Q3 2020 Earnings Call
This time I would like to welcome everyone to the eight eight Inc. fiscal first quarter 2020 earnings Conference call I will now turn the call over to Victoria, Hi, Don head of Investor Relations.
Thank you good afternoon, and welcome to eat blades third quarter fiscal 2020 earnings conference call.
Joining me today, our Vik Verma, Chief Executive Officer, and Steven Gado, Chief Financial Officer during today's call. They will begin with business highlights of our third quarter performance.
Following that Stephen will provide details on our financial results and guidance.
After these prepared remarks, we look forward to taking your question.
Before we get started just a reminder, that our discussion today includes forward looking statements about a bright future financial performance as was his business product and growth strategies.
We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties. They may cause actual results to materially vary from the forward looking statements as described in our risk factors and our reports filed with the FCC.
Any forward looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.
In addition, some financial measures that will be discussed on this call together with year over year comparisons in some cases, we're not prepared in accordance with U.S. generally accepted accounting principle workout.
A reconciliation of non-GAAP measures to the close this comparable GAAP measures is provided with our earnings press release, and Powerpoint presentation deck, which are available on our Investor Relations website.
With that let me turn the call over to Vic.
Thank you Victoria Good afternoon, everyone and thank you for joining us today.
Building on our Q2 results I'm very pleased with continued improvements in execution and financial performance, which led to very strong Q3 results.
I'd like to focus my remarks on three topics strong financial results in Q3.
Continued channels success.
And aligning our global operations for both revenue growth and profitability.
Turning to Q3 results.
Service revenue and total revenue each grew 32% year over year and exceeded the high end of our financial outlook.
Key drivers of growth performance included success with Midmarket and enterprise customers and broad based global strength across our product suite, including both contact center and feedback.
The momentum we are seeing is cleared customer validation of our strategy of owning a global integrated single stock technology platform.
Customers increasingly migrating to cloud for their communication needs and they want to work would be platform leader.
The investments we've made over the last few years in both go to market and product innovation are succeeding.
Sales execution was strong in Q3 with robust pipeline growth in all segments.
Total organic bookings grew 30% year over year.
Enterprise eight our our grew 85% year over year.
For off our top 10 wins were a buyer replacement, who opted for X series bundle platform solutions.
X series now represents over 37% of our installed base up from 32% last quarter.
We also continue to broaden our enterprise customer base with a record 40, new deals closed in the quarter with eight are greater than $100000.
And the common theme for many of these successes was our integrated platform.
In fact, 71% of our new bookings greater than $12000 E.R.R. were from customers that selected bundled you cast and see cast as compared to 51% one year ago.
This continues to validate the power up or single technology platform with our customers.
[noise] channel execution was strong again in Q3 with channel bookings growing 62% year over year.
Channel drove 54% of new bookings overall, including nine off our top 10 deals.
Channel also helped the Midmarket achieved eight our our growth of 44% year over year.
[noise] I'm, particularly pleased to see accelerating market adoption of our contact center solutions.
Contact center bookings grew 90% year over year.
As compared to 41% growth in our last quarter.
It represented 33% apart total new bookings this quarter as compared to 24% last quarter.
More importantly, all of our top 10 deals included contact center, which demonstrates the criticality of having contact center as part of a single scalable technology platform.
New customer logos represented 59% of total bookings.
One such when what's a seven digit TCB a buyer on premise replacement.
This deal included more than 1300 seats up eight by X series, including both you see and contact center within insurance adjusting from that manages complex environment that must scale up with little notice.
Their business requirements included a more flexible contact center and a mobile collaboration solution with a single user experience for voice video meetings and messaging.
Another large seven digit TCB a buyer on premise of placement win was with a north American industrial just distributor with over 20 centers throughout U.S. and Canada.
The customer I was looking to modernize their contact center and enhance workforce collaboration as well as offer omni channel communication options to its customers.
Bites X series was selected for its tight integration of contact center and workforce management capabilities.
A large mito on premise replacement was a seven digit TCB win with a UK based service provider.
This customer is replacing on premise communication systems across 250 sites and chose the eight by X series, including contact center to deliver multi channel capability to over 4000 seats.
I'm also pleased to see that land and expand continues to be the norm without midmarket and enterprise customers.
A great example of our X series platform driving a seven digit TCV customer expansion is bokassa.
North Americans largest vacation rental management platform.
After a recent purchase a wyndham vacation rentals bokassa wanted to remain true to its mission drive industry, leading revenue for homeowners and unforgettable experience for its guess.
It was important to bring the Wyndham vacation rentals property management into its contact center process.
In doing so they've added additional eat bite xsix receipts to the initial contact center deployment sort of business can continue to operate seamlessly.
Turning to product innovation, we launched eight by eight video meetings, a free Standalone service, enabling users to easily schedule start enjoying HD video and audio conferencing from any device or room without the need to register or download software.
Sure.
Released just in mid November.
Early adoption has been very encouraging and stands as another entry point onto the X series platform.
We are on track to launch our eight by meetings room solution this quarter.
This goal is to bring easy video collaboration to every huddle and conference room space with an intuitive interface and smart bearing technology to connected devices.
We also recently purchased web RTC quality monitoring and analytics technology from called stats Dot Io.
Called stats has been a long term technology partner and with this acquisition. These strategic capabilities become part of our integrated X series platform.
[noise] looking at contact center, we recently announced new capabilities, including eight bites secure pay enhanced outbound dialer and expanded quality management capabilities.
Also we were honored to receive the 2019 custom experience Innovation award from Pmcs customer magazine, recognizing eight bites contact center approach to delivering exceptional customer experiences.
Turning to see pass we continue to build traction with large multinational customers, including signing a leading food retailer with more than 1000 outlets across the Asia Pacific region.
The enterprise customer will use our sea bass SMS solution to improve the consumer delivery service.
Additionally, we're very excited to have deployed our initial bids voice see past services, bringing expertise and capabilities from our X series platform to a portfolio of sea bass offerings.
We now have several production customers on our voice sea bass services, including a new contract with one of the largest and fastest growing ride hailing and digital service companies in Southeast Asia.
Our strategy of coupling see past capabilities with voice chat video and contact center opens up a huge opportunity for us to penetrate our installed customer base and expands the differentiated use case, we can deliver with our single technology platform.
The second topic I'd like to address this continued channel progress, particularly with the addition of significant new strategic partners this quarter.
As you are aware there are two different types of channel partners in the community.
The master agent referral channel and the var channel.
As I mentioned earlier, our referral program has grown dramatically over the past here and now consistently delivers over 50% of new bookings.
Our global Bar program allows us to reach yet another massive installed base of customers that are also looking to replace the legacy on premise communications infrastructure, but prefer to buy from their trusted var. Instead of directly from the service provider.
By offers a compelling value proposition for bars for three reasons.
First thanks to the X series platform, we are the only ones in the market today, who can offer both standalone and bundled solutions with no need to integrate additional products.
Second Vars can leverage eight bites best in class partner portal partner exchange, which was enhanced to a vars to independently quote order provision and managed customers as well as access certification content and marketing assets.
And finally, the bar community can continue to operate in that existing reseller business model retaining ownership of the end customer and leveraging their existing selling motions.
It was these foundational advantages that led to cloud fuel our partnership with Scansource and poly.
As we have talked about before this was the first time, a comprehensive frictionless hardware replacement and cloud migration program has been offered to the bar community.
Cloud fuel opens up access to over 15 million avaya seats and gifts eight by a large market for ongoing customer acquisition.
And initial set of Scansource bars have already undergone training and enablement and we expect cloud field to be available to end user customers. This month.
In addition to this I'm pleased to announce the expansion of our UK bar program with soft Cat Charterhouse NFL and computer Center.
More prominent UK bars, including the you case, two largest bars for channel reseller news.
We have already closed an initial set of X series deals with these partners, including the replacement of an on premise mitel customer that is a leading homecare provider in the UK with both you cast and see cast solutions.
We're excited to continuously to see the bar community approach us on a global basis to work with them across our all in one cloud based platform for voice video meetings collaboration contact center and Npis.
In total there are more than 350 million legacy seats globally from a buyer Cisco short tail Mitel and other on premise solutions right for cloud migration and eight by it has a leading cloud platform available today to me business needs across unified Communications video.
Earnings collaboration and contact center.
Finally, I'd like to take a minute to discuss recent leadership appointments and how we are aligning our global business to drive both improved execution inefficiency.
We announced Marge bria as our new Chief Marketing Officer Officer responsible for all marketing globally, including product and corporate marketing communications and demand generation.
Second we promoted Sam Wilson to Chief customer Officer, and managing director of the media.
Sam will own the customer lifecycle globally, including deployment professional services customer success and customer support.
Sam ran the global small business and us midmarket sales for over two years, where he built out the sales engine and ecommerce capabilities to drive the flywheel of adding customers and reducing acquisition costs.
Our third executive appointment as the promotion of Homero Salinas to group Vice President commercial sales Homero will provide leadership for our commercial sales team in both North America and the UK I'm excited to have Homeira take the range from Sam on the broader commercial sales from and expect that moving ahead, we will be able to run even fab.
Sure.
In conjunction with these announcements we also took steps to realign our global operations. We have spent a lot of time and energy building up a true global footprint over the past several years with offices in the UK, Singapore, Sydney, Kluge, Minneapolis, and new offices in the Bay area in Campbell and Sam.
Ramon.
We're now in a great position, where we can hire talent globally to optimize and streamline our operations.
In parallel we continue to invest in product innovation.
We see not just customers, but also a market and industry analysts really starting to understand the value every single technology platform.
We will continue to invest to maintain a technology leadership to provide true differentiation for the long term.
In summary, it was a very strong quarter for us driven by steadily improving execution and market momentum across our global business.
We're focused on broadening the Midmarket and enterprise business with the investments we are making in our customer facing teams and deepening our relationship with customers and partners.
With today's new var partnership announcement, and the earlier announced strategic partnership with Scansource and Poly, we're excited to broaden our global channel partner reach and empower enterprises to migrate to the cloud with confidence.
Finally, I'd like to take a moment to thank my eight by teammates around the world for their hard work.
Their commitment to our customers and partners will enable us to finished the year strong and positions us for future growth in delivering a half a billion dollar revenue run rate in the near term.
With that let me turn the call over to Steve.
Thanks, Nick Good afternoon, everyone. We appreciate you joining us I'd like are you three topics today first I'll start by reviewing the financial results for our third fiscal quarter ending December 30, Onest second I'll share info around the actions that we've taken that are improving our operating efficiency and support our commitment to exiting Q4 fiscal 2020.
One at breakeven and third I'll go through our outlook for fiscal Q4, and the full fiscal year 2020.
Will wrap up with QNX.
Going into Q3, we delivered very strong revenue results as exhibited across multiple metrics total revenue grew to $118.6 million in Q3 up 32% year over year and service revenue came in at $113.6 million also an increase of 32% year over year non-GAAP pretax net loss.
For the third quarter was approximately $16.3 million coming in better than outlook. This marks the third consecutive quarter that our financial results have finished above the high end of our guidance.
There were four primary drivers of our Q3 financial results one strong execution in our go to market initiatives centered on demand Jan and solid pipeline coverage ratios with particular strength again from our channel partners.
To continued success moving up market with mid market and large enterprise customers growing nicely with a by a platform purchases and becoming a larger part of our portfolio.
Three contributions from our see pass offerings that continue to be integrated into and a compelling differentiator of our global platform and that included a full quarter results and for strong organic bookings growth of 30% across both new and existing customers with particular strength in our contact center offerings.
As Victor mentioned.
You can see to strengthen our operating a business performance metrics, where total air our came in at $411 million for the December quarter, 33% year over year growth and the result of a combination of solid organic growth and are you Cas and see cast businesses and contributions from Marci pass offerings.
Q3 had 592 customers generating air are greater than $100000, 57% year over year growth and that speaks to the growing success that were seen with large enterprises.
We closed a record 40, new deals in the quarter generating EMR greater than $100000 and these customers represented 33% of new bookings up from 29% in the prior year.
Looking at a our by customer size Q3 was another quarter of solid growth, where our grew above market and small business at 18% year over year.
44% growth and the Midmarket and 85% year over year growth, where their enterprise customers.
We continue to focus on Midmarket and enterprise customers that have attractive CAC drive higher lifetime value and lower churn.
Looking at our unit economics metrics average annual service revenue per customer increased 27% and the Midmarket and 28% and our enterprise segment.
Coming in at more than $43000 per year for mid market customers and more than $181000 per year for enterprise customers were seen our customers purchase more seats and with our X series product platform and we're also seeing more contact center included such that contact centers.
Growing faster and as making up a greater proportion of our bookings.
Looking at Q3 Opex. The takeaway is that we're starting to deliver some operating efficiency and improvements.
Non-GAAP sales and marketing expense flattened out in Q3 at approximately 47% of revenue.
R&D came in at 11% of revenue in Q3 versus 13.5% in Q2, and DNA improved to 12.3% in Q3 from 12.8% of revenue in Q2.
As we indicated at the outset of the year as we look to drive growth from our investments in product and go to market. We will also be driving operating efficiencies.
As we've discussed it isn't a linear relationship in which every metric will improve every quarter, but we've begun delivering returns and we expect continued efficiency improvements going forward.
And this current fiscal Q4 quarter. For example, we expect some improvement in sales and marketing as a percentage of revenue.
Also notable this quarter as Rick mentioned, our global far program as garnering considerable partner and customer interest last quarter, we announced the development of cloud fuel, our first strategic partnership with Scansource and poly and with it approximately 6 million to $8 million of nonrecurring initial expenses.
As over the course of Q3 in Q4 on migration tools, our next generation partner portal marketing campaigns training and enablement activities and deployment services.
We're on track with that plan and expect modest revenue contributions beginning in the first half of fiscal 2021 as cloud fuel and other new var partnerships and customer traction begins to ramp.
Wrapping up Q3 results.
We further strengthened our balance sheet this past quarter through the issuance of an incremental $75 million and convertible notes from our original issuance from February 2019 on some very attractive pricing in the market.
With that perspective, let me now talk about the backdrop of the investments that we made this past year and the timing of why we've now taken steps to drive returns and operating efficiencies going forward on the heels of our bookings and growth success.
We continue to prioritize investing for growth as we've communicated our investment strategy is focused on three core elements to continue to drive revenue growth and stockholder value.
One investing in our demand Jan and go to market engine to maintaining our strong technology platform advantage with continued investments in product innovation and three driving the var channel as another front to unlocking the several hundred million legacy on premise seats owned by these key ecosystem players.
Yeah.
Throughout the past year, we've invested in our demand Jan and channel Master agent referral program and fault head count and program spend.
We invested in getting the right talent onboard sales in channel enablement materials compensation plans on spiff structures website content and search optimization.
We've seen these investments bear tangible successes in the form of strong pipeline coverage organic bookings growth north of 30% channel bookings growth consistently north of 50% numerous industry and partner recognition and new customers increasingly turning to eight by because of our single technology platform.
And so with both the insights and experienced that I've gained through my tenure here at eight by eight this first year and now with strong pipeline coverage bookings execution traction revenue growth and our global infrastructure in place. This was the right time for us to now implements specific initiatives.
To drive efficiency in our operations and further support our targeted path to breakeven on a non-GAAP basis.
Accordingly, we recently took steps to realign our global operations and cost structure. So that we may continue to not only focus on our technology platform and go to market success, but importantly, also moved to drive meaningful Cogs and Opex efficiencies.
Our approach to this realignment was about moving forward from our foundation of strength to build and most competitive business structure for the company for the longer term.
Specifically, our recent actions centered around two dynamics first we took outspend and overhead from our cost structure. So we can focus on the core business areas that deliver growth.
And second we shifted how we execute globally to drive operating efficiencies across the company, most notably in the U.S. and through offshoring initiatives to our various geographic centers in Europe and Southeast Asia.
I talked about this off shoring last quarter and now were executed on it.
And doing so we moved several functions and head count out of the high cost locations in the San Francisco Bay area in New York, and London to more cost effective and still talent rich areas in Romania, Minnesota, the Philippines and India.
The net is that less than 100 rolls were eliminated with the majority being non revenue generating functions.
We expect this approach will further enable us to drive operating efficiencies across all expense areas from Cogs to DNA and importantly, the realignment provide added support to expand gross margin.
While Q3 saw some margin pressure from a full quarter of see pass operations in the mix and some incremental spend on operations and readiness for our far program launch that we discussed we anticipate improving our gross margin percentage and the current Q4 fiscal 2020 quarter.
Improvements are expected to continue over time through a combination of cost discipline higher margin organic growth and continued operational efficiencies.
Overall, we expect these actions will drive greater global operational efficiency and achieve alignment between our costs strategic priorities and capturing organizational efficiencies. They reflect our continued commitment and increased confidence and delivering on our path to breakeven on a non-GAAP basis exiting next fiscal year asset.
Communicated.
I look forward to talking more about this as we plan to share thoughts with you on fiscal 2021 on our next earnings call expected in May.
Taking this all into account I'd like to turn to the financial path ahead and share our outlook for the fiscal Q4 quarter ending March 30, Onest 2020, and what that means for the full fiscal year ending March 30, Onest 2020.
For Q4 fiscal 2020, we anticipate total revenue to be in the range of $118.9 million to $119.4 million, representing 27% year over year growth.
We anticipate service revenue to be in the range of $114.4 million to $114.9 million, representing a year over year growth of 28.5% to 29%.
And we anticipate non-GAAP pre tax loss to be approximately $14.1 million.
The implications of this on the full year fiscal 2020 are that we are raising our revenue guidance and maintaining our non-GAAP pre tax loss guidance such that we anticipate total revenue to be approximately $444 million, representing 26% year over year growth.
We anticipate service revenue to be approximately $425 million or 27% year over year growth and we continue to anticipate full year fiscal 2020, non-GAAP pre tax loss to be approximately $60 million.
So to wrap up.
Just pass my one year anniversary here at eight by eight.
Demand Jan is now consistently working and we have record pipeline coverage, we added leading video meeting and see past technology to our platform, we launched a new global var program with well respected partners, who are helping us displays over 350 million on premise seats.
We realigned our cost structure and global operations to drive efficiency and support our path to breakeven exiting next fiscal year in March 2021.
I'm more excited now than when I got here.
With that we appreciate your support and we'll open the questions now the call now for any questions.
Operator.
To ask a question you will need to press star one on your telephone.
To withdraw your question press, the pound or hash key.
Please standby, while we compile the Q and a roster.
Your first question comes from the line of Michael touring with Wells Fargo. Your line is open.
Hey, there.
Thanks for taking the question appreciate it I guess, maybe to start off because in terms of the competitive commentary you mentioned for the top 10 wins coming from the legacy side.
That side was also telling a similar tail maybe to no surprise at their conference. This week. So just maybe more from your perspective in terms of what might be driving that acceleration in migration today and and what might give you confidence that can continue.
Yes, so from our perspective, we have a fully formed platform and.
The key part that we have noticed is beer is no exclusivity between avaya and of by as customers. So the moment that a bias started offering cloud solutions all of the customers started shopping around and we have a fully formed solution, where we're able to go to market and it includes a car.
Contact center, so that already gives us a competitive bed. So we started to see quite a few of via customers come to us.
The second part that was actually even more interesting and I think that is something we are uniquely positioned to do because we have one platform and it has voice video contact center.
It's all integrated together it has all the seapass weaken essentially enabled bars, we develop this thing called the partner exchange and Thats, what the Scansource.
Relationship is all about and the relationship with scan sources bars, plus the relationships that we just came up within the UK. The bar model is the bars typically have the relationship with the customer not the service provider. So in essence, what we're doing is we're allowing vars to go to their customers and sell our.
Products and it's obviously.
Labeled with eight by eight but the var is selling it the vars deploying it in the bars supporting it which is the traditional model that has been one of the impediments to this whole move forward. So in essence now we have two routes to market both of which are working I have the referral channel the master sub referral channel, which frankly as you can see has been consistently grow.
Going and for US now represents over 50% of our bookings and Thats working perfectly and then there's a whole new slew of channel partners, which are the var channel partners that have resisted the move to cloud because they wanted ownership of the customer and what we've done is we are now enabling them to go.
To that legacy base and offer a complete comprehensive cloud solution, but they are providing it and they are selling it for us and we're supporting them and selling it for us So as I said from our perspective all of the the shaking up of the market is all the good thing and having this complete and comprehensive platform as a good thing and I think we've literally got hundreds of UBS.
Customers already online.
That we've been able to basically deploy and so we've had the experience of what it takes to migrate those guys and it isn't easy, but it's something we're good at.
That's that's clear appreciate that pick me, maybe one for Stephen.
You stepped through some useful to tail in terms of efficiencies I was hoping to revisit some of that commentary and maybe get into a little bit more detail can we talk about the underlying mix shift that maybe impacting gross margin trajectory and then in terms of in terms of free cash flow I'm, assuming some of the step up in Capex, there was really related to the relocate.
And in terms of headquarters, but anything you can do to kind of help us quantify and parse through some of those impacts, particularly as were looking towards this profitability target exiting next year is certainly helpful. Thanks sure Yeah, Yeah, great questions take the last one first.
It's fairly straightforward, our operating cash flow, our free cash as well improved apples to apples from Q3 over Q2.
There are few onetime items and both of those quarters, where the wave sell acquisition in Q2 that was a big negative of negative 60.
And we obviously had the convert deal in Q3 that was a positive 65 that basically washes, but to your point Q3 also the cash balance.
It was burdened and this quarter onetime item was the build out of our headquarters.
Office, New office space for about $15 million and change and so that was a big degradation without that the.
Declining and cash would have been less down on the 28 million ZIP code improvement over Q2.
And we expect that to continue improvement going forward.
To your point on gross margin.
Q3.
Had had a mix of three or four things one there was more costs in our core in the you can see cast we talk a little bit about that and so far as the far readiness. If you will so there were some element of that.
We also had a little bit more see past than we anticipated and so there's a bit of a mix shift. If you will that was pressure on gross margin. One we had a full quarters worth while we add even more than we anticipated. There was also more product.
Revenue.
So that was a drag on gross margin that you could see the economics there.
That brought that down and Prof services was also a little bit more of a drag when you add those all up that's how you get to the degradation.
Looking ahead.
Talked about this a moment ago for Q4, there are two meaningful drivers of gross margin expansion and we would offer that we expect that improvement to be going forward not just a Q4 event.
That is we see more favorable cost structure on our underlying core you can see cash operating structure, so our ability to deliver our cost structure. Some of the efficiencies that we just drove in our realignment.
But all act to drive back up to a higher gross margin levels aren't you can see cast we would also anticipate a bit of an improvement in our see pass business.
Both from a mix shift as well as an aggregate rise in the C pass gross margins.
We've talked to a bunch about this in the past.
One on one as well as with others.
Where the see pass business is expanding into the.
European theater, as well as the U.S. and and offering higher margin services like chat and voice and so as those two dynamics geography and product set rollout more and more over the coming month, we expect to see margin lift from the C past contribution.
Thanks appreciate all the color there it's helpful. Thanks for taking the cluster.
Yes, let you.
Your next question comes from the line of Ryan Mac Williams with Stephens. Your line is open.
Thanks for taking my question. So first off congrats from reaching the 30% year over year service revenue growth milestone in the quarter once we more to come there.
Yep and also also the 3 million increase in deferred revenue was another positive in the seems like an increase due to improved contact center bookings what about your bundled offering is currently resonating with customers and you have any new marketing initiatives under the new CMO.
This bundled offerings.
So I'll take that once a couple of things. The main part that is the most interesting thing and this is where.
I think there is a big opening for us.
Everybody is generally now concluding that you need one platform right, which as you. Most people are buying both contact center as well as Ucas together. The most interesting statistic for me was that for our customers.
We look at customers greater than 12000.
Our our so if you look at those customers the number of people buying both our unified communication and contact center solution jumped up from 51% one year ago to 71% this year.
And we are seeing that as a trend and by the way that tends to be a trend, particularly for a via customers because they used to buying both unified communication and contact center and frankly, that's where a lot of the confusion has been created because there is that teamed up with one vendor for you cast, but they're going to go down.
All of their own contact center solution, but there are other vendor had another pre existing relationship with a contact center vendor and so us being able to go in and offer this complete and comprehensive platform makes it very simple and then with regard to vars, the vars, particularly owned the customer Theyve had long standing relationships and Weve.
Theme the effects of that because we started closing our first few deals with bars, where we play a role of support we play a report of training, we play a role of enablement, but the bar pretty much closes the customer in what they're able to do is close with either EWC Src guest and upsell from there the more interesting thing is see path.
Allows them to customize experiences, which allows services for the vars as well as a level of customization and uniqueness for the customer so from that perspective, what we're finding is this one platform concept is increasingly resonating the ability to have as through sea bass is hugely differentiated and then the most interesting thing we are finding.
Add video to that mix, what contact center combined with video and the level of customization that can happen there becomes a game changer.
It was quite an interesting trend where the number of customers that basically bought our contact center, but wanted us to move forward with see past engagements as well as video conferencing as an added addition to all of that.
I was quite as I said heartening, so I'm increasingly.
Bullish about that and as far as I'm concerned every EVIA customer that is out there. There is no exclusive relationship between avaya and their customers and our intent is to compete for every one of them either directly through our.
Master sub channel or two of our channel, but every one of those deals will be competed because I think we have a compelling offering which as cost effective and we have the migration ability as we have demonstrated by I think we have approximately 10000 plus seats that we've already migrated over and so from that perspective, we should be in a very positive position.
Perfect. Thanks, and this one's for Steve the wave sell meet your calendar 2019 revenue expectations that you laid out acquisition any color on growth there would be helpful and for the higher margin.
Have you seen any nuclear traction in voice or video thanks.
Sure. So so generally speaking we are pleased with the see pass business I think what the more important thing to US candidly is the technology. The revenue pieces is obviously helpful and Thats nice.
But the integration of the open Apiay framework into our.
Video voice and most importantly, the contact center offering and how we engage with customers has probably been the biggest high five around the floor. So we're happy with the business outperforming their growing nicely in region, they're adding more customers there anymore countries. Most importantly come into the UK.
In the us.
And so we're pleased with where that is I'll add another element because see pass as a differentiator for our core platform is increasingly valuable give you a very simple use case.
So imagine if you are a customer with a contact center. So your vacation rental company and you get your customer center gets a call.
Basically look for keys be ability to send a cost a link which can be opened on a web browser and instantly turned the customers phone into a camera where they can look around and the customer service agent can then point to where they go or how they change the thermostat or something like that is a huge and massive productivity savings.
That is an example of how you've taken a packaged solution, which is contact center and unified communication and by the addition of video conferencing as well, let's see pass you have turned it into a unique customer engagement that is hugely differentiated.
Thats why we bought wave cell and we're seeing huge traction in that particular area bundled with our products.
Great and expect the question thanks, guys.
Your next question comes from the line, Tim Horan with Oppenheimer. Your line is open.
Thanks, guys and great quarter.
Can you just maybe spend a little bit more time in the bar side of things, how what percentage of the enterprise market do you think they control.
Do you think your relationship with the bars now is relatively unique unique I guess as anyone else kind of given the same level of support and terms and conditions that but that you are and when will the bar channel really be up and running at 100% do you think thanks.
Great question. So early days, so adjusted the Scansource and the Scansource controlled and their distributors and Vars control approximately $50 million Avaya seats, plus minus and we will have the first set of initial vars fully trained enabled and they will be in market with their end user customers.
This month.
With regard to UK. There are several million seats that are biased seeds that are up for grabs and as you know we signed a var relationship with the top two UK bars.
Some of them already closed deals with the with end user customers one of our larger deals last quarter was closed through a bar. So we are starting to see vars as a non trivial approach to the market and we think that has been some of the impediment to the move to cloud. So if you think about it the master sub referral channel is phenomenal they've done.
Great job for Us and we appreciate the relationship and we're starting to become more and more of the vendor of choice I think both intelisys on a few others just recently recognized us.
For being being there.
A vendor what is now interesting is but there's been an entire set of channel or customers that have not move forward because they're used to dealing only would that trusted bar and they don't want to deal with the end of with the service provider us, enabling the bar to essentially be the front, where we can basically go out and in.
Able to bar to go provide the same kind of service to their end use a customer using our partner exchange. We think opens up a very significant portion of the market and that is additive to basically the ability going to the master sub channel and then the ability to see past four vars to be able to provide customization served.
Mrs to the end use a customer.
Ends up providing that much more value for both the bar and be end user customers. So we believe by building. This one platform. We have two very unique ways to go to market. We can go the master sub route which is working very well and as I indicated is now 50% of our bookings were enabling the bar, which now basically starting to work with the first few initial wins.
But it really is a win win for the var. The var gets to go in and maintain the existing business model and provide customization services and for the customer it's a win because they used to dealing with the same trusted person that theyve always dealt with and I think we are unique in our ability to do that as evidenced by the relationships. We're signing I think we'll start to see revenue impacts of that in.
21.
Early stages, but we've already had a first few wins using departure.
And our these relatively exclusive I mean, I know, they're not absolutely exclusive but do you expect to be the primary partner.
I expect to be the primary partner, but I never asked for exclusivity because im never willing to give exclusivities. So from that perspective, but I think we will end up being the primary partner and as I said, our single platform is uniquely positioned to do that.
Thank you.
Okay.
Question comes from the line House, Mike Latimore with Northland Capital. Your line is open.
Hi. This is we had they were far Mike Latimore.
Good exhibit on those bumps on board that churn in small business segment and.
Generally it's also.
Your customer base.
Sure. So so churn as we've talked about before is primarily for US a function of customers that are on our legacy platform.
And so customers within generally older functionality of product not on X series, a churn by by definition is lower for customers. We have experienced once they migrate to X series and for those customers who were onyx there is a slower and so our focus.
Has been is now this year moving customers migrating the remainder of our legacy customer base to the X series, that's something that we're starting to get more traction around and we anticipate.
Moving in the bulk of our customer base over too.
Acts by the end of this calendar year.
No.
In may soon in your bookings number.
It is not when we report our bookings number that is organic if you will mean in as the you cast and see cast business and that business, that's where customers sign up for committed contracts with us over typically a three year period, the see past business.
Historically and currently for the most part is a usage based business where customers are signing up we become part of their operational infrastructure and so there is some very core amount of baseline revenue that they generate but it is usage based revenue that is not reported as bookings. So when we report our book.
Gains growth of 30% that is all the core you can see test business.
And migrations by the way will not be reported as part of bookings migration is just moving the customers from one platform to the other.
Your next question comes from the line of Rich Valera with Needham Company. Your line is open.
Thank you.
Provide deals you mentioned one were any of those are result of the crowd fuel partnership and to do they require a higher level of incentives relative to your your sort of standard deals was there anything unusually.
Anything unusual incentives in those deals.
No no unusual incentives.
The key part of with regard to cloud fuel cloud fuel will be in market. This quarter. So the initial wins, we've had have been through our UK vars.
And also actually one other var that we have in the us.
But yeah, no unusual incentives as a matter of fact of actually is.
Is quite works quite well from a.
Incentive perspective, because spiffs and other things like that a lower and the customer takes on a or the mark takes on a significant portion of the selling support and deployment costs.
Got it thank you and then.
The drill down a little bit more on the gross margin I know you've given some color on the Steve but gross margins dropped to about 800 basis points. Since you have completely folded in wells wave Selwyn by my math about 400 of that should be due to waive sell suggesting another 400 from sort of other factors, which you alluded to.
So I'm just wondering should we be thinking about gross margin once you've got through.
Some of the migration stuff you're doing the cloud fuel costs should we should we be thinking of it bouncing back on the order of let's say 400 basis points from from where it wasn't a third quarter or any way you can help help quantify that maybe how much you're thinking of in terms of sequential.
Gross margin improvement I know you said it improve it any any quantification of that would be very helpful. Thanks.
Sure. So so the short answer is yes, we expect to improve orders of magnitude gross margin back into the sixties.
No not not next quarter mean in Q4, but over time right. There is two sources of that Theres, a more efficient cost structure that we have in the core business and there is a higher margin.
Profile for a C past contribution and so.
We will talk more about kind of target model gross margin profile I I suspect in our earnings call next quarter, when we close out the fiscal year and look forward, but we do expect an improvement in Q4 not on the orders of magnitude. If you said 400 basis points in Q.
For not not so much.
Coming to the as you said coming from where we are now it was you know.
Trough.
Hopefully than that would be great. If we start our climb backup.
Hey would 50 to 100 basis points be reasonable.
Yes, we just haven't technically given guidance on gross margin percentage per se, but you would hope to see some expansion at least in that Cisco.
Got it and then you just with respect to the guidance you raised.
You know the service revenue by 3 million and you kind of maintain the loss there would have hoped maybe see some flow through of that to that to do it should improve bottom line is there anything you can point to their why why the bottom line didnt improve despite the improved rough guide.
Yes. We this was this was part of our approach to managing the business. We decidedly invested a lot really the first three quarters of the year and so it really was in anticipation of returning back to a more healthy.
Expense growth and expense run rate and so we saw this as part of our target and operating structure that we needed to get too which is why candidly weve been so vocal about calling out that we are spending a lot of money historically here in Q1 in Q2 in Q3 on those two big areas of go to market.
Marketing specifically.
Demand Jan and on our product innovation and technology and so this was part of our thought process and how we saw it go forward. So theres no surprise to us and so far as bottom line. This is what we have been managing too.
Okay. Thanks, very much appreciate it yeah sure. Thank you for questions.
Your next question comes from the line of Catharine Trebnick with Doherty. Your line is open Oh, I'm nice quarter and thanks for taking my question.
Drove back into device opportunity. So my question has to do with their our head you said in your prepared remarks over 15 million I'm biased seats out there, but also in talking to all the various channel partners. There's hundreds in difference of Fiat implementations right different operating.
In systems different integration, so what kind of plan do you had in place to facilitate you know and easy when if it's you know this version over this version to to speed up some of that thanks.
Yes, Thats a great question, Catherine and that was why you to some of the the press we saw about how it would be easy just through.
A quick relationships for competitors to migrate everybody all over to a buyer I mean as you know even of I has multiple flavors of phones. They have the sip phones, but have a whole series of other phones. So there is no easy answers. So we have built a lot of migration tools as part of it as I indicated we've had quite a few.
Wins, a with a buyer customers and a buyer replacements and they fall into three or four very broad buckets and so that was part of the thing as part of our.
Relationship it scansource as well as some our relationship with the various bars is to develop a series of very clear migration tools and processes by which we will be able to migrate existing of by a customers.
Also kind of highlighted 234.
Features that are important to buy a customers and made sure. We tried to kind of prioritize them on our product roadmap. So that they're able to move forward in that area and then that is also part of the relationship with poly where in some instances where you have legacy phones and that are not sip compatible and so the ideas on those phones, we will work with poly to basically make it easy for the customer to.
Able to literally getting subsidized phone and transfer over to a very modern phone. So this is a big you know very thoughtful process team put together about a year year and a half ago and we've been systematically working towards it because of Iowa has 100 odd million seeds through Scansource, we access 15 million of them, but my intent is to go after everyone.
That is in a bias seed and frankly, if you're in a by a customer.
You have no exclusive relationship with the via it is very much in your best interest to look out for what is your best option. We are a very credible option and since we particularly have one integrated platform with the contact centers already built in and we have to see best and the video conferencing and it's not a hodgepodge of stuff assembled together, we think we provide something very compelling.
For those of customers and I intend to either through a master sub channel or through our channel to go after every one of them.
Alright, Thanks, Nick.
Your next question comes from the line of meta Marshall from Morgan Stanley. Your line is open.
Great. Thanks question on.
For the intent of wave sell was just to kind of bring better analytics to the X series platform and just wanted to get a sense of kind of progress on some of those initiatives and then second on the professional services drag just that investment just due to growth you know or contact center kind of take.
More professional services just any insight on that thanks, okay. So so we've sold was actually.
We have analytics, we've still was actually to provide customization to our core platform. So the example, I would use and happy to set up a demo because it really is kind of unique is if you were for example, a vacation rental company and you rent out a house and you called the contact center agent and say I can't find the.
Yes, the normal approach would be okay, I'm going to get somebody in a car to go meet you at the house. So they can help you find the keys with see past, what you're able to do is literally send a custom link somebody presses that on the web browser and now the phone becomes a camera and they can look around to hitting on a point the camera to the left or right. There's your keys now you've saved.
Huge amount of work and you have increased customer satisfaction. That's one example, also the ability that if you have a phone call at the end of it I can send you a quicklink where did you like the phone call to do not like the phone call or something like that that's what sea bass is intended to do it adds that customization. It adds that customer engagement as in addition to our overall package such.
Lucian.
Paul Stat, Io, which is the company, we just bought which is de Minimis actually no revenue, but a very interesting technologies for web RTC. It analyzes all called stats and flows for our for web RTC endpoints. So it ensures that we have end to end analytics. So that's something that's core to what we did and now we've added cost at higher to add that too.
Two.
To web RTC as well, but as I said, that's one part.
Wave cell is intended to add the customization and that entire layer of personalization to both contact center and Ucas and increasingly a lot of our customers are using that as a way to say okay. It won't just be a contact center I'll be able to personalize my experience unique to my customers and we're seeing wave so be a significant flare in.
[music].
I think with regard to professional services once you take thats, even sure so submitted.
Professional services for US is mostly any you and I've talked about this mostly deployment services theres some element of higher margin high value at Prof services sure, but it's mostly deployment and the dynamic of those services is fairly different between more of the.
Flywheel SPE model and a large midmarket enterprise deployments by large midmarket enterprise deployments are fairly understood economics and pricing that we still have some pricing power on that and those are not really massively loss, making ventures for us.
Where we have some work to do and we're thrilled that Sam is now taking this on as chief customer officer, and putting together all of the deployment and thereafter facing work with customers is looking at really partnering with our engineering team and building a more fluid.
Less friction higher speed deployment tooling, so our capabilities to drive leverage to get customers deployed quicker faster cheaper and so it's it's something that we've begun the migration to and so we're pleased with that and we expect to see improvements in our deployment gross margin.
Overtime.
To see a huge lifting Q4 from that.
Not so much but I'm kind of looking at Vic and I am I'm sure that's on Sams.
Goals for the next six months to start driving that to be better does that make sense as far as the color outcomes together.
I mean, it without objection so ordered.
Maybe there.
Mr. Mark operator line is open.
Your next question comes from the line of James Breen with William Blair. Your line is open.
Thanks, Thanks for taking the question just a couple.
Little bit on the margin structure as well is there any differences you're talking about a lot of the sales this quarter with contact center.
How does that in the mix, excluding see pass how does that impact the overall margin structure.
And then around see pass.
As you are getting scale, there and you're getting the there's a cost side that equation, which I'm, assuming you're getting some benefits there as you get bigger or you passing on some of that savings to the end user in an effort to drive higher volume growth like sort of whats the thought there in terms of the direction going thanks.
Sure I think I'll tag team on the so.
The the gross margin structure.
The first part I apologize was up just like our season pass in the first part was contact center products are yes. So short answer is yes. The contact center gross margin is lower than you cast gross margin and so the more contact center you do that will pull it down more towards to me, it's still above where our gross margin is right now.
So doing more contact center still pulls our gross margin up if we were to add one more dollar growth margin today would have pulled it up so so thats an important message, but your your instinct is correct.
On the C past side, it's a usage base volume model and so a lot of the economics for us are baked into a lot of the contracts with our customers at the at the time of signing and so the margin expansion for us.
Really from geography, and product less so from changing in pricing with existing customers over time.
You have more pricing power with more value added services sure but for the most part in the very very core SMS message base products, we're really looking at maintaining pricing.
Rather than driving savings in passing that on.
Great. Thank you very much.
Sure.
Your final question comes from the line of George Sutton with Craig Hallum. Your line is open.
Thank you Stephen I wondered if you could just walk through the goal of non-GAAP profitability by next year's yearend.
As you're doing the planning process could you just talked through the importance of that metric.
Where are you may run into situations, where you might otherwise want to invest for growth I just wanted to get a perspective on that.
Sure that metric candidly is top of the list for us.
We are doing our fiscal 21 planning right now had a board meeting a few weeks ago and started going through that with our board.
Whole team is oriented around that and we we see that candidly as a very important sustainability and credibility factor to driving growth right and it's a mix of driving growth, but driving profitability to support that growth.
And so how we get there really is two factors one is.
Growing revenue and contribution at a higher rate and two is increasing costs at a decreasing rate. So it's the divergence of those two curves. When you asked how do you get there that's how we expect to get there.
So what we just did the realignment we talked about was we've removed a whole bunch of cost.
So that was good we ratcheted down the whole cost structure, and we will look to increase cost at a decreasing rate.
And the part I would add this goes back to the conversation I think we've had in the past about the platform.
The whole idea of a platform is that you have multiple technologies with shared services on one common structure and keeping us on the painful things we had to do we did I know I guess nine acquisitions over the last.
Few years is to put everything together with one common engineering team, which means anything that gets developed for contact center also applies for unified communication any analytics and this I think was one of them made his questions. We had acquired this company Mariana acute which provided a layer of analytics that entire analytics applies for everything from sea faster Ucas to video.
Conferencing to our contact center et cetera, so that leverage if a platform means that for one more incremental dollar engineering spend I get a lot more productivity as opposed to I mean does probably 30% to 40% shared between all of these various technologies. So thats one second increasingly because you are selling.
The platform to your customers. The same CAC can now be leverage because once you sell ucas, who can so the video conferencing you can sell contact centers set us dissolve part and parcel of our core strategy. That's why you're starting to see engineering costs moderate even to our innovation continues at this kind of pace and then at the lower end.
The big investments, we made an E. Commerce is so that the lower end customers, we can increasingly send more and more towards E. Commerce. Because then that cat goes down so from that perspective, you can kind of see hall to chess pieces over the last few years and the massive investments over the last few years are now starting to get to a point, where they bear fruit and thats, how it will be reflected.
21 funding process.
Great one last thing relative to our CMO change, we've obviously seen different iterations over the years relative to search engine optimization and the branding focus what generically would you say might be different with our new CMO.
So I mean look marches been issued a very experienced CMO. She was at micro strategy. So those analytics you was a CMO of Informatica.
CMO I'd be a very senior marketing executive at HB at Sep very few people with that breadth of experience has been there she has done that.
Everything from and she is very familiar with this whole concept of platform, so more and more we're heading towards platform and the leveraging the platform to basically get maximum utilization and CAC. So I think you'll see March continue to focus on efficiencies digital spend.
Go to market on channel branding product marketing et cetera, and kind of combining it altogether, but as I indicated what margins done issues come from an analytics and a background in a flat from back from which we think gives us a huge edge.
Perfect. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].