Earnings Call: Q1 2020

Jul 30, 2019

Good evening. My name is Kavitha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. Fiscal 1st Quarter 2020 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 1st fiscal 2020 earnings conference call. Joining me today are Vik Verma, Chief Executive Officer and Steven Gatoff, Chief Financial Officer. During today's call, Vik will begin with business highlights of our Q1 performance. Following this, Steven 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 business, product and growth strategies that are pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. 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, were 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. Additionally, we will be discussing new annual recurring revenue and annual average service revenue per customer metrics. These new metrics are discussed in the press release and included in a financial and operating metrics worksheet that is posted on our Investor Relations website. With that, let me turn the call over to Vic. Thank you, Victoria. Good afternoon, and thank you, everyone, for joining us today as we review our Q1 results. I would like to share 3 points about the quarter that highlight both our business performance and the capabilities of our cloud technology platform that we are using to disrupt the $60,000,000,000 market for voice, chat, video, team messaging, contact center and now enterprise class API solutions. 1st, mid market and enterprise customers continue to drive strong revenue growth with an increasing contribution from our channel partners. As a reminder from our last call, our customer segments are not based on how much revenue we get from them, but rather based on industry convention in which mid market is defined as businesses with revenue greater than $50,000,000 less than $1,000,000,000 and enterprise customers as businesses with revenue greater than 1,000,000,000 dollars Combined mid market and enterprise ARR grew at a healthy rate of 39% year over year and was one of the factors why we were able to beat the high end of our guidance. 2nd, we continue to differentiate 8x8 with the pace of our innovation. We had 4 major new service announcement, more evidence that our one technology platform is delivering both velocity and innovation and clear differentiation from a shared data model that provides cross platform analytics. My third point centers around our recent acquisition of WaveCel. We have invested 100 of 1,000,000 of R and D dollars over many years into building, transforming and integrating a fully owned technology platform for global voice, contact center, video and team messaging. With WaveCel, we round out our framework with enterprise class CPaaS APIs. We have now fully realized our vision of 1 complete cloud based technology platform that combines the simplicity of prepackaged solutions with the power and flexibility of enterprise class APIs to enable global high scale fully personalized customer engagement. This is explicitly what our customers have been asking us for and allows us to take market share from legacy on premise vendors and further differentiate ourselves from cloud competitors. Let me touch on each of these in a bit more detail. First, our Q1 fiscal year 2020 results illustrate the fundamental strength in our core business with 39% growth in ARR for mid market and enterprise customers. Total ARR growth for the quarter was 21% year over year. Service revenue for the Q1 was $92,400,000 and grew over 18% year over year. Stephen will cover our financial results and guidance in greater detail, but suffice to say, we're off to a strong start as we see bookings growth that allow us to increase our full year guidance. We saw improved sales and marketing execution in the Q1. Pipeline growth was robust with improving coverage ratios across the board. Overall win rates remained strong and consistent with prior quarters. New customer logos in the quarter were 57% of total bookings. Our U. S. Enterprise business was a particularly strong contributor with bookings growth of around 95% year over year. Enterprise ARR grew 52% year over year. We saw success not only in our core UCaaS market and in combination deals including both UCaaS and CCaaS, but also with standalone contact center deals. Channel execution was strong again in Q1 with channel bookings growing 86% year over year, marking our 2nd consecutive quarter of approximately 90% growth. As we talked about during our last call, we implemented a series of changes 6 months ago that have driven material improvements. Clearly, our channel strategy is now working and we are seeing consistent execution. Channel was also an important driver behind increasing our reach in the mid market where ARR grew 32% year over year. Investments in our channel enablement program allowed us to expand to 15 strategic masters and 813 active partners, an increase from 12 strategic masters and 698 partners last quarter. We also launched the Elevate partner program so that 8x8 channel community has the resources it needs to drive expanded pipeline generation initiatives. Overall, 57% of new bookings were from the channel, including a record high 9 of our top 10 deals. Our ONE technology platform continues to be an important differentiator as we replace legacy on premise systems and single point solution providers. And customers continue to ask for cross platform analytics that can only be delivered from a single platform with a unified data model. This past quarter, we had a number of marquee wins, including a Fortune 500 global leader in financial services technologies with clients in over 130 countries. They chose 8x8 to replace their legacy system and they're starting with 15,000 X Series Seats. The company considered several other cloud and on premise providers, but in the end chose 8x8 for our global presence, voice quality and analytics that require a single technology platform. Another significant win this quarter included Thrive, a leading software company serving more than 400,000 small businesses. Thrive was looking for a single vendor to replace their mix of legacy systems and cloud providers, including Genesys, Cisco and Five9. The overarching requirements driving their buying decision were to have a single unified communications and context in a cloud platform with global voice quality and to easily manage IT operation and costs. They considered several of the cloud providers, but in the end chose to initially move more than 5,000 license seats of X Series, including contact center. Another marquee win was Halfords, a British cycling and motoring retailer operating in the United Kingdom and Ireland. Halfords was looking for a single provider to replace legacy Avaya and various mix of solutions. Their business requirements included a cloud provider with 1 technology platform for voice and contact center as well as integration with workforce management. Alpherds considered several other cloud providers, but in the end chose to start with a 4,000 seats of X Series solutions, including contact center to meet their growing retail needs. My second point is that we continue to accelerate the pace of innovation on our platform. We have the advantage of a single platform that can be sold to customers through our inside sales, field sales and channel as well as through our newly launched e commerce store. But a single platform also gives us a key technology advantage in the pace of innovation because any new capability developed for one particular use case is immediately available to other applications on the platform. 8x8 owning a single, fully integrated cloud platform will provide us with a lasting competitive advantage in the pace of innovation for years to come. As evidence of this, we would highlight 4 key product innovation announcements since our last earnings call. First, we launched 8x8 Managed Technical Services, MTS, a service which optimizes and manages local and wide area network performance to ensure world class voice performance. For some customers, particularly those with limited IT resources, understanding how issues in their local network configuration impact communication services can be difficult. By combining SD WAN with 8 bytes premium support, we solved this problem for customers of all sizes, ensuring optimum voice quality without the need for the customer to dedicate resources to network optimization. 2nd, we launched a brand new 8x8 meetings, a next generation WebRTC based cloud video collaboration solution based on Jitsi technology acquired from Atlassian. It allows teams to collaborate effortlessly with high definition video conferencing accessible on mobile, desktop and in room devices. We believe this solution will drive broader adoption of voice, chat and team messaging capabilities present in X Series as customers experience the power of seamless multimode communication. Additionally, we are planning to enter the standalone video collaboration market in the late fall. 3rd, we announced the availability of 8x8 Express, a complete communication system that empowers emerging businesses to quickly and seamlessly establish a professional identity. 8x8 Express is available for purchase exclusively in 8x8's e commerce store. 8x8 Express also includes the new 8x8 Meeting solution. 4th, we announced new capabilities for 8x8 Contact Center, including improved IVR functionality and Google AI enabled self-service with the use of automatic speech recognition and natural language processing. Also included is Expert Finder, which combines the value of 8x8's team messaging and 8x8's AI engine to search and rank message rooms based on past chats and expert interactions. Out of the box, ExpertFinder interoperates with more than 24 third party messaging platforms such as Slack, WebEx Teams and Google Hangouts. These are just a few of our initial AI capabilities for contact center and we expect to announce more as we continue to innovate in the broader AI capabilities across our technology platform. Contact center, both bundled and standalone, is an increasingly important component of our overall strategy and represented approximately 30% of our mid market and enterprise bookings in the quarter. X Series success is highlighted by the strength of combination deals, which include contact center. 7 of our top 10 deals were combination deals. We are also seeing acceleration in stand alone contact center deals with ARR growing 35% year over year. My final point is to reinforce our excitement about the WaveCel team and technology joining 8x8. As the leading CPaaS provider in Asia Pacific, Wavecell brings to 8x8 3 important strategic advantages. First, this acquisition expands 8x8's market to include CPaaS, creating a total addressable market in excess of $60,000,000,000 2nd, this acquisition enhances 8x8's fully owned end to end cloud technology platform with API offerings for SMS, chat apps, voice and video as well as a proven API framework that can be extended across the entirety of 8x8's cloud communication platform. 3rd, WaveCel expands 8x8's global presence by adding local offices in 5 Asian countries and enhances 8x' global voice coverage through existing relationships with more than 190 carriers. The Wavecell founding team will continue to drive 8x8 CPaaS business, which is growing rapidly in Asia, while close collaboration with 8x8 sales, marketing and engineering teams will accelerate the global expansion of that CPaaS business with additional geographies and services. We have a successful track record of integrating new technologies into our platform and we will pursue a similar approach where we will invest in and grow the existing team in place to minimize distraction while rapidly pursuing shared opportunities globally. I was present at the Wavecell office in Singapore for our day 1 activities, and I can tell you, I am very excited about the talent that we have brought on board and the business they have collectively built. Now as part of 8x8, I'm confident in our combined teams to grow and innovate even faster. Even in these early days, we are seeing cross sell interest in both directions. Immediately following our announcement, we received inbound calls from existing large U. S. And U. K. 8x8x8x series customers who wanted to know more about how the WaveCel APIs can extend their existing UCaaS and CCaaS solution to enable highly personalized interactions with end customers. As one example, using the Wavecell APIs together with the 8x8 platform, we were able to quickly demonstrate the delivery of alerts via SMS to shared workspace customers when their facilities and services are available. This enhances the end user experience for those clients and illustrates one of the many personalized interactions Wavecell can deliver on top of 8x8 solutions. We have also received inquiries from Wavecell customers for core 8x8 service offerings like X Series and standalone contact center. For example, Wanna Wave sells insurance customers that leverage CPaaS capabilities to enhance mobile apps for its claims adjusters now wants a solution for its contact center agents. As WaveCel's customers include some of the largest and fastest growing e commerce, FinTech and shared logistics providers across Asia, we know there will be immediate opportunities for both UCaaS and CCaaS with those businesses. Reinforcing our strategy and approach, customers want all communications data in one platform so they can drive improved experiences and insights. 8x8's 1 cloud platform delivers this across all forms of communication, voice, contact center, video and team messaging. One cloud platform that is API extensible and delivers omnichannel communication services with integrated analytics and AI capabilities is unique in the industry. In summary, we believe our strategy is correct. It is delivering what customers want. It is differentiated and our results demonstrate we are executing against it. As such, first, we continue to see strong bookings growth driven by mid market and enterprise businesses helped by our focus on channel partners. 2nd, our fully owned cloud technology platform allows us to innovate faster and deliver more value to a broader range of customers than bundled competitive offerings. 3rd, with WaveCel, we expand our total addressable market to greater than 60,000,000,000 dollars we extend our platform to include enterprise class APIs and we immediately grow our global footprint to include offices across Asia. In short, we are proud of the work we've accomplished this quarter to deliver strong results. And as we have continued to execute on our strategy, so too we have had a deliberate strategy to add targeted expertise to our Board. Most recently, we brought on board Elizabeth Theophile, the Chief Technology Officer and Digital Officer at Novartis. Elizabeth brings over 30 years of global IT experience in transforming large customer centric enterprises. I would also like to thank Ian Potter, who will be stepping down from the Board after more than 5 years of distinguished service. Before I turn the call over to Steven, let me also thank our more than 1700 global employees, which now includes the WaveCel team for their hard work and dedication to excellence, as well as our customers and partners for continued loyalty and support. It is all coming together and I have never been more excited about the future of 8x8 than I am right now. On to Stephen. Thanks, Vic. Good afternoon, everyone. We appreciate you joining us. I'd like to cover 4 topics today. First, review our Q1 fiscal 2020 financial results and business metrics. 2nd, discuss the WaveCel acquisition. 3rd, share some insights on how we're managing and balancing our growth portfolio and 4th, provide our financial outlook for Q2 and fiscal 2020. We'll of course wrap up by opening the call to your questions. I'm starting with our Q1 financial results. As Vik mentioned, we had a strong start to fiscal 2020 with our investments in demand gen and pipeline build bearing fruit, channel delivering another strong growth quarter and bookings coming in from a nice blend of new logo generation and existing customer expansion. As a result, total revenue for the Q1 of fiscal 2020 grew to $96,700,000 up 16.2% year over year. Service revenue came in at $92,400,000 an increase of 18.2% year over year. While large enterprise deals continue to be a bit lumpy quarter to quarter, this key segment delivered strong revenue growth in aggregate and on a revenue per customer basis. This was evidenced in both the land and expand dynamic with these larger accounts and the favorable impact of both the multiproduct nature and increasing usage of our cloud platform among customers. Our international operations also generated nice revenue growth and contribution in Q1 coming in at approximately 13% of service revenue and that despite a weaker British pound that negatively impacted service revenue growth by about 50 basis points in the quarter. Non GAAP pretax loss for Q1 was approximately $14,000,000 meaningfully better than our May outlook and driven by a mix of the timing of certain expenses and rigor in our expense management in both program and headcount spend. On the OpEx front, our increased go to market spend that we talked a lot about on our last call drove what we believe is the high watermark in the non GAAP sales and marketing expense to revenue ratio, which came in at 51% in Q1. We expect to see increasing sales SaaS metrics that we use internally and are providing in order to continue to drive transparency as we execute on our business and make key investments to accelerate revenue growth. The first new metric that we're adding is the percentage of new bookings closed by the channel, a good measure of our growing channel program and their involvement in creating pipeline and closing deals. In Q1, we saw 57% of new bookings closed by channel partners, including 9 of our top 10 deals. The second new metric that we're introducing is average annual service revenue per customer. This added definition is intended to align our business metrics and performance around an annual viewpoint and provide insights on the revenue profile across our more than 50,000 customers insofar as our revenue composition among small business, mid market and enterprise customers. Average annual service revenue per customer increased 18% in the mid market and 20% in our enterprise segment, coming in at more than $37,000 per year for mid market customers and more than $154,000 per year for enterprise customers. This is largely a function of our customers purchasing more seats and our X Series solutions, including contact center, as we're seeing good bookings, traction and growth across our largest contributors to service revenue. The 3rd new SaaS metric we're now reporting is total ARR, which came in at $332,000,000 at the end of the June quarter, growing 21% year over year. The drivers of ARR growth in Q1 were supported by the addition of 28 new deals that we closed in the quarter with ARR in excess of $100,000 and they represented 31% of new bookings, up from 26% in the prior year. In addition, overall, we had 4 49 customers generating ARR greater than $100,000 in Q1, a strong 50% year over year growth. We'll close out Q1 results with perspective on ARR customer segment dynamics that we initiated last quarter. Looking at ARR by customer size, we saw another quarter of solid growth in Q1. ARR grew essentially at the market in small business, a very healthy 32% in the mid market and a strong 52% year over year with our enterprise customers. And so with that, let's turn to my second topic and talk about the Wavell acquisition. As we've said, we're very bullish on the CPaaS business and the opportunity that it brings to 8x8. We expect Wavecell to be accretive to our service revenue growth rate, and we see tremendous opportunity ahead with WaveCel and expanding our TAM, adding the terrific API CPaaS technology to our platform and expanding our global growth. As we talked about in the announcement press release, the transaction economics were attractive as we acquired a very strategic technology and business that brings high growth revenue and we paid less than 4x their anticipated calendar 2019 revenue. Importantly, we also consciously structured the transaction to both minimize dilution and not use a lot of cash. Total consideration of $125,000,000 was comprised of approximately $69,000,000 in cash $56,000,000 in common stock, of which we tied approximately $12,000,000 to certain vesting restrictions over the next 3 years. This resulted in a net U. S. GAAP purchase price of approximately $113,000,000 and that is subject to customary adjustments and holdbacks. Looking at the acquisition and the impact of the CPaaS business on our revenue model, in addition to the powerful existing subscription based ARR driving our economics, CPaaS brings an increasing and important usage based aspect to our model. Going forward, our core subscription business now benefits even more directly from customer expansion upside, which we suspect will be an increasing contributor to our model in the form of high growth usage based revenue. On that front, I'd like to talk about my 3rd topic and share our perspective on our decided approach of optimizing a balanced growth portfolio across our technology platform and businesses. Our deliverable is very clear: drive increasing revenue growth and scale efficiently in order to grow stockholder value. To accomplish this, we're executing on a balanced growth portfolio and making investments and driving our core subscription business with usage based upside across all three business segments and all of this leveraging one technology platform. On this framework, we are better optimizing our growth trajectory and our operations. As you've seen in the metrics, we're already seeing strong traction and bookings results in the channel and in the mid market and enterprise segments where we're explicitly investing for growth. These larger customers are becoming an increasing part of our portfolio and are expanding at high growth rates. In the small business segment, we're investing for higher velocity and efficiency. We're looking to drive more attractive customer acquisition to lower CAC and deliver more favorable economics. We're accomplishing this through several opportunities and initiatives such as our recent 8x8 Express e commerce platform launch, where we're driving higher new customer volumes at materially lower costs. That is the advantage that a single technology platform provides. It offers us multiple levers to optimize our growth, giving 8x8 a differentiated advantage for several years ahead. In that context, let's turn to our financial outlook. Our guidance for Q2 fiscal 2020 is as follows. We anticipate total revenue to be in the range of 100 and $6,000,000 to $107,000,000 representing 24% to 25% year over year growth. We anticipate service revenue to be in the range of $102,500,000 to $103,500,000 representing 26% to 27% year over year growth, and we anticipate non GAAP pretax loss to be approximately $16,500,000 Looking at the full year of fiscal 2020, we are raising our previously issued guidance. We anticipate total revenue to be approximately 438 $38,000,000 representing 24% growth over fiscal 2019. We anticipate service revenue to be approximately $420,000,000 equates to year over year growth of 26%, and we anticipate non GAAP pretax loss to be approximately $53,000,000 Our service revenue guidance reflects both our confidence in accelerating growth in our core business and contributions from revenue from WaveCel. Note that with the WaveCel acquisition closing on July 17, Q2 will include a stub period of about 10 weeks. I did also want to note that we're modeling flat foreign exchange rates in today's market. And so to the extent GBP or other currencies depreciate further against the dollar, that would put marginal pressure on our year over year revenue growth. We're pleased to drive stockholder value with the addition of the highly strategic CPaaS technology onto the 8x8 platform with the addition of WaveCel. Directly related to this, we wanted to highlight that the gross margin profile of WaveCel's revenue is lower than that of the UCaaS and CCaaS portfolio. It's consistent with other CPaaS providers and models in the space. And as such, we expect a modest decline in gross margin in Q2 and through fiscal 2020. Looking at operating expenses going forward, while we continue to maintain a posture of investing in OpEx for growth, primarily in go to market, we continue to expect to realize sequential improvements in operating leverage and sales efficiency coming out of Q1 and throughout fiscal 2020, as we said on our last call. We continue to anticipate improving expense to revenue ratios among all of sales and marketing, R and D and G and A expenses in Q2 and through the year. And so far as some color on the bottom line in fiscal 2020, we also mentioned in the acquisition press release that we expect WaveCel to have a minimal impact on the pretax loss this year and have added roughly an additional $4,000,000 loss to the full year non GAAP pretax loss number. Rounding things out with some color on our balance sheet. We continue to be in a strong financial position with ample cash, strong working capital and our very attractive 50 basis points of convertible notes as our only debt. As a final takeaway, we continue to see a path to profitability through a combination of accelerating revenue growth and operating efficiency in the business that provides us the ability to achieve non GAAP breakeven exiting next fiscal year March 2021. With that, we appreciate your time and support, and we're glad to open the call for any questions. Operator? And our first questions come from Matt VanVliet with Stifel. Yes. Hi. Thanks for taking my question. Really appreciate it. I guess looking at the very much improved channel performance in the quarter, It's been a big focus of yours and you mentioned about 6 months ago you made some changes. But curious on how you place the mix between the improving performance between some of the recent changes, some of the programs put in place a little over a year ago and then some of it just being the time that it takes to build up those pipelines and sales cycles for the channel partners? Thanks. So it's a combination of all of the above. Channel, we were a little late to the party, as you know, and we started to take the channel seriously about a year, year and a half ago, had a few missteps, but I think corrected that. And 2 quarters does not a trend make, but I'm pretty happy with 90 odd percent year over year growth. And I think we're just barely scratching the surface. We 9 out of our top 10 deals came from the channel. And we are increasingly seeing the channel liking this idea of this one platform approach that we've got. Because once you train somebody on the whole platform, they can upsell everything from there. They can literally go into a classic land and expand model and the channel is ideal for that. They can start with selling essentially an X Series, they can sell and then upgrade to X8, which is our contact center. We are launching standalone video meetings starting late fall. They'll be able to sell that. We obviously have the ability also to sell standalone contact center and then analytics on top of that. So it's a process. The team has done a great job. Coverage has improved. And I think we've finally cracked the formula. So now it's a question of time and just keep executing at those kind of rates. And then, Stephen, could you maybe help us narrow it down a little bit more in terms of the guidance being raised about $20,000,000 How much of that contribution is going to be some additional upside from the organic business and the booking trends that you saw in the Q1 versus the expectations for contributions from WaveCel? Yes. The increases from both, candidly, it's both our confidence in the core business and the growth we see through the rest of the year, the increasing growth, as well as obviously the contribution of Waycell. And so we wanted to provide you with that map, which is why we disclosed the acquisition multiple so that you all had a sense of what their calendar 'nineteen revenue was like And so that now you have the numbers to model that out. All right, great. Thank you. Sure. And our next question comes from Nandan Alamadi from Guggenheim Partners. Hi, good afternoon. Thanks for taking my question. So, Vic, you mentioned this on the previous question too. But 2 quarters into major changes in the channel, what do you think is left to do? Is there anything that from just a channel development perspective that still need to implement? No, actually, it's more execution. If you think about it, the company has gone through a massive amount of change over the last few years. We introduced X Series as a bundled offering to the channel around the July time frame, and we are starting to get that moving in the right direction. We went through and upgraded the entire team. We have dramatically improved coverage, leadership, etcetera. We have started what is called an Elevate program where we are going in sub agent by sub agent and training them. So I think now it's much more of we know the formula. It is all about enablement, execution and literally keep on executing, keep adding coverage, keep increasing the level of knowledge that different channel partners have to our product and little by little keep adding additional products that they can upsell. As you know, we started out with the X Series, but we also started to include now stand alone contact center where they can sell just stand alone contact center by itself. That's seen quite a bit of uptick very quickly because I think we have positioned our contact center stand alone to be something competitive with the leaders in the industry, and we're starting to see good progress there. We are going to be introducing meetings in the late fall time frame. And the initial response to CPaaS has been extremely positive because CPaaS allows you to customize our platform, increase the level of integration to back office systems as well as provide end users with bite sized pieces of this various technology. That is tailor made for the channel that has spent all this time building customer intimacy and the ability to go in and keep adding more and more features to the channel. So for us, it literally comes down to execution. And just related to that question, as you begin to sell into larger enterprises, how much of the emphasis will be channel driven versus direct selling? I think our focus initially is channel 1st, but I am a big fan of diversification. So we will continue to put emphasis on direct demand generation. As you know, that was another area where we had a few missteps. We have now put in pace our outbound demand generation activity. Our Web site has dramatically improved. So we're starting to see even demand generation from direct have a nice uptick. Channel has had a nice uptick. And so we see a good mix of channel as well as a direct demand generation and we see all of this coming together to see to keep driving enhanced bookings. Thank you. And our next question comes from Will Power with Baird. Great, thanks. Yes, I guess a couple of questions. I just want to come back to WaveCel first. I wonder if you could provide any further color on how we think about the growth opportunity there. I know you provided some color on calendar 2019 contribution, but what does the growth rate look like there? And what do you expect going forward? In the second part of WaveCel, just any thoughts on how quickly that can be introduced to the U. S. Other markets and maybe any breakdown on SMS versus voice there? Sure. Thanks, Will. So we wanted, obviously, as we said, to provide you the numbers. It's obviously very early on in the journey for us. And so we have been fairly conservative in the approach with how we're setting out guidance for that business. It's a pretty cool business at the core. It's super strategic, obviously, for what we're doing. And so we will update you gladly as we report out this Q1 of having that meaning Q2, right, where we have the business as part of ours where you can provide a little bit more informed view on what that growth profile looks like in the bigger portfolio. And what I can add is more the cross sell opportunities. The reason we did this Wavecell acquisition, it's been a technology we have been looking for, for the last 2 plus years. And I always start with the technology because in the end, if the technology is great, everything else eventually takes care of itself. As an added benefit, we love the fact that in essence, they have penetrated a lot of the fast moving, fast growing unicorns over in Asia Pacific and in logistics and FinTech, etcetera. And they've gotten as well as in ride sharing, so they've positioned themselves extremely well. And then what we notice more and more is our core customers have always been looking for customization and bite sized pieces on top of our core voice offering. We used to do that with pure professional service engagements. Now we're able to do it literally with APIs out of the box. So we closed the acquisition and within 48 hours, some of our largest customers, and you know who they are, were reaching out to us to start projects and how you can add additional capabilities to their core either contact center or UCaaS offering that they have from 8x8. Surprisingly, one of WaveCel's customers right off the bat also reached out because they have it's an insurance adjuster. They basically are using video at the very end on camera on cell phones to help with insurance adjustment. They want to then tie in the customer support agents in. So in essence, using an X Series type platform, so in essence, you can do real time claims assessment. So you can see how CCaaS and CPaaS and are just kind of starting to merge together. And it's always been our vision. All of these things will come together. And the reason the timing for us was right is we have spent the last few years integrating our platform. So WaveCel will not be run as a standalone, bite sized acquisition just selling pure SMS, 2 factor authentication or whatever. It's an API framework for our entire platform, and we see massive cross sell opportunities on both sides. And our next question comes from Rich Valera with Needham and Company. Thank you. With respect to WaveCel, I wonder if you can give any color on how their OpEx break out relative to your sort of proportions on the OpEx lines? And do you see any opportunities for synergies or OpEx savings down the road? Yes. To the discussion earlier, it's part of the portfolio, and we talk about a balanced portfolio and investing for growth and investing for efficiency. And there is a lot of both with this asset. And so there is a tremendous amount of overlap on the go to market side. And so there is a bunch of efficiency and synergy there. There's also a lot of engineering cost redeployment. So it's not a question of we acquired Waycell and now we have to go spend a ton more money. It's really the money that we would have spent in various capacities in R and D as well as go to market now integrate quite well from an OpEx standpoint. That's why the litmus test on that, if you will, is when you look at our full year guidance, a very small single digit $1,000,000 of incremental investment is what we would see from our own run rate. And so that's the sanity check on that, if you will. From a margin profile and OpEx profile, we talked about this a little bit in the prepared comments. But at the core, there are very different services that CPaaS provides, right? There's the core SMS messaging services that have its gross margin profile. There are the higher value application services that sit on top of that. And so that range of gross margin contribution is in the 18% to 22% zip code, like the rest of the space. Got it. And then just to follow-up on the contribution expected, from WaveCel from a revenue perspective. You pointed out that you've given the kind of sub-four x multiple, and we obviously know the valuation. So I would have expected kind of a low $30,000,000 annualized run rate there. And if you prorate that for, say, 8.5 months, you'd get kind of a low $20,000,000 expected contribution, which is a little more than what you're raising your guidance by. So I'm just trying to reconcile that with your comments that you're raising both the organic and the inorganic components of the guidance? Sure. Your numbers make sense, so that's not off the reservation. And we would offer that there is a dynamic of the numbers that they are have provided and that the transaction was executed on. There's how we run the business. And then as we said, we're being fairly thoughtful and mindful insofar as how we set guidance for our own business, let alone for something that we just acquired and thinking multiple quarters out. And so it's really just a sense of being fairly thoughtful and responsible candidly, so we don't get out over our skis on something that's brand new. Fair enough. Okay. Thanks for taking my questions. Yes, sure. Thanks, Rich. And our next question comes from Meta Marshall with Morgan Stanley. Great. Thanks. Maybe turning to kind of the contact center commentary around the 30% of bookings from contact center or having some element. I guess, does that mean that 30% of new bookings bought like an X8 license or 30% of deals have X8 kind of as a portion of them? Just how to think of that factor? And then maybe second question for me Go ahead. Go ahead, and I'll ask the second question and follow-up. Yes. No, 30% of a bookings by value is directly attributed. This is for mid market and enterprise is directly attributed to contact center. Contact center is starting to become a bigger and bigger piece of our business. The part that's the most exciting me then you've been with us on our journey. We launched the X Series, X Series when you have X8, which is we have a certain value ascribed to contact center, certain value ascribed to the voice piece. So part I'm talking about is the stuff that's ascribed to contact center, but we're also seeing standalone contact center uptick as well. So both of those things reinforce each other. Keep in mind, contact center standalone is a relatively new introduction for us, but we're seeing again good acceleration on that. We brought a sales team on board over the last few actually last 4, 5 months from several competitors as well as a product marketing team. And we're starting to see, as I said, uptick on both standalone as well as on combo deals but contact center is going to be a very appreciable part of our business going forward. Okay. And then maybe just a second question, just on what is the difference between ARR and kind of service revenue because it seems as if ARR is a little bit lower than the service revenue? Just helping reconcile that piece. Yes, sure. So ARR is our book of business, right? So that's a point in time value of the recurring revenue measure for our customers as of a given point, for example, as of June. Service revenue is a period concept is that's the revenue that we took in on the P and L over that period. And so your ARR is basically your leading indicator a bit, right? ARR grew about 21% and service revenue also includes other components beyond subscription. So there's a little bit of usage revenue, there's a little bit of professional services revenue in there as well. Okay, got it. Thank you. Yes, sure. And your next question comes from Josh Nichols with B. Riley. Thanks for taking my question. I did want to ask 2 things. 1, the company has obviously been investing a lot of growth. Could you talk about the target year over year headcount increases going forward, obviously, not including the acquisition, but just organic growth from here? And given that you're increasing the pro form a pre tax loss expectation for the year to $54,000,000 although you beat for the Q1, could you walk us through how that's going to translate to free cash flow and your expectations for the year? Sure. So the high level point of view on our headcount is we're growing and will continue to grow headcount at a lower rate than our other expenses. And so there was some investment you've seen in the last few months, particularly this quarter, right? It is the largest component of our OpEx, something like 70% of our OpEx are headcount costs. So it's something that we can control very closely. But basically, we're starting to see leverage in the last, gosh, probably 18 months, something like 60% of our company, the employee base has been here for 18 months or less. And so you've seen a big increase in headcount over the last 18 months and that rate is now declining meaningfully so that it's much less than the overall expense increase and it's much less than the revenue growth rate. So you're starting to see leverage on the people side of the business, full stop. On free cash flow and what that means, yes, we manage our cash very frugally. It's an important aspect of the business and obviously a stockholder value. And so we see that metric dovetailing with our point of view and our desire to manage to breakeven. And so that should be something that goes part and parcel with that. And just I guess what I'm really trying to get a handle on is you've targeted being breakeven exiting next year on a pro form a pretax basis, right? That just seems like it could be a bit of a stretch given the guide for the pretax loss is up pretty significantly quarter over quarter for the September expectation. Although you're talking about getting some increasing leverage on the operating line. And then just looking on a cash flow perspective, you had about a $14,000,000 pretax loss, but you burned through about $30,000,000 of cash in the quarter and how that's going to flow through in the next 6 to 12 months? Yes. So one correction is we guided on non GAAP basis to breakeven by the end of next year, 2021. And look, we have confidence in the leverage that we're seeing right now in the model. And so we don't see I would differentiate guidance from how we run the business, right? And so we've messaged that we have confidence in our ability to drive leverage, and we just messaged that for our expectations right now for Q2 coming out of Q1, where you'll see improved sales efficiency as well as operating efficiency and lower EOR ratios and therefore lower burn. And we see that continuing on quarter to quarter. And so that's something that we feel confident about and that we do not draw a direct line with guidance. Our guidance approach on the bottom line builds in an appropriate comfort zone and variability on certainly on a brand new business that we just acquired, for example. Okay. That's helpful. I guess, fair to say then, I guess, so you are guiding to non GAAP profitability exiting next year, but there are a lot of non GAAP costs as far as deferred commission, right, capitalization costs. So you expect cash flow to probably continue to be negative through next year. Is that a fair assumption? Yes, that's right. We said non GAAP breakeven by the end of next year, and the non GAAP costs are some odds and ends, but it's mostly amortization and SBC. Great. Thanks a lot. Sure. And your next question comes from Tim Horan with Oppenheimer. Thanks guys. Can you talk about just customer awareness at this point of all the new products out there? Obviously CPaaS is really new, but I mean we've had some major company come public in the collaboration space, in the video conferencing space, major improvements in contact center. And I guess ultimately what I'm trying to get at is what percentage do you think you have of your enterprise or mid market total cloud communication spend at this point and where do you think it can kind of go? I didn't understand the last part, but let me address the gist of the question. Yes, our timing on our acquisitions, frankly, if I may say so myself, has been brilliant. We acquired Same Room, which is essentially a chat function, which interoperates with 24 odd collaboration platform literally out of the box a couple of years ago and it is now totally integrated with our products. It's a huge the team messaging aspect of it is a huge differentiator for us and we are finding customers are increasingly using it more and more. The second part of it, contact center, as you know, we did 3 acquisitions in contact center. Contact center has now become a very big part of our business. As we indicated for our mid market and enterprise business, 30% of bookings are coming from contact center. And both standalone and on a combined basis. We see that as a and we're winning, I think I can't remember the exact number, but I think 7 out of 10 deals or something like that were contact center had contact center in it. Now we're starting to see a big shift in video. As you know, we acquired Jitsi from Atlassian about October, November of last year. We are launching it or just launched it a few days ago, bundled as part of our X Series and also as part of our Xpress. That's starting to have quite a bit of impact and we're hearing more and more from customers. We'll be launching that standalone by late fall timeframe. So we'll have both contribution, 1, as a way to protect the overall pricing power of our X Series because it's bundled in, but also as a standalone product that we can sell on itself. And since it's all on one platform, you get double leverage essentially from it. And then not just the Express piece, which we just launched also, which is for our not just the Express piece, which we just launched also, which is for our low end SMB business, basically the micro SMB business, which is fully automated and that has bundled meetings in it. So all of these growth vectors are just starting to happen. So if I were to stage it, I would say that the majority of our business in the past has been UCaaS. Increasingly, CCaaS is becoming a bigger and bigger portion of our business. Collaboration is built into all our UCaaS and we're seeing pretty significant adoption, particularly from enterprise customers. We are now starting to see the beginnings of adoption by of a video meeting solution, the 8x8 meeting solution that we just launched. And then we anticipate that Express will help us increase the efficiency of our SMB CAC quite dramatically because it's complete self-service. It's launched on our e commerce platform and there will be no essentially chat support, etcetera, and it's intended for 510C type low end SMB businesses that are just starting out. Very helpful. Thank you. And the next question comes from George Sutton with Craig Hallum. Thank you. I want to go back to Rich's question because I think that's really the key question relative to guidance and the contribution from the acquisition. Is there not some deferred revenue you're losing as a result of the acquisition because that would answer that question a little more cleanly. There is no deferred revenue that we are losing at all. It's a usage based model, and that was not part of the calculus in the acquisition. Okay. One other question relative to your mission to do the standalone video collaboration in the fall. I'm just curious how that's being funded? How you're going to market there? Who you're viewing as the competition? So I'll do it in a couple of ways. 1, it's funded as part of remember, I have one platform. The whole idea of having one platform is it's one engineering team. And so we are able to have our engineers work interoperably on all of our various capabilities and a lot of the services in that one Series. We just launched that over the last few weeks. We are Series. We just launched that over the last few weeks. We are also going to market with it as part of our Xpress, which is our e commerce solution. I want to see how both of those go out. And then depending on that, we will either go to market with it using our e commerce platform as a stand alone meeting solution or as a stand alone meeting solution that will have either our inside sales or our field sales sell. That's why I keep hammering this concept of 1 platform because it gives us ultimate flexibility. With 1 platform, you can bundle it as part of your X Series, you can sell it through your inside sales, your channel sales, your field sales or you can sell it through your e commerce platform as standalone. What we are trying to do and put the focus on is the customer. The way our customers want to buy is the way we want to sell them. What's increasingly starting to happen, and I think you have your finger on the pulse of the industry, I think as you check around with certain analysts that have had early looks at 8x8 meetings, they're pretty impressed with the overall product and how effective it is. And we're starting to see large enterprise customers saying, hey, we've got your UCaaS solution, can you just give us essentially the meeting solution and we can add that on and use it to replace WebEx? I see the primary competitors we have are no secret. It's primarily the legacy guys, right? So it's the Avaya, the Cisco, the Mitel, the ShoreTel and whatever Tel there is. It's also increasingly people like WebEx and Cisco where we see them as legacy vendors. We obviously see cloud vendors such as RingCentral and Five9 and inContact all the time. And every once in a while, we'll see Zoom. But the target initially for our meetings will be people like WebEx and then GoToMeeting and then eventually people like Zoom, but we're not we'll take our time over the whole process. And initially, as I said, we would start with a bundled solution. Okay. Helpful clarity. Thank you. And our next question comes from James Breen with William Blair. Thanks for taking the question. Just with respect to WaveCel, obviously, we know the product set that you're getting and how you're going to integrate that in. Is there some expertise you're getting also behind the scenes you can talk about just in terms of because of their geographic location and just some from a sales perspective and that's your perspective in Asia? Thanks. So I'll take the lead on that one. So a couple of things. 1, they have an incredible team that has carrier relations with I think about 190 carriers. They have built an amazing telco network and the ability to do seamless messaging all over the world. These guys are excellent at. That's one aspect of it. All of them have been in this industry. This is a 9 or 10 year old company that we've been tracking for some time. 2nd, what they have is a lot of ability to work with customers where they do essentially design wins and they embed their product in. Some of their customers, for example, have used them not just for initially SMS, but now are starting to use them for voice and video, which we see as a huge opportunity for upsell with us. 3rd, they have a local presence in Singapore as well as Philippines and Hong Kong and Japan and a few other local markets, Indonesia, Malaysia, etcetera. And we have already an installed base of customers that are global that maybe MNC is based in the U. S. Or U. K. Or Australia that have headquarters all over the place. And it was quite interesting how several of them essentially see both WaveCel as an opportunity for additions to their product and we also have, as I indicated, wave cell customers who see the ability for UCaaS and CCaaS. And particularly, our UCaaS solution, the Express, the 8x8 Express, which is the e commerce solution, we see great opportunities to go global with it because it's a completely seamless solution. And so the intent is over time, we're testing it out in the U. S. Initially, but launched that all over the world and we will now have an installed footprint all over the world. And if you think about it, we have become a truly global company. We have what 900,000 employees in the U. S, we have people in Australia and Asia Pacific area. We now have people in Singapore. We also have about 500 people in sorry, I shouldn't I said 900,000. We have brought 900 to 1000 employees. I'm not quite there yet. So we have between 900 to 1000 employees in the U. S, about 500 plus employees in between UK and Europe. We now have a pretty appreciable 70, 80 employees in Asia Pacific region plus A and Z. We have really built a global footprint. And with the kind of carrier Add that with a great SMS network, you really have something powerful. Add that with a great SMS network, you really have something powerful. And the investments that you're making in the channel that you've made over the last 12 months or so, will those overlap into the Wave Fill territories? Is there sort of a different group of channel partners that you have to deal with there? Both actually. Some channel partners have actually a presence in that part, some don't. So there will be some overlap. The most immediate overlap is we see the ability for channel partners that our existing channel partners in U. S. And U. K. To be able to sell WaveCel services on top of the 8x8 UCaaS platform. We also have, as I indicated, partners in Australia. So there's a tight integration between the partners in Australia and all of Asia Pacific. So we see opportunities for growth there as well. Great. Thank you. And our next question comes from Mike Latimore with Northland Capital. Great. Thanks. I guess first on WaveCel, have they historically mainly sold to developers or are their channels more diverse than that? And then, I guess, given their usage model, is there any seasonality in their business throughout the year? So I'll take that one. So one, WaveCel is primarily sold to enterprises. They are not about a developed community, which if you think back to some of my own views, that is totally aligned with our vision. We see APIs as a logical extension of SaaS as a way to customize and as a way to go to local markets. And so what WaveCel has done is they have traditionally worked with enterprises to embed their solution as part of a larger solution that the enterprise is offering. 1 of their customers, for example, does ride sharing and is one of the most prominent ride sharing companies in that part of the world. They provide essentially SMS. Now there's a logical extension of voice and other capabilities like video that you can add to that. So again, their APIs are geared more towards the enterprise as opposed to the developer community and that will remain our focus. Our focus is the ability to work with enterprise to create applications that we can embed into larger applications as well as the framework that we can use to take our core UCaaS, CCaaS offerings plus the X Series and be able to provide customization and additional features on top of that. So again, the focus is not on the developer community, the focus is on professional services organizations. Seasonality, there's some at the customer level or some verticals that they have some specialty in that have seasonality naturally. But the portfolio effect kicks in. So that from an aggregate level, when you look at the revenue stream, there's not a tremendous amount of seasonality. Got it. And then just last on the deployment cycles, I guess, especially with your X Series, how have they been sort of trending over the last year? Getting faster. I mean, every the X Series, as you know, it was a difficult birth. But once we got past it, once we got it introduced to the channel partners, once our own deployment team got much more comfortable with it, it is definitely accelerating time to revenue across the board. So that's a good sign. So it's been a long journey. Bundling everything into the X and completely upgrading the platform was a nontrivial amount of work, but I think it is paying fruit and we're seeing revenue acceleration there. With regard to WaveCel also, I think we see an but the real value will be how it tightly integrates as an API framework for the entire consolidated platform that HPI has built together. Great. Thanks. And our next question comes from Jonathan Kees with Summit Insights Group. Great. Thanks for taking my questions. Vic, I think I'm going to tag along to what you just talked about in terms of how the waste sales can be tightly integrated with the network. I guess, I'm just curious in terms of the timeframe in terms of this integration, not just from the network. I mean, it has its own cloud network and it's this is the core stuff that you just referenced. What is the timeframe you think about in terms of integrating that onto your cloud platform or excuse me, your cloud network? And in terms of the platform in general, you're talking about your engineers being able to work on multiple products, being able to interoperate in terms of their functionality. You've already also talked about sales, some of the sales teams already in channel already also being able to sell waste on top of your UCaaS. Just trying to get a sense in terms of the integration for from both the technical level as well as the engineering level and in the total sales in channel level. Okay. Let's break it out into different. This the integration will happen incrementally over the course of the year. To give you one interesting anecdote, one of our customers had a need on top of our UCaaS platform, and I'm sure you can guess the type of customer, where they wanted to send alerts out to people on shared office spaces. Our engineers were able to put together a demo for them in 48 hours using WaveCel on top of our core offering. So portions of it will be worked. The integration will happen over time, but portions of it will work. The way the classic model we will follow is exactly how we have the model we have followed for all the various technologies we have acquired over the years. I'll pick the last 2. Same room, which was essentially a collaboration engine, was embedded into both our mobile app as well as into our desktop app and now is part and parcel of everything that has ever shipped to anybody at all time and customers of every size. And so Collaborate, which is our team messaging capability, is now completely embedded. Video, that is just starting to happen. It started to happen. Now video, if you recall, was acquired in, I think, October, November of last year. And already, the video has been embedded into our core virtual office desktop app. It's also been embedded into our core virtual office mobile app. It's now part of our integrated Express solution and it's also integrated about new X Series sales on a case by case basis. And as I said, that is being sold by the exact same sales team. We will make a determination on stand alone meetings where it will be sold by the exact sales same sales team, and we will use the e commerce platform that we are testing essentially with our Express offering to also additionally add meetings to that same e commerce platform. With regard to WaveCel, I think we will essentially assist them in they've got some amazing high growth e commerce, fintech, logistics players that are household names in Asia Pacific. They've done a phenomenal job of embedding their solution into several of these. And as these companies are growing, WaveCel grows with them. We will be working with them to add not just SMS messaging, but voice and other capabilities right off the bat. Several of WaveCel's customers now want contact center solutions because that's a logical extension to essentially a CPaaS application. That's easy for us to do. Our contact center works globally and that's why the stand alone contact center is so valuable because that can be immediately sold as an addendum to WaveCel. So it will happen, as I said, over time, as I said, incrementally over the course of the year, but I think in about a year or so, it will be fully integrated. Great. That's helpful. And if I can, one other question. In terms of your deal strategy, maybe I can step back and ask about your deals in general. You've had a large amount of standalone contact center sales and that's a positive surprise and that's certainly a trend that it would be encouraging to see continuing. WaveCel already has that. You're talking about video coming out in the fall as a standalone product. I guess, what are you are you do you have a change in terms of deal strategy? Are you looking at profitable deals? Or are you looking at just get a footprint in and then profitability in the mid- to long term for each all across the product? Okay. Yes. So let's walk through. We've had the same vision. And so I think you have the benefit of us never having changed our strategy with regard to what we think the customers want. The strategy has been this creation of one platform with the ultimate mix or match. I can sell you the entire suite of products bundled in an X Series or I can sell you elements of it standalone, and that has always been. So now the great thing is when you do development for standalone, it applies to the bundle and vice versa. When you do anything that changes, say, for example, single sign on or data layer or security or reliability for the platform, it applies to every individual component as well as to the bundle. So the way we are going to market is we launched X Series in the July time frame. We're getting that out there. We're starting to see traction across the board with X Series. And over time, over the next 18 months or so, our entire platform will be on the same common platform. Then what we've done is once X Series is launched, we took a component of X Series, which is contact center, and we launched that standalone. Then we took a portion of X Series, essentially tightened it all up, so it was very easy and self-service launched that as Express, video as 8x8 Express. We will take a portion of X Series, which is our meeting solution, and we will launch that essentially as standalone, and it's already been launched as bundled. So the intent is essentially a land and expand model, which is classic for every SaaS company, and it's the same common sales team that sells all our course of all our products and it will be the same channel that we'll use to go to market with all our products. So that's fundamentally how we believe we're going to drive very significant leverage in the model. That's why we've had this one platform strategy because all the work that you do for one element or for the platform applies equally for everything. And then because you own your own technology, you can split it up and sell it and you also maintain pricing leverage because in essence, you can defray cost between different elements and always ensure the customer is getting full value. Okay, great. Thank you. And our final question comes from Ryan Kountze with Rosenblatt Securities. Thanks. My question has been answered already. Appreciate it. All right. Thank you. And I would like to thank everyone for joining today's conference call. And you may now disconnect.