Good afternoon. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. Fiscal Q3 2019 Earnings Conference Call. All lines will be placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Victoria Hyde-Dunn, Investor Relations, you may begin your conference.
Thank you, operator. Good afternoon, welcome to 8x8's third fiscal quarter 2019 earnings conference call. Joining me today are Vikram Verma, Chief Executive Officer, and Steven Gatoff, Chief Financial Officer. During today's call, Vik will begin with business highlights of our third quarter performance. Following this, Steven will provide details on our financial results and guidance for our fiscal Q4 and full year fiscal 2019. After these prepared remarks, we look forward to taking your questions. Before we get started, just a reminder that during this conference call, any forward-looking statements are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and our actual results could materially differ as a result of a variety of factors.
Additional information concerning these risk factors is available in our most recent reports on forms 10-K and 10-Q, which you will find on the SEC's website and the investor relations section of our website. As a reminder, we adopted the new revenue recognition standard, ASC 606, in April 2018. For certain income statement items, we have provided the third fiscal quarter 2019 results as they would have been under the old standard, ASC 605. Reconciliation of ASC 606 and 605 results are included with our earnings press release. In addition, some financial measures that could 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.
With that, let me turn the call over to Vik.
Thank you, Victoria. Good afternoon, thank you to everyone for joining us. I would like to share 4 points about the quarter that highlights our business performance and the large opportunity ahead of us. First, we exceeded the high end of our financial outlook in our third quarter and saw another sequential increase in our year-over-year service revenue growth rate, as has been the case in every quarter this fiscal year. Second, our X Series cloud platform, which integrates voice, video conferencing, contact center, and collaboration into a single technology platform, is strongly positioned to address the current market as customers are increasingly adopting robust integrated cloud solutions. These customers are seeking one technology platform which offers unique product, data, and analytic capabilities. Third, our new bookings performance in the U.S. mid-market and enterprise came in weaker than we expected.
Our enterprise business continues to be a solid but lumpy business with a few large deals pushing out of the quarter. Our U.S. mid-market business, however, had specific execution issues, as a result, I'm making specific organizational and process changes. These changes are already showing a positive impact. Finally, we expect sequential year-over-year service revenue growth rate increases of approximately 50 to 75 basis points per quarter to continue for the foreseeable future. This means we're anticipating reaching approximately 25% service revenue growth, excluding DXI revenue and in constant currency with about a two-quarter delay from our original expectation. Let me touch on each of these points in a bit more detail. First, our third quarter revenue results illustrate the fundamental strength in our business as we exceeded the high end of our financial outlook. Service revenue for the third quarter was $85.9 million and grew 20% year-over-year.
Adjusting for constant currency and excluding DXI revenue, service revenue growth was 22% compared to 21% in the second quarter, showing that we continue to accelerate growth. Customers continue to see the value of our single technology platform for cloud business communications and contact center solutions. Our sales team closed 25 new mid-market and enterprise deals with monthly recurring revenue of $10,000 or greater during the quarter, an increase of 14% year-over-year. Six of our top 10 deals included contact center, 5 of our top 10 deals were outside the U.S. We booked approximately 50% of new monthly recurring revenue from new customer logos. Also, 8 of our top 10 deals were assisted by channel partners, our channel enablement program has grown to include 10 strategic masters and over 400 partners, up from 250 partners last quarter.
To provide greater insight into our enterprise customer adoption, let me highlight a couple of examples. One marquee enterprise customer win is an international vacation rental management company, managing properties in 20 U.S. states and 15 countries. Their homegrown voice solution had limited functionality and customer experience challenges with answer rate, connecting to employees in remote locations using their cell phone, and lack of data tracking for call transfers. 8x8 won this deal after a very competitive RFP process that involved multiple cloud providers. They ultimately chose X Series packages, X2 and X8, to take advantage of our single-platform solution and 8x8's proven expertise that allows them to focus on their business rather than developing and supporting voice and contact center technology. Another notable customer win is a U.S.-based Southwest Service Administrators, a third-party provider of administration services for healthcare and employee benefit plans.
This customer has outgrown their legacy on-premise system and needed a solution that combined unified communications with true contact center capabilities. The overarching requirements that drove their buying decision were twofold. First, a single UCaaS and CCaaS cloud technology platform, and second, robust HIPAA compliance. This was a competitive takeaway from an incumbent hybrid provider, and the customer selected a mix of X-Series solutions across the user base to best fulfill their overall needs. My second point is that our X-Series cloud platform, which includes voice, video conferencing, contact center, and collaboration, is strongly positioned as this $50 billion market takes off. We continue to see validation from customers and even from our competitors that a full suite solution based on a single cloud technology platform is what the market wants.
Over the past four years, we have invested in both research and development and acquisitions that positions us as the only pure cloud provider that owns the full technology platform required to deliver voice, video conferencing, collaboration, contact center, and one system of intelligence in the marketplace today. The X-Series is becoming the leading solution for our new 8x8 customers, and we're seeing 25%-30% of new seats being sold with higher value contact center and collaboration capabilities. We have rolled out X-Series to all business segments in the U.S. and U.K. to help small, mid-market, and enterprise businesses connect with customers faster and smarter. Approximately 15% of our installed base is now on the X-Series platform, up from 10% last quarter.
Upcoming announcements, which demonstrate a continued commitment to extend the capabilities of our X-Series, include enhanced speech analytics that provide voice-of-the-customer insights, enabling companies to optimize customer experience through data-driven decisions, something that cannot be done with stitched-together solutions. In addition, recent award recognition from TechTarget and Frost & Sullivan highlight a competitive strategy, innovation, and leadership in UCaaS. As we discussed on our last call, last quarter, we acquired Jitsi, an open-source video collaboration technology and team of video technology experts from Atlassian. We are in the process of integrating the full Jitsi stack into 8x8's X-Series offering. The new desktop and mobile clients will be piloted this quarter with general availability in mid-year.
Once integrated, the Jitsi-based 8x8 meeting solution will be run on public cloud infrastructure while leveraging our global audio expertise and with a feature set that is competitive with leading team meeting solutions on the market today. The third point around our fiscal Q3 is that while we are encouraged by our progress across many fronts, our third-quarter U.S. mid-market new bookings performance fell short of internal expectations. New monthly recurring revenue booked from mid-market and enterprise customers increased 13% year-over-year and comprised approximately 66% of total bookings in the quarter. Total channel bookings grew 23% year-over-year. While we are still averaging close to 30% growth in new mid-market and enterprise bookings over the first three quarters of the year, I am not happy with our go-to-market execution in this quarter relative to the opportunities that we had available.
We believe this to be a direct side effect of two major transitions we have been managing: the introduction of X Series to the mid-market and a rapidly expanding channel team. With regard to X Series, as previously mentioned, we have received strong positive response from enterprise customers and industry analysts that our new solutions are delivering immediate value and meeting the need for mix-and-match capabilities based on a single cloud technology platform. Where we did not execute, however, was in enabling our mid-market sales force to sell X Series at high velocity with well-defined value paths to drive short sales cycles. We have taken immediate steps to improve both our enablement and sales processes specific to high-velocity sales and are already starting to see the results in this quarter in accelerated deal execution.
With regard to the channel execution issues, over the course of late Q2 and early Q3, we brought in a large number of very talented, experienced channel professionals. Unfortunately, we did not focus enough on adequately enabling this new team and integrating them tightly with our existing field sales team. Again, we have taken immediate steps to improve both process and execution and are seeing early signs of success. While the unfortunate combination of these two execution issues translated into a U.S. mid-market booking shortfall, the positive news is that these are discrete tactical issues that we have identified and are addressing. More importantly, market demand remains strong, our win rate remains high, and we continue to deliver solutions that differentiate us from peers. We have plenty of room to grow in our $50 billion addressable market.
We remain confident as ever in our long-term growth opportunities as we believe delivering a single cloud SaaS technology platform remains a winning strategy. To my final point, in regards to the underlying strength of the business, we expect sequential year-over-year service revenue growth rate increases of approximately 50 to 75 basis points per quarter to continue for the foreseeable future. Over the first three fiscal quarters of this year, we have increased our year-over-year service revenue growth, excluding DXI and adjusting for constant currency from 20% in fiscal Q4 2018 to 22% this quarter. We expect to exit the fourth quarter with a service revenue growth rate of approximately 22%-23%, excluding DXI revenue and in constant currency. We expect to now reach the milestone of approximately 25% service revenue growth rate about two quarters later than originally anticipated.
Before I turn the call over to Steven, I would like to thank our employees, customers, and channel partners. I have tremendous conviction in the value of our technology platform and the market opportunity in front of us. It is up to us to execute, and I'm confident and committed to doing that. Over to you, Steven.
Thanks, Vik. Good afternoon, everyone. We appreciate you joining us. We're glad to provide some details and color around the business that drove our Q3 financial results and walk you through our guidance for Q4 and the full fiscal year 2019. We'll of course, wrap up by opening the call to your questions. With this being my inaugural earnings call here at 8x8, I wanted to frame out this part of the discussion into three financial areas of note. One, my personal bullishness on the large and largely unmet cloud disruption opportunity that 8x8 is uniquely monetizing. Two, our SaaS model that's driving solid increases in sequential quarterly year-over-year revenue growth. Three, the compelling operational and financial path in front of us to drive continued improving revenue growth and increasing stockholder value. First off, I'm thrilled to have joined Vik and the team here.
After 90 days or so on the job, I can say that I'm more bullish on the opportunity that's sitting in front of us at 8x8 than I was when I first started. 8x8 owns a signal integrated and global technology platform that uniquely positions us to disrupt a $50 billion TAM, 1 that is less than 10% penetrated by cloud offerings. I'm excited about contributing a focus around driving a SaaS orientation and execution in terms of both our revenue scale and how we run the business to achieving increasing leverage and returns. From evolutions in our customer contracts and customer onboarding to managing our leading indicators around pipeline, lead gen, and funnel conversion, we're driving greater operating and organizational efficiencies in our execution to make sure we're well-positioned to capture the large market opportunity.
Bridging these strong market drivers and the 8x8 model to our P&L, let's look at our Q3 performance, where we delivered a solid quarter of service revenue and strong continued gross margins. Before we get into the details, though, let me briefly comment on the bookings dynamic that we observed in the third quarter. As Vik talked about, our bookings growth from the U.S. mid-market came in lower than we expected due to specific execution issues in our new channel organization and go-to-market motions. I'm encouraged that we've already begun to correct these shortcomings with concrete actions. We're focused on what you'd expect us to be.
We're looking at such operating metrics as our return on lead gen spend, weekly pipeline creation, rep productivity, and channel partner new logo registrations and closings. It's the numbers and leading indicators that told us there was an issue. It's these metrics and numbers that we're fiercely focused on and driving improvement around. Let's turn to the fiscal Q3 P&L results. Our ability to deliver service revenue ahead of our guidance for Q3 demonstrated the strength of our SaaS model, where we've built a solid base of recurring subscription revenue. You see this in service revenue coming in at $85.9 million, above the high end of our financial outlook. At the higher growth rate of 22% year-over-year, adjusting for constant currency and excluding DXI.
Looking at the important contribution to growth from larger deals, service revenue from mid-market and enterprise customers billing greater than $1,000 in monthly recurring revenue grew 30% in Q3 and represented 62% of monthly recurring revenue, also on a consistent basis of adjusting for constant currency and excluding DXI. Service revenue for mid-market enterprise customers billing greater than $10,000 in monthly recurring revenue increased more than 61% year-over-year and represented 29% of monthly recurring revenue. On both fronts, strong continued revenue growth and contributions from a key business driver. On a global basis, our investments in international expansion are continuing to drive incremental growth, as we increase international revenue by 20% year-over-year, primarily from the United Kingdom. Looking at some additional business metrics that continue to contribute to growing revenue and favorable economics.
Overall average monthly service revenue per business customer was $506, growing 11% year-over-year. The average monthly service revenue per mid-market and enterprise customer grew more than 9% to $5,211. In Q3, we had a balanced mix of both new customer logos and upsells and cross-sells within our existing customer base of roughly 50% each. Customer churn continues to be relatively modest on both a dollar and customer count basis, with annual dollar retention rates, which include upsells, well over 100% across all business segments. This reflects our continued customer satisfaction and the impact of our strong deployment and customer support teams. One of the key attributes of our SaaS financial model is our strong and consistent gross margins. The lion's share of our revenue has seen consistent non-GAAP service margins the past seven quarters of 83%-84%.
Importantly, as we continue to invest in lead gen, go-to-market, and channel, we're also taking a disciplined approach to managing our spend. With that perspective, looking at our Q3 non-GAAP operating expenses, let's start with sales and marketing. Sequentially, we had a similar amount of spend in Q3, with sales and marketing expense at 61% of revenue. From a high-level perspective, we continue to invest in driving growth through more effective top-of-funnel lead gen, channel execution, and conversion rates, where we're looking to drive continued increases in new logo pipeline and additions, higher sales rep productivity, and continued customer penetration. For the current Q4, we anticipate a marginally lower year-over-year increase in non-GAAP sales and marketing expenses of about 19%. Turning to R&D, our investment strategy has been central to building our single tech platform leadership and competitive advantage, and we're seeing this in our win rates.
R&D expense was approximately 15% of revenue in Q3 as we continued our investment in product innovation, talent, and x platform features and functionality. Finishing out OpEx, non-GAAP G&A costs in Q3 were 9% of revenue, up marginally 4% year-over-year, and consistent with the past four quarters as we continue to appropriately manage expenses as we scale the business. As a reminder, on a GAAP basis, G&A includes a charge of $1.5 million in Q3 related to U.S. sales tax obligations on our customers' behalf. For the current Q4, we would expect a similar GAAP sales tax charge. Pulling this all together, Q3 non-GAAP pre-tax net loss was $4.2 million, excluding Jitsi-related operating expenses of approximately $1.2 million, and better than our October outlook for Q3 of a $5 million - $6 million loss.
With that, let's turn to our third point on the 8x8 model and financial results coming out of Q3, which is the compelling operational and financial path in front of us that we expect to drive continued revenue growth and increasing stockholder value. We're committed to continuing to drive growth. As Vik noted, we're adding between 50 and 75 basis points of sequential improvement in year-over-year revenue growth every quarter, and we expect that to continue going forward. We also continue to see 25% adjusted service revenue growth as an achievable milestone on our growth path, albeit we're admittedly about two quarters behind where we thought we'd be. Considering all this, our financial outlook for Q4 fiscal 2019 is as follows. We anticipate service revenue to be in the range of $88.6 million-$89.6 million. This equates to a year-over-year growth of between 18%-19%.
Excluding DXI and in constant currency, we expect service revenue growth to be in the range of 22%-23%. We anticipate non-GAAP pre-tax loss for Q4 to be in the range of $7 million-$8 million, excluding approximately $600,000 related to Jitsi operations. As you would expect, full year fiscal 2019 outlook is simply the math of our first three quarters actuals results, plus our Q4 outlook, and implies outlook for the full year fiscal 2019 as follows. We anticipate service revenue to be in the range of $334 million-$335 million, representing 19%-20% year-over-year growth. Excluding DXI revenue, again, constant currency basis, we expect service revenue growth for the full fiscal year to be approximately 22%. We anticipate total revenue for fiscal 2019 to be in the range of $351 million-$352 million, representing 18%-19% year-over-year growth.
Finally, we anticipate non-GAAP pre-tax loss for the full year 2019 to be approximately $19 million, not including approximately $2 million in expenses related to Jitsi. As it relates to our fiscal 2020, which begins April 1st, 2019, we're working on refining all of that now in our fourth quarter. We look forward to sharing that with you consistent with our historical practice on the Q4 earnings call in the mid-May 2019 timeframe. We expect at that time to also introduce some new business, SaaS, and operating metrics, which we plan to discuss more on our next earnings call. We're confident that we are addressing our go-to-market execution issues quickly and effectively.
We're oriented around driving the business and managing our spend responsibly. We continue to have confidence in monetizing the opportunity in front of us and our path of continued sequential quarterly revenue growth going forward. With that, we appreciate your time and support. We're glad to open the call for any questions. Operator?
To ask a question, please press star one on your telephone keypad. The first question comes from the line of William Power of Baird. Please go ahead, your line is open.
Great. Thanks for taking the question. I guess a couple. I guess, Vik, maybe just coming back to the change in outlook with the 25% services revenue growth. I think a lot of confidence over the course of the quarter at conferences, investor meetings, and the like, that you'd achieve that based on the trends you were seeing through the quarter. I think investors are probably trying to understand when that trajectory changed and the key drivers of that. I know you talked about the mid-market X Series and channel, but maybe just to go into a little bit more color on the bookings growth and the channel impact of that. Really, how do investors get confidence that you have those pieces now in place to accelerate still to that 25% two quarters later? That's a lot packed in there.
Yeah, no, absolutely. Look, that is the most important question. Yeah, annoying as heck. That's the most, I guess, politically correct way to say it. About late November, early December, we were starting to still feel pretty good, and it came down to something as simple as we had introduced X Series into Enterprise, and it was very well received. Then as we started to introduce it into the channel as well as into mid-market, we found out we did a less than stellar job of basically enabling the team with all the tools, the questions, the collateral material, et cetera. I think we just frankly underestimated the time it takes to basically bring an entire sales team up to speed on how to sell a much faster, much more packaged solution. That was one.
Then on top of that, I brought on board quite a few amazing folks in the channel, and then as we grafted them onto the team, what became pretty obvious is that we brought in a brand-new channel team, combined it with a direct selling mid-market team, as well as with channel partners and a brand-new product introduction. That too, as I said, the biggest impact was on deal velocity. We didn't lose these deals, but just in the process of generating, the ability to quote, the ability to do just the very simple basics of getting stuff in the hands of customers and channel partners, we did a less than stellar job. It was a completely self-inflicted wound, but one that is relatively easy to address. It just will take us time.
Maybe just to help us on the channel side, where are you then in that process? I guess maybe that's part of the key to getting confidence and accelerating that growth rate. Do you have the number of people you need, and do you have the full leadership team in place? Where does that sit?
Yeah, no, actually, we have brought on board, I think it was well north of 23 people who were brought on board in channel over the course of about a quarter and a half. They have all the relevant relationships. The most interesting takeaway from our channel partners is that they love X. They think it is a game changer, the biggest problem we've had is the level of information and tools that they've had to go bring that to market has not been there. On top of that, the other part that became more and more clear is they told us the pent-up demand is there. We've just not been there. It is as simple as, and I think unfortunately, business always comes down to blocking and tackling, and in this particular case, it's not structural.
It literally is, you have a brand-new product, which is right for the market. The channel partners is the right selling motion for the mid-market. The channel partners are interested. They like it. We just did not do a good job of creating the right business flow, the business processes, as well as the training and enablement for our channel partners to bring that in front of their customers as quickly as possible. It'll take us, as I said, in the 4 - 6-month timeframe to fix, the team is in place, the leadership is in place, we've made the relevant changes to make sure we drive that basic blocking and tackling execution.
Okay. Thank you.
Your next question comes from the line of Timothy Horan of Oppenheimer. Please go ahead, your line is open.
Great. Could you just give a little bit more detailed examples of what you mean? Sorry, just a little confusing from the outside. Were you just not able to give quotes? If you did sales, were you just not able to provision those sales, or did you just not have the right marketing material? Are you having conflicts between your channel and your existing sales team? Thanks.
Frankly, a little bit of all of the above. X, as you know, is an amalgamation of all our various products, and it's a much more packaged solution. The selling motion is much simpler than the original way that we used to basically build up our product. Then we brought on board a brand-new channel team that had all the relevant relationships, and the way we integrated that channel team and enabled them on X was probably less than ideal. The relevant collateral material, the sales portals updated so that the quoting could happen in a much more high-velocity manner. All of those things kind of played a part. It fundamentally was a speed bump, not a directional change. We just needed to do better than we did. Again, it was not rocket science.
It literally was the basic blocking and tackling of business that we actually stubbed our toe on.
Got it. Why will it take another six months to correct that? What's the low-hanging fruit in improving that? Are you seeing any results yet?
Actually, we're starting to see the results now. It'll take six months or so to get everything humming the way it should so that it's a fast-moving engine. The channel partners have pretty much made it very clear to us that they think X, and I think you guys do the same channel checks that we do, but I think you'll find the same prevalence. People like X. They think it's fit for purpose. It does exactly what they need it to do. They just want to know exactly how to quote it, how to train people on it, how to train their sales forces on it, how to train their masters and subs on it, then make sure that 8x8 is easy to do business with. We have been not ideal to do business with just levels of complexity and confusion that we've had in the past.
Those are things that should not have happened. They unfortunately did. It probably will take about 4 - 6 months to make sure it gets addressed across the board.
Great. On the artificial intelligence side, have you launched any products yet? When do you think you might?
Yeah, there's a couple of upcoming announcements. That is one of the interesting things about X that we have seen. People love the fact that in X, you get one-stop shop for voice, video, as well as contact center. Then they like the fact that there is this underlying data that they can leverage to make decision support. We're seeing some very good logo wins, and over the next few weeks, you'll start to see increasing announcements on artificial intelligence. My initial focus, though, is, as I said, the very, very simple things. We launched a brand-new product which is completely packaged. It is fit for purpose. We need all our systems to make it easy for our channel partners to be trained on them, quote them, and our sales team to sell it as a packaged solution as opposed to the way they used to sell our legacy products.
Thank you.
Your next question comes from the line of Meta Marshall of Morgan Stanley. Please go ahead, your line is open.
Great. Just a question on the DXI and constant currency drag. It seems to be expanding, though DXI is shrinking. I understand that the pound was weaker year-over-year. Can you just level set for us now, how big is DXI? How big the headwind was for DXI versus constant currency?
Steven, do you want to take it or I can? Either way. DXI used to be a couple of mil per quarter in FY 2018. It's under 1 million a quarter as of now. It's continuing to dip down. It's dropped from, as I said, approximately 2 million a quarter as of FY 2018 to well under 1 million by Q4 of FY 2019.
Just the rest of that is constant currency? Because the pound doesn't seem, it's less than 10% different than it was last year. It just seems like a very big discrepancy between the services headwind and the ex-DXI constant currency headwind. Just any level of the constant currency drag?
Hey, it's Steven. No, it is a question of math at this point. Candidly, there was more revenue at a much different valuation in the prior year, and you have a much smaller amount, to Vik's point, roughly half in the current period. The [crosstalk] prior year impact-
No, I understand [crosstalk] the [crosstalk] DXI piece.
Yeah
just the constant currency piece, I guess. The pound doesn't seem that much different than it was a year ago.
We can go through the calculator [crosstalk] offline.
Yeah, we can follow [crosstalk] up afterwards.
The [crosstalk] math is easily traceable to the numbers we just put out and happy to go through it.
Then just on detecting things in November, December period. X Series has been out since July. I guess, is it just that deals take 4 - 6 months to work through? I guess I'm surprised you wouldn't have picked up on it when X Series was released and you started seeing initial sales. What is that difference between timing of X Series coming out and then detecting that you don't have enough materials for the channel and partners to sell it? Answer[crosstalk] the question for me.
I'll take that one. We launched X Series, as you know, initially for enterprise. The good news about enterprise is it's a high touch sale. You've got SEs, you've got very well-trained AEs, et cetera, and we had very good adoption. As we then migrated X Series to channel and mid-market, that was where we started to find out that the level of training material, et cetera, was not as self-evident as it should've been. We started to see the deals come. It just took us longer to close them than we had anticipated. Just the deal velocity was what started to impact us. The deals started to progress, but they didn't close by the end of the quarter as we had anticipated.
Do you think [crosstalk] those deals yeah. I guess as a [crosstalk] follow-up there, like Go ahead.
Yeah, no. I'll address in two ways. I think I know where you're heading with that one. One, think of it this way, from an enterprise perspective, look, I saw the right win rate. When I went into mid-market and to channel, it was clear that it needed to be much more of a high velocity, less touch sales model. All our materials, all our tools, et cetera, were not designed to be as hands-off as they should've been for a much higher velocity sales model. The deals are progressing, and so we're feeling better about the quarter. That's why you can see our growth rate has been, despite all these execution challenges, our growth rate has been trending up every quarter by between 50 - 75 basis points. I don't view these deals as gone.
I view these deals as just taking longer to close, and that was not what was anticipated. I modeled them closing much faster because X is everything's all bundled in. You don't have to go through a lot of machinations. From that perspective, the whole purpose of X was that it makes it, think of it almost like a price fixed menu with everything necessary for the customer to do their job all bundled in, versus having to go in and customize this, that, or the other. It should've been much faster. It wasn't, and frankly, it was an execution issue on our part.
Okay, great. Thanks, guys.
Your next question comes from the line of Dmitry Netis of Stephens. Please go ahead, your line is open.
Hi, guys. This is Ryan MacWilliams for Dmitry.
Okay.
With the [crosstalk] recent changes in the sales and mid-market platform, do you expect to slow down the pace of adding channel partners in the coming quarters? I have one follow-up.
No, other way around. To some extent, our problem, as I said, has been we added channel partners. We didn't do a good job of enabling them on exactly how to sell X, we didn't provide them the tools and the portals to go sell that. That transition from our regular products to essentially X, which required a lot more automation, was not well-handled. It will not actually slow down the pace of adding channel partners. We expect that to accelerate because now I have my channel team essentially in place. As I said, we brought on board, I think it's 23, 24 people over the course of the channel managers and over the course of about a quarter and a half, they've been going through the training process. They've got all the relevant channel partners. We'll keep accelerating the pace of recruiting.
The whole idea of X was 8x8 had been very good at being able to provide a complete and perfect solution for enterprise. The whole idea of X was to package everything together so you dramatically increase the pace of the selling motion, I think that's where we did not do as good a job. As we continue that packaging, I think that pace of bringing channel partners on board accelerates.
Great. Two quick ones. Sorry if I missed this, would you mind quantifying the win rate in the quarter versus competitors? With the install base only moving up 5% quarter-over-quarter, how should we expect the timing of customers moving over, do you think there's an upsell opportunity there? Thanks.
Both. Let's start with win rate head-to-head against our primary competitors is two out of three. I like our chances. If we're in a deal, it's a credible deal, we're in it, we will win two out of three, that's something I monitor personally on a weekly basis. Our problem has been, as I said, making sure we have enough at bats, the channel partners are telling us that there are enough at bats. They just didn't have all the tools necessary to code our stuff in an efficient manner. That's item number one. With regard to the install base, we have not yet started the major migration process of our install base.
What we are doing is I think as we trend up, we're doing it very systematically over the course of the next four to six quarters, where the entire install base will move over to the X Series, probably six quarters from now, everybody will be on the X Series. It's approximately 15% of our install base. X absolutely represents an upsell opportunity because in essence, you're able to have different gradations of capabilities, as you can see, more than 25%-30% of the seats have additional capabilities than the core telephony, which was where 8x8 came from. From that perspective, we see non-trivial upsell opportunities with X.
Your next question comes from the line of Josh Nichols of B. Riley Securities. Please go ahead, your line is open.
Thanks for taking my question. I did want to ask more on the OpEx side. I see that the non-GAAP pre-tax loss has come up a couple of quarters in a row now on the guide, looking at the fiscal year. Just given the fact that you're looking about a two-quarter lag to hitting your growth targets, should we expect that those are likely to continue to increase, or I'm just trying to think of the trajectory for the company's OpEx over the coming quarters?
Sure. It's Steven . From a percentage of revenue E R basis, we talk about a modest uptick in Q4, mostly as a result of a little bit lower revenue than anticipated. Aggregate dollars will go up a bit. The two big investments that we're making, as I talked about, are around channel and lead gen. We're continuing to invest in that for the next short period quarters, but we expect to start driving leverage in that, meaning we expect that dollar basis to start increasing at a decreasing rate.
I know you've talked about it before, but the 25% services revenue growth, that was discussed as just kind of being a little bit of as a way station, but not a final destination, I would assume. If that's still the case, I would assume you'd probably need to continue to invest to see any potential further acceleration of growth. Is that a fair assumption, and is that still the company's longer-term target?
Yes and yes, the important point is the leverage we expect to garner in the model, meaning we will invest more aggregate dollars sequentially quarter-over-quarter, but at a lower marginal increase. If you look at our bookings trajectory as well as the absolute level and as we've talked about, really targeting a 30% sustainable bookings growth rate, that will portend with our model, with a SaaS model, that you would expect revenue increase to really come up and hit that rate over the next call it several quarters until we hit that. To your point, importantly, 25% is not the end result. That's the milestone on the way, and we're oriented around a 30% bookings growth that now on a SaaS model will drive that revenue growth over time.
The company's had some good success historically in a couple specific type verticals whenever you go after these. Just regarding the X Series, and some of the hiccups for the sales issues, was that more broad-based that you're seeing, or were there any specific areas like retail or healthcare that were particularly weak or causing a little bit more of the drag, or just trying to get a little bit better handle on that?
Okay. Yeah. No, I'll take that one on. We've almost got the reverse Gaussian curve. Small business is starting to tick up in the right direction, and that's continuing to execute, and X has been well-received there. Enterprise continues to do well, and X has done well there. It's been the mid-market, which is the whole higher velocity sales motion where with a level of automation and self-service and other tools like that we probably laid an egg on. The idea there is it's not broad-based as in size or by vertical in terms of it really has got to do with the fact that where we leveraged the channel, we did not do a good job of enabling our channel managers, our channel partners, and our salespeople to basically sell X for the high-velocity mid-market. We've started to see that change.
It's more around the selling motion than anything else.
Thank you. That is it for me.
Participants, please remember to limit yourself to one question. The next question comes from the line of Jonathan Kees of Summit Insights. Please go ahead, your line is open.
Great. I am going to take a different tact and I guess commend you guys for taking ownership of this issue, saying it is execution. Throughout this earning season so far, we are hearing a lot about companies blaming everything from China to the government shutdown. With that said, though, if this is indeed mid-market execution issues here, what macro issues have you concerned? You haven't mentioned anything. You are not saying there is anything right now that is bothering you in terms of the market. The market trends are still strong. What is bothering you in terms of, or could be on the horizon in terms of macro headwinds? You are exposed to U.K., so there is Brexit, and you already have currency issues there too. I guess, talk to me in terms of what could be on the horizon there in terms of macros.
Fair enough. Jonathan, that is actually pretty funny because in a somewhat gallows humor kind of way, because I was hoping to be able to blame China or government shutdown or something else, and unfortunately, when we looked in the mirror, it literally was, we screwed up on the basic blocking and tackling of taking a brand-new product, combining it with a brand-new channel team, bringing it to our channel partners, and making it simple and easy for them to sell. Unfortunately, that was the issue, and there is nobody to blame but ourselves. From a macro point of view, I am not seeing any change. A matter of fact, I think the thing you have heard from me as a common refrain has always been, we need more at-bats. When we are in the deal, I win two out of three deals. That continues to be the case.
We're now finding out where those deals work and why we were not in it. To a large degree there with channel partners in some instances, there are other areas that we've been able to identify sources of demand that I think as we get our act together, and particularly with X and the ability to do high-velocity selling with X, we feel pretty damn bullish about it. From a Brexit point of view, I don't anticipate any issues. I view that as just some noise. I think all the macro fundamentals are all fine. The market is fine. The demand is there. Our product is fit for purpose. We just shot ourselves in the foot, and the goal is to own up to it, fix it, get better, keep getting better.
Okay. If I can squeeze in one more here. Especially with any stock pullback here, can you update us in terms of your stock buyback program?
Sure. We had a total program authorized of $25 million, I believe we have not done anything in the past year on that. We have a capacity right now of approximately $7 million.
Great. Thanks. Good luck, guys.
I'll add one more, Jonathan. As you know, from time to time, I've been a net buyer of our stock over the years, and I've not sold a single share. It is not my intent to do that anymore, and at the appropriate time and subject to the right open window, I will continue to be a buyer in dips.
Actually, people are already noticing that, Vik. I noticed that too. That's good.
Your next question comes from the line of Nikolay Beliov of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi, this is actually Jasmine Cheung on for Nikolay. I have a couple questions regarding the X Series. Are you seeing a change in win rates with the X Series? How disruptive is the process of upgrading your installed base to the X Series?
Two things. We have seen our win rate with the X Series go from one out of three to two out of three against major competitors. That is telling me X is exactly fit for purpose. I don't anticipate the transition of our installed base to be disrupted at all with the X Series, because the idea is we will give them additional capabilities than what they have today for comparable prices. The goal is to just make it completely seamless and do it over four to six quarters so there's no impact. X is exactly what we have worked over the last four years to get. As I said, the way we rolled out X, and I think Meta had asked this question early on, we did it in a very systematic manner. We rolled it out initially with Enterprise.
Everything was positive, but that was a high-touch environment with Enterprise. Where we discovered where we had some weaknesses in our sales enablement, selling motion, training, et cetera, was when we got to mid-market and channel. That's what we are addressing right now. Frankly, it's not been an issue with small business. Small business is starting to evolve to X relatively easily because it's relatively simple. It's the more mid-market and channel that we need to address, the selling motion, the tools, and everything that we can do to actually increase the velocity of sales. From a win rate perspective, that is the whole purpose of going to X is to dramatically change our win rate, which is what we are seeing.
Got it. If I can squeeze in a quick one. Are there any new features in the X Series that customers like the most, and what are they?
Frankly, the biggest thing is the ability to have everything all integrated together, particularly the contact center. You'll start to see us make a bigger and bigger push in contact center, because what's becoming pretty evident is we essentially, as part of X, have a complete and fully formed contact center that is competitive with all the leaders in the contact center space today, except we bundle in telephony and presence, and that should give us significant advantage. In addition to that, we have a lot of data analytics, reporting, and now with Jitsi, we will be introducing video conferencing. This is a team we bought from Atlassian. We'll be introducing video conferencing tightly integrated into X Series, and it will be unveiled at Enterprise Connect end of March, and it'll be generally available by end of June, July, August timeframe.
I think that, again, the ability to have state-of-the-art telephony combined with state-of-the-art contact center, combined with state-of-the-art video conferencing with the underlying data and analytics is essentially in four bundles or so is the whole brilliance of X. We just have to do a good job of getting that out to market, getting that in the hands of our channel partner, enabling them, I think we're off to the races.
Great. Thank you.
Your next question comes from the line of Rich Valera of Needham & Company. Please go ahead. Your line is open.
Thank you. Vik, when we had talked about what was going to enable you to see the kind of quarterly acceleration into the fourth quarter to hit that 25% bogey, you'd said that you had a lot of seats sort of in backlog from prior orders that had already been closed, that the ease of deployment of the X Series was going to enable you to do some sort of rapid deployment of already won business. Is that still true? Given that dynamic, it's just sort of surprising to see things slip out two quarters on some soft bookings. Just wondered if you could comment on that. Thanks.
Yeah, no, it's still true. As a matter of fact, look, the bookings are less than happiness. We had a 50% bookings for mid-market Enterprise Q2, and obviously 13% this quarter is a major disappointment. Despite that, you're seeing a sequential increase continuing off approximately 50 - 75 basis points. That is because of the faster pace of deployment and the ease of X. The whole purpose of X was the ability to deploy to mid-market very quickly so you can even start to collect revenue in-quarter. That slipped out a little bit because of lighter than expected bookings, but I think it's a temporary blip and will come out on the other side. Again, it's a self-inflicted wound, which is what I'm really annoyed about. In the end, I think it's one of those things where you fix it, you get better, and you move on.
Okay. Thanks for that, Vik.
Your next question comes from the line of George Sutton of Craig-Hallum. Please go ahead. Your line is open.
Hi. Sorry to belabor the call, you mentioned, Vik, that the leading indicators had told you there were some issues. I'm just curious if you could be a little more granular about what those leading issues were. You mentioned that the early indications are that the changes you've made have improved things. I'm curious if you can give us the leading indicators you're seeing from that angle.
No, I think it was just the deal progression. We monitor deal progression and going from different stages. We saw deals sit in the quoting stage, and there was a lot of back and forth on quoting and questions that we thought would've been self-evident, or questions about features that should've been obvious that kept going back and forth and necessitated multiple meetings. That's when our antenna started to go up and say, "We have not done a good job of enabling our channel team as well as our various sales executives." That was where we started to see around probably late November, mid-December, that the deals were taking us longer, and there was a lot of back and forth and questions on what should've been very obvious, very basic stuff. That was the number one issue. The second one. Look, this is always embarrassing to some extent.
We did a listening tour with all our channel partners. The great thing about our channel partners, we've got some phenomenal channel partners, and they were very honest with us. They said X is fit for purpose. They just didn't have all the tools necessary to sell it. They thought our own team was not totally aware of all the capabilities of our product and that our tools were harder to do business with and the velocity was missing. That's hard to hear, but I'd rather hear it, and we started to hear that late December, early January timeframe. We're going to address it head on. We've brought the right folks in. We kind of made some process and org changes. We'll go address it because in essence, the channel partners made it clear.
They said, "If you had made it easy for us, we would've been able to get you dramatically more business than what we were able to get you." You go, self-inflicted wound, but the good news is you can address this.
Just as a quick follow-up to that, are any of those channel partners looking at other potential vendors as a result of these issues?
Other way around. They're actually viewing X as the answer to a lot of the turmoil that is happening in the market. I think you sent me a note some time ago about how we picked the right vision three, four years ago that everything is going to converge towards basically contact center video conferencing as well as telephony as part of one platform. Gartner, as you know, has just most recently gotten rid of their UC category and now is only UCaaS and CCaaS, which means cloud is mainstream, and two, in order to be part of that, you have to have a full stack of UCaaS and CCaaS solutions bundled together.
Channel partners are viewing us as the safe bet because they're going, "Hey, with all the turmoil happening and shifting alliances, you're one of the few guys that we know own your own technology and basically are here to stay." They were disappointed in our ability to give them all the information necessary to quote, but therefore, I think we were not in deals that we should have been in, and candidly, once we're in those deals, I like our chances.
Gotcha. Thank you.
Your next question comes from the line of Matt VanV liet of Stifel. Please go ahead. Your line is open.
Yes. Thanks for taking my question. I guess looking at some of the channel conflict issues that I think you sort of briefly touched on, but was curious what changes or organizational shifts have you made around, especially the mid-market, to enable that, but also understand that your existing sales force has their jobs to do?
Very simple. Basically, combining the direct sales team and the channel team with essentially common quotas, common goals, and a very tight leadership rhythm at the top. It's compensation drives behavior, and then on top of that, creating essentially processes by which channel partners or channel managers as well as our sales executive visit channel together on a very tightly integrated do deals reviews together, et cetera. Again, as I said, the part that is annoying about this is very basic blocking and tackling. We should not have stubbed our toe, but the reality is we did. The goal is to address it head on, and as I said, we made a few changes at different levels of the organization and as well as processes. We are starting to see the benefits of that. I like the team we have.
We have got some amazing folks, and they were honest about telling us where we were not doing a good job as an organization. I'm very grateful to our channel partners for being completely blunt with us about the opportunity we had and the way we kind of stubbed our toe and what we needed to do to get better. We'll address it.
You obviously added quite a few partners to the community this quarter and even last quarter. Just curious if you could give us a little bit more of a geographic mix or targeted customer size mix of the type of partners that you've added recently versus maybe what the system had in it before.
Increasingly, our focus is on channel partners that can bring us mid-market deals, which is anywhere from 250 seats all the way up to 2,000, 3,000 seats. We have done a great job on the really large deals, and we keep winning those large deals because our product is ultimately configurable, which means we win the very large enterprise deals, but those are high touch. The goal was we need to get that engine from mid-market, which is the 250 - 2,000 seats, really accelerating with a relatively lower touch model and as much automation, self-service, et cetera, and that's the area, and we've targeted channel partners who have that kind of customer base, and the goal is to enable them so that they can all be successful.
All right, great. Thank you.
Your next question comes from the line of Mike Latimore of Northland Capital Markets. Please go ahead, your line is open.
Yeah, great. Thanks a lot. In terms of the migration of the base, is there any notable sort of incremental cost that would go with that?
Relatively de minimis. The whole idea is to automate it as much as possible, that's why we're being very systematic about it. The goal is that every existing customer will get more than what they have at a price that is comparable to what they pay today, then the ability for them to have a lot more self-service automation, et cetera, will be a huge enhancement on top of that. We don't anticipate any major cost. X was designed so that it would be able to be migrated to our entire installed base. The goal is to do it systematically and stretch it out over four to six quarters.
All right, got it. Then, in terms of just the larger deals that you've won in the past few quarters, are the deployments of those generally on track? Is that what you said?
Yeah. No, deployments are faster. Look, because of the newer platform, deployments are faster. Across the board, every element of the company has gotten better. Right? If you think about it, despite what I consider very light bookings for Q3, the company's continuing to sequentially increase growth rate by between 50 and 75 basis points every quarter. That's primarily because of execution. Ultimately, to me, I want to start seeing the bookings grow sustainably, because then you're off to the races. Because now you can deploy much faster, and if you can see sustainable growth in bookings, particularly in the mid-market, then, as I said, you get that extra 1% - 2 % point increases in growth rate by quarter, which is what I was targeting, as opposed to the 50-75 basis points, which I'm settling for right now.
Are you assuming that, sort of implied in that kind of revenue growth rate improvement that you get back to the 30% bookings growth relatively soon here?
In the not too distant future in terms of bookings, yeah. The intent is, again, I'm buying myself 4 - 6 months to make sure that the stubbing of toe that I did kind of gets addressed systemically so that it's sustainable and we don't just have a one-shot, one quarter, it's great. That's unfortunately been us, right? We have a great quarter followed by a so-so quarter, followed by a great quarter, followed by a so-so quarter. The goal is how do you sustainably keep increasing bookings quarter-over-quarter so that the engine is cooking. That's the whole purpose behind X Series, that's the whole purpose behind the selling motion that we're trying to create. That's the target that we're getting towards, which is the 30% sustainable bookings growth.
Okay, thanks.
Your next question comes from the line of Zach Percott of Dougherty & Company. Please go ahead, your line is open.
Hey, guys. Zach on for Catharine Trebnick. Just two quick questions. First, if you could go into your international presence a little more, specifically your penetration in APAC. Secondly, what's your roadmap or current progress for selling X Series internationally?
X is available, the intent is to make X available everywhere. It's already available in the U.K., and I think in the not too distant future, it will be available in both ANZ, basically Australia and New Zealand, in Q1 timeframe as well as Asia Pacific. It is currently available U.S. as well as U.K. as well as continental Europe, then ANZ by end of Q1. X will be the only product that we will sell, and everything will basically get subsumed under X. As I said, over the next four to six quarters, we will get our entire installed base shifted out over to X. That's essentially where we're targeting.
From a financial standpoint, we've talked about international being roughly just north of 10% of our revenue. It's probably 2x that insofar as our new bookings, we're seeing nice growth overseas. We would expect that to continue to edge up as that becomes a larger and larger portion of the base over time.
Got it. Thanks.
There are no further questions at this time. I would like to turn the call over to Vikram Verma for closing remarks.
Thank you, folks, for attending our Q3 FY 2019 earnings call. I think both Steven and I will be on the road over the next few weeks to months so that we have an opportunity to interface with several of you. We look forward to your continued support and look forward to answering any questions that you may have. We will have some significant announcements and a big presence at Enterprise Connect, which is around the March timeframe in Orlando. I think you guys will have an opportunity to see X Series in all its glory and get a sense of why we're so excited about it. Thank you again.
This concludes today's conference call. You may now disconnect.