Q1 2021 8x8 Inc Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Good evening My name is David and I will be a conference operator today.
At this time I would like to welcome everyone to be by eight.
Fiscal first quarter 2021 earnings conference call.
Well now turn the call over to Victoria <unk>.
Head of Investor Relations.
Thank you good afternoon, and welcome to eighth grade first quarter fiscal 2021 earnings conference call.
Joining me today, our Vik Verma, Chief Executive Officer, and Samuel Wilson, Chief Financial Officer during todays call Vic will begin with business highlights of our first quarter performance. Following that Sam 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 eight by future financial performance as well as it isn't it.
Got it and growth strategies, including the impact of the Cobot 19 pandemic.
We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties. They may cause actual results could vary materially from the forward looking statements as described in our risk factors in 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 are not prepared in accordance with U.S. generally accepted accounting principles work out.
Reconciliation of non-GAAP measures to the closest 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.
We continue to experienced unprecedented times and I hope you and your families of staying state unhealthy.
Before we begin I would like to welcome Sam Wilson, our new CFO to the call.
Sam has been part of the eight by you team for almost three years in various executive leadership roles, including spending the previous six months' transforming eight bites cost structure through self service and automation initiatives as chief customer officer.
Sam has also led our small business a midmarket sales professional services implementation and customer support functions.
As you will see Sam as quickly come up to speed and the CFO role and we're pleased to have his financial leadership and operational acumen as we accelerate into a next phase of growth and profitability.
And now to today's business.
I will focus my remarks on for core prop topics.
First quarter results go to market execution.
Platform strategy and finally, our back to profitability exiting fiscal 2021.
At eight by our mission is to help businesses leverage enterprise communications to create the new digital workplace.
Business today, it requires resilient communication systems to support increasingly distributed.
All the remote workforces.
Now more than ever cloud communications is fundamentally shaping the new campus, the new work group and the new office.
Our team had strong execution against the accelerating cloud transformation opportunity in today's challenging environment.
We started off fiscal year 2021, strong with solid service and total revenue growth and improved operating performance.
Reach exceeding the high end of our financial guidance for the first quarter.
Total eight are our grew 30% year over year with consistent performance across our block from offerings.
New bookings accelerated to 33% year over year, excluding feedback.
We achieved our second sequential quarter of solid progress towards profitability, beating our bottom line guidance and reducing our non-GAAP pre tax loss by 5 million from the previous quarter.
As a result, we reaffirm our path to delivering non-GAAP pre tax breakeven exiting the fourth fiscal 2021 quarter and our cash usage continues to improve as we got our cash burn by more than half from the prior quarter.
As we have previously discussed we have made substantial investments in our go to market over the past two years that are now bearing fruit.
This quarter, we saw improved deal execution.
Continued channel strength and robust pipeline growth with significantly lower customer acquisition cost overall.
Specifically.
We expanded our enterprise customer base with 38, new eight our our deals greater than $100000, including a new eight be good total contract value deal.
Combined Midmarket and enterprise eight our our grew 52% year over year as compared to 39% growth in Q1 last fiscal year.
We delivered a record high bookings quarter overall led by channel bookings that grew 47% year over year.
62% of overall, new bookings and nine our top 10 deals getting from channel partners.
Our cloud feel partnership with Scansource on Poly continued to sign new value added reseller partners that are focused primarily on accessing 15 million on premise a biopsy.
One. Notable addition is allegion technology.
Oh biased 2019 cloud partner of the year.
Who joined the Scansource and poly cloud fuel bar program.
They were particularly impressed with our newly developed eight by voice for Microsoft teams integration, which provides them with a unique value proposition to access the upper Midmarket and enterprise markets.
Other new Scansource bars added to the cloud fuel program include gauge Telkom Shamrock communications and stock eight technologies.
We're also pleased to have Lantana communications join our U.S. bar program.
In the UK Virgin media business is ramping ahead of expectations and we have multiple high valued deals and the pipeline.
Globally, we launched our new website and are already seeing improved awareness a notable improvement in marketing CAC and increased overall pipeline production.
Finally, 68% off our customer base is on the X series platform up from 43% last quarter.
And we now expect to have more than 85% <unk> customer base on the platform by the end of the calendar year.
Ahead of our prior target up 80%.
Turning to customers.
New customer logos in the quarter represented 64% of new bookings up from 57% a year ago.
Customers in key verticals, such as health care manufacturing public sector and financial services responded to the pandemic by purchasing X series.
We saw an improvement in our business performance and channel dynamics in May and June as economy is gradually began to reopen in domestic and global markets.
Let me highlight a few notable examples.
Six off our top 10, new deals with a buyer replacements from customers, who selected our X series solution after conducting competitive or a piece with other cloud providers.
Two noteworthy examples include a 5000 plus feet win with a global financial software firm in the UK.
And a 2000 plus seat win with a manufacturing company in the U.S.
Both of these deals with channel partner led and included a bundled eight by you Cas and see gas suite.
Our newly announced the voice from Microsoft team solution made a strong debut last quarter in a number of deals.
One example is a global manufacturing company headquartered in Europe that needed to solution that interconnected with Microsoft teams to enhance the sales and service experience.
We won with our eight by X series, you can see guess suite with secure pay.
We saw strong momentum in the state local education and special District segments also known as sled in both the U.S. and UK as agencies responded to increasing cobot 19 impacts.
Manchester City Council is one of these and a Prime example of how eat by eight was able to keep vital surfaces running safely for its more than half a million residents throughout the UK locked up.
We also want to major U.S. state contact center deals in this quarter.
Our largest win was in North America with an important channel partner, who led a new eight figure total contract value deal with the health care provider.
Just on premise replacement when included more than 20000 seats up eight by X series.
Continuing with health care, we're proud to support providers and employees working on mitigating the impact of the cobot 19 pandemic.
We were especially pleased to assist let's get checked a cobot 19 home just get services provider with remote contact centers in the U.S. and Europe.
Within 10 days, we enable lets get checks contact center agents to work remotely and continue providing an uninterrupted customer experience at this critical time.
Finally last quarter I spoke about a global financial services customer who needed to rapidly scaling work from home contact center operation for employees based in India.
We enabled 1000 seats over a weekend.
This past quarter, we deployed another 4000 X series, you gas and see gas seats throughout offices in South America EMEA.
This enterprise customers relationship with eight by has expanded to a over 11000 seats within nine months.
[noise] all of these wins are a direct result of the ongoing investments we have made in our go to market capabilities.
Enterprise have witnessed the on premise legacy systems do not have the ability to tailor a communication and contact center strategy that adapts to a work from home Cobot 19 environment.
As we continue to reap the benefits of our open communication platform and strategy. We believe this will further position us to deliver sustainable long term growth and profitability.
Now, let's move onto our platform advancement in market penetration strategy.
The eight by open communication platform is arguably the industrys most complete portfolio of operate from anywhere enterprise communications.
It uniquely brings together all the essential digital workplace blaze elements required for enterprise communications, combining voice team chat video meetings contact center applications and Apiay solutions.
You buy shared intelligent communication services like AI, driven expert routing and predictive analytics all on a single platform.
Our voice for Microsoft team solution is an enterprise class global cloud telephony solution that is the first to fully integrate with teams without changing the experience for end users.
It works natively with both the Microsoft teams mobile and desktop applications with no downloads required from eight bye.
Other Microsoft teams integrations, either change the end user experience or do not provide global coverage.
The benefits of Microsoft team and cloud telephony exists in virtually every organization that requires collaboration and communications and is further accentuated when it is integrated with a world class contact Center solution.
One of Microsoft largest you get channel partners is working with US on a program to bring eight bites solution to that thousands of existing Microsoft customers.
In the U.S. nearly 1000 channel partners registered for a kick off Webinars and we're already seeing a strong pipeline of opportunities for this product with those partners.
Due to a continued investment in the business, we own all be essential elements of an integrated platform, resulting in three volume on ramps that are driving sustainable revenue growth.
The first on drive is our core technology platform, we do you cash and see cast bundled offerings.
More and more customers see the benefits from having all of their communications delivered from the same platform.
55% of new bookings up $12000 are more in a RR were from customers that selected bundled you cash and seek yes.
Contact center, new bookings grew 194% year over year and represented 32% of total new bookings this quarter.
Throughout this pandemic, we've seen many contact centers challenge to handle increased call volumes.
Artificial intelligence and automation is increasingly key and we've expanded our offering with conversational AI that captures intent and integrates into Amazon Aurora and an IDR jackpot that offers the ability to send and receive automated SMS messages <unk> instant mobile communication.
The second on ramp is delivering see pass globally.
We believe that human interaction is redefining the user experience of today's b to B and B to C applications.
There are millions of corporate than I guess, we developers worldwide and we believe that core competency of the coming years will be the ability to add real time communications into these applications.
Last month, we announced the expansion of our communications platform as a service RC pass programmable applications and energized to North America and EMEA.
This concludes our new powered by Gypsy eight by meeting CPR.
Our network of more than 130 top tier carriers around the world in 160 countries is powering BCP eyes in enabling businesses to customize applications and workflows by building and SMS.
Voice and video communications into both front and back office customer partner HR and IP solutions.
Our sea bass pipeline in the U.S. and UK is ramping including many cross sell opportunities within our you cash and see gas customer base.
This past quarter, we signed more than 50, new sea bass deals globally, including more than a dozen clients in the UK.
Use cases for new customers include text to speech software that turn just text into a voice call and adding SMS messages for customer notification and to enhance security using mobile number verification two factor authentication and onetime pens.
We also signed a new mobile carrier partnership with Telefonica for Europe, and Latin America to expand our SMS and voice network connectivity.
Our partnerships with both Oracle and Amazon Web services, who each have a large share of the developer community worldwide.
We'll be an asset here as we ramp this portfolio to developers worldwide.
Our third volume on ramp is our E commerce platform as a fully self service entry point for small businesses and work groups.
In the U.S. you can't Austria alone there are tens of millions of small businesses.
Our E Commerce portfolio was created to address these customers with a low friction buying provisioning and support experience.
E Commerce is gaining traction and consists of our eight bite express and meeting pro products.
To remind everyone. This is a self service hundred percent online provisioning solution, enabling customers to buy the products with a credit card and be up and running in minutes.
Since the inception of our E commerce business Weve doubled E commerce logos and more than doubled E commerce revenue every quarter.
We are now, adding thousands of new customers per quarter.
Our just see an eight bite video meetings growth has now stabilized to the mid teens in terms of millions a monthly active users. Although we do expect increased activity school returns to session in September.
We expect that our path to monetization of our significant jutzi user and developer base will continue to ramp through our eight bite meetings pro and increasingly our newly announced eight by meetings CPI.
With tens of millions of companies in this business segment. We are optimistic that there is a long runway of growth ahead of this portfolio.
I also want to discuss one of the most important investments we've made which is automating the migration from our legacy products to our X series platform.
As we continued to make progress on this transition our X series customer satisfaction churn rates and support infrastructure are all the vast improvements from our legacy base.
I'm very pleased to share with you today that X series now represent 68% up our customer base up from 43% last quarter.
We've completed our largest automated migration in the first quarter and now expect to have more than 85% of our customer base on the X series platform by the end of the calendar year ahead of our original plan.
These strong returns for the quarter, where a direct result of our go to market investments are differentiated platform and continued engineering innovation.
The final topic I'd like to discuss is our path to profitability exiting this fiscal year 2021.
Over the last two fiscal years, we've invested in developing our platform and building our go to market engine and channel infrastructure.
The company has transitioned try mainly small business view IP offering to a full featured cloud communications platform, that's moving up market.
We remain on track to achieved non-GAAP pre tax breakeven exiting a march 4th quarter fiscal 2021.
Our operating discipline is delivering results as we optimize our global sales marketing and operations for improved efficiencies retuning economies of scale on our multiyear investments as evidenced by our improving gross and operating margins year over year.
We remain steadfast in our assertion that work from anywhere will increasingly become a fundamental requirement for businesses of all types and sizes and we're confident that are eight by eight open communication platform and go to market capabilities are well aligned with the market direction.
We're pleased with the progress we made this quarter and remain focused on accelerating the execution of our strategic plan.
Finally, I want to express my gratitude to all of my colleagues for their hard work and continued commitment to our mission.
Now for some additional color on Q1, let me turn the call over to Sam.
Thanks, Rick and good afternoon. We appreciate you joining us as we report first quarter financial results I want to Echo Dicks comments that I hope you in your families are well and staying safe.
Im excited to be speaking with you. This afternoon. During my first earnings call as the CFO of eight by eight thank you to Vic and the board for having confidence in my abilities.
For today's call I will walk through our Q1 financial results and then provide guidance for the second quarter and some color on the remainder of the fiscal year Lastly, I would like to share my initial observations and ongoing priorities over the last 50 days before opening the call to answer your questions.
Starting with our first quarter results, we're pleased to deliver performance that beat our guidance overall results were driven by better than expected performance from you can see gas and are bundled offerings.
Total revenue for the quarter was $121.8 million, an increase of 26% year over year and above our $120 million to $121 million guidance.
Total revenue was driven by better than expected service and professional services revenues.
Looking specifically at service revenue, we generated $114.2 million, an increase of 27% year over year. Please note that service revenue reflects the reclassification action, we implemented last quarter and now excludes professional services revenue.
Including professional services revenue service revenue would have been $118.2 million, an increase of 28% year over year. As a reminder, we will not be disclosing the historic reporting a professional services after this quarter.
Turning to our business metrics total ARR was $432 million at quarter end up 30% year over year and solid growth across you can see cast and see pass offerings. This growth was driven by our continued movement up market to larger enterprises channel was also an essential driver behind.
Increasing our reach in the Midmarket and enterprise markets.
As Vic discussed our investments in the channel and product innovation over the last two years are continuing to pay off our bundled offerings that you can see Cas is fit from customers needs. During the quarter. We further expanded our see past offerings into the U.S. and UK markets our largest markets.
Giving us a further multiproduct platform advantage lastly, we announced our Microsoft teams direct routing solution. During the final month of the quarter and have been receiving very positive early interest.
Over the next several quarters, we're going to lap some large channel led deals we close last year, including eight figure PCB deal with more than 30000 seat. We previously discussed we will also lab our July 2019 acquisition a wave sell these.
Impact our growth rate in various channel and customer segment, which we expect to cause them to bounce around.
Our first quarter non-GAAP gross margin was 61.3% driven by product mix and better than anticipated professional services revenue.
Non-GAAP service revenue margin improved by one percentage point over last quarter to 67.7%.
Non-GAAP other revenue margin came in at minus 34.7% for the quarter, a large improvement from the minus 70.5% a year ago.
We executed on several rapid deployments with professional services engagement in response to our customers evolving pandemic means giving us better professional service revenue.
Also we have continued to grow our hardware rental program, which improves gross margin.
We had lower than expected see pass usage during the quarter, mainly driven by continued koby related slowdown in Asia, which began early in the quarter, but started to rebound towards the end of the quarter.
As we have previously mentioned see past margins are significantly lower than you caf and see cash gross margins.
In the first three weeks of July we see improved usage patterns as certain verticals end market. Our re opening for business. We currently expect the gross margin trend will reverse in the second quarter with increased see pass usage as the world reopened and our entrance into the UK end use markets.
This could influence product mix in our overall gross margin profile to come in slightly lower sequentially.
Looking at Q1 operating expenses, we are delivering on our goal of aligning the global business to drive both improved execution and efficiency.
Non-GAAP sales and marketing expenses improved to 43.4% of revenue in Q1, 3% lower than last quarter.
A combination of optimizing our media spend and moving from physical events to virtual events and Webinars have driven spending efficiencies. We also continue to add sales capacity.
Non-GAAP R&D expenses came in at 11.8% of revenue in Q1 versus 9.5% last quarter, we continue to prioritize investing in our differentiated technology platform advantage and completing the migration of legacy customers to X series.
Non-GAAP DNA expenses improved to 12.5% in Q1 from 12.9% of revenue last quarter.
We hope to gain further genie advantages as we scale revenue and related operations.
Total non-GAAP operating expenses were up 6% year over year, well total revenue grew 26% year over year, a clear sign that we're making progress on our return to profitability.
I would like to point out the due to the timing of certain expenses each expense metric will not necessarily improved each quarter in linear fashion.
However, we have begun delivering returns and we expect to continue efficiency improvement trend in combined operating expenses as a percentage of revenue on a year over year basis.
Importantly, our top of funnel metrics, including pipeline coverage rates continued to improve our growth rates remain relatively high and our margin profile improved. These results show we are starting to reap the returns a previous investments in demand generation and the channel.
We expect to see further improvement in unit economics, as we optimize our go to market motions.
Our non-GAAP pre tax loss was $7.6 million for the quarter ending June Thirtyth. This was materially better than our 12 million dollar guidance provided in May and the result of a combination of better than expected total revenue margin improvement operation were financed and the timing related items, such as reduced travel expenses.
And some currency benefit.
We are assuming the timing items will not recur when we are giving guidance I'm extremely proud of how the team is being very diligent about each dollar spent.
Turning to the balance sheet total cash restricted cash and investments ended the first quarter $186.3 million, including $19 million of restricted cash.
This is a decline of approximately $20 million quarter over quarter, an improvement of $28 million from the 48 million dollar sequential decline witnessed last quarter. We are focused on further reducing our cash burn both through operational efficiencies economies of scale and improved collections.
We also experienced some one time and timing related benefits in the quarter. For example, we availed of certain tax deferrals and credits from various jurisdictions, we saved us over $3 million in cash usage for the quarter.
For the full year, we would expect a cash usage to slightly increase in Q2 and trend lower again in Q3 and Q4, we believe the better than expected collections is a good sign that cobot related risks are manageable.
One final item under liabilities I want to discuss is deferred revenue, which increased during the quarter to over $11 million from roughly $8 million the previous quarter.
We have started the journey of moving towards billing contract in advance of service delivery and expect deferred revenue will continue to grow in the balance sheet. Additionally, we have started a number of operational programs focused on reducing the time between booking a deal and receiving the cash.
Turning to the outlook as we entered the second quarter, we've seen improved sales funnel metrics increased fee path usage in July and we are offering new products like Ns teams meetings pro in additional see pass offerings.
Offsetting this is the continued uncertainty in the macroeconomic environment as a result of the pandemic and our primary use market.
Which more adversely affects our small business installed base.
Taking all this into account we are establishing our guidance for Q2 fiscal 2021, ending September Thirtyth 2020 as follows.
We anticipate total revenue to be in a range of 125.5 to 126.5 million, representing 15% to 16% year over year growth.
We anticipate service revenue to be in a range of 117.3 million to $118.3 million, representing 16% to 17% year over year growth.
We anticipate non-GAAP pre tax loss to be approximately $7.5 million.
While we do not a formal guidance for the full year. We wanted to provide some color on the service revenue growth profile as we mentioned in our May earnings call. We continue to expect service revenue growth rates to come down as we move out of Q1 and through Q2 in Q3 as we lap the anniversary of the wave sell acquisition.
Considering continued cobot 19 impacts on the global macro economy, we continue to see service revenue growth rate for the full year fiscal 2021 in the area of 17% to 18%. We are conservatively factoring in a range of outcomes based on what we know today.
And so with that let me turn to my final topic and discuss my initial observations and ongoing priorities over the last 50 days before opening the call for questions I've had the pleasure speaking with many of our institutional shareholders and analysts to solicit their feedback and help clarify some misconceptions.
Eight by is a company with a considerable amount of assets and strong monetization potential. Therefore, my top priority as CFO is capital allocation.
As I look forward the balance between investing in future growth operating speed and direct returned to shareholders is essential operational improvements are a must and as such we are optimizing spending to improve the overall business performance.
Additionally, I remain focused on delivering on our commitment to non-GAAP pre tax breakeven exiting Q4 fiscal 2021, the March 2021 quarter.
This is important for our customers our employees and you are shareholders. Additionally, we intend to have approximately $100 million or more in cash and cash equivalents on the balance sheet at fiscal year at.
Our model suggests we will be cash flow breakeven two to three quarters after and at this time, we believe we have adequate cash to get the positive free cash flow in fiscal 2022.
From an IR point of view I have heard our investors loud and clear simplify the reporting a financial results moving forward.
We provide a vast level of financial detail in our supplemental IR metric sheet, which has created the impression that the business has many moving pieces.
This is not the true case.
As a first step in this process next quarter, we will no longer provide the metric we have referred to as new bookings growth excluding see past when we introduced this metric last year. It was to measure the growth rate of bookings contracts for our core ucas fancy cast business, excluding see past usage.
And other fees until we anniversary our see past acquisition.
It does not include renewals it has been a subset of total bookings growth and now that we have lapped the acquisition and fully integrated the business.
We believe it is no longer a meaningful metric, we believe going forward error or as a more precise and relevant metric to measure the health of the overall business.
In addition, we're not contemplating introducing new metrics at this time and instead, we look to continue to refine our parameters, we will seek to simplify what we report with your input.
To wrap up we remain well positioned to manage the business for the long term and are committed to accelerating our efforts to deliver better financial performance and enhanced shareholder value operator, we're ready to take your questions.
As a reminder to ask a question you will need to press our 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 a line of rich Valera with Needham and company. Your line is open.
Thank you good afternoon, and thanks for taking the question.
I appreciate you kind of reaffirming the 17% to 18% service revenue growth number that's a pretty healthy number. It just seems that you would need to see a significant incremental uptick in the the service revenue added per quarter relative to what your guidance suggests in the September quarter. So can just talk us through how you.
Our thinking about that sort of acceleration of incremental add up service revenue in the back half the year.
How we should think about that maybe between the two quarters and what drives that.
That incremental add.
All right. So this is Sam I'll take that one rich.
It is straightforward, it's driven by our modeling and what we have based on our bookings and what is currently in our forecasted model.
Gave you the two to guidance and the color for the fiscal year I think what you'll see is higher growth rate you have your growth rate in the fourth quarter over the third quarter, but we're pretty confident what the model shows right now.
Got it.
And then could you just give us any color on what's going on with churn.
Last quarter, you gave a fair bit of disclosure there you talked about your DB any being below 100% because sort of.
Celebrated SMB churn or higher SMB churn can you talk about how that's trended over over the last quarter and how we should think about that going forward.
Yeah, I think last quarter, we said that we exited fiscal year 19 surface their 20 with our best churn quarter with the fourth quarter, we did see slightly higher churn in Q1 the quarter. We just reported I think mainly based on coded I mean, we did see a little bit of.
The increase in our small business segment I just to say, though if you look at the cash flow number collections were very solid in the quarter. So I think it's very manageable and our right now everything just feels like it's kind of like on the plan that we're expecting for fiscal 2001.
Okay. One more just maybe just one more thing I'll add and then you mentioned the NDR stuff.
So I think we said last quarter that overall NDR was less than one but X series NBR was significantly over one and as we migrate customers to X series, we are seeing those types of numbers hold.
Got it Thats helpful. Thanks, Sam.
Your next question comes from the line of Ryan Mcwilliams with Us season.
Lines open.
Thanks, just to piggyback off for just a question for the service revenue growth guidance, a 70% to 80% from full year you talked on this included 200 bips of comfortably to turn per quarter from the first quarter to third quarter. This fiscal year, just talk about where that was versus the 200 ups for this quarter and then going for.
We would you consider that's like a conservative expectation given the rebound that you saw in end of May and June.
All right. So think doesn't reverse order I do consider the forecast conservative.
As you can imagine having a global diverse base like we have and given the fact that cobot is anything but a.
Easily model moderate global function, we are trying to be conservative with our guidance to make sure that there is no severe surprises.
In regards to churn I'm.
Advantage being the new Guy, so I'm really not going to get into.
Giving you turn numbers down to the the basis point level I'll just tell you its inline with our expectations. There was nothing surprising in the quarter.
Great and then one for Vic So my checks have highlighted that the voice or Microsoft team seems like an interesting integration.
Teams, having over 75 million daily active users at this point, how do you think about the size of that opportunity and what type of customer do you think this fits best.
Yes, so it's it's been quite interesting. So we've actually already got customers deployed on Microsoft teams that gives you a sense of how quick be uptick was.
And it helped us win a couple of very large global deals.
What we're finding that the profile of the customer is large multinational customers with offices all over the world, essentially which need global voice and potentially contact centers and so that piggybacks very well with the Microsoft teams experience, which is primarily a collaboration experience and the thing that makes us Julie.
Oneq is you don't have to get out of the Microsoft teams environment. It's completely native you don't have to download anything from eight blade. It's all very tightly integrated together, we had a couple of a very interesting events I think one of Microsoft's largest distributors in the UK.
Bob has really jumped on it and they had I think.
Webinars, which they said was the highest attended Webinars and then in addition to that we've had I think just out here, we did a webinars over 1000 channel partners signed up for it. So we're seeing good strong demand and I think it is.
It's going to be a decent growth driver for us.
Great. Thanks, guys.
Your next question comes from the line of Mehta Marshall with Morgan Stanley. Your line is open.
Hi, Thanks to the question this is Karen on for meta.
First question would be so you noted that your X series transition has progressed ahead of plan. So I guess just wanted to know what kind of incentives, you're giving to the channel order or to customers to accelerate that transition and then maybe a part to that question would be what kind of savings would you.
Bring from just supporting one product. Thank you.
So again, we'll we'll tag team. This one so the we're not providing incentives to people actually with the as you can think about it. This is a company that is 2030 years old and so we have a customer base stretching back to the early two thousands that I've been on various legacy platforms, who have done multiple acquisitions, so accelerating to exit.
Aries, which frankly, what all the channel checks, we have done indicate that that has industry leading the NPS.
And customer satisfaction, what we are finding as we figured out a way to completely automate the process and so it's a seamless experience for customers, where we go in and gather all the data of usage of the various functions and then literally over a weekend the customer comes in in the morning on a Monday and you are now in a new experience, which is much more.
Sure.
Integrated much better user interface more automation, most self service et cetera et cetera. So we're not providing incentives what we're trying to do is make sure that essentially the two costs remain essentially the same so there's no real leakage and and overall revenue for us and there is no extra.
The.
Cost for the customer with regard to the overall cost savings as you can guess that is something Sam will address so I'll take this one so right now I mean as you can imagine we just raise the number from 80% to 85%. So we're still expecting as he's going to next calendar year and maybe even next fiscal year, we'll still have people and resources attached to it.
Probably as we enter next fiscal year, what we'll do as we'll reassess at that point and as we as we finish our migrations, we the roll the engineering and the support efforts into high ROI projects or will bring it down to the bottom line whichever seems the right decision at the time.
Got it thank you and if I could you just has one more could you provide some more detail on your teams partnership and when you think that could contribute money meaningfully to revenue. Thank you.
It's starting to contribute to revenue I believe there is a 100 active deals in the pipeline is just another one of the growth drivers for our you see cc platform business. So we continue to see traction in that and that I think becomes another differentiator for us so far so good.
Great. Thank you so much.
Your next question comes from the line of James Breen with William Blair. Your line is open.
Thanks for taking the question just a couple on the sales side, you talked about channel bookings growing 47% of year investing 62% a new bookings.
Do you think about that over the long term.
Where can that go to will be essentially 80% or so and then when you look at year breakout of.
By customer small mid and enterprise.
Are there any pre between the gross margins in those businesses across three different segments. Thanks.
All right I guess I'll take these as I'll take both of these.
We expect that channel as a percentage of overall bookings will continue to trend higher over time, but I wanted to be very clearly that will be a linear thing it will be jumpy a lot of our larger deals are big eight figure TCV deals are generally channel led.
We're working very closely the channels at points of the always be some lumpiness there, but I would expect over time, we're investing in the channel we're seeing benefits from the channel investment, we love our channel partners, and it's becoming a very virtuous cycle.
On the second question.
As channel have any real difference in gross margin I presume versus direct the answer is no.
Cost to serve those customers is roughly the same.
There's a little bit of a difference in sort of economics, but remember, while we may give a channel incentive or an a competition the channel partner to close the deal there also providing tremendous value added services.
To our end customers that that we benefit from the cost savings and it basically equalize itself out.
Great. Thank you.
Your next question comes from the line of make platform with Northland Capital markets. Your line is open.
Yes, thanks, Yeah, we're in this quarter there.
Maybe can you just talk a little bit about.
Bookings closer out.
Like the quarter, even in July you're obviously, we're kind of a fluid environment just kind of curious how bookings have played out sort of April may June July timeframe has that been elevated throughout or has it been building throughout just some color there would be great.
They have been generally strong throughout I.
I think April was a little slower and then May and June definitely picked up.
But I've been pleased overall by our bookings and I think particularly the channel I think one of the refrains you guys have always heard me say is that we're not getting enough at bats.
We're now getting a lot about bets and we thank the channel for that and I think several of you have done channel checks, which are showing that we are being definitely getting more than our share of of interest from end user customers and so what we hope that this trend continues it seems like it is continuing to where I think increasingly we're getting more and more presence in the channel and we can.
Can you to think that that'll give us more and more add backs, which has been in the past one of the weakness as of the company and I'll take the question on the pace of bookings.
Linearly throughout the quarter with nothing abnormal I would say it was in the noise level of what we've seen over the last couple of years.
Great. Thanks, and then I'm contact center just the growth.
Growth was let's phenomenal. This quarter is that resulted of kind of cobot 19 environment or is that just kind of sales cycles coming to close for you guys.
Actually both I mean, one of the things that is pretty unique is as you know we we've all made the best that we are all about the platform, which is unified communication and contact center and until about a year year and a hospital, we would always lead with unified communication and then dragging the contact center that trend has started to reverse of.
Only now because of our ability to rapidly deploy contact centers. We are seeing a lot of very big deals and contact centers I think we made reference to I think the city of Manchester.
Let's just say that there were others that were of similar size that also went with our contact center lets get checked deployed to contact center and 10 days. So I think part of the reason that you've seen us a big surge and growth of contact center is the fact that in essence now people want a rapidly deployable contact center and right after that that pulled in ucas, but it is.
Is all about the platform.
Great. Thank you.
Your next question comes from the line of Tim Horan Oppenheimer. Your line is open.
Thanks, guys.
You talked about the pace.
Okay. Thanks.
It seems like you're very very well position as the.
The cloud communications I'm just.
No surprise, it's not going to building building on itself at this point given the initial shock to the economy. Thanks.
I hear your question loud and clear, but I'm, sorry, we can't comment on July.
Quarter I I the best I can tell you is there is no surprises in July everything is as expected and we factored everything into our guidance, but this is earnings call on the June quarter.
Great and then maybe can you just talk about the bar opportunity.
Where are you with developing not end.
What you haven't looked like out there for bars at this point. Thanks, Yes, no I'll take that went on and actually.
We continue to feel very good about it in the sense that.
Two sets of var opportunities as you know the cloud fuel opportunity, which is the Scansource Farley.
Rolla, and we're seeing more and more avaya resellers joined that I think we talked about Allegion technology, which was the cloud partner of the year provider in 2019, and they're basically standardized on this we are seeing we've already seen our first few deals on that close and we are now starting to see the pipeline start to build quite considerably since.
Early in the UK as you know we have of our relationship with Virgin media and there Theyve got a lot of public sector exposure and we're starting to see quite a bit of pipeline develop there as well. In addition in the UK as you know we have bar relationships with Charterhouse computer center as well as.
Soft cat and those also a continuing to expand so we view var as the very unique way to go after the installed base, where we are able to go to folks that are used to selling in a particular way and enable them to selling the exact same way and so far so good.
Okay.
Thank you.
Your next question comes from the line of math and bleed with BTG lines open.
Hi, Thanks for taking my question I guess.
Looking at sort of the the average deal size and revenue per customer.
Ticked down a little bit here in the enterprise name in the mid market this quarter.
But we're hearing a lot more attach rate on bundled deals and overall X series growing as a percentage of bookings mix with the letter to sort of implying that you should see larger deal sizes.
Maybe just help us reconcile what kind of the strong growth in channel and enterprise overall with with those metrics ticking down just a little bit.
Overall, yes, I'll take this one I mean, it's a fair question, but I think lets just kind of put in context right over the last four quarters, we've been between 40.
39 in $42000, maybe in the mid market and once it's a kind 174, yes tick down a little bit I think it's a combination of.
We saw very good deal volume, but customers are little bit more cautious right now about placing very large orders through the system given the cobot environment. So we are seeing a little bit more of a land and expand type of philosophy instead of a large order upfront, but in terms of deal velocity, we had a record number of of.
At the channel partners and all those other kinds of things. So your second part of your question was around channel I think were very positive there I wouldn't read anything into the average revenue per customer segment. I think it was just a little bit of noise around the the marketplace.
Yeah, and then I guess, specifically in the channel.
Our our checks indicate that you guys are certainly present, a lot more deals much like what you've been talking about.
Curious, though what.
I guess from here, what's what's or how do you get the most mindshare start winning mind share for channel partners to select you.
Their lead.
Lead package instead of some of your competitors that maybe they've been working with longer have a larger book of business overall.
So our channel checks indicate and I think several of you guys have done similar channel checks and we've seen some consulting reports as well that X series when surveyed within the channel community is viewed to have the best NPS and overall customer satisfaction and the most comprehensive.
Offering of anybody else out there.
And so what we have seen is successfully get success, it's very simple and so you're starting to see channel partners win bigger and bigger deals using our product and you're seeing I mean, we talked about that eight figure TCB deal and so the more deals that they win with us and the more deals that allow them to make sure that its differentiated with.
X series, but some of the other activities that we have such as Microsoft teams et cetera, we're seeing that they're offering more and more of our deals Sam and maybe if I could I just one more thing look I every channel partner has economics at heart rate and the fact that we offer a combo product with contact center allows a higher per seat cost for us.
One other transactions contact center is becoming instrumental in these platform and new caspase cast deals and the fact that we havent together, we offer functionality that leverages both sides of the house is fantastic and now that we've got true mindshare and sustained momentum in the channel I think it's as Dick said to success the guest success.
And I think good to add to that.
I think you saw the number of channel partners has increased quite materially for us and so the number of active channel partners keeps growing I think it was 800 813 I think in Q1, a year ago and right now I think it's 10 92.
So you're starting to see again, a level of momentum pick up as people are able to get more and more success with our products in the marketplace.
Great. Thank you.
Your next question from the line of Charlie early with Baird. Your line is open.
Hey, guys. Thanks for taking my question.
I'm, hoping you can just talk about maybe the traffic levels on your network over the past couple of months since.
I guess March the traffic levels increase at all maybe in March and April and I'm wondering is since then that kind of leveled off to normalized levels or maybe remained elevated thanks.
I'm going to break that into two pieces of it to break it into the past side in the more traditional telephony side contact center side. So.
What what we saw the company contact center Ucas side.
Was.
Definitely a situation where as a tale of two cities healthcare government sled et cetera, all increased usage, all ramping really quickly offset a little bit by lower usage in retail hospitality.
Those types of covered related asset with a net it was down flat to down slightly.
Also on the seat past side because of our presence our strong presence and some of the ride sharing next generation type of companies in Asia, We did see a declining usage.
A lot of that that has has reversed itself as economy start opening backup right. So starting in May June. We then saw usage pick up particularly in retail and some of these other segments back to levels that we saw in January February and we have seen solid trends in July as I mentioned in the script and NRC past business picking back.
We lost no customers in that space, just usage as ride sharing and some of those things start to pick back up we start to see that increase so.
I really don't want to draw too big of a conclusion because it was the it's been a tale of two cities depending on what the vertical was.
Okay. That's helpful. Thank you.
Your next question from the line of Andrew came with all your security Your line is open.
Hey, guys. Thanks for taking my question. So just on the 15th.
Got you mentioned that you close how many of those were outside of the APAC region and then also given the faster.
On the cloud fuel Ed the Virgin media.
Dziedzic partnership do you see any further investments given your initial expectations.
And just talk about not that'd be great. Thank you.
So the Cps part we closed.
Over a dozen I think if the term I used in my earnings call in the UK and we closed I think our first few in the U.S. So we're starting to see quite a bit of interest in very healthy interest and pipeline foresee pass outside of Asia Pacific, which is exactly one of the reasons why we made this acquisition.
I think the second part of the question.
I'm, sorry could you repeat the second part of your question.
Yes, just talk about your expectations on further investments in your strategic partnerships given their fast ramps.
Just I guess the clarification is on the var side I mean, we have a number of strategic partnerships across the company. So I'm just trying to get some clarity.
Yes, you folks on the Virgin Media partnership and then also the cloud fuel partnership Okay got it some of our site.
Got it so so let's put it this way on Virgin.
Well into the ramp fully funded we're moving forward solid roadmap in place deals already in the pipeline really impressed with Virgin is a partner they are world class and it's been so far just.
Just fantastic working with that those guys and really like it a lot much the same for cloud fuel so once again.
Fully funded roadmap in place.
As Dick mentioned, signing up bar partners deals in the pipeline revenue produced there.
That's just a matter of scaling it right now if we have everything in place just really effectively on both sides of the house the early innings or Don and now is just scale it and the deals or with both partners are there to scale the operations.
Great. Thanks.
Again, if you would like to ask a question star one on your telephone.
Your next question comes from the line of George Sutton with Craig Hallum. Your line is open.
Thank you Vic as we've always tried to do looking from the outside trying to understand the breakdown of some of your spend.
Here's what I've concluded and I wondered if you could correct me, where I'm wrong. It looks like you're doing less search spend looks like you're doing less branding spend looks like you're ramping up a referral program and looks like you're spending quite a bit more on the channel, which is obviously working is that a fairly representative breakdown of the changes.
Yes, you've been making on marketing.
And spending side.
I'm going to take this one since I'm on deepen the spending sites at a macro level I have it sort of roughly agree with what you're saying.
I think what we're very focused on on the areas that you just cited is optimization.
So what we're really focused on is maximizing each dollar spent really focused on marketing with your questions that were very we're very focused right now on maximizing each dollar of marketing spend to both pipeline creation and closed when deals and we've got very Atlanta analytics in place now and we've got enough that's in place now.
It's a really drive that optimization process. It's why you saw substantial improvement in sales and marketing spend quarter on quarter its widest.
And to improvement in operating margin year over year, even as we grew R&D.
And George I'll add to that one because I think you brought this up before we made a very significant investment over the last year or so in our marked tech stack and the whole purpose of that was in the past because we had a lack of brand recognition and our Marchex stack was pre historic we needed to really ramped that up and we're starting to see that we can.
Get a lot of customer acquisition costs down because people are coming onto our websites were able to do a lot more interesting campaigns and tailor it to different people drift et cetera. So that's one aspect of it and second in addition to that what we're seeing is but the whole evolution of the meetings product has done a great job of increasing our level of brand awareness.
And then finally, what we are starting to see is E. Commerce is also another one that we have kind of driving costs down into the system. We've now got three very credible on ramps onto our product as you know we've got the unified communication and contact Center, we've got see pass which includes our video meetings, a pie and we've got E Commerce and then.
With that coupled with a brand new Martech stack, you were able to really start to drive much from efficiency into the system.
Great. That's that's helpful. One other thing the accounting Geek side of me needs to ask Sam you mentioned, you're starting to build contracts in advance of contract delivery can you just kind of explain the thought process behind that.
Yes, so I mean, we're as we as we satisfy the business even more were basically moving I think more commonly referred to prepaid.
But it's not really prepaid, but like most asked businesses were starting to build 12 month.
Annual prepaid for for our contracts and I think that was in something that we historically havent done and it's why we have had a working capital balance I very much like to get us to pure SaaS company, where we can have either zero or negative working capital balance and become more capital efficient overtime any doable I think it's achievable we started the plans and.
Place and we're already seeing the results it's.
It's why we expect that we don't need to raise any capital it all to become free cash flow positive and why we think the balance sheets in a very good position right now.
Okay helpful answer thank you.
Your next question comes from the line of Ryan.
Rosenblatt Securities Your line is open.
Hi, Thanks, what to circle back to your contact center comments, and that's a great metrics so far.
What's your kind of strategy as you approach as market more of a disruptor here from a pricing perspectives.
Coming and against bigger legacy incumbents can you maybe talk about that limit appreciate it.
So.
I'm very proud of the work that the team has done in completely revamping our contact center over the last three four years, but what we really are about as a platform business. So what we've got is one platform, where we have got contact center unified communication video conferencing chat all with an underlying layer of analytics.
So what that allows us to do is mix and match for different customers. Some customers lead with contact center and what we're seeing is weaken when some very big deals with contact Center Manchester City comes to mind. There were two very large state governments that basically went to the contact center into us Manchus Us Manchester cities sister City.
Over in the UK that also competes with them on the UK Premier League went with US on the contact center, so you're starting to see contact center become a way that we lead into the business and then it brings in unified communication as a very differentiated asset into the mix. So on the whole what we are able to do is we're able to provide the entire platform for a signal.
Perfect and cost advantage and Sam you may want to jump in I, just want to add maybe one more small thing when you talk about legacy providers that a tendency to think of the really high end guys and that's not where we're focused we're not focused at the 5000 10000 contact center agent market sure. There is a very large mid market opportunity where they want.
No one else running the infrastructure they want someone else, providing all the features and functionality, especially when we can spread that across the path and ucas. It becomes a very compelling value proposition for that mid market segment.
Great. Thanks, so much.
And there are no further questions at this time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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