Earnings Call: Q1 2021

Jul 30, 2020

Good evening. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8 Inc. Fiscal Q1 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 Q1 fiscal 2021 earnings conference call. Joining me today are Vik Verma, Chief Executive Officer and Samuel Wilson, Chief Financial Officer. During today's call, Vic will begin with business highlights of our Q1 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 that our discussion today includes forward looking statements about 8x8's future financial performance as well as its business, product and growth strategies, including the impact of the 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 duty to update them. In addition, some financial measures that will be discussed on this call, together with year over year comparisons, in some cases, are not prepared in accordance with U. S. Generally Accepted Accounting Principles, or GAAP. A reconciliation of non GAAP measures to the closest comparable GAAP measures is provided with our earnings press release and PowerPoint presentation deck, which are available on our Investor Relations website. With that, let me turn the call over to Vic. Thank you, Victoria. Good afternoon, everyone, and thank you for joining us today. We continue to experience unprecedented times and I hope you and your families are staying safe and healthy. Before we begin, I would like to welcome Sam Wilson, our new CFO to the call. Sam has been part of the 8x8 team for almost 3 years in various executive leadership roles, including spending the previous 6 months transforming 8x8's cost structure through self-service and automation initiatives as Chief Customer Officer. Sam has also led our small business and mid market sales, professional services, implementation and customer support functions. As you will see, Sam has quickly come up to speed in the CFO role and we are pleased to have his financial leadership acumen as we accelerate into our next phase of growth and profitability. And now to today's business. I will focus my remarks on 4 core topics: 1st quarter results, go to market execution, platform strategy and finally our path to profitability exiting fiscal 2021. At 8x8, our mission is to help businesses leverage enterprise communications to create the new digital workplace. Business today requires resilient communication systems to support increasingly distributed or fully remote workforces. Now more than ever, cloud communications is fundamentally shaping the new campus, the new work group and the new office. Our team had strong execution against the accelerating cloud transformation opportunity in today's challenging environment. We started our fiscal year 2021 strong with solid service and total revenue growth and improved operating performance, each exceeding the high end of our financial guidance for the Q1. Total ARR grew 30 percent year over year with consistent performance across our platform offerings. New bookings accelerated to 33% year over year excluding CPaaS. We achieved our 2nd sequential quarter of solid progress towards profitability, beating our bottom line guidance and reducing our non GAAP pre tax loss by $5,000,000 from the previous quarter. As a result, we reaffirm our path to delivering non GAAP pre tax breakeven exiting the 4th fiscal 2021 quarter and our cash usage continues to improve as we cut our cash burn by more than half from the prior quarter. As we have previously discussed, we have made substantial investments in our go to market over the past 2 years that are now bearing fruit. This quarter, we saw improved deal execution, continued channel strength and robust pipeline growth with significantly lower customer acquisition cost overall. Specifically, expanded our enterprise customer base with 38 new ARR deals greater than $100,000 including a new 8 figure total contract value deal. Combined mid market and enterprise ARR grew 52% year over year as compared to 39% growth in Q1 last fiscal year. We delivered a record high bookings quarter overall led by channel bookings that grew 47% year over year. 62% of overall new bookings and 9 of our top 10 deals came from channel partners. Our cloud fueled partnership with ScanSource and Poly continue to sign new value added reseller partners that are focused primarily on accessing 15,000,000 on premise Avaya seats. One notable addition is Allegion Technology, Avaya's 2019 Cloud Partner of the Year, who joined the ScanSource and Poly Cloud Fuel VAR program. They were particularly impressed with our newly developed 8x8 Voice for Microsoft Teams integration, which provides them with a unique value proposition to access the upper mid market and enterprise markets. Other new ScanSource VARs added to the cloud fuel program include Gauge Telecom, Shamrock Communications and Stack8 Technologies. We're also pleased to have Lantana Communications join our U. S. VAR program. In the UK, Virgin Media Business is ramping ahead of expectations and we have multiple high value deals in the pipeline. Globally, we launched our new website and are already seeing improved awareness, a notable improvement in marketing CAC and increased overall pipeline production. Finally, 68% of our customer base is on the X Series platform, up from 43% last quarter. And we now expect to have more than 85% of our customer base on the platform by the end of the calendar year ahead of our prior target of 80%. Turning to customers. New customer logos in the quarter represented 64% of new bookings, up from 57% a year ago. Customers in key verticals such as healthcare, We saw an improvement in our business performance and channel dynamics in May June as economies gradually began to reopen in domestic and global markets. Let me highlight a few notable examples. 6 of our top 10 new deals were Avaya replacements from customers who selected our X Series solution after conducting competitive RFPs with other cloud providers. 2 noteworthy examples include a 5,000 plus seat win with a global financial software firm in the U. K. And a 2,000 plus seat win with a manufacturing company in the U. S. Both of these deals were channel partner led and included a bundled 8x8 UCaaS and CCaaS suite. Our newly announced Voice of Microsoft Teams solution made a strong debut last quarter in a number of deals. One example is a global manufacturing company headquartered in Europe that needed a solution that interconnected with Microsoft Teams to enhance their sales and service experience. We won with our 8x8x Series UCaaS and CCaaS suite with SecurePay. We saw strong momentum in the state, local education and special district segments also known as SLED in both the U. S. And UK as agencies responded to increasing COVID-nineteen impacts. Manchester City Council is one of these and a prime example of how 8x8 was able to keep vital services running safely for its more than 500,000 residents throughout the UK's lockdown. We also won 2 major U. S. State contact center deals in this quarter. Our largest win was in North America with an important channel partner who led a new 8 figure total contract value deal with a healthcare provider. This on premise replacement win included more than 20,000 seats of 8x8x support providers and employees working on mitigating the impact of the COVID-nineteen pandemic. We were especially pleased to assist Let's Get Checked, a COVID-nineteen home test kit services provider with remote contact centers in the U. S. And Europe. Within 10 days, we enable Let's Get Chek's contact center agents to work remotely and continue providing an uninterrupted customer experience at this critical time. Finally, last quarter, I spoke about a global financial services customer who needed to rapidly scale work from home contact center operation for employees based in India. We enabled 1,000 seats a weekend. This past quarter, we deployed another 4,000 X Series UCaaS and CCaaS seats throughout offices in South America expanded to over 11,000 seats within 9 months. All of these wins are a direct result of the ongoing investments we have made in our go to market capabilities. Enterprise have witnessed that on premise legacy systems do not have the ability to tailor a communication and contact center strategy that adapts to a work from home COVID 19 environment. As we continue to reap the benefits of our open communication platform and strategy, we believe this will further position us to deliver sustainable long term growth and profitability. Now let's move on to our platform advancement and market penetration strategy. The 8x8 open communication platform is arguably the industry's most complete portfolio of operate from anywhere enterprise communications. It uniquely brings together all the essential digital workplace elements required for enterprise communications, combining voice, team chat, video meetings, contact center applications and API solutions fueled by shared intelligent communication services like AI driven expert routing and predictive analytics, all on a single platform. Our Voice for Microsoft Teams solution is an enterprise class global cloud telephony solution that is the first to fully integrate with Teams without changing the experience for end users. It works natively with both the Microsoft Teams mobile and desktop applications with no downloads required from 8x8. Other Microsoft Teams integrations either change the end user experience or do not provide global coverage. The benefits of Microsoft Team and Cloud Telephony exists in virtually every organization that requires collaboration and communications and is further accentuated when it is integrated with a world class contact center solution. 1 of Microsoft's largest K. Channel partners is working with us on a program to bring 8x8 solution to their thousands of existing Microsoft customers. In the U. S, nearly 1,000 channel partners registered for our kickoff webinar and we are already seeing a strong pipeline of opportunities for this product with those partners. Due to our continued investment in the business, we own all the essential elements of an integrated platform resulting in 3 volume on ramps that are driving sustainable revenue growth. The first on ramp is our core technology platform with UCaaS and CCaaS bundled offerings. More and more customers see the benefits from having all of their communications delivered from the same platform. 55% of new bookings of $12,000 or more in ARR were from customers that selected bundled UCaaS and CCaaS. Contact center new bookings grew 194% year over year and represented 32% of total new bookings this quarter. Throughout this pandemic, we've seen many contact centers challenged to handle increased call volumes. Artificial intelligence and automation is increasingly key and we have expanded our offering with conversational AI that captures intent and integrates into Amazon Aurora and an IVR chatbot that offers the ability to send and receive automated SMS messages for instant mobile communication. The 2nd on ramp is delivering CPaaS globally. We believe that human interaction is redefining the user experience of today's B2B and B2C applications. There are millions of corporate and ISV developers worldwide and we believe that a core competency of the coming years will be the ability to add real time communications into these applications. Last month, we announced the expansion of our communications platform as a service or CPaaS programmable applications and APIs to North America and EMEA. This includes our new powered by Jitsi 8x8 meetings API. Our network of more than 130 top tier carriers around the world in 160 countries is powering these APIs and enabling businesses to customize applications and workflows by building an SMS, voice and video communications into both front and back office customer, partner, HR and IT solutions. Our CPaaS pipeline in the U. S. And U. K. Is ramping, including many cross sell opportunities within our UCaaS and CCaaS customer base. This past quarter, we signed more than 50 new CPaaS deals globally, including more than a dozen clients in the UK. Use cases for new customers include text to speech software that turns just text into a voice call and adding SMS messages for customer notification and to enhance security using mobile number verification, 2 factor authentication and one time pins. We also signed a new mobile carrier with Telefonica for Europe and Latin America to expand our SMS and voice network connectivity. Our partnerships with both Oracle and Amazon Web Services, who each have a large share of the developer community worldwide, will be an asset here as we ramp this portfolio to developers worldwide. Our 3rd volume on ramp is our e commerce platform as a fully self-service entry point for small businesses and work groups. In the U. S, UK and Australia alone, there are tens of 1,000,000 of small businesses. Our e commerce portfolio was created to address these customers with a low friction buying, provisioning and support experience. E commerce is gaining traction and consists of our 8x8 Express and MeetingPro products. To remind everyone, this is a self-service 100% online provisioning solution, enabling customers to buy the products with a credit card and be up and running in minutes. Since the inception of our e commerce business, we have doubled e commerce logos and more than doubled e commerce revenue every quarter. We are now adding thousands of new customers per quarter. Our Jitsi and 8x8 Video Meetings growth has now stabilized to the mid teens in terms of millions of monthly active users. Although we do expect increased activity as school returns to session in September. We expect our path to monetization of our significant Jitsi user and developer base will continue to ramp through our 8x8 Meetings Pro and increasingly our newly announced 8x8 Meetings API. With tens of millions of companies in this business segment, we are optimistic that there is a long runway of growth ahead of this portfolio. I also want to discuss one of the most important investments we have made, which is automating the migration from our legacy products to our X Series platform. As we continue to make progress on this transition, our X Series customer satisfaction, churn rates and support infrastructure are all vast improvements from our legacy base. I'm very pleased to share with you today that X Series now represents 68% of our customer base, up from 43% last quarter. We have completed our largest automated migration in the Q1 and now expect to have more than 85 percent of our customer base on the X Series platform by the end of the calendar year ahead of our original plan. These strong returns for the quarter were a direct result of our go to market investments, our differentiated platform and continued engineering innovation. The final topic I'd like to discuss is our path to profitability exiting this fiscal year 2021. Over the last 2 fiscal years, we've invested in developing our platform and building our go to market engine and channel infrastructure. The company has transitioned from a mainly small business VoIP offering to a full featured cloud communications platform that's moving up market. We remain on track to achieve non GAAP pre tax breakeven exiting a March Q4 fiscal 2021. Our operating discipline is delivering results as we optimize our global sales, marketing and operations for improved efficiencies. We're achieving economies of scale on our multiyear investments as evidenced by our improving gross and operating margins year over year. We remain steadfast in our assertion that work from anywhere will increasingly become capabilities are well aligned with the market direction. We are pleased with the progress we made this quarter and remain focused on accelerating the execution of our strategic plan. Finally, I want to express my gratitude to all of my 8x8 colleagues for their hard work and continued commitment to our mission. Now for some additional color on Q1, let me turn the call over to Sam. Thanks, Vik, and good afternoon. We appreciate you joining us as we report first quarter financial results. I want to echo Vic's comments that I hope you and your families are well and staying safe. I'm excited to be speaking with you this afternoon during my first earnings call as the CFO of 8x8. Thank you to Vik and the Board for having confidence in my abilities. For today's call, I will walk through our Q1 financial results and then provide guidance for the Q2 and some color on the remainder of the fiscal year. Lastly, I would like to share my initial observations and ongoing priorities over the last 50 days before opening the call to answer your questions. Starting with our Q1 results, we are pleased to have delivered performance that beat our guidance. Overall results were driven by better than expected performance from UCaaS, CCaaS and our bundled offerings. Total revenue for the quarter was $121,800,000 an increase of 26% year over year and above our $120,000,000 to $121,000,000 guidance. Total revenue was driven by better than expected service and professional services revenues. Looking specifically at service revenue, we generated $114,200,000 an increase of 27% year over year. Please note that service revenue reflects the reclassification action we implemented last quarter and now excludes professional services revenue. Including professional services revenue, service revenue would have been $118,200,000 an increase of 28% year over year. As a reminder, we will not be disclosing the historic reporting of professional services after this quarter. Turning to our business metrics, total ARR was $432,000,000 atquarterend, up 30% year over year and solid growth across UCaaS, CCaaS and CPaaS offerings. This growth was driven by our continued movement up market to larger enterprises. Channel was also an essential driver behind increasing our reach in the mid market and enterprise markets. As Vik discussed, our investments in the channel and product innovation over the last 2 years are continuing to pay off. Our bundled offerings of UCaaS and CCaaS is fit for our customers' needs. During the quarter, we further expanded our CPaaS offerings into the U. S. And UK markets, our largest markets, giving us a further multi product platform advantage. Lastly, we announced our Microsoft Teams Over the next several quarters, we are going to lap some large channel led deals we closed last year, 2019 acquisition of WaveCel. These will impact our growth rates in various channel and customer segments, which we expect will cause them to bounce around. Our first quarter non GAAP gross margin was 61.3 percent driven by product mix and better than anticipated professional services revenue. Non GAAP service revenue margin improved by 1 percentage point over last quarter to 67.7%. Non GAAP other revenue margin came in at minus 34.7 percent for the quarter, a large improvement from the minus 70.5 percent a year ago. We executed on several rapid deployments with professional services engagement in response to our customers' evolving pandemic needs, giving us better professional service revenue. Also, we have continued to grow our hardware rental program, which improves gross margin. We had lower than expected CPaaS usage during the quarter, mainly driven by continued COVID related slowdown in Asia, which began early in the quarter, but started to rebound towards the end of the quarter. As we have previously mentioned, CPaaS margins are significantly lower than UCaaS and CCaaS gross margins. In the 1st 3 weeks of July, we see improved usage patterns as certain verticals and markets are reopening for business. We currently expect the gross margin trend will reverse in the 2nd quarter with increased CPaaS usage as the world reopens and our entrance into the UK and U. S. Markets. This could influence product mix in our overall gross margin profile to come in slightly lower sequentially. Looking at Q1 operating expenses, we are delivering on our goal of aligning the global business to drive both improved execution and efficiency. Non GAAP sales and marketing expenses improved to 43.4 percent of revenue in Q1, 3% lower than last quarter. A combination of optimizing our media spend and moving from physical events to virtual events and webinars have driven spending efficiencies. We have also continued to add sales capacity. Non GAAP R and D expenses came in at 11.8 percent of revenue in Q1 versus 9.5% last quarter. We continue to prioritize investing in our differentiated technology platform advantage and completing the migration of legacy customers to X Series. Non GAAP G and A expenses improved to 12.5% in Q1 from 12.9% of revenue last quarter. We hope to gain further G and A advantages as we scale revenue and related operations. Total non GAAP operating expenses were up 6% year over year, while total revenue grew 26% year over year, a clear sign that we are making on our return to profitability. 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 we expect to continue efficiency improvement trend in combined operating expenses as a percentage of revenue on a year over year basis. Importantly, our top of funnel metrics including pipeline coverage rates continue to improve, our growth rates remain relatively high and our margin profile improved. These results show we are starting to reap the returns of previous investments in demand generation and the channel. We expect to see further improvement in unit economics as we optimize our go to market motions. Our non GAAP pre tax loss was $7,600,000 for the quarter ending June 30. This was materially better than our $12,000,000 guidance provided in May and a result of a combination of better than expected total revenue, margin improvement, operational refinance and the timing related to items such as reduced travel expenses and some currency benefit. We are assuming the timing items will not recur when we are giving guidance. I'm extremely proud of how the team is being very diligent about each dollar spent. Turning to the balance sheet, total cash, restricted cash and investments ended the Q1 at $186,300,000 including $19,000,000 of restricted cash. This is a decline of approximately $20,000,000 quarter over quarter, an improvement of $28,000,000 from the $48,000,000 sequential decline witnessed last quarter. We are focused on further reducing our cash burn both through operational efficiencies, economies of scale and improved collections. We also experienced some one time and timing related benefits in the quarter. For example, we availed of certain tax deferrals and credits from various jurisdictions, which saved us over $3,000,000 in cash usage for the quarter. For the full year, we would expect the cash usage to slightly increase in Q2 and trend lower again in Q3 and Q4. We believe the better than expected collections is a good sign that COVID related risks are manageable. One final item under liabilities I want to discuss is deferred revenue, which increased during the quarter to over $11,000,000 from roughly $8,000,000 the previous quarter. We have started the 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. Turning to the outlook. As we enter the Q2, we have seen improved sales funnel metrics, increased CPaaS usage in July and we are offering new products like MS Teams, Meetings Pro and additional CPaaS offerings. Offsetting this is the continued uncertainty in the macroeconomic environment as a result of the pandemic in our primary U. S. Market, which more adversely affects our small business installed base. Taking all this into account, we are establishing our guidance for Q2 fiscal 2021 ending our guidance for Q2 fiscal 2021 ending September 30, 2020 as follows. We anticipate total revenue to be in a range of $125,500,000 to 126 $500,000 representing 15% to 16% year over year growth. We anticipate service revenue to be in a range of 117 $300,000 to $118,300,000 representing 16% to 17% year over year growth. We anticipate non GAAP pre tax loss to be approximately $7,500,000 While we do not have formal guidance for the full year, we wanted to provide some color on the service revenue growth profile. As we mentioned in our May earnings call, we continue to expect service revenue growth rates to come down as we move out of Q1 and through Q2 and Q3 as we lap the anniversary of the Wavecell acquisition. Considering continued COVID-nineteen impacts on the global macro economy, we continue to see service revenue growth rate for the full year fiscal 2021 in the area of 17% to 18%. We are conservatively factoring in a range of outcomes based on what we know today. And so with that, let me turn to my final topic and discuss my initial observations and ongoing priorities over the last 50 days before opening the call for questions. I have had the pleasure of speaking with many of our institutional shareholders and analysts to solicit their feedback and help clarify some misconceptions. 8x8 is a company with a considerable amount of assets and strong monetization potential. Therefore, my top priority as CFO is capital allocation. As I look forward, the balance between investing in future growth, operating speed and direct return to shareholders is essential. Operational improvements are a must and as such we are optimizing spending to improve the overall business performance. Additionally, I remain focused on delivering on our commitment to non GAAP pre tax breakeven exiting Q4 fiscal 2021, the March 2021 quarter. This is important for our customers, our employees and you, our shareholders. Additionally, we intend to have approximately $100,000,000 or more in cash and cash equivalents on the balance sheet at fiscal year end. Our model suggests we will be cash flow breakeven 2 to 3 quarters after and at this time we believe we have adequate cash to get the positive free cash flow in fiscal 2022. From an IR point of view, I've heard our investors loud and clear, simplify the reporting of financial results moving forward. We provide a vast level of financial detail in our supplemental IR metric sheet, which has created the impression that the business has many moving pieces. This is not the true case. As a first step in this process, next quarter we will no longer provide the metric we have referred to as new bookings growth excluding CPaaS. When we introduced this metric last year, it was to measure the growth rate of bookings contracts for our core UCaaS and CCaaS business excluding CPaaS usage and other fees until we anniversaried our CPaaS acquisition. It does not include renewals. It has been a subset of total bookings growth and now that we have lapped the acquisition and fully integrated the business, we believe it is no longer a meaningful metric. We believe going forward ARR is a more precise and relevant metric to measure the health of the overall business. In addition, we are not contemplating introducing new metrics at this time and instead we look to continue to refine our parameters. We will seek to simplify what we report with your input. To wrap up, we remain well positioned to manage the business for the long term and are committed to accelerating our efforts to deliver better financial performance and enhanced shareholder value. Operator, we are ready to take your questions. Your first question comes from the line of Rich Valera with Needham and Company. Your line is open. Thank you. Good afternoon and thanks for taking the question. Appreciate you kind of reaffirming the 17% to 18 percent service revenue growth number. That's a pretty healthy number. It just seems that you would need to see a significant incremental uptick in the service revenue added per quarter relative to what your guidance suggests in the September quarter. So could you just talk us through how you're thinking about that sort of acceleration of incremental add of service revenue in the back half of the year? How we should think about that maybe between the two quarters and what drives that incremental add? All right. So this is Sam. I'll take that one, Rich. It's straightforward. It's driven by our modeling and what we have based on our bookings and what is currently in our forecasted model. We gave you the 2Q guidance and the color for the fiscal year. I think what you'll see is a higher growth rate year over year growth rate in the Q4 over the Q3, but we're pretty confident what the model shows right now. Got it. And then could you just give us any color on what's going on with churn? Last quarter, you gave a fair bit of disclosure there. You talked about your DBNE being below 100% because of sort of accelerated SMB churn or higher SMB churn. Can you talk about how that's trended over the last quarter and how we should think about that going forward? Yes. I think last quarter we said that we exited fiscal year 2020 with our best churn quarter with the 4th quarter. We did see slightly higher churn in Q1, the quarter we just reported. I think mainly based on COVID, I mean, we did see a little bit of increase in our small business segment. I do have to say though, if you look at the cash flow number, collections were very solid in the quarter. So I think it's very manageable. And right now everything just feels like it's kind of like on the plan that we're expecting for fiscal 2021. Okay. Maybe one more just maybe just one more thing I'll add. And then you mentioned the NDR stuff. So I think we said last quarter that overall NDR was less than 1, but X Series NDR was significantly over 1. And as we migrate customers to X Series, we are seeing those types of numbers hold. Got it. That's helpful. Thanks, Sam. Your next question comes from the line of Ryan McWilliams with Stephens Inc. Your line is open. Thanks. Just to piggyback off Richard's question. For the service revenue growth guidance of 17% to 18% for the full year, you talked about this included 200 bps of code related churn per quarter from the Q1 to Q3 of this fiscal year. Can you just talk about where that was versus the 200 bps for this quarter? And then going forward, would you consider this like a conservative expectation given the rebound that you saw in end of May June? All right. So I'll take those in reverse order. I do consider the forecast conservative. As you can imagine, having a global diverse base like we have and given the fact that COVID is anything but an easily modelable function, we are trying to be conservative with our guidance to make sure that there's no severe surprises. In regards to churn, I advantage of being the new guy. So I'm really not going to get into giving you churn numbers down to the basis point level. I'll just tell you it's in line with our expectations. There was nothing surprising in the quarter. Great. And then one for Vik. Some of my checks have highlighted that the 8x8 Voice or Microsoft Teams seems like an do you think this fits best with? Yes. So it's been quite interesting. So we've actually already got customers deployed on Microsoft Teams that gives you a sense of how quick the uptick was. And it helped us win a couple of very large global deals. What we are finding that the profile of the customer is large multinational customers with offices all over the world essentially, which need global voice and potentially contact centers. And so that piggybacks very well with the Microsoft Teams experience, which is primarily a collaboration experience. And the thing that makes us truly unique is you don't have to get out of the Microsoft Teams environment. It's completely native. You don't have to download anything from 8x8. It's all very tightly integrated together. We had a couple of very interesting events. I think one of Microsoft's largest distributors in the UK has really jumped on it and they had, I think, a webinar, which they said was the highest attended webinar. And then in addition to that, we've had, I think just out here, we did a webinar and over a 1,000 channel partners signed up for it. So we're seeing good strong demand and I think it is it's going to be a decent growth driver for us. Great. Thanks guys. Your next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open. Hi. Thank you for the question. This is Karan on for Meta. So the first question would be, so you noted that your X Series transition has progressed ahead of plan. So I guess just wanted to know what kind of incentives you're giving to the channel or to customers to accelerate that transition? And then maybe part to that question would be what kind of savings would you bring from just supporting one product? Thank you. So we'll tag team this one. So we are not providing incentives to people. Actually, as you can think about it, this is a company that is 20, 30 years old. And so we have a customer base stretching back to the early 2000s that have been on various legacy platforms, who've done multiple acquisitions. So accelerating to X Series, which frankly what all the channel checks we have done indicate that that is industry leading NPS and customer satisfaction. What we are finding is we figured out a way to completely automate the process. And so it's a seamless experience for customers where we go in and gather all of the data of usage of the various functions. And then literally over a weekend, the customer comes in, in the morning on Monday and you're now in a new experience, which is much more integrated, much better user interface, more automation, more self-service, etcetera, etcetera. So we're not providing incentives. What we're trying to do is make sure that essentially the two costs remain essentially the same. So there's no real leakage in overall revenue for us and there's no extra cost for the customer. With regard to the overall cost savings as you can guess that is something Sam will address. So I'll take this one. So right now, I mean as you can imagine we raised the number from 80% to 85%. So we're still expecting as we go into next calendar year and maybe even next fiscal year, we'll still have people and resources attached to it. Probably as we enter next fiscal year, what we'll do is we'll reassess at that point. And as we finish our migrations, we'll either roll the engineering and the support efforts into high ROI projects or we'll bring it down to the bottom line, whichever seems the right decision at the time. Got it. Thank you. And if I could just ask one more, could you just provide some more detail on your Teams partnership and when you think that could contribute meaningfully to revenue? Thank you. It's starting to contribute to revenue. I believe there's 100 active deals in the pipeline. It is just another one of the growth drivers for our UC CC platform business. So we continue to see traction in that and that I think becomes another differentiator for us. So far so good. Great. Thank you so much. Your next question comes from the line of James Breen with William Blair. Your line is open. Thanks for taking the question. Just a couple on the sales side. You talked about channel bookings growing 47% over year and being 2% of new bookings. How do you think about that over the long term? Where can that go to? Will it be eventually be 80% or so? And then when you look at your breakout of by customer, small, mid and enterprise, there are any differences between the gross margins in those businesses across the 3 different segments? Thanks. All right. I guess I'll take these as I'll take both of these. We expect that channel as a percentage of overall bookings will continue to trend higher over time. But I want to leave you very clear that won't be a linear thing. It will be jumpy. A lot of our larger deals, our big 8 figure TCV deals are generally channel led, and we're working very close to the channel at that point. So there will always be some lumpiness there. But I would expect over time, we're investing in the channel. We're seeing benefits from the channel investment. We love our channel partners and it's becoming a very virtuous cycle. On the second question, does channel have any real difference in gross margin, I presume versus direct? The answer is no. Cost to serve those customers is roughly the same. There's a little bit of a difference in sort of economics. But remember, while we may give a channel incentive or a compensation with channel partner to close a deal, they're also providing tremendous value added services to our end customers that we benefit from the cost savings and it basically equalizes itself out. Great. Thank you. Your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open. Yes, thanks. Yes, very nice quarter there. Maybe can you just talk a little bit about bookings flow throughout like the quarter and even in July here? Obviously, we're in kind of a fluid environment. Just kind of curious how bookings have played out sort of April, May, June July timeframe. Has it been elevated throughout or has it been building throughout? Just some color there would be They've been generally strong throughout. I think April was a little slower and then May June definitely picked up. But I've been pleased overall by our bookings and I think particularly the channel. I think one of the refrains you guys have always heard me say is that we're not getting enough at bats. We are now getting a lot of at bats and we thank the channel for that. And I think several of you have done channel checks, which are showing that we are being definitely getting more than our share of interest from end user customers. And so we hope that this trend continues. It seems like it is continuing to where I think increasingly we're getting more and more presence in the channel and we continue to think that that will give us more and more at bats, which has been in the past one of the weaknesses of the company. And if I'll take the question on the pace of bookings, linearity throughout the quarter was nothing abnormal. I would say it was in the noise level of what we've seen over the last couple of years. Great. Thanks. And then on contact center, just the growth was phenomenal this quarter. Is that a result of kind of COVID-nineteen environment or is that just kind of sales cycles coming to close for you guys? Actually both. I mean, one of the things that is pretty unique is, as you know, we've all made the bet that we are all about the platform, which is unified communication and contact center. And until about a year, year and a half ago, we would always lead with unified communication and then drag in the contact center. That trend has started to reverse. And particularly now, because of our ability to rapidly deploy contact centers, we're seeing a lot of very big deals in contact centers. I think we made reference to, I think, the city of Manchester. Let's just say that there were others that were of similar size that also went with our contact center. Let's get checked, deployed a contact center in 10 days. So I think part of the reason that you have seen a big surge in growth of contact center is the fact that in essence now people want a rapidly deployable contact center and right after that they pull in UCaaS, but it is all about the platform. Great. Thank you. Your next question comes from the line of Tim Horan with Oppenheimer. Your line is open. Thanks guys. Can you maybe just talk about the pace of bookings in July? It just seems like you're very, very well positioned as companies look to move to cloud communications. I'm just a little surprised it's not kind of building on itself at this point, given the initial shock to the economy. Thanks. I hear your question loud and clear, but I'm sorry. We can't comment on July quarter. The best I can tell you is there's no surprises in July. Everything is as expected and we factored everything into our guidance. But this is an earnings call on the June quarter. Great. And then maybe can you just talk about the VAR opportunity? Kind of where are you with developing that? And what's the competition look like out there for VARs at this point? Thanks. Yes. No, I'll take that one on. And actually, we continue to feel very good about it in the sense that 2 sets of bar opportunities, as you know. The Cloud Fuel opportunity, which is the ScanSource Poly umbrella and we're seeing more and more Avaya resellers join that. I think we talked about Allegion Technology, which was the cloud partner of the year for Avaya in 2019 and they have basically standardized on this. We're seeing we've already seen our first few deals on that close and we are now starting to see the pipeline start to build quite considerably. Similarly in the UK, as you know, we have a VAR relationship with Virgin Media and they've got a lot of public sector exposure and we're starting to see quite a bit of pipeline develop there as well. In addition, in the UK, as you know, we have VAR relationships with Charterhouse, Computer Center as well as Softcat and those also are continuing to expand. So we view VAR as the very unique way to go after the installed base where we're able to go to folks that are used to selling in a particular way and enable them to sell in the exact same way and so far so good. Thank you. Your next question comes from the line of Matt VanVliet with BTIG. Your line is open. Yes. Hi. Thanks for taking my question. I guess, looking at sort of the average deal size and revenue per customer, saw it tick down a little bit here in the enterprise and even the mid market this quarter. But we're hearing a lot more attach rate on bundled deals and overall X Series growing as a percentage of bookings mix, with the latter two sort of implying that you should see larger deal sizes. Maybe just help us reconcile kind of the strong growth in channel and enterprise overall with those metrics ticking down just a little bit overall? Yes, I'll take this one. I mean, it's a fair question, but I think let's just kind of put it in context, right? Over the last four quarters, we've been between $49,000 $42,000 in the mid market and $166,000 174,000 Yes, it ticked down a little bit. I think it's a combination of we saw a very good deal volume, but customers are a little bit more cautious right now about placing very large orders through the system given the COVID environment. So we are seeing a little bit more of a land and expand type of philosophy instead of a larger order upfront. But in terms of deal velocity, we had a record number of active channel partners all those other kinds of things. So your second part of your question was around channel. I think we're very positive there. I wouldn't read anything into the average revenue per customer segment. I think it was just a little bit of noise around the marketplace. Yes. And then, I guess specifically in the channel, our checks indicate that you guys are certainly present in a lot more deals, much like what you've been talking about. Curious though what or I guess from here, what's or how do you get the most mindshare or start winning mindshare 4 channel partners to select you as their lead package instead of some of your competitors that maybe they've been working with longer or have a larger book of business overall? So our channel checks indicate and I think several of you guys have done similar channel checks and we've seen some consulting reports as well that X Series when surveyed within the channel community is viewed to have the best NPS and overall customer satisfaction and the most comprehensive offering of anybody else out there. And so what we have seen is success begets success. It's very simple. And so you're starting to see channel partners win bigger and bigger deals using our product. And you're seeing I mean, we talked about that 8 figure TCB deal. And so the more deals that they win with us and the more deals that allow them to make sure that it's differentiated with our X Series plus some of the other activities that we have such as And the fact that we offer a combo product with contact center allows a higher per seat cost for a lot of their transactions. Contact center is becoming instrumental in these platform and UCaaS plus CCaaS deals. And the fact that we have them together, we offer functionality that leverages both sides of the house is fantastic. And now that we've got true mind share and sustained momentum in the channel, I think it's as Vic said, just success begets success. And I think to add to that, I think you saw the number of channel partners has increased quite materially for us. And so the number of active channel partners keeps growing. I think it was 813, I think in Q1 a year ago. And right now, I think it's 1092. So you're starting to see again a level of momentum pick up as people are able to get more and more success with our products in the marketplace. Great. Thank you. Your next question comes from the line of Charlie Erlikh with Baird. Your line is open. Hey, guys. Thanks for taking my question. I'm hoping you can just talk about maybe the traffic levels on your network over the past couple of months since, I guess, March. The traffic levels increased at all maybe in March April. And I'm wondering if since then, it's kind of leveled off to normalized levels or if they've maybe remained elevated? Thanks. So I'm going to break that into 2 pieces. I'm going to break it into the CPaaS side and the more traditional telephony side, contact center side. So, what we saw in the telephony contact center UCaaS side was definitely a situation where it was a tale of 2 cities, healthcare, government, sled, etcetera, all increased usage, all ramping really quickly, offset a little bit by lower usage in retail, hospitality, those types of COVID related. And I would say net it was down flat to down slightly. Also on the CPaaS side, because of our presence, our strong presence in some of the ride sharing next generation type of companies in Asia, we did see a decline in usage. A lot of that then has reversed itself as economy start opening back up, right? So starting in May, June, we then saw usage pick up particularly in retail and some of these other segments back to levels that we saw in January, February. And we have seen solid trends in July as I mentioned in the script in our CPaaS business picking back up. We lost no customers in that space just usage as ride sharing and some of those things start to pick back up we start to see that increase. So, I really don't want to draw too big of a conclusion because it was a it was been a tale of 2 cities depending on what the vertical was. Okay. Yes, that's helpful. Thank you. Your next question comes from the line of Andrew King with Polyure Securities. Your line is open. Hey guys, thanks for taking my question. So just on the 15 CPaaS deals that you mentioned that you closed, how many of those were outside of the APAC region? And then also, given the fast ramp that you've had on the Cloud Fuel and the Virgin Media strategic partnerships. Do you see any further investments given your initial expectations than what you had? If you can just talk on that, that'd be great. Thank you. So the CPS part, we closed over a dozen, I think is the term I used in my earnings call in the UK and we closed I think our first few in the U. S. So we're starting to see quite a bit of interest and very healthy interest in pipeline for CPaaS outside of Asia Pacific, which is exactly one of the reasons why we made this acquisition. I think the second part of the question I'm sorry, could you repeat the second part of your question? Yes. Can you just talk about your expectations on further investments in your strategic partnerships given their fast ramps? I guess the clarification is on the VAR side. I mean we have a number of strategic partnerships across the company. So I'm just trying to get some clarity. Yes. Can you focus on the Virgin Media partnership and then also the Cloud Fuel partnership? Okay, got it. So on the VAR side. Got it. So let's put it this way. On Virgin, well into the ramp, fully funded, we're moving forward, solid roadmap in place, deals already in the pipeline, really impressed with Virgin as a partner. They are world class and it's been so far just fantastic working with those guys and really like it a lot. Much the same for Cloud Fuel. So once fully funded roadmap in place, as Vic mentioned, signing up VAR partners, deals in the pipeline, revenue produced there. That's just a matter of scaling it right now. We have everything in place just really effectively on both sides of the house. The early innings are done and now it's just scale it and the deals are with both partners are there to scale the operations. Great. Thanks. Your next question comes from the line of George Sutton with Craig Hallum. Your line is open. Thank you. Vik, as we always try to do looking from the outside, trying to understand the breakdown of some of your spend, here's what I've concluded and I wondered if you could correct me where I'm wrong. It looks like you're doing less search spend, looks like you're doing less branding spend, looks like you're ramping up a referral program and looks like you're spending quite a bit more on the channel, which is obviously working. Is that a fairly representative breakdown of the changes that you've been making on the marketing and spending side? I'm going to take this one since I'm deep in the spending side. So at a macro level, I sort of roughly agree with what you're saying. I think what we're very focused on the areas that you just cited is optimization. So what we're really focused on is maximizing each dollar spent, really focused on marketing with your question. So we're very focused right now on maximizing each dollar of marketing spend to both pipeline creation and close one deals. And we've got very good analytics in place now and we've got enough at bats in place now to really drive that optimization process. It's why you saw a substantial improvement in sales and marketing spend quarter on quarter and it's why you're seeing a substantial improvement in operating margin year over year even as we grew R and D. And George, I'll add to that one because I think you've brought this up before. We made a very significant investment over the last year or so in our MarTech stack. And the whole purpose of that was in the past because we had a lack of brand recognition and our MarTech stack was prehistoric. We needed to really ramp that up and we're starting to see that we can get a lot of customer acquisition costs down because people are coming onto our websites. We're able to do a lot more interesting campaigns and tailor it to different people, drift, etcetera. So that's one aspect of it. And second, in addition to that, what we are seeing is the whole evolution of the Meetings product has done a great job of increasing our level of brand awareness. And then finally, what we're starting to see is e commerce is also another one that we are kind of driving costs down into the system. We've now got 3 very credible on ramps onto our product. As you know, we've got the unified communication and contact center. We've got CPaaS, which includes our video meetings API and we've got e commerce. And then as I said, coupled with a brand new MarTech stack, you're able to really start to drive much more efficiency into the system. Great. That's helpful. One other thing the accounting geek side of me needs to ask. Sam, you mentioned you're starting to build contracts in advance of contract delivery. Can you just kind of explain the thought process behind that? Yes. So I mean, we're as we satisfy the business even more, we're basically moving, I think more commonly referred to as prepaid, but it's not really prepaid. But like most SaaS businesses, we're starting to build 12 months annual prepaid for our contracts. And I think that would have been something that we historically haven't done it's why we have to have a working capital balance. I'd very much like to get us to a pure SaaS company where we can have either a 0 or negative working capital balance and become more capital efficient over time. I think it's doable. I think it's achievable. We've started the plans in place and we're already seeing the results. It's why we expect that we don't need to raise any capital at all to become free cash flow positive and why we think the balance sheet is in a very good position right now. Okay, helpful answer. Thank you. Your next question comes from the line of Ryan Kountze with Rosenblatt Securities. I want to circle back to your contact center comments and the great metrics so far. How do you what's your kind of strategy as you approach this market? Are you more of a disruptor here from a pricing perspective, coming on against bigger legacy incumbents? Can you maybe talk about that a little bit? Appreciate it. So I'm very proud of the work that the team has done in completely revamping unified communication, video conferencing, chat, all with an underlying layer of analytics. So what that allows us to do is mix and match for different customers. Some customers lead with contact center and what we're seeing is we can win some very big deals with contact center. Manchester City comes to mind. There were 2 very large state governments that basically went to the contact center in the U. S. Manchester City's sister city over in the UK that also competes with them on the UK Premier League went with us on the contact center. So you're starting to see contact center become a way that we lead into the business and then it brings in unified communication as a very differentiated asset into the mix. So on the whole, what we are able to do is we are able to provide the entire platform for a significant cost advantage. And Sam, you may want to jump in. I just want to add maybe one more small thing. When you talk about legacy providers, I a tendency to think of the really high end guys. And that's not where we're focused. We're not focused at the 5000, 10000 contact center agent market. There's a very large mid market opportunity where they want someone else running the infrastructure, they want someone else providing all the features and functionality. And especially when we can spread that across CPaaS and UCaaS, it becomes a very compelling value proposition for that mid market segment. Great. Thanks so much. And there are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.