Q3 2021 8x8 Inc Earnings Call
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Ladies and gentlemen, there either technical difficulty while bringing the playback. Please stand by thank you.
Good afternoon, and welcome to API, Inc. Third quarter fiscal 2021 earnings conference call.
Speaking on our call today is Dave Sipes, Chief Executive Officer, and Sam Wilson, Chief Financial Officer.
Before we get started just a reminder, that our discussion today includes forward looking statements about <unk> future financial performance as well as its business product and growth strategies, including the impact of the 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 in our reports filed with the SEC.
Any forward looking statements made on this call reflect our analysis as of today, and we have no plans 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 U S. Generally accepted accounting principles or GAAP a reconciliation.
Filiation of these non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release, and Powerpoint presentation deck, which are available on the Investor Relations website.
And with that I'll turn the call over to Dave. Thank you Victoria. Good afternoon, everyone. I hope you're on your families are healthy and safe I am pleased to speak with you today on my first earnings call with a bi.
I will cover business highlights from our third quarter results and Sam will walk us through financial results and guidance for the fourth quarter and full year.
I'll then share my observations from my first 50 days and initial thoughts on the company's next level of growth now.
Now, let me start with Q3.
Q3 was a good quarter total revenue grew to 137 million, a 15% increase year over year and above the high end of our guidance range.
Key drivers of the growth were strong demand for our bundled feature and Ucas offering continued upmarket focus new logo acquisition channel contribution and improving operational execution.
Our fully integrated free cash and Ucas solution is a clear differentiator for us as a mid market enterprise organizations replace legacy on premise systems and shift employee and customer engagement to the cloud.
The industry continues to recognize the value of it by its fully integrated platform.
For the ninth consecutive year Gartner named <unk> as a leader in the magic quadrant for unified Communications as a service worldwide.
Also on the quarter for the six year on a row Gartner named a bi as a challenger in the magic quadrant for contact center as a service.
Of note API is the only Ucas Magic quadrant leader that is also in the contact center as a service magic quadrant.
Furthermore, we achieved our fourth sequential quarter of improved profitability.
We exceeded top and bottom line guidance improved operating efficiency and strengthen our cash position.
With a clear line of sight to improving revenue growth and profitability in the fourth quarter, we are raising full year guidance on cash balance outlook for the fiscal year.
Sam will speak to this in a moment.
Now, let me turn to highlights from the quarter.
We are pleased with the success, we are seeing from our channel for strategy and upmarket focus with mid market and enterprise customers.
We had a record quarter up market with over 730 customers with greater than $100000 on air or a 24% increase year over year.
This was a result of strong execution across self marketing and channel and a combined product solution that is fit for purpose for enterprise customers.
Channel execution was strong again, driving 64% of bookings in the quarter eight of the top 10 deals and enterprise <unk> growth of 46%.
The channel team across all regions delivered their highest bookings quarter on record channel partners are turning to <unk> because of our integrated contact center and communication solutions deliver exceptional value for our mutual customers.
Our U K value added reseller or var route to market is the fastest growing segment within our channel.
Nearly 40% of channel pipeline in the quarter came from the U K bar community and the number of partners registering deals grew by 70% year over year.
We were also honored to be awarded the 2020, CRM U K cloud services vendor of the year and the 2020 Tech target Archer Award for Best Channel Enablement program in North America.
Turning to specific customer wins, we observed strong growth in new logos overall, representing 56% of new bookings up from 44% last quarter we.
We saw strong execution in all geographies and in key verticals, such as healthcare retail transportation and public sector.
Let me highlight a few recent examples.
In North America, a notable win with CEC Entertainment, which operates Chuck E cheese. The number one family Entertainment Center with operations on 47 States and 15 countries around the world.
CEC Entertainment was looking to consolidate from multiple providers and lower their it infrastructure expense.
They needed a vendor that could rapidly deploy a unified communications platform for the restaurants in their corporate offices.
They found a buyer was able to reduce their overall cost and completely deploy our UC platform within four weeks.
On additional wind is a seven figure <unk> competitive cloud replacement with a medical office solutions provider, who wanted an integrated see cash and Ucas solution.
This customer required outstanding call quality and integration between its voice and contact center platforms.
They selected <unk> to deploy 800, Ucas and 150 C cash licenses.
Outside of North America, We also had many important customer wins attracted by our differentiated ucas and see cast bundled offering.
A major example is Ryanair holdings, Europe's largest airline group.
Ryan Air can X travelers to over 240 destinations on 40 countries on a fleet of 470 aircraft with a further 210 on order.
Ryanair chose day by eight to support their expected growth and provide more than 600 agents with a unified ucas and free cash platform.
Our platform will be used across <unk> customer service agents, who will utilize our Zen desk integration to automatically log all customer activity within their CRM. Additionally, they will use our speech analytics.
And quality management solution to drive improvements in customer experience and to help upskill their it.
Agents.
Next is service energy UK limited.
The U K 's largest independent distributor of fuels and lubricants.
They selected a by a free cash and ucas platform to modernize communication with their customers.
Hey, buy it will support 500 contact center agents and 1000 back office and depot based staff.
Our solution allows <unk> to have a single operational view of their contact center functions and customer interactions.
Another example comes from our Australia, New Zealand region with a top multinational cyber security company.
They wanted to replace their multi vendor communication and contact center solutions with a single vendor solution that could provide a higher level of voice quality call routing and reporting globally.
They chose <unk> for a combined free cash and ucas solution and integration capabilities with CRM systems.
Seven figure T. C V win is for over 850 globally distributed business users and multiple contact center locations across 44 countries.
This is the initial deployment and has ample opportunities for future expansion.
The public sector in the UK also continues to be a bright spot.
Our UK public sector customer base has nearly doubled year over year notable wins this quarter included.
NHS public health, Scotland, which provides specialists national health care services in Scotland to support the 14 regional NHS health boards.
They are responsible for managing vaccination helplines and booking services for Scotland's COVID-19 response, and selected <unk> free cash and Ucas solution supporting over 3300 seats.
Kent community Health, a UK NHS provider of community services.
Also selected day by eight with 4000 seats to accelerate their digital transformation and improved customer experience.
New home College of further education was an important bar win with 480 seats secured through our partnership with Virgin Media business.
Furthermore, we continue to see existing customers adopt more API services, creating a land and expand opportunity that will fuel future growth.
A great example is whole foods group, a British retailer of car parts and enhancement tools campaign and touring equipment.
Paul from selected API free cash and Ucas for more than 4700 seats in 2019.
And have now added an additional 450 free cash seats across the UK locations to further enhance their customer experience.
And solve compliance challenges after several acquisitions.
Another. Notable example is a seven figure <unk> deal with one of Canada, and Europe, leading equipment service providers, who placed on add on order of approximately 2300 bundled C tests and new Caf seats.
Almost all of these wins are channel partners were critical to our success and I would like to thank them for their collaboration and support.
Now I'd like to discuss the market success of our products.
Free cash and Ucas bundle offerings continue to lead the way.
Bundled contact center and communications represented 67% of upmarket bookings bookings that were 12000 or more and IRR.
A R from combo customers customers, who have purchased UC and Cc now represents over a third of total company <unk>. Additionally.
Additionally for the second quarter in a row combo customer <unk> grew at twice the rate of market growth.
Also I am proud to say that more than two thirds of our field sales reps close that bundled UC cc deal last quarter.
The channel is also seeing the benefit of bundled UC cc.
Our sub agents, who historically sold ucas are now selling more see cash.
The number of partners selling our bundled solution grew by over 38% year over year.
Finally, this week, we announced a partnership with parent to enhance our <unk> offering by adding additional integrated cloud work force management applications for mid market and enterprise businesses worldwide.
Next is $8 eight voice for Microsoft teams, which continues to generate strong demand from customers that want to modernize their telephony platform with a direct routing solution from a proven ucas and free cash provider.
The overall opportunity is extremely large and a study we commissioned through Hanover Institute research found that more than three quarters of organizations are likely to integrate Microsoft teams with third party telephony providers.
In the quarter, we added the ability to manage settings, such as calling configurations voicemail call forwarding and logging in and out of call queues directly from Microsoft teams.
Additionally, a buy a contact center is now included in Microsoft.
That did contact center from Microsoft teams certification program.
A couple of notable wins include a fast growing retailer, which operates 2000 stores across 37 U S States selected day by eight for its ability to seamlessly integrate unified communications with Microsoft teams.
After a competitive RFP.
<unk> will deploy a mix and match solution of 10000 Ucas seats of which 3500 will utilize voice for Microsoft teams.
This solve their need for a combined solution for both frontline and knowledge workers.
A large win in EMEA is BDO, one of the largest global networks of public accounting tax consulting and business advisory firms.
BDO had been working on a large scale digital transformation initiative and needed a communications platform that would enhance Microsoft teams functionality.
They selected day by eight in the U K with an initial 6000 seat license for a mix and match solution across Ucas see cash and utilizing voice for Microsoft teams Lastly, turning to see pass Aia's API offerings are also driving new customer acquisition.
And Indonesia government Ministry selected eight by eight as a <unk> provider for an SMS based applications to support a job creation initiative to up skill blue collar workers with an easily accessible learning platform there.
Their SMS usage increased 200% quarter on quarter to provide critical services to citizens.
We also added support for <unk>, a mobile messaging app with over 52 million monthly active users in South Korea.
The API chat apps API now allows companies to reach customers across seven different services, including Whatsapp fiber and Facebook messenger. Additionally, the Google service, Google verified SMS is now available to AIA business customers through our API FNF.
Hi.
To sum up <unk> and enterprises are moving with urgency to the cloud our integrated platform sets us apart in the market and continues to drive growth globally.
With that let me now turn the call over to Sam to cover the financial results.
Thanks, Dave and good afternoon. We appreciate you joining us as we report the third quarter financial results I want to Echo Dave's comments that I hope you and your families are staying safe.
We are pleased to have delivered results that exceeded guidance improved operating leverage and reflects increased confidence in achieving profitability key.
Key drivers were better than expected performance from product categories, Ucas see cash and C pass and bundled offerings.
Total revenue for the quarter was $136 $7 million on increase of 15% year over year and above our $132 million to $133 million guidance.
We had good sales linearity in the quarter unexpectedly hardware grew sequentially as enterprise customers accelerated deployment and professional services were strong.
Looking at service revenue, we generated $127 $1 million on increase of 15% year over year and above our $124 million to $125 million guidance total IRR was $494 million at quarter end up 20% year over year, our strategic investments in the channel and product innovation over.
The last few years are delivering strong results.
Third quarter non-GAAP gross margin was 59, 6% as expected lower sequentially and driven mainly by product mix.
Non-GAAP service revenue margin declined 80 basis points over last quarter to 66%.
As we have previously mentioned see past margins are significantly lower than ucas, and see cash margins C pass usage increased during the quarter from holiday activities.
Non-GAAP other revenue margin came in at minus 25, 6% for the quarter, a large improvement from the minus 73, 5% a year ago and sequentially improved from the minus 27, 7%.
Key drivers were continued growth in our professional services and the flex hardware rental program looking ahead to the fourth quarter. We currently expect that overall gross margins to improve mainly due to better product mix and from C pass usage returning to pre holiday levels.
Turning to the third quarter operating expenses, we continue to align global business to drive both improved execution and efficiency non.
Non-GAAP sales and marketing expenses improved to 39, 1% of revenue in Q3, two 2% lower than last quarter. The combination of leverage from our digital marketing programs optimization of media spend and moving from physical to virtual event has driven spending efficiencies. We've also added domestic and international.
Sales capacity and have improved sales productivity.
Non-GAAP R&D expenses were 10, 7% of revenue in the quarter versus nine 9% last quarter, we continue to prioritize investing in our differentiated technology platform advantage.
Non-GAAP G&A expenses improved to 10, 8% of revenue in Q3 from 11, 5% of revenue last quarter, we hope to gain further G&A advantage as we scale revenue and related operations.
Total non-GAAP operating expenses were down about 1% year over year, while total revenue grew at 15% year over year, a reflection of tight expense management, we expect opex to be up single digit percentage year over year in the fourth quarter.
Non-GAAP operating margins were minus one 1% for the quarter. The best we have seen in 12 quarters. We believe we have clear line of sight to non-GAAP pre tax profitability exiting March 2021 quarter and future cash generation as a reminder, due to the timing of certain expenses each expense metric will not.
<unk> improved each quarter in a linear fashion.
Our top of funnel metrics, including pipeline coverage rates continue to be good and new logo growth was strong. These results demonstrated that we are delivering solid returns on our previous investments in demand generation in the channel.
We expect to see further improvement in unit economics, as we continue to optimize our go to market motions.
Our non-GAAP pre tax loss was $1 9 million for the quarter ending December 31, 2020. This was better than the minus $3 million guidance provided in October and a result of a combination of better than expected total revenue tight expense management offset by a currency headwind I am extremely pleased with how the team is being very diligent with each dollar.
<unk>.
Turning to the balance sheet total cash restricted cash and investments ended the third quarter at $168 million, excluding $15 5 million of restricted cash balance was $152 $5 million. This is a decline of approximately $7 million quarter over quarter and includes the corporate bonus payments we discussed last.
Quarter.
Our quarterly cash usage has improved by over $40 million since the fourth quarter of fiscal 2020, we remain focused on further reducing our cash burn and improving collections, which continue to run ahead of expectations. Further we believe the better than expected collections is a good sign that COVID-19 related risks are manageable.
We are making steady progress towards zero net cash usage and expect to see further improvement in the fourth quarter.
Staying on the topic of cash last quarter, we discussed our intent to have approximately $135 million or more in cash cash equivalents and investments on the balance sheet at fiscal year end I am pleased to say that we are raising our expectation again to now over $148 million in cash cash equivalents and investments excluding restricted cash.
The program improvements we have put into place are performing significantly better than expected and we remain 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 is deferred revenue, which increased during the quarter to over $20 million. We have moved towards building contracts in advance of service delivery and expect deferred revenue will continue to grow on the balance sheet.
One metric we are regularly asked about is remaining performance obligations or <unk> simply put <unk> is the aggregate of deferred revenue and committed revenue backlog for our subscription services.
For the third quarter <unk> was approximately $365 million up from $330 million in the second quarter and $245 million in the year ago period, where nearly 50% growth turning to financial outlook as we enter the fourth quarter. We have good sales funnel metrics and continued strong demand for our bundled ucas and see cash solution.
And voice from Microsoft teams offsetting this is the continued uncertainty in the macroeconomic environment as a result of the pandemic.
Taking all this into account we are establishing guidance for Q4 fiscal 2021, ending March 31, 2021 as follows.
We anticipate total revenue to be in a range of $138 $5 million to $145 million.
Resenting, approximately 14% to 16% year over year growth.
We anticipate service revenue to be in a range of 138 to $131 8 million, representing approximately 16% to 17% year over year growth and.
And we anticipate non-GAAP pre tax loss of approximately $800000.
Combining our outperformance for the third quarter with the forecast for the fourth quarter, we are raising guidance for full year fiscal 2021, ending March 31, 2021 as follows we are raising our total revenue outlook from $519 million to $522 million to a range of 526, 1%.
$528 $1 million, representing approximately 18% year over year growth.
We are raising our service revenue growth range from 489 million to $492 million to a range of $493 million to $494 million representing.
Representing approximately 19% year over year growth.
And we anticipate non-GAAP pre tax loss of approximately $13 $7 million.
The final topic I'd like to discuss is our IR metric sheet.
Based on the feedback from the discussions we've had with the Investor community, we will stop reporting certain booking metrics. After the fourth quarter earnings results are published.
We believe <unk> metrics are a better indicator to measure business performance.
We expect to discuss these changes in conjunction with our fourth quarter results in May.
On a personal note I am excited to see the positive impact Dave has already had his focus operational excellence and go to market expertise will help position <unk> for our next phase of growth and profitability.
With that let me turn the call back to Dave.
Thank you Sam in closing I'd like to share some of my initial observations and thoughts. This is now day 50 for me and I've been spending time with our employees customers and partners to better understand our strength and where we can focus to make meaningful improvements I have a deep appreciation and respect for the strong technology.
<unk> is built I joined <unk>, because I believe we have an incredible market opportunity in front of us. Additionally, I'm very encouraged by the talent and dedication and seen amongst the EFI team looking forward I see the opportunity to leverage my 20 years of experience to drive improved operational execution and.
To help the company reach its full potential.
<unk>.
As has been demonstrated for years now the resiliency of the business model really is special and the market opportunity is massive not many SaaS companies have reached the half a billion in revenue size that AIA is today, yet we are just scratching the surface moving business communications.
To the cloud is one of the largest SaaS market opportunities. There is period that transformation is still on the early innings. Yet recently, we have seen it become a top business priority.
The urgent adoption of work from anywhere has accelerated the timeframe in which companies are making and planning to make the move to the cloud.
Enterprises now see cloud communications is a critical component of employee enablement customer connection and business continuity have.
Having been a pioneer in cloud business communications from the beginning.
<unk> is well suited from a product and experience base to capitalize on the accelerated nature of this transformation.
Second.
<unk> has a unique technology to capitalize on this opportunity I've spent a considerable amount of time with our engineering and product teams and strategic business review meetings based on my initial evaluations I am confident in the platform and the product suite of solutions <unk> has developed an integrated platform leveraging a decade.
Plus of innovation, we have consistently been recognized into Gartner magic quadrants, both ucas and see cash.
Tremendous business and customer base has already been built upon these products yet and I find this an exciting positive there's even more we can do to fill the promise of cloud communications to deliver an amazing experiences for the customers.
In the quarters and years ahead, we will continue to be a customer first.
Product first and team first company that consistently delivers amazing innovation for the business user.
Third.
We are focused on execution.
I have been impressed with the progress that has already been made towards revenue growth and profitability.
And today's announcements you already seen some of those harder on the results.
I do believe there are further additional opportunities to become even more efficient and streamline processes.
We are reviewing everything from top to bottom Inc.
<unk>, where to best focus our resources and drive stronger operational excellence.
Building, a highly scalable efficient streamlined go to market engine will be a strategic area of focus in the coming quarters.
I am excited about leading into this next level of growth.
I am confident that through our focus on execution.
Our differentiated technology.
And this unique massive market opportunity.
We will progress down the right path to provide the best communication solutions for our customers and partners and will be recognized and rewarded for such I look forward to discussing our strategy is more on the future.
Lastly, I'd like to thank our customers and partners for their continued support.
And the <unk> employees for making me feel welcome.
With that operator, we are ready to take questions. Thank.
Thank you so much ladies and gentlemen, if you would like to ask a question you May Press Star then the number one on your telephone keypad.
Your first question comes from the line of Matt <unk> from <unk>. Your line is open.
Yes, hi, good afternoon. Thanks for taking my question and welcome welcome to the team Dave It's great to have your board.
Yes.
From I guess.
So my first question.
On a goes on on the <unk>.
Press release from this morning, and you touched on it quite a bit but the Microsoft teams acquisition or immigration and all the capabilities you built out there.
And our work we continue to hear and it's no surprise to anyone on the teams is very well proliferate it across the enterprise, but can you just help us understand sort of what the opportunity is for $8 eight from a total addressable market and how.
Maybe the margin structure of the contract structure is a little bit different than.
Going in with more of a direct sale.
On the X series.
Sure I'll talk to the market opportunity I'll, let Sam talk to that last part.
This is David.
So on the.
What we're providing with the Microsoft teams direct connect is an ability for our and our customers to utilize the Microsoft teams endpoints with our market capable you cast in C pass offering and it brings an ability for customers like that.
Fast growing retailer, we talked about to utilize their current teams environment. Additionally, because we have our unique in providing that direct routing capability of being able to bring on also contact center agents and other employees like frontline workers that might not be on the teams.
We can create a mixed environment for those customers and that's where having quite a tremendous amount of pickup in that product capability. We also launched some capabilities there the ability to set settings from within teams and in and out of call queues. So there's continued innovation that were put.
It into that product to create differentiation and.
The market Tam is large as theres, a large ecosystem around teams chat.
That is adopted today and through the.
Pandemics and probably about 115 million daily users is the size of that and growing and we commissioned that research with Hanover Institute.
Institute that says about three quarters of those companies are going to Institute third party integrations for the Ucas telephony capabilities. So the market opportunity is large.
We're leading in the some of the capabilities there.
On are having success, both in the channel and directly with customers, Okay and on the topic of Microsoft teams margins, we don't see a materially different margin between our teams seat in a non team seat.
Particularly when we look at the bottom line on the top line there might be a slight decrease in margin, but that's usually more of an effect that we're selling to a larger company and they're buying in large volume.
But when compared to the bottom line with the reduced support costs and those kinds of things. It's it's effectively the same we're agnostic to either one and I think that's one of our great benefits as we want to do what's right by the customer not necessarily pushed them one way or another.
Great and then on the contact center side, obviously, a ton of traction here and we continue to come across more and more usage more and more focus on how youre going to meet your customer in the digital world is everything shifts E commerce given the pandemic.
What are what are you seeing is this mostly still rip and replace of some ore.
Consolidation of multiple vendors that are in our customer or are you really starting to see kind of net new use cases, I know you highlighted maybe NHS in Scotland is one better helping rollout the vaccine, but are you seeing enterprises look.
To stand up maybe small contact centers, where historically they've not had anything.
On the mass majority the majority of the market is still on legacy solutions.
So bringing that to the cloud with a modern solution that combines both contact center and unified communications as a massive opportunity.
<unk> is where the bulk of the new new logo acquisition comes from ultimately.
And in that.
We're in the early innings of this market transformation.
On the.
The changes of work from anywhere that has occurred has created increased urgency in that transformation, but we're still in that early phases of.
Early customer adoption and then people planning the adoption of replacement of the older systems.
Alright, great. Thanks, good job on the quarter.
Thank you.
Your next question comes from the line of Ryan Macwilliams from Stephens. Your line is open.
Congrats on the results Dave I appreciated the color about what attracted you to buy and love to hear how you think your experience and skill set can help the next leg of growth for the company.
Sure.
Founded invigorating so far there has been a very warm reception from employees and partners and customers, even investor and analysts and.
Part of that is there.
So it was felt there was a good fit right between myself and the organization.
With my knowledge of the customer.
And my operational bench.
<unk> as well as go to market expertise.
I feel that is largely playing out so it feels like.
The right opportunity at the right time. Additionally, with the increased elevation of moving organizations from legacy to cloud.
The profile of the whole category has increased and that is creating tremendous.
Tremendous opportunity so overall it feels like a strong.
Combination at this point.
Excellent Yeah, that's true.
<unk> hospitality and retail loans, you mentioned certainly wouldn't it be from the first wins that come to mind this macro environment, but what's the channel bookings in the quarter be encouraging the celebration of growth you saw there can you just talk about the composition of what your pipeline looks like heading into 2021 and are there larger deal sizes on there. Thanks.
Yeah.
Channel is obviously an area with momentum and I think it's attributable to consistent execution and great leadership that we have at <unk> by eight that's building strong relationships with the channel.
We are seeing strong.
Congruence between mid market enterprise customers.
And.
I would say pipeline wise is healthy and our goal is to continue that momentum and growth of our channel capabilities and marrying that with our ability to help the channel close those deals.
And accelerate the penetration into that category for a combined <unk> offerings.
I appreciate the color guys.
Thank you.
Your next question comes from the line of <unk> from Needham <unk> Company. Your line is open.
Thank you and let me add my welcome David Gladstone glad to see aboard.
So.
Dave I wanted to ask you about the channel since that's something that's sort of you've clearly been involved with a lot on your career and just to give your assessment of where <unk> is in terms of presence in mind share on both the bar on master agent side of the channel.
And if you see opportunity for them to increase their mind share. While also improving unit economics, you know obviously, there's been some issues in the industry historically with folks sort of buying channel presence that maybe it wasn't economically.
Wise.
But in any case, just your thoughts on where you guys stand on the two parts of the channel.
Yeah.
So like I said channel momentum has been good and Theres been an element of catch up to some degree but I think there is also a preference thats being created at this point.
Through consistent actually ex execution.
Execution, the economics, we like the economics, we think Theres, a good mix between channel and direct today.
And.
We're encouraged by that where we see additional success and we saw obviously overall momentum but.
<unk> in the U K continues to be China, or with generating 40 percentage to channel pipeline and that's a differentiated model.
That is.
On opportunity to continue grew.
Growing that in that market as well as probably an opportunity to move into additional countries beyond the U K for that.
Great.
It makes sense.
And then question on the API business.
That was on that acquisition was done one of the thoughts was that you'd ultimately be rolling that out in some higher margin Gol's net would help the margin profile. Just wondering if you have any update on sort of where you stand in terms of rolling that out beyond some of the initial.
<unk> when you bought that property.
So I think we mentioned on our last quarter's call that we did.
Roll some limited availability of of the API business into the U S. U K, we have close customers existing customers on to that.
Still the vast majority of the business is in Asia, we expect it to stay in Asia, because it continues to be robust growth there.
So I think stay tuned it is definitely a source of differentiation, particularly when we mix it with our contact center product.
That's great. Thanks, gentlemen.
Yes.
Ladies and gentlemen, maybe the question limit your question to one and your next question is from.
From the line of Tim Horan Your line is open.
Thank you and welcome Dave can we dive into teams. Please.
It's been really incredible 18 month growth for Microsoft really unprecedented and almost I think very few of these customers are on your cash at this point.
Can you talk about the benefit of customers choosing you cash with teams.
What's your go to market strategy, there and why would these customers use you over.
Any other options that they have and I guess, how unique are you and then lastly, like can you give us a sense of how important this is to your growth or percentage of growth incremental customers you expect on a year or two thank you.
Yeah.
Yes.
Answer the first part of that so the.
Being able to light up the team's chat application with a full blown ucas until <unk> capabilities. This is really kind of at the broadest stroke of what the opportunity is doing that and the approach we've done it with direct routing.
It creates a high quality interface on doing that with a reliable high quality dependable vendor is really what the customers are looking for in that case. Additionally, we provide the ability to bring in things like contact center agents that is differentiated and unique.
In addition to other types of workers that might not be on the teams environment. Even in a large organization as you can imagine there's different types of deployments within those organizations. So this allows through mix and match our customer too.
Enable their entire organization.
With real time communications with that a symmetric communication platform that teams is providing.
I think I'd just add one small tidbit to what Dave was saying as you know look teams are generally purchased by the it department, we generally sell to the it department we offer a global solution. It's a one stop shop with the direct routing we don't bogged down the end users in the areas where they are on teams and so it's a very clean solution for the it department.
<unk>.
The it department doesn't have to have a bunch of telecom expertise or a bunch of local carrier partners in regions in the world.
And so the net to the it department is it's one stop it's a great tcl and its low low manageable ongoing operating costs. It's just kind of a win win and I think the Hanover research, which suggests that 75% of all teams customers will be using a direct routing solution supports that also so I think it's just it.
It's one of those rare instances I think youre spot on Microsoft's got a winning product on their hands, but the it departments still need to deploy it globally and make it work well and we're just a nice hand in glove solution to that.
And so what's your go to market strategy, there and how important will it be to growth a year or two from now.
I mean, I think the easy answer to that is I don't want to say, it's nothing sophisticated right we hit the digital channels that.
The regular Subagent master channels, we've also targeted a bit the Microsoft channels, because they are super interest as you remember last quarter, we signed up <unk> eight which is a traditional Microsoft partner.
We have some of the largest Microsoft partners in the U K, who are selling our product. So I mean, it's to the Midmarket and enterprise customers, they're a little bit more channel focused so we hit them through the channel through the smaller customers, we hit them through the traditional digital routes.
Thank you.
Your next question comes from the line of Jonathan Kees from Summit insights Group. Your line is open.
Great. Thanks for taking my questions and I'll add my congrats.
Congrats on the quarter and the welcome for Dave.
And.
I wanted to ask about it yes.
The two product lines here are obviously your your cash and see cancer doing well wanted to double click first on your C pass you talked about it.
All day.
Usage a day.
It came back from previous quarter. It came back it sounds like it rebounded.
And if so that brought down the margins yes.
With.
With that.
That particular product line can you talk about whats your expectations in terms of the growth could be for that product I know youre trying to integrated with.
Your other.
Products and offering portfolio, but it's it's still being sold separately, it's still not completely bundled with with the other products. So if you can just talk about releasing on what you think the market rates would be for the growth for that product would be in terms of where you're trying to deploy it and the second thing I wanted to doubleclick.
Click on the product will actually be your video video is obviously pretty hot during the pandemic during lockdown can you talk about.
Maybe this is more for Dave here, what your vision is for the video in the development for that and where you see that going thanks, Alright, I'll take <unk> and I'll give the and.
And I'll give the video to date for your suggestion on the <unk> side look.
As we had said last quarter, we expected gross margins to be down sequentially. I mean, we do generally see a pick up in the traditional SMS portions of the C pass business and some of the lower margin portions of the <unk> business during the holiday season, and that was reflected in our financial statements and then correspondingly post holidays now we expect that rebound in gross margins.
It is a fully integrated segment into our business. So I'm really not going to break out the growth rate separately for a whole host of reasons, but mainly.
It is a faster growing piece of the overall business I think right now we're very focused on next steps and I think that's great about having Dave on board as he brings a fresh set of eyes to it about the next steps that we want to take with that business.
And and figure out that those next steps I would say stay tuned a little bit on the last part of your question, we'll get to answering that and I'll turn it over to video to Dave.
On video.
With our Gypsy community.
We've had a great opportunity and have launched a product called jazz chooses Gypsy as a service.
And it creates a differentiated approach to bringing video meetings into.
Other app developers allows organizations to embed a full meeting experience at a high level of API into different applications our workflows.
That's a product that were.
We've put into beta we have over 1000 developers on it and it's unique in its ability to it has a simplified pricing model.
Based upon monthly active users.
That allows those organizations to implemented fairly risk free into their products.
Additionally, it has portability capabilities across different cloud environments.
So a number of differentiations.
That is an early launch of an interesting product that we will be watching and.
Looking and building a successful.
Okay, great. Thank you.
Yes.
Your next question comes from the line of Neal Fowler from Baird. Your line is open.
Oh, great. Thanks, Yeah, Hey, Dave, Yes, congratulations great too.
Chad again.
I guess one of the big questions for Us and I think investors generally is as you look forward and you look at some of the cloud communications industry leaders and growth rates on me.
I think we're just trying to understand what some of the challenges are that you face to kind of close that gap with some of the industry growth leaders versus some of the advantages you might in fact have over over some of the other.
Leaders and I know you spoke to the strength Youre seeing in the channel I think gave us over on survey work you know kind of validates that so how do you think about that I mean, what are the big challenges what are the advantages and what helps you kind of close that gap over the next couple of years.
Yeah, well and good talking again.
I think about it in a few different ways of different steps and we are I am going through in depth, the organization and the capabilities, but always looking for opportunities to reinforce success and youre seeing a number of those even on the call today with channel with U K with a combination of cc in.
And with Microsoft teams, so where there is strong muscle continuing to build stronger muscle and effectiveness in those areas on.
Also creating more operating efficiency in the organization is key and that's something that theres been great strides in in.
Sam is a great CFO to have on that is all over that but theres further opportunities to be world class and how we operate and how we go to market, how we serve customers that will help.
Smoothed out and create opportunities for investments into those areas are working well and then obviously improving go to market motions and playbooks everything from how we position and how we message how we talk to prospects. So all of those will help.
Smoothed out and create a strong drivetrain between applying.
Force and seeing the results in the market and obviously these things take some time.
<unk> sales cycles that are nine months in enterprise, so things won't happen overnight, but working across those key areas I know will create.
Better capabilities and opportunities.
To get market leading.
Gross gross opportunities.
Okay.
If I could just ask a quick follow on just those I know, there's a big focus on enterprise and you've seen generally I think on improving trends there.
Is there any low hanging fruit to help improve the growth rate of the SMB business because I know that's one of the elements from a mixed standpoint, that's holding back the overall growth.
Look I mean, we have good growth in SMB and U K and obviously rolled out the E commerce initiatives to both the increase the number of new logos, we are bringing on board and bringing them on more efficiently. If you look at a lot of the third party research DSP business overall in the U S isn't growing that robustly fast I think were at or above.
<unk> market growth rate. So I think it's more about growing profitably and smartly than it is about just putting up a raw number.
Okay Alright, good luck to you all thank you. Thank you thanks will.
Your next question comes from the line of Peter Levine from Evercore. Your line is open.
Okay.
Great. Thank you and.
Great Congrats on a great quarter and day, you're welcome to into the company.
I think most of US know the success you had on your prior life.
You could duplicate that performance or a playbook here.
Did you see coming in day, one that you knew needed to be addressed.
So that kind of played against like buy items first hundred days. If you can kind of go into further detail on the opportunities you see whether that'd be operational products or the partner front and what's top of mind for you out of the day.
You know that.
Okay.
A strong product background with eight by eight and applying world class go to market capabilities already feels like a good fit and opportunity and those are the areas. We're digging into I'm not going on to depth. At this point those are things we'll come back to.
Do you as investors and lay out how we see that playing out but.
The opportunity to create greater greater capabilities greater awareness.
Better deal velocity those are all.
General areas, where we will combine the strong product capabilities with a world class go to market capability for the organization.
Okay.
Maybe for you Sam did you see a materially different post COVID-19 expense profile for <unk> as it relates to sales and marketing travel expense real estate, just curious to know how youre kind of managing busy.
Business as we kind of hopefully.
Turning the corner.
Oh I would say you are reading the CFO journals, that's what we all talk about them there.
I believe Inc.
In corporate America, there has been a very clear realization that we don't need to travel as much and do as much <unk> to generate business like we did in the past.
I think it's on both sides I think it's both on the seller side and the buyer side. So I think we're open to the idea of more remote workers in lower cost regions lower <unk> expenses. So that we can fund more engineering initiatives and more sales capacity and more marketing capacity and so.
I am not unique in saying that that is definitely something we are looking at and it's something that we're looking at institutionalizing coming out of the pandemic.
Okay. Thank you very much.
Your next question comes from the line of meta Marshall from Morgan Stanley. Your line is open.
Great. Thanks.
I wanted to dive into kind of some of these new customer deals that were greater than 100 can.
You noted that.
53 deals, but only 34 of them are new logos, just getting a sense of.
Clearly that means you're upselling your customers quite a bit is that cash.
Talking on more fee is that selling contact center secondary is that pulling through you see just a little bit.
On a commentary on some of these new deals that come from existing logos.
So I'll start with some general characteristics and then I'll, let <unk> pick up if he wants to add anything so I hate to be so obvious, but it's a little bit of all of the above so definitely we add on more seats definitely we cross sell so if we land a customer would you see we see cross sell contact center every once in a while we will land on contact center customer and cross sell you see.
I think one of the biggest things as we move into Midmarket and enterprise. We do find is will frequently land one region, one buying center one division.
And they're the first the first group that moves to the cloud and then the rest of the organization catches on and we sort of get an overall corporate buying decision that gets made.
Looking through the deals this quarter and over the last previous quarters I'm constantly surprised when we land a European division of the U S Division of a multinational and then they want to roll this out to Asia. They want to roll this out to the rest of their global operations and so I do think almost every one of these six figure deals that youll see.
Is cross boundary Cross geographic Cros.
Products in the end, David do you want to add.
Think when you see.
Like whole foods, where we already had 4000 plus seats and they're in a <unk> perspective, and then are able we have the open discussion with the buyer and then are able to cross sell our whole product category with contact center and there we added 450 seats that's.
That's a great opportunity because we get to tell the story of the integrated product and with the relationship that is already strong and the customer.
That's an area that is quite fruitful Chris.
Got it thank you.
Your next question comes from the line of Mike Latimore from Northland Capital markets. Your line is open.
Great. Thanks very much.
I guess, Dave on the eight by eight platform.
It sounds like you are you have you may be the number one differentiator being the full UC cc stack just wanted to make sure. That's right and then second can you give us you know.
Sort of a concrete couple of examples of.
If a customer uses this full stack what benefit do they get vs.
Another platform.
It's sort of an integrated approach okay.
Yeah. So.
Yes.
It goes back a long time customers have wanted those products combined in the legacy solutions of combine those <unk>.
The ability to have high reliability high uptime from a single vendor and not create complexity and chance for duplication across multiple vendors. There is opportunities to reduce total cost of ownership, but additionally, things when you're talking about an it buyer.
<unk>.
Being able to have integration out of the box and not having to integrate the two products as well as being able to maintain integrations into corporate workflows.
Additionally, we see feature capabilities not only from Manageability from an administrator, but also the ability to share presence or analytics across the product suite for adoption and usage.
And.
Hi.
<unk> of high levels of call quality and mass scoring across both products. So I would say the bucket sizes into several areas and it's a.
Buyer demand Thats existed previously and legacy and Theyre looking for also in cloud.
Got it and then just quick on the gross margin on the sort of other product line.
Negative 25% is there an opportunity to kind of improve on that over time.
Heck, yes.
We've improved it pretty radically over the last year and we will we should we will continue to improve it.
May not be every quarter it depends on certain things that happen, particularly around.
Sometimes we have to do phone sales and from as you get larger enterprise phone sales.
But yes, we definitely have room to improve gross margins on the other revenue line.
Thank you.
Your next question comes from the line of Catherine Chetnik from Hollywood Securities. Your line is open.
Thank you for taking my question, Congratulations, Dave and I see there and a great quarter mine has to do with.
Channel.
And what we're seeing this quarter is from consolidation of master agents, and Vars and upside from there I'm wondering if.
What's your take on if that persists.
Where do you see your strength that eight by eight and then also in addition can you give us an update on our <unk> and where that partnership is and how it's progressing thank you.
Yeah, I'll take the first part of.
On the fee.
That there is consolidation in the in the channel I think thats helpful. Overall.
We like to work with large partners and we have a reputation in the market for being easy to work with.
Flexible and supportive of the partner community.
And that will continue to to support us going forward as well as we are getting known for having the differentiated combination of Ucas and C tests and continue to leverage that with the channel going forward.
And then specifically on on cancer I know, we talk about a single partner without their permission so it'd be a little bit inappropriate, but on the U S of our program in general It continues to roll out it's something we're reviewing continuously to see what the next steps forward are.
But it continues to rollout and.
Not much else to say.
Okay. Thanks, great quarter guys. Thank.
Thank you Catherine.
Your next question comes from the line of George Sutton from Craig Hallum. Your line is open.
Thanks, David on maybe the only one that goes back to your Webex days as well so nice to work with you for a third time, so I did want to double click on the UK channel success.
Now my question May be inappropriate based on sales last answer but.
The Virgin program, along with the cloud fuel program I'm. Just wondering if you can give us a little bit better sense of why that has been so successful thanks charge and Sam was running our European operations previously let him yes. So I wouldn't give you specifics on Virgin, but I'll certainly talk about the UK market look the company entered.
The UK market in 2013 first through an acquisition and then double down again in 2016, we've been there for eight years.
We are the team always tells US we're the number one cloud player in the UK market.
And.
It's a lot of what Dave said earlier about our success in the U S. We're known we're reliable we're easy to do business with we figured out how to do the bar wholesale billing in the UK and all of the intricacies of the business model there over time and I think it's a real competitive advantage for us because we've got years of head start compared to everyone.
<unk>, there and so I definitely think that the var. You mentioned in particular saw what our capabilities were and selected us for their next phase of growth there.
Got you that's it from me thanks, guys. Thank you.
Your next question comes from the line of James Breen from William Blair. Your line is open.
Thanks for taking the question just one clarification is on the cost side, Tim I think you talked about expenses being up sequentially.
1% I was just wanted to be.
Clarify that and then.
One for David just on the competitive side, what are you seeing in the market.
On your success.
That youre going head to head with similar competitors that you were before you're getting invited into more deals.
On.
Generally in these deals and especially in the larger ones. How many competitors are you seeing that you have to beat in order to win the deals.
Alright, I'll take the first one David.
I think what I said was we would be up single digits year over year growth for Opex in the fourth quarter, so single digit year over year growth in the fourth quarter for Opex.
Great. Thanks.
Competitive landscape largely similar as you might expect the buyers Hussein.
It's meeting those needs there is a little more bent to the contact center side on both the competitive and buyer side needs on that.
The only difference.
Have you seen in terms of the sales cycle I think there was a little bit of a disruption when we went to a lot of remote work earlier in the year.
Things improved and more as people get more comfortable with.
You're buying and selling the product.
Based on a base.
Okay.
So when you hear the last part and absolutely right. So.
The multiple meeting face to face meetings required have now turned into remote video conferences, using our own product and remote video demos using our own product.
So definitely that's the case.
Look I think the biggest thing Thats changed in my mind looking through what's happened is the it departments used to this now we did have panic buying and I think we talked about that over the last couple of conference calls now, it's less panic buying and its more course of business. They know what they're doing they know how to remotely deploy they know how to remotely enable.
Their users.
And we're look I think it's great I think it's great because the cloud has really shown through.
During this pandemic and no one's ever going to think about buying an on Prem system again for all the reasons that this pandemic showed.
Terrific. Thank you.
Thank you.
Thank you speakers there are no further questions I would like to share any back to the management for closing remarks.
Thank you so much and obviously there is a replay available on our website and until next time. Thank you.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you all for participating you may now disconnect.
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Yes.
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