Q2 2021 8x8 Inc Earnings Call
Good evening My name is Simon and I will be your conference operator today.
At this time I would like to welcome everyone to the 8.8 Inc. fiscal second quarter 2021 earnings Conference call.
I will now turn the call over to Victoria.
Head of Investor Relations.
Thank you good afternoon, and welcome to <unk> second quarter fiscal 2021 earnings Conference call. Joining me today are Vik Verma, Chief Executive Officer, and Samuel Wilson, Chief Financial Officer. During today's call. It will begin with highlights of our second quarter performance.
Following this Dan will provide details on our financial results and guidance.
After these prepared remarks, we look forward to taking your questions.
Before we get started just a reminder, our discussion today includes forward looking statements about a bright future financial performance as well as its business products and growth strategies, including the impact of COVID-19 pandemic.
We caution you not to put undue reliance on these forward looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward looking statements as described in our risk factors and our reports filed with the FTC any forward looking statements made on this call reflect our analysis as of today and we have no clue.
Lance or obligation to update them.
In addition, some financial measures that will be discussed on this call together with year over year comparisons in some cases were not prepared in accordance with the U.S. generally accepted accounting principles or GAAP a.
A reconciliation of these 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.
Hope all of you and your loved ones are healthy and safe.
[music], we delivered a strong quarter across the board in Q2.
As the only pure play integrated you can see Cafs and C pass provider in the market today.
Customers embracing and validating our integrated platform strategy.
In fact black from customers, who have at least two out of our creek solution categories grew at twice the rate of the overall market and now represent nearly a third of the company's eight are.
Our new voice for Microsoft teams solutions sold tens of thousands of seats. This quarter and is one of our fastest growing new products.
We are accelerating acquisition of new logos as E commerce delivers thousands of new customers per quarter.
And our pipeline significantly expanded due to both record partner deal registrations and the strongest conversion ever from our digital channels.
In summary, our go to market investments are achieving strong returns and our team executed exceptionally well.
In parallel we have also made significant strides unlocking operating leverage in the company.
We achieved our third sequential quarter of improved profitability exceeded top and bottom line guidance and significantly reduced our non-GAAP pre tax loss.
Steadily improving execution resulted in lower customer acquisition costs higher operating margins and better cash management.
And we surpassed expectations by migrating off our legacy customer base with more than 90% of our customer base now on the X series block.
Most importantly, we remain on track to achieve non-GAAP pre tax breakeven exiting the fourth quarter and expect to be cash flow positive in the second half of fiscal 2022.
Looking ahead, we have a clear line of sight to both profitability and continued growth.
As a result, we are comfortable establishing full year guidance and raising our ending cash balance outlook for the fiscal year.
Dan will cover more of the financial details later on the call, but he and the finance team have made a significant contribution in improving our operating margin optimizing our investments in go to market and strengthening our cash position.
Let me focus my remaining remarks on highlights from the quarter. The three pillars of our platform strategy and thoughts on the second half of the fiscal year.
With regard to a second quarter business highlights our go to market and channel first strategy saw improved growth globally, particularly up market with Midmarket and enterprise customers.
We had a record quarter with Midmarket and enterprise customers.
We closed 48, new deals with eight are greater than $100000 up from 30 deals a year ago.
This includes 20 to upsell and cross sell deals.
Illustrating the effectiveness of our land and expand platform strategy.
At the end of the quarter, we had a total of 670 customers with eight are are greater than $100000, a 25% a year over year increase.
We had a very strong quarter overall for our contact center portfolio, including a seven figure total contract value or TCV win with a global recruiting leader that added more than 800 contact center seats.
We also delivered several eight figure TCV wins this quarter, including a significant international AD on order from a global logistics company that included 1300 contact center seats and 13000 voice for Microsoft teams see.
Channel success is accelerating as our channel program drove nine of our top 10 deals and 59% of overall new bookings.
We partnered with Master agent packs eight one of the top suppliers or Microsoft teams to the MSP community.
This is a significant move to drive further adoption of eight by voice for Microsoft teams.
Our cloud fuel bar program continues to ramp with the number of bars qualified to sell implement and support eight by eight after completing our exhaustive certification program.
We added dozens of new var partners, including Spectro tell in the U.S. and Onecomm in EMEA.
In the UK Virgin media business closed several new wins with state local education and special districts also known as flat.
These included Asheville District Council purchasing 400, you cast seats plus voice for Microsoft teams and he bought in Wiltshire mental health NHS Trust purchasing over 3000 bundled you cast and see gas seats.
And we were very honored to receive both the partner's choice Award top overall supplier for the second consecutive year from Intelisys and.
And the international vendor of the year award from about.
In sum, we are seeing an acceleration in sales momentum and healthy pipeline coverage with growth across our domestic and international markets.
Customers in key verticals, such as healthcare manufacturing public sector in financial services are choosing eight by eight X series for their cloud communication needs let.
Let me highlight a few notable wins.
We continue to replace legacy of bio on premise systems, including a notable seven figure TCV win with a global manufacturing enterprise.
With operations in North America, and Asia Pacific This customer needed a tightly integrated cloud based communication and contact center solution.
This is a 2000 plus seat you cast and 400 plus seat contact center deal in which eight by eight was selected for expertise in global deployment and customer service.
A marquee channel when an eight figure TCV deal is with a large veterinary practice they.
They were using several disparate communication systems, including Mitel, and we're looking to consolidate them into a single platform to help support disaster recovery and business resilience initiatives.
We won this 16000 plus the deal after a very competitive RFP with several other cloud providers.
We see continued momentum in sled as government agencies respond to ongoing COVID-19 impacts.
A great example is with one of the largest NHS community health providers in England.
Bite replace multiple legacy telephony solutions with our platform for patient facing contact center agents and back office clinical experts across 200 location.
This seven figure TCV deal with 4000, plus bundle seats builds on a successful 250 seat contact center deployment earlier this spring.
Lastly in financial services, we secured a 7000 plus seat up sell deal with a longstanding enterprise customer. They continue to turn to eight by eight as a trusted business partner for their global cloud communication and contact Center solutions.
Moving on to my second topic for discussion as you know our open communication platform is the only pure play integrated technology platform in the market. Today that includes you guys see Cas and sea bass.
We are seeing strong growth across each of these three pillars from customers that want be advantage of an integrated platform.
First we continue to see strong growth for you cast solutions with customers that want to modernize the telephony platform.
Success with a you guess offerings has long been our core business, but recently growth has been powered by success with Microsoft teams integration E Commerce and customers looking for you Ghassan see gas combination solutions.
With voice for Microsoft teams, we are seeing strong early adoption.
From small businesses to large enterprises customers selecting eight bytes global cloud telephony solution that works natively across Microsoft teams mobile web and desktop applications.
Hey by voice from Microsoft teams is an enhanced direct routing solution that connects to a customer's tenant on the Microsoft phone system, providing that customer with PST in connectivity and global calling plans and 42 different countries worldwide.
Our solution also integrates eight by contact center, and third party enterprise apps, including Salesforce.
This quarter, we signed several hundred customers and sold tens of thousands of voice for Microsoft teams seats.
A great example is with MSC Mediterranean shipping company, one of the world's leading container shipping companies headquartered in Geneva, Switzerland.
During our May earnings call I spoke about MFC previously using 20 disparate global communication systems prior to select an eight by eight per our integration with Microsoft teams and global deployment expertise.
After experiencing successful rollouts in Germany, and the U.S. MSC expanded their global footprint to include approximately 17000, you guess and seek EPS seats overall.
[noise] based on experience with similar customers, we believe that our global voice for Microsoft teams solution is highly differentiated in the marketplace today.
We have also seen accelerating demand for this solution without channel partners in all geographies.
Additionally, our E Commerce platform remains an exciting self service entry points with small businesses and workgroups.
We have nearly doubled E commerce revenue every quarter since launch and continue to add thousands of new customers each quarter with our eight bite express an eight by meat Pro solutions.
We are now offering eight by it expressed through several of our channel partners as well as with new affiliates, such as Wix, where small and new businesses can easily add you cast capabilities as they set up their web presence and purchase other small business services.
E Commerce is a high leverage economically attractive way for us and our channel partners to bring large quantities of our customers onto the X series platform.
Moving to our second solution pillar see Cas, we see strong acceleration in demand, particularly for bundled you can see gas deals.
As businesses aggressively shift to operate any way to engage customers remotely demand for cloud based contact center has increased sharply.
70% of new bookings 12000, k. or more in a R.R. were from customers that selected bundled you cast and see caf as compared to 47% a year ago.
Nine out of the top 10 deals where you see NCC bundled deals.
Overall contact center, new bookings grew 62% year over year and represented 32% of total new bookings this quarter.
We saw more large contact center wins as well as additional expansion of our base embracing our combined USI and contact center approach to support work from home agent outbound sales help desk and field employees.
We also started rolling out beat by contact Center version nine Dot 12.
Important updates include new and enhanced functionality, bringing together preview progressive and predictive dialing notes.
This release helps our customers improved connection rates maximize revenue opportunities and meet evolving regulatory requirements in the us and UK.
We also expanded our global reach capabilities with added support in Latin America, Europe Africa, and Central and East Asia, providing an enterprise telephony solution for organizations in 42 countries across six continents.
Our third solution pillar is C pass, we have scaled globally with the expansion of our programmable applications and energized to North America and EMEA.
We achieved double digit sea bass revenue growth quarter over quarter and see signs of continued improvement in southeast Asia.
We nearly doubled the total number of deals close quarter over quarter, including double digit wins from the us and UK.
New customers into the transportation and logistics retail and E commerce businesses, using our SMS voice video our chat npis.
We are also seeing customers find new ways to add C pass to our open platform to extend communication and customer engagements to meet their unique business requirements.
One example is a leading UK insurance broker that wanted to extend their X series, you cast and see gas capabilities to further enhance the customer experience.
They added our sea bass SMS notifications to provide information to new policyholders and alert existing customers about coming policy explorations.
We are also seeing demand for real time performance monitoring to ensure high quality experiences as the number of virtual events meetings and work from home requirements continue to increase.
Called stats, our web RTC analytics service is uniquely positioned to quickly provide administrators with those insights. So they can easily address any network related issues.
We saw a record level of account sign ups for our called stats solution.
We signed a new mobile carrier partnership with Telia for Europe to expand our SMS and voice network connectivity we.
We have a network of more than 160 carriers delivering coverage globally to enable businesses with us the best solutions.
Finally, we will shortly be announcing beta availability of Gypsy as a service, which will be the most reliable secure and scalable video meeting as a service solution in the market.
Building on the Gypsy open source experience this solution empowers developers to add and customized video meetings to their website and real time contactless engagement applications in areas, such as Tele health education and retail.
We have several customers already leveraging the just see as a service EPS to self imposed embed and manage video meetings to engage customers online and in mobile applications.
We expect to make just see as a service generally available before the end of the calendar year.
As we continue to explore the multiple growth opportunities afforded by our complete platform, we expanded the team throughout our organization, including in sales and marketing product development and customer success.
During the second quarter. We also welcome Steve Seeger as Chief revenue Officer, Steve has more than 20 years of experience in revenue leadership roles in prominent companies such as Tibco software SCS Xerox and Oracle.
He has deep experience in enterprise software and cloud technology, and we believe that he will be instrumental to our progression and grow.
The final topic I'd like to discuss our observations for the second half of the year.
We have demonstrated that the eight by open communication platform is fit for purpose as part of a customer's digital transformation to the cloud.
We are uniquely positioned to meet customer demands with our global proven and scalable unified phone video messaging contact center enterprise CPI platform.
While the competitive landscape is always changing the strategy of having a single platform solution has been validated by the market, which will ensure an ongoing source of value for a bye.
We are very pleased with our financial progress and are steadily unlocking operating leverage within the company.
We have aligned resources and are investing in innovation and go to market initiatives that will provide tailwinds for the remainder of this fiscal year and beyond.
A key component are continuing operational improvement and leverage has been our strong success with automating customer migrations.
The migration of our legacy customer base is well ahead of plan and we exceeded our goal of having more than 85% of our customer base on the X series platform by the end of the calendar year.
In fact over 90% of our customer base is now on the X series platform up from 68% last quarter.
Above target and ahead of schedule and.
And we remain focused on substantially completing our legacy migration program by end of the fiscal year.
We have already seen a reduction in churn rates improve customer satisfaction scores and a decrease in support costs from customers migrated to the X series platform most.
Most importantly, now that the majority of our logos are on the X series platform. It establishes a solid base for platform expansion and up sell.
This is a significant accomplishment and I'd like to thank the engineering and Biz apps team for their outstanding work.
With continued strength from channel partners Sea bass, rebounding and newer initiatives such as voice for Microsoft teams, we're only scratching the surface in penetrating 60 billion dollar legacy market with hundreds of millions of seats all up for grabs.
In summary, we are seeing market validation of our platform strategy and steadily improving execution across the company reflected in our financial results.
We have a clear line of sight to non-GAAP pre tax breakeven exiting March 2021 with continued strong growth this fiscal year and beyond.
I would like to thank all of our employees for their hard work and dedication in achieving these outcomes.
I will now turn the call over to Sam.
Thanks, Vic and good afternoon. We appreciate you joining us as we report the second quarter financial results I want to Echo Vex comment that I hope you and your families are well and staying safe.
For today's call I will walk through our Q2 financial results and then provide guidance for the third quarter and full year Lastly, we'll open the call to answer your questions.
Starting with our second quarter results. We are pleased to have delivered performance that exceeded guidance improved operating leverage and reflect increased confidence in delivering profitability overall.
Overall results were driven by better than expected performance in you can see caf and our bundled offerings total revenue for the quarter was $129.1 million, an increase of 18% year over year and above our $125.5 million to $126.5 million guidance Tom.
Total revenue was driven by better than expected results across the board.
Looking at our geographic mix International revenue was 26% of total revenue up 37% year over year and the U.S. was 74% of total revenue an increase of 12% year over year, our investments and expanding our global footprint continue to pay benefits.
Looking specifically at service revenue, we generated $120.9 million, an increase of 19% year over year and above our 117.3 to 118.3 million dollar guidance total.
Total AMR was $467 million at quarter's end up 20% year over year and from solid growth across you can see cash and see past offerings.
This growth was driven by our continued movement up market to larger enterprises, including winning several eight figure TCV deals chief.
Channel was also an essential driver behind increasing our reach into Midmarket and enterprise customers.
As Vik discussed our strategic investments in channel and product innovation over the last few years are delivering strong results and our recent see past expansion into the U.S. in UK as well as voice for Microsoft teams is promising.
During the quarter, we lap some large channel led deals we closed last year and our July 2019 acquisition of waves sell.
As we previously discussed these two dynamics did impact growth rates in various channel and customer metrics, we provide on the IR metric sheet both.
These metrics will continue to change as we sign large enterprise deals with longer terms.
Now moving down the PML second quarter non-GAAP gross margin was 60.9% driven by product mix and better than anticipated professional services revenue.
Non-GAAP service revenue margin declined 90 basis points over the last quarter to 66.8% primarily due to product mix.
As we have previously mentioned see past margins are significantly lower than ucas and see cash margins.
Although overall C pass usage sniffing every increase quarter over quarter. It was lower than expected as the second wave of cobot effects in Asia Pacific were felt.
While the rebound has been slower than we initially hoped we expect continued improvement into the December quarter.
Non-GAAP other revenue margin came in at minus 27.7% for the quarter, a large improvement from the nine us 58.9% a year ago and sequentially improved from the minus 34.7% and key driver was our continued growth in our flex hardware rental program flex revenue was up.
Nearly 50% sequentially and has a positive influence on gross margin.
We currently expect the overall gross margins will be slightly lower in the third quarter because of product mix with increased C pass usage as the world Reopens, our UK and us business ramps and holiday driven usage.
Looking at Q2 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 continued to improve to 41.3% of revenue in Q2, 2.1% lower than last quarter. The.
The combination of leverage from our digital marketing optimization of media spend and moving from physical to online event has driven spending efficiencies. We have also added sales capacity and improved sales productivity.
Non-GAAP R&D expenses came at 9.9% of revenue in Q2 versus 11.8% 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 11.5% of revenue in Q2 from 12.5% of revenue last quarter, we hope to gain further genie advantage as we scale revenue and related operations.
Total non-GAAP operating expenses were up 1% year over year, while total revenues grew 8% year over year, a clear sign we're making strong progress on our return to profitability.
Operating margins were minus 1.8% for the quarter. The best we have seen since the fiscal third quarter of 2018, we.
We believe we have clear line of sight to a return to non-GAAP pre tax profitability exiting the March 2021 quarter and future cash generation.
I would like to point out the due to the timing of certain expenses each expense metric will not necessarily improve each quarter in a linear fashion. However, we have begun delivering returns and expect continued 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 continue to be good our growth rates remain relatively high and our margin profile improved. These results show that we are harvesting the returns of our 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 $3.3 million for the quarter ending September Thirtyth. This was better than the 7.5 million dollar guidance provided in July and the result of a combination of better than expected total revenue margin improvement more efficient customer acquisition operational refinements and the timing.
Related items, such as reduced travel expenses offset by a currency headwind.
We are assuming the timing events will not reoccur when we are giving guidance I'm extremely pleased with how the team is being very diligent about each dollar spent.
Turning to the balance sheet total cash restricted cash and investments ended the second quarter at $175 million with $15.6 million of restricted cash excluding restricted cash the balance was $159.4 million. This is a decline of approximately $8 million quarter over quarter.
Our three quarter trend in cash usage was $48 million used in the fourth quarter of fiscal 2020.
$20 million used in the first quarter of fiscal 2021 and $8 million used in the second quarter of fiscal 2021 Super proud of the whole team.
We are focused on further reducing our cash burn through operational efficiencies economies of scale and improved collections collections continue to run ahead of expectations. The operational improvements we have put in are paying off faster than expected.
Further we believe the better than expected collections is a good sign cobot related risks are manageable in terms of cash flow timing in fiscal 2021, we decided to pay our corporate bonuses on a semi annual basis, using a higher mix of cash and stock as compared to prior quarters, which will increase our.
Cash usage in the third quarter. We then expect to see further improvement into the fourth quarter.
Speaking of cash last quarter, we discussed our intent to have approximately $100 million or more in cash cash equivalents and investments on the balance sheet at fiscal year end, given our better than expected financial and business performance, we are raising our expectation to over $135 million in cash cash equivalents and investments excluding.
Restricted cash we understand this is a large job as I said the program improvements we have put in place are performing significantly better than expected.
We are focused on being free cash flow positive in fiscal 2022 more likely in the second half of the year.
One final item under liabilities I'd like to discuss it deferred revenue, which increased during the quarter to over $12 million. We have started our journey of moving towards building contracts 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.
One metric we are starting to get asked more about his remaining performance obligations or RPL under us GAAP accounting, we disclose this number in our SEC filings each quarter simply our PEO is the aggregate of deferred revenue and revenue backlog for our subscription services.
For the second quarter, RPL was approximately $330 million up from $290 million in the first quarter and $220 million in the year ago period, or roughly 50% growth.
Turning to our financial outlook as we enter the third quarter, we have seen good sales funnel metrics.
C pass usage rebounding and new solutions, such as voice for Microsoft teams and meetings expanding our global footprint.
Offsetting this is a blend of tougher comps from large deals closed last year, some revenue seasonality and continued uncertainty in the macroeconomic environment as a result of the pandemic.
Taking all this into account we are establishing guidance for Q3 fiscal 2021, ending December 31, 2020 as follows.
We anticipate total revenue to be in a range of $132 million to $133 million, representing 11% to 12% year over year growth.
We anticipate service revenue to be in a range of $124 million to $125 million growth, representing 12% to 13% year over year growth, we anticipate non-GAAP pre tax loss of approximately $3 million.
We also feel more comfortable providing full year guidance first some color on service revenue as expected growth rates in the second half of the year will come down as we lap the anniversary of the waves So acquisition.
And large channel led deals one last year, which creates a tougher comp for the balance of the fiscal year.
We expect a bottom in the growth rate in Threeq, you and an acceleration in for Q.
We continue to monitor the COVID-19 situation as it remains fluid, especially for the usage based components of revenue.
More importantly, our new service revenue full year guidance is an increase to our prior color of 17% to 18%.
Looking at total revenue, we expect to see continued customer engagement shift from desktop phones to flex hardwares rental sales and eight by apps on mobile devices and laptops as work from home and work from anywhere continues to be the new norm, we expect a slowdown in hardware sales to be reflected in other ways.
Revenue.
And so we are establishing guidance for full year fiscal 2021, ending March 31, 2021 as follows we.
We anticipate total revenue to be in a range of $519 million to $522 million, representing 60% to 70% year over year growth.
We anticipate service revenue to be in a range of $489 million to $492 million, representing 18% to 19% year over year growth.
We anticipate non-GAAP pre tax loss of approximately $16 million as a reminder, this represents a significant improvement from the 59 million dollar non-GAAP pre tax loss witnessed in fiscal 20.
And so with that let me turn to my final topic to discuss our IR program I've had an opportunity of speaking with many of our institutional shareholders and analysts to solicit their feedback.
Based on this feedback we are planning on making changes to the IR metric sheet. The goal is to more effectively report key performance drivers for our dynamic business model. We expect to discuss these changes in conjunction with fourth quarter results and so we are providing ample notice.
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 enhance shareholder value.
We feel confident in delivering on our financial outlook and have line of sight, the profitability positive cash flow and accelerating growth in fiscal 2022.
I'm proud of our second quarter performance I would like to thank our customers and our partners for their continued commitment.
Operator, we are ready to take questions.
Ladies and gentlemen at this time I'd like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Cuban a roster.
Your first question comes from the line of Ryan Mcwilliams with Stephens, Inc. Your line is open.
Thanks for taking the question nice quarter I like some of the changes to the cash collection for Vic I thought the 48, new booking over a 100000 EMR was telling of the recent pull forward in the market's adoption of cloud solutions can.
Can you talk about any further changes you've seen there for this midmarket and enterprise purchasing since coated.
And are you seeing any changes here to deal cycle are you seeing and sense of urgency from these larger customers.
Yes, and actually what has been quite interesting is as you can see our combination deals where people are buying two out of our three solutions is significantly ramped up at 70% of our bookings greater than $12000 in monthly recurring revenue our.
What we've also seen is this whole concept of land and expand with people. They may buy for example, our contact center solution and then immediately follow up with our Ucas solution and increasing new this starting to also buy our C pass solution to customize the end user experience one of the interesting trends. We also saw was some very large contacts.
Center deals if you remember.
In my prepared remarks, so we talked about 1300 contact center win and an 800 contact center win and several I think 400 contact center wins and so you're just seeing this trend more and more towards large global enterprises selecting a communications platform, starting with either a unified communication our contact center solution.
And then adding the rest as time goes on.
Perfect and then on Microsoft teams it seemed like eight by eight was head of the game here at least from my end it seems like you're one of the first.
James direct routing integration this year.
I know, it's still early but.
Oh boy.
Mr. Teams helped you engage with some larger enterprise customers that maybe has engaged before and have you seen any initial interest for these teams customers to maybe add on capex.
Yeah actually more than initial interest you have actually closed deals like that would be a finding is.
Microsoft teams pulled in a lot of eight by voice, because we added the PSP and connectivity and we did it essentially seamlessly so that from a user's perspective. It was a seamless experience and then we saw a tendency for people to add on also our contact centers. So we view this as a very fast growing initiative for us.
And we think we're very well positioned for it.
Thanks for your questions.
Your next question comes from the line of Rich Valera with Needham Your line is open.
Hey, it's Chad TV bonds for rich good progress on the accessories migration and just wondering what you guys have seen with respect to churn as you shifted this base. Thank you.
Okay. So this is a question that comes up several times I'll just hit it head on so it's not that we go to the customer and request that they migrate we usually migrate them over the weekend, we let them know Wayne advance and we see a lower churn rate on migrating customers and on X series customers that on our legacy customers and so we witnessed that up.
Then in the second quarter, we had lower churn rates overall compared to the first quarter that's.
Not surprising I think given the ramifications of Kobe and everything are starting to settle down but in terms of migrations we.
We definitely continue to see the trend that migrated customers have a lower churn rate.
Your next question comes from the line of Michael Turits with Wells Fargo Securities. Your line is open.
Michael Jordan with Wells Fargo Securities Go ahead your line.
Is open.
Oh, sorry.
Those the double mute function apparently.
Thanks. Good afternoon appreciate your weight in there for a second.
Maybe to start off with from the highest level.
We've talked in the past around the importance of owning the stock the messaging has since someone evolve towards single vendor open platform can you just help us understand what that means for customers and for partners and how you're positioning competitively given this move towards the more open platform approach.
No I don't think the message has evolved it's all about owning the stack and the only part that.
As part of owning the stack, we provide apiay. So basically people can change the end user experience and customize for their various business needs. We think it's increasingly more important and I think you're seeing that happen everywhere. If you look at the messaging increasingly you're seeing people by both contact center and unified communication together and see past becomes a way.
We to integrate and change the end user experience and so and then on top of that because it's all part of one common stack you have one common data layer, one common way of basically accessing all the various information and a common user experience across the entire company I view that as as hugely differentiated.
And particularly as we go into a compliance and security environment as well, having one integrated platform under one vendors control, we think is increasingly more and more important.
The C pass function gives us the ability to then ensure you can add for example, a video link or a SMS reach.
Reach or something like that at the end user experience level and do it as still part of that one common platform.
Yes.
Maybe maybe one as a follow up for Sam on guidance I mean, you mentioned a few things in the script, but given the 19% services revenue growth you just delivered in the 12% to 13% you're guiding for in Q3.
Is there anything any change to call out just in your approach to setting targets here versus the prior team.
Maybe is there anything you can add just help quantify what you mentioned there around the lapping of way of selling some of the deal activity you saw last year. Thank you. Yes. So so we we lapped wave sell in Q2, so the 20% air our growth 90% service revenue growth is relatively clean.
From a lapping it all those kinds of things point of view and what I was trying to call out was low.
Last year's comp was a big tough out there was a big surge between Q2 and Q3 and so we're we're seeing a little bit of that drop in Q3 EPS growth rate. So, but we did put the guidance out for the full year and if you do some quick math, you'll realize that there is a re acceleration going into Q.
Q4, and then overall, we did take the service revenue growth expectation up from the year. Previously we had seven said said, 17% to 18% averaging 18% to 19%. So for the year overall, you're looking at something around 18% to 19% and no change to sort of how we give guidance we give guidance on what.
We think we can do.
Helpful. Thank you.
Your next question comes from the line of Matt Van Vliet with BTG. Your line is open.
Yeah, Hi, How's it going thanks for taking the question I.
I guess looking at the channel momentum still kind of outpacing the overall growth of the company and the mix of bookings remains quite high.
Question of New Channel partners is pretty high but.
I guess as we think about that and then the guidance for the next quarter and.
Next couple of quarters, you lap you're talking about lapping some bigger deals, but you brought a lot more partners into into the network. So I guess two part question on that whats.
What's potentially slowing down on the overall growth.
In the channel business and how is that weighing on the total growth rate.
For the third quarter, and then second on some of these big announcements around the bar models, maybe a little bit more than.
Kind of just reseller or.
Yes General partners out there that are I'm, just kind of selling the bush business, how has that been a focus and how is the market changing around that dynamic.
Okay, I am Sam I'll take the first part of this one on some of the channel metric stuff not turn it over to Vic for the var second half part of the question. So what I was trying to highlight in my script was simply that the way the IR metric sheet works on bookings, it's really based on total contract value and so if we book a very large deal or a five year deal.
And whatever it can create that concept of a tough comp and so as we think closing these larger and larger enterprise deals I mean, you really see an RPL, which is growing 50% year over year.
You can really see that we can start to have an effect, where our comp or a big deal or a couple of big deals in a given quarter can whip saw that growth rate number and I just wanted to make investors aware that right I still think the purists cleanest way to look at our company is looking at our our growth, which was 20% last quarter. It encompasses our.
C pass business encompasses all those pieces I'm nothing I would highlight just on the channel piece is if you look we're monetizing our investments if you go back a little over two years ago, We had literally 127 active channel partners.
Weve effectively grown that almost head acts with I think we put the IR metric sheet 1100, 69 active channel partners and we have a lot more room to go there I think we have good traction and good momentum in the channel, we really like our channel partners, we really like where we stand, but we definitely have more room to run with that initiative.
Yes, and I'll Echo that I mean, 59% of our bookings was channel.
And more importantly that we have across the board record bookings.
The key point on bar that is another one that is an important area is as you know we made a big push into var.
Because we have this one integrated part platform and we built a partner portal, which allows a var to essentially resell our products and we made an investment both that scansource and Virgin media business.
Both pipelines are growing quite significantly and we've closed deals on both of them and Virgin media business. In particular had two very large wins that I talked about that speaks to the effectiveness of having that one platform because what it allows a var to do is to sell voice video contact center plus.
Eight the eyes, all as part of an integrated bundle and they can mix and match to their respective customers and to a large degree it addresses two of the areas, which we see a significant opportunities of growth for us, which is we want to increase our distribution reach and we want to improve our brand recognition and var partners.
Have a lot of brand recognition and a large installed base and their ability to resell our products because we made it easy for them to do is a key part of our strategy.
Thanks, and maybe as a follow up.
And a lot of success around the overall industry for obvious reasons as demand has been.
And then pulled forward for a lot of companies.
How do you feel like your purpose or you are performing in competitive deals are you still needing to get more at bats are you are you finding your way into most of the deals that you feel like you should be a part of right now.
No actually I'm feeling much better about demand generation over.
Overall brand recognition and overall performance I think for US right now what I'm seeing more and more off is the we have been on a three year journey when we have made.
Major investments in our platform major investments in our demand generation engine, our website infrastructure our channel partners and we are now starting to see all of that pay off and we also starting to see it in terms of the leverage that we are able to get so we like where we are it's all about execution.
All right great. Thank you.
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Your next question comes from the line of mid up Marshall with Morgan Stanley. Your line is open.
Great. Thanks, Sam.
Sam I wanted to ask you a question maybe first just as they've been in the role a couple of months clearly you guys have talked about making the services organization more efficient or moving into one generation of product that you have to maintain but just are there other areas, where you think theres opportunities for efficiencies within the business.
And then maybe a second question for Nick just where are you seen success in.
Kind of breeds of C pass is higher margin products and two and the kind of the sales opportunity versus just kind of.
SMS. Thanks.
All right. So I'll take the first one Matt I guess this is my Mike.
Defect is a CFO, but I believe in continuous improvement. So yes. There are other areas. We can improve on there's areas that weve already improved and we can improve more on you did highlight a couple of them professional services, we're doing better as I mentioned in the margin and in the script.
Lets hardware rental saw nearly 50% growth quarter on quarter those are areas, where it's kind of low hanging fruit and we'll continue on that.
Monetizing the channel monetizing our marketing investments our key piece I'm continuing to focus on cost structure, all those kinds of things.
We're really just focused on continuous improvement on each dollar that we spend I hate to make it's a simple, but it's really that simple.
No and I'll give Sam kudos and as well as the entire finance team they've done a great job across the board I think you saw it also in terms of how the team has executed in terms of overall margins, improving particularly professional services as well as other margins. You also saw bottom line improvement you've seen CAC improve steadily so all of those trends are underway.
We are putting in all the the efforts in place to make sure that there is continuous improvement across the board. The other part I think which you were talking about which I think is exactly the strategy. We have been on which is this whole concept of an integrated platform I.
I think we talked about the fact that you can see cast.
Represented approximately 70% of our bookings greater than 12000 here are and that's and that actually is growing too.
Twice at the market rate and now represents a third of the overall company are so thats one part the second is increasingly those customers then are asking us for C pass CPI. So that they can change the end user experience I gave you. One example of a recruiting company, which added C pass to go out and do a senior.
Use of glass to all of the various candidates would then click on it and Ken and then become part of a campaign, which can then be talked to to our contact center.
We're seeing a significant interest in our video offering which is why we will be making jazz GNC as a service available very shortly we're literally in minutes you can add a video meeting link to somebody's embedded application.
That will then become available over on a general availability by end of this calendar year. So see past we view as a great addition.
To our overall platform and we're also seeing significant opportunities for margin improvement, particularly as we move into voice and video services for CBS.
Great. Thanks.
Thanks, Matt.
Your next question comes from the line of Peter Levine with Evercore. Your line is open.
Great. Thank you for taking my questions and congrats on a good quarter. So as we think about revenue acceleration. The go to market investments you made internally and towards expanding your partner ecosystem clearly are gaining traction here. So looking at your pipelines, what's your confidence and your sales or.
Being able to deliver in the last mile.
I would we've brought on board.
Let's see our ROE, who have a lot of confidence and Steve Seeger. The team overall is executing well.
We have had our last quarter from a bookings perspective was very strong and we continue to feel like there is a good opportunity to continue to improve from there. So it is all about execution for us I like where we are at I like the fact that the investments are finally, starting to pay off and I think now it's all about execution and I think of all that is.
The proof from the numbers right, we had a great quarter, we Upsided service revenue total revenue margins everything right. So yes, we had extreme confidence that we can convert the pipeline into future revenue.
I will add one other thing, which is which I think is a team I want to also recognize which is our E. Commerce team. We introduced E. Commerce, I think literally a little a little over a year ago, the adding thousands of logos a quarter, which means the low end of the market people can literally click on and have a fully functioning ucas system right off the bat as well.
As meet broke and so that becomes a great on ramped into our overall X series platform. So it also allows us to free up our sales team to focus on larger and larger deals, which has been part and parcel of our strategy over the years.
Great and then.
Next question is what can be a little more color on your pipelines.
Throughout the quarter and if you're seeing any changes in sales activity or change in conversation with customers. During the fourth quarter now we have an election around the corner covered cases are spiking gear and across the globe. So curious if all this uncertainty in the last couple of months of the year is having any impact or if you're seeing any changes.
Specifically about your results and guidance you've given us.
Thanks, but just any incremental color would be great. Thank you.
Last quarter actually one of the good things about last quarter was it was a very normal quarter with normal puts and takes and it was business as usual.
I would like to see that continue.
Your next question comes from the line of Mike Latimore with North Northland Capital Management. Your line is open.
Great. Thanks.
Interesting to see more and more eight figure deal show up here good to see.
In terms of I guess Vic you just said it was sort of business as usual I guess does that go to.
Bookings kind of linearity as well to the bookings sort of track you expect by month.
I actually was I'll take this one it was actually a little better than expected. So it was less back end loaded than we normally have and I think that as you see the dsos on the balance sheet or basically flat rights everything was kind of as expected as Vic said it was fine and linearity was actually a little better than expected.
And then Mike going back to your comment about the first part which is as you know we've been on this journey to move higher and higher up the stack in terms of Midmarket enterprise deals, but we also wanted to make sure we were able to service us small business customers in a very efficient manner. Our E. Commerce has been adding thousands of logos at the lower end and then mid rich.
Frees up the sales team to go up to Midmarket and enterprise deals and so youre seeing both ends of the deal being serviced and the fact of the matter is you have one platform, which allows you to go from small deals all the way to enterprise level deals and you can mix and match you've got voice video chat contact center plus the Apiay is now through our sea bass acquisitions. So that we have seen the.
Land and expand portion of it also be a very significant growth driver going forward.
Great and then.
On small business anything any change in churn in the small business category.
We did migrating them so as I mentioned earlier, we're seeing lower churn rates on migrating customers. So I'd say the only thing is that churn was down in the second quarter and you can see the cash right cash is doing fantastic was better than we expected for the quarters. Our collections are really no problem.
Great. Thank.
Thank you.
Your next question comes from the line of James Breen with William Blair. Your line is open.
Thanks, just wondering as you think about this quarter rose the last any changes you're seeing in the channel as.
His company sort of adapt to what's happening pandemic et cetera.
Given sort of the potential resurgence we are seeing here.
On the cobot side.
Just wondering how those how the adoption happening in the channel. Thanks.
No I think we've really enjoyed our interactions with the channel as a matter of fact, I think our brand recognition within the channel has been going up quite significantly.
We are also starting to see.
That that.
That channel has also adopted our E commerce.
Engine, so far they're small low end deals channel partners are now starting to put that on their website. So for small customers. They can actually go in and service them. There. We're also doing these large we call them Blitz days with channel partners and eight by folks go out and reach out to prospects all over the world.
And thats been extremely well received and.
We are also starting to see much larger deals come from the channel. We've seen a lot of eight figure TCV deals coming from the channel, which means the channel is starting to feel more and more comfortable that we are the partner of choice.
And with respect to just geographic dispersion can you talk about where sales are coming from.
Globally.
Hello.
Yes, if you look at I mention this and if you look at our international business. It was up 37% year on year. So our previous investments that we've made in growing the channel, especially in the UK.
I really paying off I mean, Vic mentioned Virgin.
But in general we are seeing stronger growth internationally than we are domestic you asked but I don't want to downplay we're seeing growth in both markets part of it is just the U.S market. So much larger it harder to get a bigger growth rate number off of it.
Great. Thanks.
Your next question.
Question comes from the line of Citi Pedigree with Mizuho. Your line is open.
Thanks for taking my question and good to see progress in the business.
Couple of question first on Microsoft teams good to see this early success, you've talked about tens of thousands of seats. So.
So how would you characterize this sets as is more in the U.S. or outside the U.S. sudden geography and also any particular segment between this small mid size and large.
No actually it's global and it's broad based it's you've got small customers you've got mid market customers I think we even talked about 13000.
Microsoft teams win so yes, it's broad based and its global.
Okay.
And then.
We look at hearing in a pretty good positive feedback audio technology and platform as you've talked about and you are making progress on the go to market side now that Steve joined US Seattle I'm wondering what sort of changes we should expect in the go to market initiative.
So I'm thrilled to have Steve Seeger onboard he's a former defensive end and he has that kind of mentality I think our team has a strong team that generally in place and Steve brings that we have brought everybody essentially under one roof and Steve brings that intensity to kind of.
Take it to that next level, we also see bar being a very strong growth driver going forward and E. Commerce as I indicated allows us to go after the low end of the market in a very cost efficient manner. So as I said I like where we are at it's all about execution.
All right. Thank you thanks, Rick Thank you.
Your next question comes from the line of Andrew King with Colliers Securities. Your line is open.
Hey, Thanks for taking my question just one quick one.
Migration has really accelerated path, where we were originally that gas once again.
Factors outside of that.
Accelerated this migration path to your expectations. Thanks.
I mean look the biggest factor is an awesome engineering and biz apps team.
They found a way to completely automate the process I think Sam alluded to it in the past where in essence, what you do is they found a way where you can take a customer that was on a legacy platform literally map it over to a new platform do all of the prep work beforehand and over a weekend literally a switch gets flipped and the customers now on the new ERP.
Lot form and there are other than the user interface from their perspective, all the feature functionalities very similar it was a phenomenal teamwork and they migrated tens of thousands of customers over the last couple of quarters. So thats a great accomplishment. We also believe some of the IP that they develop has opportunities from migrating other.
Customers that may not be an eight by bought from us in the future and the whole goal here is to make sure you automate that process.
Your next question comes from the line of will power with Baird. Your line is open.
Hey, this is Charlie Ehrlich Entre will thanks for squeezing listen.
I'll just ask one I was hoping you could talk about your gross margins expectations medium to long term given a lot of moving pieces contact center growing strongly seapass trends strong and ucas trends in video coming online too. So how should we think about that putting that altogether gross margin yes.
It's a super Fair question and I'd Love to give you an incredibly articulate answer there's really two moving pieces here as our C pass business grows from a product mix perspective that drive down gross margin at the same time as flex and our professional services scale up that's a positive influence the gross margin. So roughly we model it flat to slightly down we think.
See pass has a little bit larger influence and by slightly down I mean tens of basis points not full percentage basis points better.
Thats generally how we think about it over the next let's say four quarters or so and then after that I'll have to reassess and give you an update and answer.
Great. Thanks.
Your next question comes from the line of Jonathan Kees with Summit insights group. Your line is open.
Great. Thanks for taking my questions.
And congrats on a good quarter.
I wanted to dig a little deeper in terms of the video.
And then.
The past you talked about like the number of users for the eight by eight to studio meetings Pro and we just want to try to get update on that and also just trying to get an understanding in terms of.
Have you been using this as a lead in for the you can see cash sales is this or is this more had been a.
Upsell afterwards, just kind of get a better understanding in terms of the interplay between that and the more established.
Offerings that you have thanks.
Thanks, Jonathan Yes, no video as you know we are still at several million users. The main point on video over the last quarter as we talked about has been how do you monetize that and if theres been three very good approaches number one increasingly it has become the on ramp to both our eight bite express as well as overall you can see cast platform.
That's worked extremely well for us the second and this has been essentially customer led they increasingly like our video GNC as a service as a way to embed into their own applications to add video capability and so we've already got several pilot customers on that as well.
We've also got a very robust open source community that is continuing to innovate on that so for US video has become increasingly away, where we as part of a bundle. It's a differentiated offering it's an on ramp onto our X series platform and Gypsy as a service allows us to monetize by putting in.
Applets essentially into somebody else's larger app, where they're able to literally doing in minutes and developers are we've got as I indicated several beta customers on it already.
So you're going to keep the meetings pro more.
As an onramp for now without and more monetize it should see as a service.
That is correct.
Okay.
All right. Thanks.
Your next question.
Question comes from the line of Brian.
With Rosenblatt Securities. Your line is open.
Hi, Thanks for the question.
She took a sizable piece of the UK came out there is in the carrier business lines I Wonder how you view that the carrier opportunities too.
Southern White label product or do you prefer to it really displace them typically with your own brands channels. Thanks, Okay. So I would I would answer that question sort of a two pronged approach that we have number one is a lot of curious who traditionally have sold through vars and or have a large bar component to it. So thats, obviously our program that Vick discussed earlier the second one is with E com.
Merus and even with some extra stuff in our eyes, we have the capabilities of white labeling selling two et cetera. Those discussions have occurred are occurring will occur et cetera, I don't want you to read anything into that.
But we have the ability with for example manager Express we can white label. It if thats, what a carrier chooses to use that as a self service zero touch on ramp to you Cas and then progressively move up from there I will tell you for sure carriers are super interested in the idea of self service zero touch no huge.
One being involvement type of stuff and that's a lot of the activity were seeing when we mentioned that we are starting to have the ability to move ecommerce into our channel.
And I mean, and you can look at the example of Virgin media business in essence. This standardizing on our platform that go into their installed base. The console ucas the console seek EPS the consoles C pass they can sell it for small business customers through our E. Commerce offering. So we are increasingly seeing carriers as a route to market by them essentially co labeling our products and.
Or white labeling our products because we believe our platform is hugely differentiated comprehensive and fully integrated and from their perspective, it becomes a one vendor way to go to market with multiple offerings.
Helpful. Thanks, Thanks, Ken Thanks, Thank you.
Your next question comes from the line of George Sutton with Craig Hallum. Your line is open.
Thank you one interesting thing that I don't think has been addressed is the decision to pay more of your bonuses in cash versus stock, which I think is an interesting move can you talk about the logic behind that yeah, I'll take that one so look.
When I came became CFO back in May June I heard a lot of concerns about cash I think with the latest numbers, we've really taken that off the table, we were talking about over $185 million in cash not including restricted cash exiting Q4, we're on the path to cash flow profitability. So it's time to start to turn our attention to things like stock based comp.
Sensation in those types of things to make sure that we're very shareholder friendly and what we're trying to achieve right. So it was really a function of the fact that we have cash I don't know if you know this but you're not earning much.
When your cash and your checking account. These days so it's better for US now to issue less stock at the values that our stock is trading at and just had our bonuses in cash.
I'm well aware of the current interest rates, but I think it's an interesting move thanks.
We just do not have any concerns about cash balances right now and I think this is just another way that we expect to become more shareholder friendly.
Ladies and gentlemen, this concludes to Q and a portion of today's call as well as the conference call. Thank you all for participating you may disconnect at this time. Thank you.
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