and we continue to file new patent applications at similar rates to these issuances. In addition, the Company received a $1 million payment in the fourth fiscal quarter, related to the license of the patent family the Company sold in the first quarter of fiscal 2013. As I said during this same call last year, and as I'm proud to reiterate today, 8x8 offers the most extensive and complementary set of hosted communications and data solutions to the SMB, midmarket, and distributed enterprise customer. And we will continue to lead the way with our technology platforms and innovative new services.

With that, I'm now going to turn the call over to Dan Weirich, the Company's Chief Financial Officer, who will walk you through our detailed financial results and provide additional information regarding our business. Dan, go ahead.

Thank you, Bryan. For the fourth quarter of fiscal 2013, revenue from business customers increased 23% from the same period a year ago and represented 97.6% of total revenue. Service revenue represented 90% of total revenue. There was no revenue related to our partnership with SoftBank recognized during the fiscal year.

Gross margin was 71% in the fourth quarter and 68% for the full year. As Bryan noted, we met our 80% service margin goal in the fourth quarter. I'd like to note that our fourth quarter is a period of higher labor expense, related to higher payroll taxes and other fringe related expenses, such as 401(k) matching. Achieving 80% service margins in a period of greater expense is a phenomenal feat and something we expect to repeat. We believe that margins at this level are sustainable even with the global reach investments Bryan mentioned. For the full fiscal year, service margins were 77%, up 44 basis points from the fiscal 2012 figures. Product margins were negative 17% in the fourth quarter and negative 26% for the full year.

Non-GAAP net income was $3.8 million or 13% of revenue, compared to $3 million or 12% of revenue in the same period a year ago, and $3.8 million or 14% of revenue in the third quarter of fiscal 2013. For the fourth quarter, non-GAAP net income increased 27% compared to the same period a year ago, and for the full-year non-GAAP net income increased 42% from $10.3 million or 12% of revenue in fiscal 2012, to $14.7 million or 14% of revenue in fiscal 2013. GAAP net income in the fourth quarter was $1.7 million, $0.02 per diluted share, and $13.9 million or $0.19 per diluted share for the full year. Compared to last year, GAAP net income was down due to the one-time, $62 million non-cash release of a majority of our valuation allowance in the fourth quarter of fiscal 2012.

The sequential increase in expense that offset the gross margin improvement and resulted in lower non-GAAP net income as a percentage of revenue compared to the third quarter primarily relates to increased sales and marketing expenses, due to record-setting sales in the quarter. Sales and marketing expense represented 45.5% of revenue in the fourth quarter, compared with 42.6% in the third quarter. The majority of our sales and marketing expenses are booked in the period of the sale and higher record-setting sales result in lower profits in the respective period. We saw the same trend of greater sales and marketing expense in the fourth quarter, compared with the third quarter last year, as sales and marketing as a percentage of revenue increased to 45.1% from 42.2%.

The March quarter is traditionally our most successful quarter for new sales. We expect that our expenses will continue to be higher than normal in periods where sales are strong because we take all of the commission, sales-related, and subsidy expense for these new customers in the same period as the sale. Looking at a more macro window, sales and marketing expense as a percentage of revenue over the last three fiscal years has declined from 45.2% in fiscal 2011, to 44.3% in fiscal 2012, to 43% in the most recent fiscal year.

All of the key indicators in our business were at record or near-record setting levels this quarter. The average number of subscribed services per new business customer was 18.1 in the quarter, illustrating our success in selling to larger, more established businesses. This is a 33% increase compared with the 13.6 number of subscribed services per new business customer in the fourth quarter of fiscal 2012. Selling more than 50,000 services in the quarter, another record for the Company, was driven by our success in selling to larger customers. In addition, new monthly recurring revenue sold in the quarter was a record. The average monthly service revenue per customer continued to increase to $263 in the quarter. Business service revenue churn was solid at 1.5% in the quarter. Subscriber acquisition costs per service was $92 in the quarter, compared with $98 in the third quarter of fiscal 2013, and $99 in the fourth quarter of fiscal 2012. This improvement is a result of more effective sales execution in the quarter.

Contribution margin, defined as service revenue less billing and customer service expense, improved to 64.3% in the quarter compared with 63.1% in the December quarter. Payback, defined as the number of months of contribution margin to pay back the subscriber acquisition cost, was 6.3 months. Capital expenditures for the fourth quarter were 1.5% of revenue and, excluding the $3.7 million of capital improvement on our new corporate headquarters, capital expenditures were 1.8% of revenue for the entire fiscal year. Our Global Reach Initiative will require slightly more capital investment than in past years. Cash flow from operating activities for the year was strong at $31.6 million compared with $9.2 million in fiscal 2012. Cash, cash equivalents, and investments increased 114% in fiscal 2013 to $52.3 million and the Company does not have any debt. In addition, our working capital more than doubled to more than $50 million in the quarter.

That concludes my prepared remarks and I'll now turn the call back over to Bryan.

Thank you, Dan. For your reference and convenience on the call today, we've posted a transcript of these prepared remarks on the Events and Presentations section of 8x8's Investor website at investors.8x8.com. With that, we'll be happy to take any questions you may have for us today. Karen, go ahead and open the lines.

(Operator Instructions)

Our first question comes from the line of Dmitry Netis from William Blair.

Congratulations, guys, on an excellent quarter.

Thank you very much, Dmitry.

A couple of questions. On the revenue side, have you recorded any non-recurring engineering expenses from your SoftBank relationship?

No, there was no revenue in this quarter we just reported -- the entire fiscal year we just reported, related to the SoftBank relationship.

And the follow-on would be -- do you expect to record any NREs, and what quarter will we see that?

SoftBank has indicated to us that they intend to announce the product and solution at SoftBank World, which is the third week of July. And we expect that, sometime around that point, the product will be live, and we will be able to start recognizing revenue. We're still finalizing how the accounting will work for the transaction, and most likely the NRE component will be amortized over the life of the agreement. So there won't be a big massive slug of revenue related to the NRE.

Okay. Got you. That's very helpful.

And could you give us a sense of the size of the opportunity with SoftBank? I think you said it might be a three-year contract. Can you refresh what should we be expecting, in terms of potential revenue coming from that relationship?

On the customer size, once we begin recognizing revenue, the customer will be a top 5 to 10 customer of 8x8 in terms of recurring service revenue that we're recognizing from the customer. The Company's largest customer today bills extremely low six-figure amount. Our top 10 is in that roughly $50,000 to $100,000-ish range.

Dmitry, the initial term of the agreement is 36 months.

36, okay. Very good. Thank you.

And then on the ARPU, you guys came at $263 this quarter. This is only $3 higher than last. I think you were averaging $4 to $5, maybe even $6 in some quarters. What drove -- is it related to the smaller PBX customers signing on versus the bigger customers? Or what drove a less-than-expected jump here in the ARPU, and what should the expectation be going forward?

ARPU increased $3. If you look back over the past year, it's increased roughly $4 to $6 each of the preceding three or four quarters. The primary reason that it was down is we had a large revenue churn event that we discussed last quarter, our December quarter, and some of those customers, we recognized revenue from earlier in the quarter, like October, November time period. That spreads across our average revenue per customer in the prior quarter. So it's about $1.50 or so headwind that we started with, related to the larger revenue churn.

If you just look how we did through the quarter from January down to March -- I'm not really too keen on dissecting a quarter in months, but in this instance I think it's helpful. But we actually started January with a lower average revenue per customer than we reported for the entire December quarter. We were in a deep hole, and we came out of it pretty solid. We expect that the historical figures that we've been putting up will be repeated in the future. We just reported 1.5% revenue churn, which, if you look at it on a full-year basis over the last couple of years, it's noticeably lower than what we've been putting up from a revenue churn on a full fiscal-year '12 or '13.

Right. Okay. That's very helpful.

The last question is -- gross adds have snapped back nicely from 2,600 to 2,800. What do you guys think will happen next? Are we to expect basically a flat gross additions? Or do you expect a rise in gross additions going forward, given the sales changes you've made a couple months ago?

We've added a line to our selected operating statistics table, which you can find on the second-to-last page of the release. And the line that we've added -- and we've actually reorganized this table a little bit. We received a lot of questions after we announced our numbers in January, and we tried to put this in a format and added the second line to help investors visualize what's occurring. But the second line's called number of new services sold, so it's the aggregate number of subscription-based services that we sold in the period. And as you can see, it's 50,728 in this most recent quarter. I can just tell you that a quarter ago, I wish we added this in because we spent a lot of time talking about why gross adds declined by 298 between September and December, and as you can see from this, that we actually had subscriptions increased that we sold, and recurring revenue that we sold increased.

The primary metric that we believe investors should focus on is the number of services that we're selling. As we're selling to larger and larger customers, they're subscribing to more and more services. When we say larger and larger customers, we're just saying that the average, or the mean, is moving upwards. I've had people ask me -- did you sign a big 10,000-seat deal in the December quarter that drove you up to 17? No, we didn't sign any that are more than 500. We're selling a lot more like 300 or 400 extension opportunities that's driving the average up.

We think that a much more important figure to focus on is just the number of services sold, and we've been effectively flat on gross adds for a few years now. We've been in this below 3,000-ish range for a long, long time. The indicators to look at is -- what are we bringing in the door, and the size of the new customer? And how is it flowing through into ARPU expansion?

As we noted, just to add one point on that, Dmitry, in the prepared remarks we pointed out the parallel between the growth rate of that new multiplicative number that we're providing there; it was up 29% year over year. Our revenue from business customers over that same time period was up the identical amount. But if you look at the gross adds over that year, you don't have the same amount. So it's a much more precise number to really measure our growth by.

Okay. I just want to understand a couple of things. One, you said that number was up 29%, which is your -- I guess you're referring to your total subscription number, which was up 29%. But I think you had said revenue from business customers was up 23%. Am I reconciling this correctly?

Yes, those figures are correct.

The number of new services sold are up 29%, so that's just the 50,728 divided by the 39,229. And overall revenue from business customers is up 23%.

Okay. Which is comparable to your prior quarter, 22%. Is that correct?

Yes.

Okay. Very good. Thank you so much, and I'll cede the floor.

Our next question comes from the line of Barry McCarver from Stephens.

Good afternoon, guys. Good quarter.

Hi, Barry. Thank you.

Continuing along the lines of sales and growth in the customers here, you had talked a little bit about channel partners and the middle-market team. Separating that out, could you talk specifically about sales productivity for the rest of your direct sales force? Obviously, you had a good quarter with customer adds and services. How much can we attribute to that direct team, how they're performing? What are your expectations for that team in the next several quarters?

When you say our direct team, are you referring to our traditional inside sales group?

That's exactly right, yes.

Yes. Okay. So they performed well in the quarter that we just reported. They performed much better than the December quarter. As we had communicated, we made some changes in that Organization -- continuing to make changes in that organization -- with the appointment of Ben Taft to run it, recently. And as Bryan mentioned, it's the majority of where our focus is coming to these days -- or on, in this Group, because it represents still the majority of the Company sales. Our channel and midmarket group is doing exceptional, but it still just represents 20% of the total sales in the Group.

Any indications so far of what Ben may attempt to do with that team? Is there a change in headcount there or anything specific you can share?

I think it's too early, to be fair to Ben, if nothing else, Barry. But I think our end goal is to scale that. We want to scale that team, orders of magnitude larger than what it is today. And if you look back historically, from a headcount perspective, it's basically been flat for a couple of years. That's what we're frustrated with. The goal is to really scale the Organization, scale the marketing behind it, as we've been scaling the fulfillment and customer service, and service delivery and support functions, that I think are continuing to do quite well post-sale.

I think with Ben's background and the focus that he's bringing from the perspective of how to scale a direct selling organization that he's done previously, that's the end game. It's not something that's going to happen overnight. There's going to be continued refinements and improvements. But I do think -- hopefully when we look back this time next year, that we can look back and say -- yes, we achieved what we wanted to do. But I think quarter over quarter, it'll be much smaller stepping stones as we start to turn the ship towards getting that Organization much larger.

Okay. And then just secondly, in your prepared remarks, you talked about putting capital to use, potentially through acquisitions. Can you give us a little more color there? The question really is -- are there opportunities out there that make sense, that you've already identified? Or is that comment really broader in the sense of -- it's something you'd look at? I'm curious as to where you're at in that process.

Yes. We have certainly identified opportunities. I think we're still early in looking at some of them. We're going to do the global reach expansion that I talked about in the prepared remarkets, regardless of whether there's an acquisition. Another way to put it is -- even if there were an acquisition, let's say in Europe, we would still not change our plans to extend global reach to Europe this year, because we think we need to do that anyway. I think one way to look at it is -- the global reach work we're going to do is going to extend our customers that we have today, to be able to cover their employees in those regions, and call centers, and the conferencing and data capabilities that they need in those regions. It gives us an enormous potential to upsell some of our multinational customers, and provide them services that we can't quite do as well today, when we've only got data centers on the East and West Coast of North America.

The acquisition strategy is much more about establishing a local presence with feet on the street, salespeople, support in the same time zone, so that you could really start to build a new revenue stream around locally sourced business opportunities, rather than extending our current reach into those international markets. So if that makes sense, that's the two approaches to it. We're hoping to do both in this fiscal year. I think the currency and the stock, versus where we were a year or two ago, the balance sheet cash position, where we were, and just the overall firepower that we've added recently with some SEC filings gives us tremendous potential to do that. We'll be looking to execute on that, if we can come up with the right deal at the right price.

Okay. And then I think just last question -- so we've already had most of the -- I guess all of the traditional wireline providers report. I've heard a lot about weak enterprise spending, at least very early in the quarter, and pretty sluggish government spending as well. I know government is one very important vertical for 8x8. Did you guys see any of that, and want to comment on what you saw in the quarter?

No, I think weak enterprise spending as a macro trend actually drives business our way. I think it helps us. It enables a prospect to take a chance on a brand that's less well-known in the market -- go try 8x8 at a location, roll it out, see if it performs as advertised, or what their peer government agencies and customers are telling them, how well we're doing with them. And I think it works to our advantage. I don't think that's going to slow us down at all. If anything, it should help us accelerate.

I don't think Dan commented on the economic churn, but we always do monitor business closure and volatility as a result of the economic environment. It was 53% of our total churn, just like it's been since the first quarter of 2009. So we didn't see any improvement there, which might confirm what you're hearing from some of those other macro trends. But I've actually been quite amazed -- the acceleration we've seen in the midmarket as a percentage of new sales. I certainly didn't think we would be able to penetrate the market this quickly, based on our historical performance in that segment.

Good. That's good insight. Thanks a lot.

Our next question comes from the line of Raghavan Sarathy from Dougherty and Company.

Good afternoon. Thanks for taking my questions. Congratulations on a good quarter. Just wanted to understand the sales and marketing expenses. I looked at the SAC per service was $92, down sequentially, yet the sales and marketing expenses are up sequentially. Obviously, you sold more services per customer, but are there other expenses, other than customer acquisition costs, that drove up the sales and marketing? I'm trying to understand the jump in sales and marketing expenses.

Subscriber acquisition costs of $92 -- you can multiply that times the 50,728, and essentially get the subscriber acquisition costs there. And you can compare it to the December quarter. That's an element of the increase. The rest of it is, is that as I mentioned in my prepared remarks, specific to the gross margin side, is that the first calendar quarter of any year has higher payroll taxes, and we have a 401k plan which is effectively discretionary in the match on what you can put in. Typically, it's maxed out in the first calendar quarter. That's a small component of it, both of those two items.

But we have been hiring. We've been -- as you can see from our job board on our webpage, we've got lots of open positions. We've been doing more advertising and things of that sort. We're seeing an opportunity predominantly in this midmarket group, which is defined as 50 or more users, and is reflected in very robust sales from that and extremely marquee names that are signing up for our services. It's just across-the-board higher spending on the sales and marketing front.

So these expenses are not directly attributable to customer acquisition, overhead expenses, if you will, increased headcount, marketing programs?

No, the marketing programs are incorporated into the subscriber acquisition costs, so that's included. The additional variable expenses related to higher sales that we pay to commissions, to our sales force, and indirect sales channels, as well as increased referral payments to our customers that are referring opportunities to us, is incorporated into the $92 subscriber acquisition costs. That's a majority of the increase. Just the delta was the fringe-related expenses, as well as additional hiring that we're doing in the sales and marketing side.

Our sales and marketing line also includes customer service expense. We have been working to build out more of our customer service management and team to support some of these larger customer opportunities that we're bringing on. That expense -- we do try to provide as much transparency as possible. You can see that even with that increased expense, our contribution margin is up 1 point relative to last quarter, and it's up to 64% in the quarter we just reported.

Okay, and then with regard to this Global Reach Initiative -- Dan, you mentioned that even with that, you're expecting 80% service margins. Are these expenses or investments more with the data center, so it's more depreciation expense as opposed to headcount? How much of that would be the impact of this Global Reach Initiative on margin?

It is predominantly capital-expenditure-related expenses. And then to a smaller extent is like -- we'll be taking down data center space in some markets that we're not in today. But the bulk of it is just capital-expenditure-related expenses. We're not going to disclose a specific figure of margins, but we've just stated that we've reported 80% service margins, and we intend to continue to be there.

Okay. Then, in terms of the NRE revenue you had talked about, how much would that be if that occurs; it will be one quarter? You said you're going to amortize, but how much would that be?

It's just like a number that we're just not going to break out. We've given a lot of clarity on that first question, about the topic of what it would be.

I'm sorry, it's not clear to me. Did you say it's a low six-figure monthly recurring revenue opportunity?

No. We just said that our largest customer is low six figures, and that the opportunity would be a top-5 to -10 customer.

Okay. Got it.

One final question. The last couple of quarters, the business customer revenue growth was roughly 23%. How should we think about, going forward, if you don't want to get into the minutiae of when (inaudible), ARPU growth, and all the details? (multiple speakers) On the margin side, should we expect margin improvement, despite some of the investments you are making?

On the growth rate, for the past four quarters, our growth rate has ranged from 22% to 25%, up until the last quarter. We had an apple-and-orange comparison due to organic and inorganic growth rates. But in a solely organic basis, we were in that 22% to 25% range. We effectively were in the middle of it in this quarter that we reported. Our goal and our compensation and et cetera is targeted on growing the Company in excess of 20% per year for the foreseeable future. That's our focus.

Thanks. [That 20%] -- is that total revenue or is it business customer revenue?

We're looking at growing the entire business about 20%, yes.

Okay. And then in terms of margin, how should we think about [anything that you want to discuss in specifics], but should we expect continuing margin expansion, given some of the investments here?

We're looking at a situation to where like a year ago, for the full-year basis, we were 12% non-GAAP net income as a percentage of revenue, and we're 14% in the year that we just reported. We made a lot more investments in the past year, and we continue to feel that, specifically on the sales and marketing front, we're going to be making investments, and we see a tremendous amount of opportunity out there. I think everyone needs to remember that the market for the hosted PBX, as well as the hosted contact center market, is less than 10% penetrated. It's a tremendous amount of interest in what we're doing. The market's growing at a pretty good clip, and it is extremely underpenetrated. That's the reason why we're making these investments. As everyone can see, we've got exceptionally high contribution margins at 64%, so every new dollar of revenue that we bring in the door is highly, highly profitable. But if we see opportunities to invest and grow, we're going to make those investments.

I'm not directly answering your question, but I can just tell you that our compensation plans are based on revenue, as well as on profit. We need to be generating profits, and continuing to see revenue growth for us to be compensated the way we want to be compensated.

One final question. You had talked about this new metric that you introduced -- the number of new services sold. That was up 29% year on year. If you break that down, was it mostly driven by selling into larger customers, like you mentioned, midmarket customers? Or is it driven by selling additional services? Any color on the split between those two factors?

Yes, it's primarily driven by selling. For our channel and midmarket group, it's just representing a greater percentage of the total sales. Their opportunities are -- they're getting a little bit larger, but the primary driver is just they represent a greater percentage of the sales.

Okay, great. Thank you.

Our next question comes from the line of Jason Kreyer from Craig-Hallum.

Good afternoon, guys. Jason on for George Sutton. Just wondering if you can talk a little bit about the average subs per new customer? That's really popped in the last two quarters. I'm just wondering if you can give us a little bit more color on that? If you think that's primarily attributed to channel becoming a greater portion of the pie? Or if you have some gains on inside sales? I'm not sure if any of the larger customers come through inside sales, or if all that goes through the channel, so anything you can talk to there is appreciated.

Jason, this is Bryan. I think you can attribute the increase a little bit to both. I think it's driven a little more by -- I think going from 6% of our new revenue sold a year ago, to 20% today, is a pretty significant increase, so 20% of our new revenue now is coming from the channel and midmarket team. To confuse things a little further, they actually also sell small deals in that Group, too. Because if they find a customer that's -- through a channel partner that's very small, we're not going to turn them away.

But I would say the trend we've seen in our inside team is larger opportunities coming in the door there as well. We're seeing it across the board. I think you're just seeing, if you look at the industry acceptance and adoption of cloud-based architectures for business communications and call center, we're riding the trend which the industry is beginning to really see. The larger customers are seeing this as a sweet spot for their solutions, similar to the distributed midmarket customers who have always been a sweet spot for us. So it's across the board we see the growth, but again, I think a little more coming from the channel and midmarket team, in terms of the contribution to that increase.

Okay. Thanks, Bryan. And then, on the data cloud, we haven't really talked about that for the last couple of quarters, and it sounds like there was some nice wins that came out of here. I'm just wondering if this is becoming a bigger focus for you -- if you're having more conversations about data cloud?

We've announced two customers. We only talked about one of them in the prepared remarks, but we had done a press release late last year, with CoSentry, who's a customer that's already deployed with that licensing model. And we're pursuing additional opportunities, and working with our existing partners there to try to bring that to market. It's still a small part of our Business here, and we're still tweaking the business model as we move forward. I wouldn't put too much emphasis on it. That's why we try not to message too much on it. The primary growth driver here is still coming from the communications side.

Okay. And last one for me. You talked a little bit about the change in the headcount -- I'm sorry, change in staff, or more hiring, and I'm wondering if the total headcount is up, or is it mostly just backfilling from attrition?

Total headcount is up. At the end of the year, we were at 386 employees and full-time equivalents. That's up from 362 at the end of December, and 336 a year ago.

Okay. Would you say that's primarily sales related, or can you point to a specific area where most of the hiring is coming from?

It's pretty much across the board.

Okay. All right. Thank you very much.

Our next question comes from the line of Mike Latimore from Northland Capital.

Thanks. Excellent year.

Thanks, Mike.

Dan, you talked a little bit about your compensation tied to both revenue growth and profits. Is the weighting between those two broad categories much different than it was last year?

A little more weighted to revenue than it was last year.

Okay. On subscriber acquisition costs, do you think that it'll stay in this $90 to $100 range? Is that the best way to think about it? Is that what your plan is roughly?

Over the last few years, the lowest was the high $80s, and the highest was like around $110. So we just said it's approximately $100 for a long, long time. That's where we think it'll be, is in that range for the foreseeable future.

Got it. And then, the web hosting and the consumer as a percent of total revenue, is that similar to what it's been in prior quarters?

Yes.

Okay. How about on the call center side of things? Is that business growing at the same pace as overall business customers, or faster or slower?

It's growing pretty consistent. We sell it as a --

-- seamless part of what we sell on the PBX side.

It's totally bundled in and includes the telephony piece. That's how we're different than a lot of other folks that sell contact center solutions, is ours is fully integrated in with the PBX.

If you get a brand-new call center customer, 100% of the time they're buying a PBX for their enterprise as well?

Yes, at least in -- I looked at the five biggest new customers we've brought on board in the March quarter, Mike, and all five of them bought both.

Yes. Okay. Any customers on the call center side that have a chance of churning, or is that behind us -- the larger ones?

Referring back to the acquisition of the call center company, in terms of the transition integration issues, I think a lot of that is behind us. I think one of the things pushing us into these international markets is certainly that a lot of these call centers are located in these regions. We can serve them fine from where we are today. But in some of the regions, you're not able to serve them at the same quality levels and performance levels, because you've got to remember, in a call center, we're not just providing the voice but we're pushing the display that the agent is actually looking at to do the customer service. They're doing chat, and they're logged into a customer relationship management system. All that data push and synchronization is occurring over the same IP networks as the voice, if there's a telephone call involved. We just want to be able to be at the highest levels of performance, just like the customer service agent was sitting here in North America, regardless of where they're located in the world.

Okay. Great. Thanks a lot.

We also have a question now from the line of Greg Burns from Sidoti and Company.

Good afternoon. A follow up on SoftBank. I'm just trying to get a sense of how big that could be over time, maybe in terms of the number of v-blocks, SoftBank's talking about servicing at the onset versus what the road map looks like, and what they think they'll be bringing online in the future? And also in terms of the virtual desktop product that you're developing for them, is that something that you're planning on rolling out more broadly to your wider customer base?

Yes. Greg, this is Bryan. We don't know. It's a product and service that's going to be launched and marketed and run by SoftBank, and we're one of their technology vendors that's enabling it. All we can do is make sure that the minimums on the deal we're happy with, and we know we're going to get paid the minimums, and we'll be able to deliver the technology to them. In terms of how big it can be, it's not something I would speculate on right now.

The VDI technology that we are building for them, we are free to use in other applications, and again, it even has some interesting ties into our communications portfolio. I just talked about serving call center agent screens and so forth, and a lot of that same technology is applicable in that specific vertical of the business communications space. We certainly see opportunities to utilize it in other applications, and we have the ability to sell it to other customers, and we'll be pursuing that.

Okay. Thank you.

All right.

I have no further questions in the queue at this time. I would like to turn the conference back to Mr. Martin for concluding comments.

Okay. Thank you, Karen, very much, and thank you, everybody, for listening today.

We will be presenting at the Craig-Hallum 10th Annual Institutional Investor Conference in Minneapolis on May 29. We will be at the Stephens Spring Investment Conference in New York on June 4, and we will also be presenting at the William Blair 33rd Annual Growth Conference in Chicago on June 12. Between Dan and me, we're going to have to go buy some plane tickets, it sounds like. We would hope to see you and meet up with you and be able to update you at one of these events.

As I always say as well at the end of these calls, if you're not a customer of one of our services, I really encourage you to look into using us in your business, your application. You can learn a lot about our different diversified business communications services on our website, www.8x8.com. You can also call one of our sales executives at 1-866-TRY-VOIP.

So with that little commercial, we'll conclude today's call. Go ahead, Karen.

Thank you, sir. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.