Earnings Call: Q2 2021

Oct 28, 2020

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 8x8 Inc. Fiscal Second Quarter 2021 Earnings Conference Call. I will now turn the call over to Victoria Hyde Dunn, Head of Investor Relations. Thank you. Good afternoon, and welcome to 8x8's 2nd quarter fiscal 2021 earnings conference call. Joining me today are Vic Verma, Chief Executive Officer and Samuel Wilson, Chief Financial Officer. During today's call, Vic will begin with business highlights of our Q2 performance. Following this, Sam 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 8x8's future financial performance as well as its business, products and growth strategies, including the impact of COVID-nineteen 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 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. I hope all of you and your loved ones are healthy and safe. We delivered a strong quarter across the board in Q2. As the only pure play integrated UCaaS, CCaaS and CPaaS provider in the market today, customers are embracing and validating our integrated platform strategy. In fact, platform customers who have at least 2 out of our 3 solution categories grew at twice the rate of the overall market and now represent nearly a third of the company's ARR. Our new voice from Microsoft Teams solution 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 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 3rd 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 for migrating off our legacy customer base with more than 90% of our customer base now on the X Series platform. Most importantly, we remain on track to achieve non GAAP pre tax breakeven exiting the Q4 and expect to be cash flow positive in the second half of fiscal twenty twenty two. 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. Sam 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 our 2nd quarter business highlights, our go to market and channel first strategy saw improved growth globally, particularly upmarket with midmarket and enterprise customers. We had a record quarter with midmarket andenterprise customers. We closed 48 new deals with ARR greater than $100,000 up from 30 deals a year ago. This includes 22 up sell 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 ARR greater than $100,000 a 25% year over year increase. We had a very strong quarter overall for our contact center portfolio, including a 7 figure total contract value or TCV win with a global recruiting leader that added more than 800 contact center seats. We also delivered several 8 figure TCV wins this quarter, including a significant international add on order from a global logistics company that included 1300 contact center seats and 13,000 voice from Microsoft Teams seats. Channel success is accelerating as our channel program drove 9 of our top 10 deals and 59% of overall new bookings. We partnered with master agent Pax8, one of the top suppliers of Microsoft Teams to the MSP community. This is a significant move to drive further adoption of 8x8 voice for Microsoft Teams. Our cloud fueled VAR program continues to ramp with the number of VARs qualified to sell, implement and support 8x8 after completing our exhaustive certification program. We added dozens of new VAR partners, including Spectro Tel in the U. S. And Onecom in EMEA. In the U. K, Virgin Media Business closed several new wins with state, local, education and special districts, also known as SLED. These included Asheville District Council purchasing 400 UCaaS seats plus voice for Microsoft Teams and AVOD and Wiltshire Mental Health NHS Trust purchasing over 3,000 bundled UCaaS and CCaaS seats. And we were very honored to receive both the And we were very honored to receive both the Partner's Choice Award top overall supplier for the 2nd consecutive year from Intelisys and the International Vendor of the Year award from 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 health care, manufacturing, public sector and financial services are choosing 8x8x series for their cloud communication needs. Let me highlight a few notable wins. We continue to replace legacy Avaya on premise systems, including a notable 7 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 2,000 plus seat UCaaS and 400 plus seat contact center deal in which 8x8 was selected for expertise in global deployment and customer service. A marquee channel win and 8 figure TCV deal is with a large veterinary practice. 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've won this 16,000 plus seat deal after a very competitive RFP with several other cloud providers. We see continued momentum in SLED as government agencies respond to ongoing COVID-nineteen impacts. A great example is with 1 of the largest NHS community health providers in England. 8x8 replaced multiple legacy telephony solutions with our platform for patient facing contact center agents and back office clinical experts across 200 locations. This 7 figure TCV deal with 4,000 plus bundled seats builds on a successful 250 seat contact center deployment earlier this spring. Lastly, in Financial Services, we secured a 7,000 plus seat upsell deal with a long standing enterprise customer. They continue to turn to 8x8 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 in the market today that includes UCaaS, CCaaS and CPaaS. We are seeing strong growth across each of these three pillars from customers that want the advantage of an integrated platform. First, we continue to see strong growth for UCaaS solutions with customers that want to modernize their telephony platform. Success with our UCaaS 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 UCaaS and CCaaS combination solutions. With voice of Microsoft Teams, we are seeing strong early adoption. From small businesses to large enterprises, customers are selecting 8x Global Cloud Telephony solution that works natively across Microsoft Teams, mobile, web and desktop applications. 8x8 Voice for Microsoft Teams is an enhanced direct routing solution that connects to a customer's tenant on the Microsoft phone system, providing that customer with PSTN connectivity and global calling plans in 42 different countries worldwide. Our solution also integrates 8x8 contact center and 3rd party enterprise apps, including Salesforce. This quarter, we signed several 100 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 MSC previously using 20 disparate global communication systems prior to selecting 8x8 for 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 17,000 UCaaS and CCaaS seats overall. 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 with our channel partners in all geographies. Additionally, our e commerce platform remains an exciting self-service entry point for small businesses and work groups. We have nearly doubled e commerce revenue every quarter since launch and continue to add thousands of new customers each quarter with our 8x8 Express and 8x8 Meat Pro solutions. We are now offering 8x8 Express through several of our channel partners as well as with new affiliates such as Wix, where small and new businesses can easily add UCaaS capabilities as they set up a 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, CCaaS. We see strong acceleration in demand, particularly for bundled UCaaS, CCaaS deals. As businesses aggressively shift to operate anywhere engage customers remotely, demand for cloud based contact center has increased sharply. 70% of new bookings, dollars 12,000 or more in ARR, were from customers that selected bundled UCaaS and CCaaS as compared to 47% a year ago. 9 out of the top 10 deals were UC and CC 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 a combined UC and contact center approach to support work from home agents, outbound sales, help desk and field employees. We also started rolling out 8x8 Contact Center Version 9.12. Important updates include new and enhanced functionality, bringing together preview, progressive and predictive dialing modes. This release helps our customers improve connection rates, maximize revenue opportunities and meet evolving regulatory requirements in the U. S. And U. K. 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 6 continents. Our 3rd solution pillar is CPaaS, where we have scaled globally with the expansion of our programmable applications and APIs to North America and EMEA. We achieved double digit CPaaS revenue growth quarter over quarter and see signs of continued improvement in Southeast Asia. We nearly doubled the total number of deals closed quarter over quarter, including double digit wins from the U. S. And U. K. New customers including transportation and logistics, retail and e commerce businesses using our SMS, voice, video or chat APIs. We are also seeing customers find new ways to add CPaaS to our open platform to extend communication and customer engagements to meet their unique business requirements. One example is a leading U. K. Insurance broker that wanted to extend their X Series UCaaS and CCaaS capabilities to further enhance the customer experience. They added our CPaaS SMS notifications to provide information to new policyholders and alert existing customers about upcoming 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. CallStats, our WebRTC 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 CallStat solution. We signed a new mobile carrier partnership with Talea for Europe to expand our SMS and voice network connectivity. We have a network of more than 160 carriers delivering coverage globally to enable businesses with our CPaaS solutions. Finally, we will shortly be announcing beta availability of Jitsi as a service, which will be the most reliable, secure and scalable video meeting as a service solution in the market. Building on the Jitsi open source experience, this solution empowers developers to add and customize video meetings to their website and real time contactless engagement applications in areas such as telehealth, education and retail. We have several customers already leveraging the Jitsi as a service APIs to self host, embed and manage video meetings to engage customers online and in mobile applications. We expect to make Jitsi 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 Q2, we also welcomed 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, SAS, 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 growth. The final topic I'd like to discuss are observations for the second half of the year. We have demonstrated that the 8x8 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 and enterprise APIs 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 8x8. 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 of 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 we remain focused on substantially completing our legacy reduction in churn rates, improved customer satisfaction scores and a decrease in support costs from customers migrated to the X Series platform. Most importantly, now that the majority of our logos are on the X Series platform, it establishes a solid base for platform expansion and upsell. 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, CPaaS rebounding and newer initiatives such as voice for Microsoft Teams were only scratching the surface and penetrating a $60,000,000,000 legacy market with 100 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 Q2 financial results. I want to echo Vic's comments 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 Q3 and full year. Lastly, we'll open the call to answer your questions. Starting with our Q2 results, we are pleased to have delivered performance that exceeded guidance, improved operating leverage and reflect increased confidence in delivering profitability. Overall results were driven by better than expected performance in UCaaS, CCaaS and our bundle offerings. Total revenue for the quarter was $129,100,000 an increase of 18% year over year and above our $125,500,000 to 1 $126,500,000 guidance. 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 in expanding our global footprint continue to pay benefits. Looking specifically at service revenue, we generated $120,900,000 an increase of 19% year over year and above our 100 $17,300,000 to $118,300,000 guidance. Total ARR was $467,000,000 at quarter's end, up 20% year over year and from solid growth across UCaaS, CCaaS and CPaaS offerings. This growth was driven by our continued movement upmarket to larger enterprises, including winning several 8 figure TCV deals. Channel was also an essential driver behind increasing our reach into mid market and enterprise customers. As Vic discussed, our strategic investments in channel and product innovation over the last few years are delivering strong results. And our recent CPaaS expansion into the U. S. And UK as well as voice for Microsoft Teams is promising. During the quarter, we lapped some large channel led deals we closed last year and our July 2019 acquisition of WaveCel. As we previously discussed, these two dynamics did impact growth rates in various channel and customer metrics we provide on the IR metric sheet. These metrics will continue to change as we sign large enterprise deals with longer terms. Now moving down to P and L. 2nd 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, CPaaS margins are significantly lower than UCaaS and CCaaS margins. Although overall CPaaS usage significantly increased quarter over quarter, it was lower than expected as the second wave of COVID 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 percent for the quarter, a large improvement from the minus 58.9 percent a year ago and sequentially improved from the minus 34.7%. A 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 that overall gross margins will be slightly lower in the Q3 because of product mix, with increased CPaaS usage as the world reopens, our U. K. And U. S. 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 combination of leverage from our digital marketing, optimization of media spend and moving from physical to online events has driven spending efficiencies. We have also added sales capacity and improved sales productivity. Non GAAP R and D expenses came in at 9.9% of revenue in Q2 versus 11 0.8% 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 G and A expenses improved to 11.5% of revenue in Q2 from 12.5% of revenue last quarter. We hope to gain further G and A advantage as we scale revenue and related operations. A total non GAAP operating expenses were up 1% year over year, while total revenues grew 82% year over year, a clear sign we are 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 Q3 of 2018. We believe we have clear line of sight to a return to non GAAP pretax profitability exiting the March 2021 quarter and future cash generation. I would like to point out that 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 pretax loss was $3,300,000 for the quarter ending September 30. This was better than the $7,500,000 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 about each dollar spent. Turning to the balance sheet. Total cash, restricted cash and investments ended the Q2 at $175,000,000 with $15,600,000 of restricted restricted cash, the balance was $159,400,000 This is a decline of approximately $8,000,000 quarter over quarter. Our 3 quarter trend in cash usage was $48,000,000 used in the Q4 of fiscal 2020, $20,000,000 used in the Q1 of fiscal 2021, and $8,000,000 used in the Q2 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 that COVID related risks are manageable. In terms of cash flow timing, in fiscal 2021, we decided to pay our corporate bonuses on a semiannual basis using a higher mix of cash than stock as compared to prior quarters, which will increase our cash usage in the Q3. We then expect to see further improvement into the Q4. Speaking of cash, last quarter, we discussed our intent to have approximately $100,000,000 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 $135,000,000 in cash, cash equivalents and investments, excluding restricted cash. We understand this is a large jump. 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 is deferred revenue, which increased during the quarter to over $12,000,000 We have started our journey of moving towards billing contracts in advance of service delivery and expect deferred revenue will continue to grow on 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 is remaining performance obligations or RPO. Under U. S. GAAP accounting, we disclose this number in our SEC filings each quarter. Simply, RPO is the aggregate of deferred revenue and revenue backlog for our subscription services. For the Q2, RPO was approximately $330,000,000 up from $290,000,000 in the first quarter and $220,000,000 in the year ago period or roughly 50% growth. Turning to our financial outlook. As we enter the Q3, we have seen good sales funnel metrics, CPaaS usage rebounding and new solutions such as voice 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 $132,000,000 to $133,000,000 representing 11% to 12% year over year growth. We anticipate service revenue to be in a range of $124,000,000 to $125,000,000 growth, representing 12% to 13% year over year growth. We anticipate non GAAP pretax loss of approximately $3,000,000 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 Wavecell acquisition and large channel led deals won last year, which creates a tougher comp for the balance of the fiscal year. We'd expect a bottom in the growth rate in 3Q and an acceleration in 4Q. We continue to monitor the COVID-nineteen 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 hardware rental sales and 8x8 apps on mobile devices and laptops as work from home and work from anywhere continues to be the new norm. We expect this slowdown in hardware sales to be reflected in other revenue. And so we are establishing guidance for full year fiscal 2021 ending March 31, 2021, as follows. We anticipate total revenue to be in a range of $519,000,000 to $522,000,000 representing 16% to 17% year over year growth. We anticipate service revenue to be in a range of $489,000,000 to $492,000,000 representing 18% to 19% year over year growth. We anticipate non GAAP pretax loss of approximately $16,000,000 As a reminder, this represents a significant improvement from the $59,000,000 non GAAP pre tax loss witnessed in fiscal 2020. And so with that, let me turn to my final topic and discuss our IRR 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 4th 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 to profitability, positive cash flow and accelerating growth in fiscal 2022. I'm proud of our 2nd quarter performance I would like to thank our customers and our partners for their continued commitment. Operator, we are ready to take questions. Your first question comes from the line of Ryan McWilliams with Stephens Inc. Your line is open. Thanks for taking the question. Nice quarter and I like some of the changes to the cash collection. For Vik, I thought the 48 new bookings over 100,000 ARR was telling of the recent pull forward in the upmarket's adoption of cloud solutions. Can you talk about any further changes you've seen there for this mid market enterprise purchasing since COVID? And are you seeing any changes here to deal cycles? Like are you seeing a 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 2 out of our 3 solutions is significantly ramped up at 70% of our bookings greater than $12,000 in monthly recurring revenue. What we've also seen is this whole concept of land and expand where people may buy, for example, our contact center solution and then immediately follow-up with our UCaaS solution and increasingly they're starting to also buy our CPaaS solution to customize the end user experience. One of the interesting trends we also saw was some very large contact center deals. If you remember from my prepared remarks, we talked about a 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 or a contact center solution and then adding the rest as time goes on. Perfect. And then on Microsoft Teams, it seemed like 8x8 was ahead of the game here. At least on my end, it seemed like you're one of the first to promote your Teams' direct routing integration this year. I know it's still early, but how has 8x8 Voice for Teams helped you engage with some larger enterprise customers that maybe 8x8 has engaged before? And have you seen any initial interest for these Teams customers to maybe add on contact center? Thanks. Yes, actually more than initial interest, we've actually closed deals like that. What we are finding is Microsoft Teams pulled in a lot of 8x8 voice because we added the PSTN connectivity and we did it essentially seamlessly so that from a user's perspective, this was a completely seamless experience. And then we saw a tendency for people to add on also our contact center. So we view this as a very fast growing initiative for us and we think we're very well positioned for it. Thanks for taking the questions. Your next question comes from the line of Rich Valera with Needham. Your line is open. Hey, it's Chad Teavillebaum for Rich. Good progress on the X Series migration. I'm just wondering what you guys have seen with respect to churn as you've shifted the space? Thank you. Okay. So this is a question that comes up several times, so 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 way in advance. And we see a lower churn rate on migrated customers and on X Series customers than on our legacy customers. And so we witnessed that again in the Q2. We had lower churn rates overall compared to the Q1. Not surprisingly, I think given the ramifications of COVID and everything are starting to settle down. But in terms of migrations, we definitely continue to see the trend that migrated customers have a lower churn rate. Your next question comes from the line of Michael Turrin with Wells Fargo Securities. Your line is open. Michael Turrin with Wells Fargo Securities. Go ahead. Your line is open. Maybe to start off with from the highest level, you've talked in the past around the importance of owning the STACK. The messaging has since somewhat evolved 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? I don't think the message has evolved. It's all about owning the stack and the only part that and as part of owning the stack, we provide APIs 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 happen everywhere. If you look at the messaging, increasingly, you're seeing people buy both contact center and unified communication together. And CPaaS becomes a way 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 hugely differentiated and particularly as we go into a compliance and security environment as well having 1 integrated platform under 1 vendor's control, we think is increasingly more and more important. The CPaaS function gives us the ability to then ensure you can add, for example, a video link or a SMS reach or something like that at the end user experience level and do it as still part of that one common platform. 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 and the 12% to 13% you're guiding for in Q3, is there anything to call out just in your approach to setting targets here versus the prior team? And maybe is there anything you can add just to help quantify what you mentioned there around the lapping of WaveCel and some of the deal activity you saw last year? Thank you. Yes. So we lapped WaveCel in Q2. So the 20% ARR growth, 19% service revenue growth is relatively clean from a lapping and all those kinds of things point of view. What I was trying to call out was last year's comp was a big tough. There was a big surge between Q2 and Q3. And so we're seeing a little bit of that drop in Q3's growth rate. But we did put the guidance out for the full year. And if you do some quick math, you'll realize that there's a reacceleration going into Q4. And then overall, we did take the service revenue growth expectation up from the year. Previously, we had 17% to 18%, now we're saying 18% to on what we think we can do. Your next question comes from the line of Matt Van Biat with BTIG. Your line is open. Yes. Hi. How is it going? Thanks for taking the question. I guess looking at the channel momentum, still kind of outpacing the overall growth of the company and the mix of bookings remains high. The addition of new channel partners is pretty high. But I guess as we think about that and then the guidance for the next quarter next couple of quarters, you lap you're talking about lapping some bigger deals, but you've brought a lot more partners into the network. So I guess 2 part question on that. What's potentially slowing down on the overall growth in the channel business and how is that weighing on the total growth rate, especially for the Q3? And then second, on some of these big announcements around the VAR models, maybe a little bit more than kind of just reseller or I guess channel partners out there that are just kind of selling a Busch business. How has that been a focus and how is the market changing around that dynamic? Okay. I'm Sam. I'll take the first part of this one on some of the channel metrics. I'm going to turn it over to Vik 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 5 year deal or whatever, it can create that concept of a tough comp. And so as we've been closing these larger and larger enterprise deals, I mean, you really see it in RPO, which is growing 50% year over year, you can really see that we can start to have an effect for a comp or a big deal or a couple of big deals in a given quarter can whipsaw that growth rate number. And I just wanted to make investors aware of that, right? I still think the purest, cleanest way to look at our company is looking at ARR growth, which was 20% last quarter. It encompasses our CPaaS business and encompasses all those pieces. The other thing I would highlight just on the channel piece is, if you look, we're monetizing our investments. If you go back a little over 2 years ago, we had literally 120 with I think we put in the IR metric sheet, 1169 active channel partners. We've effectively grown at almost 10x with I think we put in the IR metric sheet 1169 active channel partners and we have a lot more room to go there. I think we 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. Vic? Yes. No, I'll echo that. I mean, 59% of our bookings was channel, and more importantly, we had across the board record bookings. The key point on VAR 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 platform and we built a partner portal which allows a VAR to essentially resell our products and we made an investment base both with ScanSource and Virgin Media Business. Both pipelines are growing quite significantly and we have closed deals on both of them. And Virgin Media Business in particular had 2 very large wins that I talked about. That speaks to the effectiveness of having that one platform because what it allows Avar to do is to sell voice, video, contact center, plus APIs all as part of an integrated bundle and they can mix and match to their respective customers. And to a large degree, it addresses 2 of the areas which we see as 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, we've seen a lot of success around the overall industry for obvious reasons as demand has been pulled forward for a lot of companies. How do you feel like you're performing in competitive deals? Are you still needing to get more at bats? 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, overall brand recognition and overall performance. I think for us right now, what I'm seeing more and more of is the we've been on a 3 year journey when we've made major investments in our platform, major investments in our demand generation engine, our website infrastructure, our channel partners, and we're now starting to see all of that pay off, and we're also starting to see it in terms of the leverage that we're able to get. So we like where we are. It's all about execution. All right, great. Thank you. Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open. Great. Thanks. Sam, I wanted to ask you a question maybe first. Just as you've been in the role a couple of months, clearly you guys have talked about making the services organization more efficient or moving to kind of one generation of product that you have to maintain, but just are there other areas where you think there's opportunities for efficiencies within the business? And then maybe a second question for Vic. Just where are you seeing success in kind of bringing some of CPaaS's higher margin products into kind of the sales opportunity versus just kind of SMS? All right. So I'll take the first one, Meta. I guess this is my defect as a CFO, but I believe in continuous improvement. So yes, there are other areas we can improve on. There's areas that we've already improved on, 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. Flex hardware rentals saw nearly 50% growth quarter on quarter. Those are areas where it kind of low hanging fruit and we'll continue on that. Monetizing the channel, monetizing our marketing investments are a key piece, 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 so simple, but it's really that simple. Yes. 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 CAC improve steadily. So all of those trends are underway and we're putting in all 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've been on, which is this whole concept of an integrated platform. I think we talked about the fact that UCaaS, CCaaS represented approximately 70% of our bookings greater than 12,000 ARR and that actually is growing twice at the market rate and now represents a third of the overall company ARR. So that's one part. The second is increasingly those customers then are asking us for CPaaS APIs so that they can change the end user experience. I gave you one example of a recruiting company, which added CPaaS to go out and do a series of blasts to all of their various candidates who then click on it and can and then become part of a campaign, which can then be talked to through our contact center. We seeing a significant interest in our video offering, which is why we will be making Jazz Jitsi as a service available very shortly, where 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 CPaaS, 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 CPaaS. Great. Thanks. Thanks, Meta. 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 reacceleration, the go to market investments you made internally and towards expanding your partner ecosystem, clearly you're gaining traction here. So looking at your pipelines, what's your confidence in your sales or being able to deliver on the last mile? We brought on board a CRO who has a lot of confidence in Steve Seeger. The team overall is executing well. We've 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 all I'd add is the proof from the numbers, right? We just had a great quarter. We upsized service revenue, total revenue, margins, everything, right? So yes, we have extreme confidence that we can convert the pipeline into future revenue. I will add one other thing, 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 over a year ago. They're adding thousands of logos a quarter, which means the low end of the market people can literally click on and have a fully functioning UCaaS system right off the bat, as well as Meet Pro. And so that becomes a great on ramp then to 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 last question, I hope to get a little more color on your pipelines and the environment throughout the quarter. And if you're seeing any changes in sales activity or change in conversation with customers during the Q4, now we have an election around the corner, COVID cases are spiking here and across the globe. So curious if this uncertainty in the last couple of months of the year is having any impact or if you're seeing any changes, obviously clear about your results and guidance you've given us, I would think not, but just any incremental color would be great. Thank you. Last quarter, actually one of the good things about last quarter was a very normal quarter with normal puts and takes and it was business as usual. I'd like to see that continue. Your next question comes from the line of Mike Latimore with Northland Capital Management. Your line is open. Great. Thanks. Interesting to see more and more 8 figure deals show up here. Good to see. In terms of I guess, Vicki, you just said it was sort of business as usual, I guess. Does that go to bookings kind of linearity as well? Did bookings sort of track as you expected by month? Actually, 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 TSOs on the balance sheet are basically flat, right? So 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 in this journey to move higher and higher up the stack in terms of mid market enterprise deals, but we also wanted to make sure we were able to service our small business customers in a very efficient manner. Our e commerce has been adding thousands of logos at the lower end and then which frees up the sales team to go up to mid market and enterprise deals. And so you're 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 APIs now through our CPaaS acquisitions. So that we've 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've been migrating them. So as I mentioned earlier, we're seeing lower churn rates on migrated customers. So the only thing is that churn was down in the Q2. And as you can see the cash, right, cash is doing fantastic. It's better than we expected for the quarter. So our collections are really no problem. 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 relative to last, any changes you're seeing in the channel as those companies sort of adapt to what's happening, pandemic, etcetera, given sort of the potential resurges we're seeing here on the COVID side, just wondering how those how the adoption is happening in the channel? Thanks. No, I think we've 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 channel has also adopted our e commerce engine. So for their 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 are also doing these large, we call them blitz days where channel partners and 8x8 folks go out and reach out to prospects all over the world. And that's been extremely well received. We're also starting to see much larger deals come from the channel. We've seen a lot of 8 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 just talk about where sales are coming from globally and how does that impact the business? Thanks. Yes. So if you look at our I mentioned this in a 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, are really paying off. I mean, Vic mentioned Virgin. But in general, we are seeing stronger growth internationally than we are domestic U. S, but I don't want to downplay. We're seeing growth in both markets. Part of it is just the U. S. Market is so much larger. It's harder to get a bigger growth rate number off of it. Your next question comes from the line of Siti Panigramaki with Mizuho. Your line is open. Good to see progress in the business. A couple of questions. First on Microsoft Teams, good to see this early success you talked about tens of thousands of seats. So how do you characterize this success? Is it more in the U. S. Or outside the U. S. Certain geography? And also any particular segment between the small, midsize 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 a 13,000 deal Microsoft Teams win. So yes, it's broad based and it's global. Okay. And then we'll keep hearing pretty good positive feedback on your technology and in our platform as you talked about. And you're making progress on the go to market side. Now that Steve joined as CRO, I'm wondering what changes we should expect in the go to market initiative? So I'm thrilled to have Steve Seeger on board. He's a former defensive end and he has that kind of mentality. I think our team is a strong team. They're 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 VAR 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, Vic. Thank you. Your next question comes from the line of Andrew King with Collier Securities. Just one quick one. I noticed that the migration has really accelerated past where we were originally expecting. I just wanted to get an idea if there are any factors outside of COVID that accelerated this migration past 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 have 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 then over a weekend, literally a switch gets flipped and the customer is now on the new platform and they are other than the user interface from their perspective, all the feature functionality is very similar. It was a phenomenal teamwork and they migrated tens of thousands of customers over the last couple of quarters. So that's a great accomplishment. We also believe some of the IP that they develop has opportunities for migrating other customers that may not be on 8x8 platform 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 on for Will. Thanks for squeezing us in. 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, CPaaS trend strong and UCaaS trends and video coming online too. So how should we think about that putting that altogether gross margin? It's a super fair question and I'd love to give you an incredibly articulate answer. There's really 2 moving pieces here. As our CPaaS business grows from a product mix perspective, that drives down gross margin. At the same time, as Flex and our professional services scale up, that's a positive influence to gross margin. So roughly, we model it flat to slightly down. We think CPaaS has a little bit larger influence. And by slightly down, I mean, tens of basis points, not full percentage basis points. That's generally how we think about it over the next, let's say, 4 quarters or so. And then after that, I'll have to reassess and give you an updated answer. 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. In the past, you talked about like the number of users for the 8x8 Video Meetings Pro, 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 UCaaS, CCaaS sales? Or is this more have 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 there's been 3 very good approaches. Number 1, increasingly it has become the on ramp to both our 8x8xpress as well as overall UCaaS, CCaaS platform. So that's worked extremely well for us. The second and this has been essentially customer led, they increasingly like our video Jitsi 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 a way where we as part of our bundle, it's a differentiated offering. It's an on ramp onto our X Series platform and Jitsi as a service allows us to monetize by putting in applets essentially into somebody else's larger app where they're able to literally do it in minutes. And developers are we've got indicated several beta customers on it already. So you're going to keep Meetings Pro more as an on ramp for now without more monetize the Gypsy as a service? That is correct. Your next question comes from the line of Ryan Kountze with Rosenblatt Securities. Your line is open. Thanks for the question. It seems like a sizable piece of the UCaaS 10 out there is in the carrier business lines. I wonder how you view the carrier opportunities to sell them a white label product or do you really displace them typically with your own brand, your own channels? Thanks. Okay. So I would answer that question sort of 2 pronged approach that we have. Number 1 is, a lot of the carriers are traditionally sold through VARs or have a large VAR component to it. So that's obviously our VAR program that Vic discussed earlier. The second one is with e commerce and even with some X Series stuff in our APIs, we have the capabilities of white labeling, selling to, etcetera. Those discussions have occurred, are occurring, will occur, etcetera. 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 that's what a carrier chooses to use that as a self-service, 0 touch on ramp to UCaaS and then progressively move up from there. I will tell you for sure, carriers are super interested in the idea of self-service, 0 touch, no human being involvement type of stuff. And that's a lot of the activity we're seeing when we mentioned that we're starting to have the ability to move e commerce into our channel. And then you can look at the example of Virgin Media Business. In essence, they're standardizing on our platform. They're going to their installed base. They can sell UCaaS. They can sell CCaaS. They can sell CPaaS. 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. Your next question comes from the line of George Sutton with Craig Hallum. 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? Yes, I'll take that one. So look, when I 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're talking about over $135,000,000 in cash, not including restricted cash exiting in 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 compensation and those kinds of things to make sure that we're very shareholder friendly in 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 fits in 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 pay out our bonuses in cash. I'm well aware of the current interest rates, but I think it's an interesting move. Thanks. Yes. 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 the 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.