Good afternoon. My name is Jason, I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. second quarter 2019 earnings conference call. All lines have been 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 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Victoria Hyde-Dunn from Investor Relations, you may begin your conference.
Thank you, Jason. Good afternoon, welcome to 8x8's second fiscal quarter 2019 earnings conference call. Joining me today are Vik Verma, Chief Executive Officer, Mary Ellen DeNittis, current Chief Financial Officer, and Steven Gatoff, our incoming Chief Financial Officer. During today's call, Vik will begin with business highlights of our second quarter performance. Following this, Mary Ellen will provide details on our financial results and guidance for our fiscal third quarter and full year 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 those 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. The earnings press release, presentation deck, and non-GAAP to GAAP reconciliations that accompany this call are available on our investor relations website. This call is being simultaneously webcast, a replay will be available for 30 days. With that, let me turn the call over to Vik.
Thank you, Victoria, thank you everyone for joining us. First, let me welcome our incoming Chief Financial Officer, Steven Gatoff. Steven brings over 25 years of leadership and finance expertise that will support 8x8's globally expanding business. He has a unique background across technology investment banking, Big Four public company auditing, and Chief Financial Officer experience in high-growth SaaS companies. It is great to have him as a key member of our executive team, many of our shareholders will have a chance to meet Steven at upcoming sell-side investor conferences. I would like to thank Mary Ellen for serving as 8x8's Chief Financial Officer for the last four years and sitting beside me through 17 earnings calls, including this one. Mary Ellen has played a significant role in driving 8x8's revenue growth through innovation and transformation from small businesses to large enterprises.
She will be moving to London soon to oversee our European operations and accelerate our plans to drive expansion and innovation into new markets. Now, onto our fiscal second quarter performance. We reported another strong quarter and beat top and bottom-line guidance. Service revenue was $81.3 million and grew 19% year-over-year. Adjusting for constant currency and excluding DXI, service revenue growth was 21%. Non-GAAP pre-tax loss was $3.6 million. I would like to share four observations about the quarter that highlight our strong performance and growth trajectory, and then I'll turn the call over to Mary Ellen to cover the financial results in greater detail. The four areas I would like to address include, first, how we see the overall market evolving. Second, our specific success with mid-market and enterprise customers. Third, the importance of owning a full cloud technology platform.
Finally, where we will focus our investments going forward. First, with respect to the overall market, we see continued acceleration in the shift to cloud across enterprises of all sizes. Recent research from IDC estimates the combined global communications, collaboration, and contact center market opportunity as larger than $50 billion by the year 2022. We estimate total cloud penetration in this market is less than 10% today. That means the opportunity in the next few years with customers of all sizes, from small businesses to the largest enterprises, will be massive. Equally important, however, is the increasing demand we see from enterprise customers for complete solutions based on a single cloud platform that can provide common data and analytics across all of their communication and collaboration needs.
The platform advantage of common services we describe as One System of Engagement refers to one overall solution that can deliver improved customer and employee experiences. The further platform advantage of shared data and cross-platform analytics, what we call One System of Intelligence, is also driving customers towards an integrated platform solution. We have a $50 billion market shifting towards cloud solutions with a preference for a single technology platform. 8x8 is the only cloud provider that delivers voice, contact center, collaboration, and video with integrated data and analytics from a single technology platform today. It should come as no surprise that we are excited by the opportunity ahead of us. The second observation on the quarter is that our success in the mid-market and enterprise segment is coming from our ability to deliver strong sales execution, world-class customer service, and industry innovations with our X Series.
Service revenue for mid-market and enterprise customers billing greater than $1,000 in monthly recurring revenue, and adjusting for constant currency and excluding DXI, increased approximately 30% year-over-year. Service revenue from mid-market and enterprise customers billing greater than $10,000 in monthly recurring revenue increased approximately 60% year-over-year and now represents 28% of our service revenue. Our strong performance in this segment is also seen in our bookings. New monthly recurring revenue booked from mid-market and enterprise customers increased approximately 50% year-over-year and comprised 65% of total bookings in the quarter. This compares to 25% year-over-year growth and 57% of total bookings in the previous quarter. Our sales team closed 27 new mid-market enterprise deals with monthly recurring revenue of $10,000 or greater during the quarter. We more than doubled the number of new large deals closed year-over-year with a 29% increase sequentially.
Our vertical strategy continues to gain traction as overall, we saw strong new logo growth and booked approximately 57% of new monthly recurring revenue from new customers as compared to 52% last quarter. One marquee enterprise customer win is Condé Nast, a U.S.-based mass media company founded in 1909. For Condé Nast, we will be replacing a legacy on-premise system with several X Series solutions across 4,000 users in 14 sites. The customer chose 8x8 to take advantage of our One System of Engagement, contact center capabilities, and out-of-the-box integration with Salesforce, Google, Okta, and Zendesk. A notable international win is a global material solution company based in Belgium who operates in 43 countries globally. This company was looking for a global customer experience solution to improve customer satisfaction by tracking customer interactions across the world.
Our solution, which displaces several incumbent contact center products, will be deployed in multiple countries in Europe, Asia, and North America. In the U.K., we sold to a large contact center outsourcer with a focus on large commercial and U.K. government agencies in a deal that included 250 contact center seats both in Europe and the U.K. and displaced an incumbent on-premise solution. We were referred by an existing U.K. public sector customer and were selected because of our single cloud technology platform and ability to support a distributed mobile workforce. Turning to the channel, our engagement and investment with channel partners continues to accelerate as more partners look for a single cloud technology platform. During the second quarter, channel bookings grew more than 50% year-over-year, and seven of our top 10 deals were assisted by channel partners.
We signed a new master agent, PlanetOne, to our strategic channel partner program. We also doubled our channel enablement program participation quarter-over-quarter to over 250 partners. A recent channel win is Toll Brothers, a Fortune 500 company that specializes in building luxury homes. Their legacy on-premise communication system lacked the flexibility to turn up new sites quickly, to standardize across existing sites, and to integrate with third-party cloud applications. 8x8's X Series solutions were able to solve these customer pain points and will be deployed across 6,000 users in over 400 locations. Customer success is an important priority for us, and delivering great employee and customer experience is at the forefront of every customer conversation our sales teams have worldwide. Because of this focus, we are highly successful in both landing new customers and expanding existing customer relationships.
Revenue churn continues to decline, and annual retention rates, including upsell, were well over 100% across all business segments. The third observation is that the market is showing that ownership of a complete cloud technology platform is critical. As I mentioned before, we are the only provider in the marketplace today that owns the full set of technology required to deliver voice, video, collaboration, contact center, and One System of Intelligence. With X Series, built on our leading cloud technology platform, we offer customers a future-proof solution on which we can continue to deliver new innovation and capabilities. Since its launch in the middle of July to the U.S. and U.K., X Series has rapidly become the leading solution for our new 8x8 customers.
Our cloud technology platform enables flexible mix-and-match capabilities for each organization and end user, including solutions that combine communication and contact center, what we refer to as combination deals. In our initial months, we are already seeing approximately one-third of new seats being sold with higher value contact center and collaboration capabilities. We had approximately 80 mid-market and enterprise combination deal wins in our second quarter, including eight of our top 10 deals. Over 50% of new monthly recurring revenue booked from mid-market and enterprise customers came from combination deals, as compared to approximately 42% last quarter. In addition, we're continuing to extend the capabilities of X Series, as evidenced by our newly announced 8x8 Team Messaging solution.
Team messaging enables business units, project teams, and internal and external collaborators to share content and communicate as a team by providing instant access for all employees through a direct connection to your global directory. Furthermore, 8x8 Team Messaging allows full interoperability with almost two dozen third-party team messaging platforms, including Slack. What that means is that work groups don't have to change existing behavior or tools, but can still bring all of their conversations into collaborations rooms that sync with existing solutions. For example, engineering teams can continue to use Slack, and their conversations will be present in 8x8 Team Messaging and vice versa. Our team messaging platform is the only solution in the marketplace today offering this capability.
Because we own a complete cloud technology platform, we will continue to strategically pursue opportunities to enhance and extend capabilities of our cloud platform to drive innovation in the market and increase value for our customers. In that context, earlier today, we announced the acquisition of Jitsi, an open-source video collaboration technology. Jitsi further extends 8x8's cloud technology platform with highly scalable video routing and interoperability capabilities, all built on industry standards such as WebRTC. Jitsi's open-source technology and team of video technology experts will play a role in leading development of new X Series capabilities, including dedicated video collaboration applications and WebRTC, which will open up new parts to markets and further enhance our 8x8 meeting solution. Our market leadership position has been recognized by Gartner for the seventh consecutive year in Unified Communications as a Service Magic Quadrant.
We are honored to be the only cloud provider to be awarded this prestigious accolade seven years in a row. We were also named a challenger for the fourth consecutive year in the Gartner Magic Quadrant for Contact Center as a Service. This speaks to the success of our strategy of innovation and building cutting-edge technologies into one common platform that delivers more value to customers than simply cobbling together multiple third-party applications that don't share a common platform, data, or analytics. The final observation I would like to make is our ongoing commitment to invest for growth. Given the magnitude of our market opportunity, we will continue to invest in the go-to-market capabilities required to capture an increasing share of these opportunities. As just discussed with Jitsi, we will invest in technologies that enhance and differentiate our single cloud platform and deliver additional value to customers.
Finally, we continue to attract and hire the top talent in the industry across all functional areas. Looking ahead to the second half of the year, given improving execution, we are modestly raising our full-year service revenue outlook to between $334 million and $338 million. We also remain focused on our service revenue growth goal, exiting the fourth quarter of 2019 up 25%, excluding DXI revenue and on a constant currency basis. As we have discussed before, execution against our 25% target is driven by three core factors. First is to accelerate new mid-market and enterprise bookings growth. Second is to improve revenue churn, and third is to shorten our time from bookings to revenue. We're making great progress across all three fronts. For the full fiscal year 2019, we expect an average mid-market and enterprise bookings growth rate north of 30%.
Churn rates are steadily declining, the X Series is allowing us to deploy solutions faster than ever before. In closing, we had a strong first half to our fiscal year. We see our $50 billion market increasingly shifting to cloud. We're accelerating our success with mid-market and enterprise customers in both domestic and international markets. We see customers demanding solutions based on a fully owned single cloud technology platform with analytics, exactly what X Series offers. We continue to make investments in innovation and go-to-market initiatives that will provide tailwinds for the remainder of the fiscal year and beyond. With that, I will now turn the call over to Mary Ellen.
Thank you, Vik. I will provide a more detailed review of our second fiscal quarter 2019 financial results under the new revenue recognition standard, ASC 606, which we adopted in April 2018. For certain income statement items, we will also provide the second 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, unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of GAAP to non-GAAP results was provided with our earnings press release and PowerPoint presentation deck. As we mentioned during our fourth fiscal quarter earnings conference call, we made the strategic decision to integrate DXI's core technology into our new X Series platform and have de-emphasized selling the standalone DXI ContactNow product.
We continue to expect revenue from DXI to decline by approximately 50% in fiscal 2019. Our second quarter results were strong. Total revenue was $85.7 million, an increase of 18% year-over-year. Adjusted for constant currency and excluding DXI, total revenue grew 20%. Service revenue was $81.3 million and came in above the high end of our guidance range. Service revenue increased 19% year-over-year and increased 21% year-over-year, adjusting for constant currency and excluding DXI. Adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers billing greater than $1,000 in monthly recurring revenue grew approximately 30% and represents 61% of total service revenue. Also, adjusting for constant currency and excluding DXI, service revenue from mid-market and enterprise customers billing greater than $10,000 in monthly recurring revenue increased approximately 60% year-over-year and now represents approximately 28% of our total monthly recurring revenue.
Gross margin for the quarter was 77%, flat to prior year. Service margin in the quarter was 83%, also flat year-over-year. Moving on to operating expenses for the second fiscal quarter, sales and marketing expenses, which also include customer support and deployment costs, were $51.8 million or 60% of revenue, compared with $38 million or 52% of revenue in the same year-ago period. As we mentioned last quarter, we are adding sales capacity and increasing demand generation. The impact from ASC 606 was approximately $2.9 million from the capitalization of sales commissions. Research and development expenses were $11.1 million, net of capitalized software or 13% of revenue, an increase of 59% year-over-year.
We previously stated, earlier this year, we reclassified our product management team into research and development from our sales and marketing expenses, which represented approximately 4% of revenue. We increased spend to support the development of our new X Series platform. General and administrative expense was $7.6 million, or 9% of revenue. On a GAAP basis, this expense includes a charge of $4.6 million related to U.S. sales and use taxes. Pre-tax net loss was $3.6 million and better than guidance range of $4 million-$5 million. Net loss was $3.8 million or negative $0.04 per share. Cash, restricted cash, and investments were $137 million at September 30th, 2018, compared with $167 million in the same year ago period. Cash flow used in operating activities was $5.3 million in the second fiscal quarter.
Capital expenditures were approximately $1.7 million in the quarter, or 2% of revenue, and capitalized software was approximately $6.3 million. Turning to key operating metrics, we saw strong improvements during the quarter. The average monthly service revenue per mid-market and enterprise customer grew 6% to $4,988, compared with $4,697 in the same year ago period. Average monthly service revenue per business customer was $490 and grew 11% when compared to $442 in the same period a year ago. Before reviewing guidance for fiscal 2019, I would like to remind everyone that we do not expect a material difference to our revenue and year-over-year growth between ASC 606 and ASC 605.
We continue to estimate that our fiscal 2019 non-GAAP operating expenses will be between $11 million-$13 million lower under ASC 606 due to the capitalization of a significant portion of commission expense, rather than recognizing it at the time of sale. The adoption of ASC 606 increased retained earnings as of April 1st, 2018, by approximately $40 million due to the capitalization of commissions from prior years. As a reminder, this new standard is an accounting change only and has no impact on our operating or free cash flow. Moving on to our financial outlook. For the third quarter of fiscal 2019 under ASC 606, we are introducing the following guidance. Service revenue in the range of $84.5 million-$85.5 million, representing approximately 18%-19% year-over-year increase. Excluding DXI revenue, we expect service revenue in the range of 20%-21%.
Our non-GAAP pre-tax loss is expected to be in the range of $5 million-$6 million. Turning to fiscal 2019, we are updating our full year guidance. We are raising service revenue modestly and expect it to be between $334 million and $338 million for an annual growth of approximately 19%-21%. Excluding DXI revenue, we expect our service revenue growth in the range of 21%-22%. We are reiterating our total revenue guidance to be between $347 million and $352 million for an annual growth of approximately 17%-19%. We expect our non-GAAP pre-tax loss to be at the high end of the previously stated guidance of approximately $17 million. This excludes approximately $3 million of expenses related to Jitsi. I will add some additional color to help you with your models for the full fiscal year.
We continue to expect non-GAAP gross margin to be approximately 77%. We continue to expect non-GAAP operating expenses as a percentage of revenue to be approximately 83%, excluding approximately $3 million related to Jitsi. We expect our sales and marketing expenses, excluding the impact of ASC 606, as a percentage of revenue, to be approximately 59%. As a reminder, our sales and marketing expense includes customer support, professional services, and deployment. Specifically, sales and marketing expenses will increase from added headcount, channel enablement execution, commissions, and advertising spend to support the brand and go-to-market strategic initiatives from the mid-market and enterprise segment. We expect our research and development expenses, net of capitalized software development, as a percentage of revenue to be approximately 14%. We expect general and administrative expenses as a percent of revenue to be approximately 10%. We expect interest income as a percentage of revenue to be approximately 1%.
We estimate our income tax expense to be approximately $100,000 each quarter. Due to the full valuation allowance against deferred tax assets, our tax expense reflects the current cash income taxes in certain U.S. states and foreign jurisdictions. In closing, we are pleased with our second quarter performance. We are executing to our fiscal 2019 plan, and as Vik mentioned earlier, making great progress on delivering to our revenue growth targets. Before we answer questions, I'd like to say a few words about my journey at 8x8. It has been my sincerest pleasure serving as Chief Financial Officer for the last four years. I lived in London earlier in my professional career, and I am excited to go back and work with our European team as the Managing Director of European operations. I am delighted to pass the baton to Steven.
I am very confident that he and Vik will continue to create shareholder value as we continue to execute over the long term. Operator, we are now ready for questions.
At this time, I would like to remind everyone, in order to ask a question, please press star and then the number 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matt VanVliet from Stifel. Your line is open.
Yes, hi. Great. Thanks for taking my question. I guess looking first at the acquisition that you made. I see that it's really helping scale up some of the video routing you talked about and just making maybe a more robust video conferencing solution. Is this something that customers have pushed back on in terms of what your solution was offering, or was this more opportunistic to see sort of where the product roadmap can go over the next couple of years and really just jumpstarting that?
A combination. To me, I'm thrilled about this acquisition. A really very cool team, great and vibrant open-source community, and some really impressive technology. For us, as you know, we have always believed in this concept of one platform, and we have always believed that the market is going to evolve to this, as opposed to just cobbling together loose partnerships between multiple companies. It started off, if you think about it, on UCaaS, where we are industry-leading and have been world-class for several years. We added contact center, where we are moving up the Gartner quadrant and hope to be pretty close to industry-leading across the board in that. We've added collaboration and team collaboration, and now we've got some really world-class technology with the way we interoperate with all the various platforms out there.
Our video conferencing solution is increasingly becoming more and more important to customers because they're looking for a one-stop shop. Our video conferencing solution's always been solid. Jitsi makes our video conferencing solution world-class. This is some seriously cool stuff. Now when you're looking at 8x8, UCaaS is clearly world-class. Contact center, we're getting pretty close to world-class with own technology. Team collaboration, world-class. Video conferencing with the acquisition of Jitsi and the team, world-class. We, again, believe that this whole concept of an own technology, a single platform, not having to depend on other third parties to provide this one integrated solution, and then a common data layer and analytics that basically build on top to that is game-changing.
Looking at some of the sales and marketing investments that you've made, particularly around headcount, where are you in terms of progress for your full-year plan? How much of that is maybe back-end weighted, and when would you expect to have the majority of those hires at sort of a maybe 75%-80% sales efficiency rate in terms of getting new deals booked?
Good question, Matt. We are pretty much on plan right now. We had mentioned as we entered into this fiscal year that we would have about 30% growth in our new talent, and we're pretty much on plan halfway through the year. We'll continue to add, especially in the sales and marketing area. We do have a sales team that is ramping, and we are seeing productivity improvements now from our ramped sales reps. If we continue to grow, which we expect to do into fiscal 2020 and beyond, we'll constantly be hiring new sales talent so that we can meet the needs of the market. This is a very large market as you know, $50 billion, less than 10% penetrated, and we think we have something very unique in this market.
We'll continue to invest in headcount in order to get us to where we want to be from a growth perspective.
All right, great. Thank you for taking my question.
Your next question comes from the line of Meta Marshall from Morgan Stanley. Your line is open.
Great, thanks. First thing I wanted to dive in on, you mentioned one of the keys to achieving growth targets is shortening sales cycles, just wanted to get a sense of what you're seeing there. Then second, just given how much more accelerated the bookings growth rate is than the billings growth rate, is there anything we should think of as timelines or deployments of those contracts or things that we should be aware of there? Thanks.
I'll take that one on. One, as you know, we introduced a new platform, and we've been evolving our technology, so it makes it much faster with a single platform to do provisioning for our customers. Bookings, as you rightly point out, has accelerated quite materially, and we're starting to see quite a bit of pent-up demand, and we're also seeing customers now starting to deploy almost instantly across all of their various offices. Finally, channel has been a great-- I think this is the second quarter in a row where we delivered north of 50% bookings growth for channel. When I say it's more than 50%, it's more than 50%. The sales cycles there are definitely accelerating.
Then the other part that is also good and gratifying is churn is starting to come down, and I think we had probably the best churn we've ever had in our last quarter, the least churn that we've ever had. With all of that going on, those are the three pillars that we have been targeting. As I indicated, we're trying to have an average bookings growth rate for the year of approximately 30%. The newer platform allows us to deploy significantly faster. Then the third thing is churn continues to come down below our expectations, which is better than our expectations. All three of those things are goodness. We continue to chug on along in the right order.
Yeah. Just this is one follow-up. Is there anything that we should be aware of in timeline to getting those bookings to revenue that may elongate things or, just being cognizant of what could cause the revenue growth rate to accelerate kind of in the timeline to that in the coming year?
Yes. Yes, as you know, we booked a number of large enterprise deals, customers that are billing more than $10,000. That was our 27 new deals in that category. They typically do take longer to deploy. However, as Vik had said, with our new technology, we should be able to deploy them quickly. We're expecting that a great deal of that will in fact, be able to turn to revenue by our fourth fiscal quarter. In addition, if you remember, we also had a number of large deals that we booked in our third fiscal quarter. We've had two very good quarters in a row from a big deal perspective, and we would expect that that would start to turn to revenue certainly by the fourth fiscal quarter and continue to deploy more quickly as we enter into fiscal 2020.
Great. Thank you.
Your next question comes from the line of Rich Valera from Needham. Your line is open.
Great. Thank you. I think you may have just answered my first question, which is, your guidance implies, if you're at the midpoint of your third quarter service revenue number, that you'd need to see kind of a 7%-8%, I think, quarter-over-quarter increase in service revenue in the fourth quarter to hit the midpoint of your guide, which you haven't seen, I think, in the last four years. That would be a pretty meaningful acceleration from recent years in terms of that seasonality. Is it fair to say that it's orders that you've already booked in the first couple of quarters of this year that really underpins that expected acceleration in your 3Q to 4Q growth rate?
Yes. You're absolutely right. You will see a hockey stick in our fourth fiscal quarter, and that has a lot to do with the strong bookings of large customers in Q1 and Q2 that we expect to be deployed no later than Q4. A lot of that has to do with some of the new technology that we have as well that allows us to deploy more quickly.
Great. You had a pretty remarkable increase in the number of your channel partners. I think you said they roughly doubled quarter-over-quarter, to 250 or more. Just what do we attribute that kind of very large increase in your number of channel partners relative to sort of recent gains you've made? Can you give us a sense on how long it takes them typically to become productive? Do we think those will be contributing in the third quarter, fourth quarter? Any color there would be appreciated. Thank you.
Two things. One, we brought on board, as I indicated, probably in the quarter first, a pretty strong channel team and under great leadership. We've also put major emphasis in channel marketing. There are two or three things that are happening, as you indicated. We've seen our bookings at the mid-market enterprise level increase quite dramatically. We have seen much more of an outreach by channel partners to us, particularly now when channel partners are realizing that we are a one-stop shop. The idea of being able to come to one company, one platform, and be able to get essentially contact center, video conferencing, collaboration, as well as telephony, has been huge. We're making a real effort with all. Given all of that outreach, we're seeing that we can get a channel partner productive in the 30-day timeframe.
We're also coming up with multiple ways to basically fast-track different enablements. Again, it has been a real pleasure to deal with the world-class channel team that we have here now, and the level of interest from channel partners has been quite dramatic. You're seeing how channel bookings two quarters in a row have been well north of 50%, and I think the best is yet to come.
Okay. That's it for me. Thanks for taking my questions.
Your next question comes from the line of Nikolay Beliov from Bank of America. Your line is open.
Hi, Vik, question for you. What's the preliminary indications and metrics you guys look at to evaluate the X Series traction in terms of win rates? Are you seeing maybe improvement in win rates? How you guys stack up, again, both against the on-premise guys and the cloud guys with the X Series. What are the preliminary indications here?
Very positive. That is a number, Nikolay, as you know, I look at all the time. Bryan Martin and I both monitor that literally weekly. We are well north of 50% against all competitors, and particularly against on-premise, we're doing very well, and X is helping us that much more. Again, work in progress. X has only been introduced in the last few months, but we are seeing, again, a lot of good uplifts on X Series.
Are you guys going to upgrade the install base to the X Series? If yes, how disruptive that could be to the install base?
Actually, the intent is to make it non-disruptive. We are going to do this in a very systematic and thoughtful manner. Right now, approximately 10% of our install base is on the new platform. We'll start with small business to basically start to migrate them over to the X Series. The intent is to literally do it with one click, over time, we'll start to migrate mid-market and enterprise customers. We don't anticipate any level of disruption. As a matter of fact, we expect we'll be offering additional features to customers as bundled in, as opposed to what they've had in the past. We actually expect that this will actually give us opportunities to upsell significantly, and we'll do it right around time of renewal.
My last question is around Regus, if you can give us the update on the deployment there, and whether it's tracking in line, that'll be great. Thank you.
Yeah, no. Regus is steady as she goes. Moving in the right direction, up and to the right. It's not the accelerated timeline as we had indicated. It's moving in a steady, continuous, thoughtful, organized manner.
Thank you.
Your next question comes from the line of Catharine Trebnick from Dougherty & Company. Your line is open.
Oh, thanks for taking the question. Could you clarify something, Vik? Last quarter, or Mary Ellen, you said the SMB segment grew pretty much in line with the market at 15% year-over-year. Can you update us on that segment? Then I have a follow-on question.
Okay. Yeah, we're pleased to say that we're continuing to grow our small business, that we are growing at market or slightly ahead of market. We saw sequentially about a 70 basis point improvement in growth, which is very, very nice. Our goal, as you know, is to grow our small business at least market, slightly above, and mid-market enterprise above market.
All right, great. Vik, could you provide some color as to, during the quarter, any particular product feature that stood out, the reason why you landed the deal over another cloud provider, or a premise provider? Thanks.
Yeah. Catharine, it's X. It's the X Series. It is all about the X. If you look at an interesting number, 50% of our mid-market and enterprise bookings are what we call combo deals, which is some variation of X one through X eight. That number used to be 42%, and our win rate there is phenomenal. We are seeing X, this concept of One System of Engagement with basically voice, video, collaboration, conferencing, contact center, and the ability for the customer to mix and match and upgrade or downgrade depending on how their business needs change and for each end user to have that level of flexibility is absolutely game changing. X, as you know, we just introduced in July timeframe, so these are early days, but the initial indications are very positive, and I think that has been a huge differentiator for us going forward.
All right. Thanks, Mary Ellen, good luck in Europe, we'll stay in touch.
Okay. Thank you, Catharine.
Your next question comes from the line of Jonathan Kees from Summit Insights Group. Your line is open.
Hi, thanks for taking my questions. I, too, want to wish Mary Ellen good luck in her new opportunity. You've always been helpful with your insights and the time that you spent. You'll be missed. Look forward to working with Steven. In regards to my questions, I'll stay on the M&A track. In regards to Jitsi, they, I guess, were targeting more developers. You tend to target more IT and CIOs. Are you going to be differentiating your sales, targeting your sales cycle with regards to this new acquisition? I have a second question after that.
No, actually, the intent is both. They have a vibrant open source community, we love the idea of continuing to invest in that open source community, invest in that technology. This stuff is really cool stuff, it's pretty game changing, it can be highly disruptive to some of the incumbents in that space. We can also expect to integrate portions of this technology into our both meetings product as well as the X Series. It also opens up different routes to market for us. We were very fortunate that the team became available, we're very fortunate that they chose to come on board with us. These are some really cool people, really smart people. Video conferencing is going to increasingly be more and more important, I think we're ahead of the curve in basically getting ownership of that technology and incorporating it.
As I said, we'll leverage the open source community a lot.
Okay. It sounds like an exciting acquisition. Second question would be also on M&A, not yours. This morning, obviously, there's a lot of news with the Red Hat acquisition, that's taking a cloud computing bent, the focus there is going to be on hybrid. I know you, Vik, in the past, you've talked about the opportunities more in pure cloud, less so in the hybrid. Contrary to what your peers, Mitel and ShoreTel would say. I guess I'm just curious, how many times do you have customers who either you turn away, or they choose not to go with you? You're probably not going to give me specific statistics here, I guess I'm just trying to get a gauge there in terms of hybrid. What kind of interest have you gotten from customers, especially with enterprise, larger customers, in terms of hybrid? Thanks.
For the record, I'm saying this tongue in cheek, we just announced the second-largest open source acquisition in the last 24 hours. I just want that on the record. No, there were a few zeros more that IBM paid for Red Hat than we paid for Jitsi, hey, who's counting? Going back to your comment on hybrid, I actually feel more and more that people are becoming more and more comfortable with pure cloud, enterprise included. I don't believe that there is any hybrid required for telephony. Of course, I defer to colleagues who have different viewpoints. For us, we are seeing old guard companies, new guard companies, essentially all evolving purely towards a cloud-only offering. I think you're seeing that in the success of people like us who are continuing to see an uplift in the market.
I expect that this trend is going to continue, I think the train has left the station for hybrid solutions for communication systems. I think it's more and more going to be a cloud-only offering, I think it has been de-risked to a sufficient enough degree that you're going to start seeing very large enterprises all shift en masse to the cloud. That's our view, that's the trend we're seeing.
Okay. All right. Fair enough. Thank you.
Thank you, Jonathan.
Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.
Thank you. Vik, you mentioned that partners are looking for a single cloud partner, and I have honestly not heard that as we talk to channel partners, so I wanted to better understand your thoughts there.
What we are finding is that particularly large channel partners servicing enterprise customers, what they tend to want is one vendor, and over time, they want to play a bigger and bigger role in basically being the service provider and the value-added reseller. Trying to do that with three or four different technologies, with three or four different service agreements, is typically not ideal if you are a VAR and/or essentially a channel partner. The ability to go to one partner, very much like a Microsoft Office, you don't want to necessarily go to WordPerfect for Word and then Lotus 1-2-3 or whatever. You go to Microsoft, and you get the Office suite. We are seeing that for people like that, it becomes that much easier to basically go to one vendor.
X, I do think is game changing, which is X one through X eight, where you can add contact center, you can add video conferencing, you can add collaboration, or you can add telephony, and you can subtract it, and you can do a different mix and match by different end users. I don't quite know where your sources are, but our sources, and I've spent quite a bit of time with a lot of different channel partners. We are increasingly seeing that that is why they are coming to us. We are seeing the number of channel partners that have gotten engaged with us significantly increase quarter-over-quarter, and you're seeing our channel bookings accelerate quite significantly.
One other question. Just wanted to see if you could expand on your single technology platform differentiation. Given M&A and integration work, it seems like there will be a few players with very similar strategies to yours. I wondered if you could just elaborate there.
George, I'll pull on that thread. That is exactly right. You used the exact words that we have been saying, which is we see this market will have to evolve to a single platform with all the technologies that are relevant to providing that platform all under one roof. Your point that you are seeing a lot of our competitors make M&A decisions where they're trying to buy the missing pieces of their technology, very similar to what we did three, four, five, six years ago, they're now starting to do that. One, I applaud them for their strategy because I think it is right on. That is exactly where the industry is headed. The second thing is, it's going to take them the few years that it took us to start to integrate all of these various technologies together.
It's a long and painful process, as we have learned. We are more and more convinced that it is the right one. I think the fact that people are paying top dollar to acquire missing components of their technology so they can provide that one platform solution tells us that we were right. We just have to keep executing. I think this market is coming to us.
Perfect. Thank you.
Your next question comes from the line of Josh Nichols from B. Riley. Your line is open.
Thanks for taking my question. Real quick, a little bit of a housekeeping matter. Could you run through a little bit over $6 million of non-recurring expenses in OpEx that were backed out? What's the breakdown on that?
Oh, okay. A portion of that was the $4.6 million that I had mentioned on the call, which has to do with sales and use tax.
I'm sorry, you said sales and what tax?
Sales and use tax. The sales and use tax. Many SaaS companies, especially in the UCaaS industry, are constantly evaluating local and state tax regulations. We currently file almost 1,400 tax returns each and every month. From time to time, these companies come, or these states and local municipalities come and inquire about our collections and remittance of sales tax and fees. We currently have several jurisdictions that are conducting sales tax audits. As a result of this, and with doing some internal work with our tax advisors, we accrued $4.6 million during the quarter as a contingent liability for various sales and use taxes that may be imposed on us by various states and jurisdictions from previous periods. We have a great deal of experience working with the relevant authorities for each one of these.
There's a lot that goes into this. There's several factors that goes into the number. For instance, our estimate depends on where the company services are being used, Nexus in that area, and the taxability of our services in those particular states or jurisdictions.
Thank you. I was going to ask, I know earlier, Vik, you were talking a bit about expanding the company's platform, with the recent acquisition and what the company's been building on over the last few years to really complete an end-to-end solution here. What are your thoughts on some of the recent news that's come out? Seems like more people are entering into the contact center space where you see the acquisition announced by Vonage. Twilio also made an announcement not too long ago, and what impact do you think that will have on 8x8 as you continue to compete with the number of firms for the enterprise business side?
I'm thrilled about it. To some extent, I think you've heard me say over the last four years or five years that I see the entire market converging towards one common platform, voice, video, text, contact center, all basically being tied together with a common framework and common data, common analytics. I have said that as part of that, you need to ensure you own your technology because you can loosely cobble stuff together, everybody's interests eventually diverge, and we've seen this story play out in the technology industry year after year. That's why 8x8 was very aggressive. We bought three companies in the contact center space. We bought a collaboration company. We just recently bought a video collaboration company. We have acquired across the board to basically build out, we have this one common framework, one common platform.
I think we've got a leg up on everybody, and that's the investment we started to make with the X Series, is to bring all of these various technologies together. I think pretty much the entire industry is waking up to the fact that that's what you need to do, and that you can't just go in and loosely partner with everybody and kind of just talk about it. You have to eventually go acquire the technology. From that perspective, I applaud those moves, I think, as you said, they're all going to go through the same pain of how you integrate all of these diverse technologies into one common platform, and I wish them luck. The second part is that more and more, I see two or three worldviews evolving. I think I see a worldview evolving towards essentially a packaged solution.
Which is voice, video, text, collaboration, contact center, all as part of one platform with basically the ability to control the entire platform through APIs. That's one worldview. The second worldview is going to be a series of build-it-yourself developer kits, which is the Twilio worldview, where companies that have very large development teams can go in and basically build custom solutions leveraging essentially these widgets. 8x8 has taken the view that we're going to have a packaged solution, and we think that the majority of the world is going to go towards these packaged solutions, and we're creating APIs so that you can control the entire packaged solution. Twilio, which is a phenomenally successful company, has taken an opposite worldview. Either way, I think those are the two worldviews.
I do believe that the concept of loosely cobbling three or four different companies to provide, and calling it an integrated platform or calling it a common platform, I think over time, all of that is going to change, and people will have to make all of these acquisitions, which I like to think we bought when they were relatively inexpensive.
Thanks for the detail. Last question from me. I know you mentioned and talked about the company's ramp, particularly in sales and marketing. Just how long does it take to train up a sales staff where they're a full quota-carrying member of the team going out there and able to actually close deals and drive some top-line revenue growth?
Three to six months. Typically, that's been the typical ramp that we have had, depending on the size of the market. Small business, you can ramp much faster, obviously. Enterprise takes a little bit longer. Again, in your early stages, yes. As I said, I always characterize us, and I'm very pleased about quarter two, but I characterize us as a work in progress. Little by little, you're starting to see the machinery start. You've seen what X Series has done for us, and X Series was years in the making. It didn't just happen. Now we built up the sales and marketing engine to support that, and you're starting to see it little by little get moving, and we expect to see this ramp continue for some time.
Thanks. That's it for me.
Your next question comes from the line of William Power from Baird. Your line is open.
Great, thanks. Yeah. Vik, I wanted to come back to the 25% revenue guidance exiting fiscal 2019. I know you talked through some of the drivers, bookings growth, which has been great to see. I think one of the elements you called out was improving revenue churn, and I wonder if you could drill down into that for us a bit more. Maybe what some of the key drivers have been. Any data points in terms of where it can go from here. I don't know if it relates to deployment. Is it bundled solutions? What are some of the things that you're doing to help on that front?
I think it's just growing up as a company. To some extent, we have systematically taken a look at all of the four segments. I think as you have pointed out in the past, we have always had the lowest churn amongst our peers in our industry. Now systematically, we've been going segment by segment and figuring out every pain point, every reason for churn at every level, and putting in place plans to go address. I'd love to tell you we have these blinding flash of insight. It literally is just basic blocking and tackling. We've really built up our customer success team. They're phenomenal folks. We have tied engineering bonuses towards customer satisfaction and quality, which makes it that much more of a focus. We measure churn on a weekly basis and go through customer health on a weekly basis. It's little things like that.
We've upgraded our team in customer success by bringing in, I think our VP of customer success support just came from, was head of, I think, customer support from Marketo. Little by little, we are looking at every aspect of our business and improving it. As I said to me, I'd love to tell you it was brilliant insight on the CEO's part. Unfortunately, I can't say that. It's a lot of good people working very hard and literally making a list, checking it twice, and one by one, ticking and tying it together. I think that's what's causing our churn to head in the right direction.
Okay. My second question, I know you spent a fair amount of time on the call talking about some of the bundling opportunities and the X Series product helping drive that. Are there any parameters you can provide with respect to usage? What you're seeing in terms of collaboration growth, same room growth, contact center. How do we think about then kind of ARPU from here? What's the right way to think about the revenue that you can get from adding these additional products going forward?
It's a good question. I think the interesting one is a third of our X Series customers are actually buying the contact center, so they're buying the highest end of X. Over time, you'll start to see up ARPU trend up because what's happening is people that would traditionally just buy X1, X2, X4 are buying more and more the X8, which is the full-blown contact center. We have not yet seen the uplift from team messaging that only just became generally available in the last few weeks. Video conferencing is also a nice-to-have so far, and we think that'll become a big lift as well. So far, what we have seen is about a third of our X Series of orders have contact center, which is starting to be more and more interesting.
Again, too early to tell exactly what's going to happen on ARPU, I think over the next few quarters, we'll be able to provide you with more color. Our sense is that over time, you will start to see more and more of our ARPU trend up as contact center becomes a bigger portion of our business.
Okay, thanks. Mary Ellen, good luck with the transition.
Okay, thank you, Will.
Your next question comes from the line of Jim Breen from William Blair. Your line is open.
Thanks for taking the question. You've obviously seen a lot of growth on the channel side. Can you sort of give us color on how you think about the mix, in terms of where you're generating revenue from, in terms of versus the channel and other places? Just with respect to the channel in general, is there more room for growth there as you sign up new partners going forward? Thanks.
I actually think what we're seeing is small business, the micro business, we're heading more and more towards e-commerce and self-service. We're starting to see that trend up. Let's say 49 seats to about 150, 200 seats, we're seeing more and more direct is still the primary driver. At the enterprise level, you start to see, again, direct be a material driver of business. At a macro level, small tends to be either self-service or direct. Mid tends to be primarily channel. Small enterprise tends to be channel. Very large enterprise often is direct. That's what we are seeing. I think channel is barely tapped. It is fascinating to find out how little the channel knew about us. We've been around a long time, but our brand has not necessarily been great.
As we go out and we put a full team together, and we go out and we meet with enough channel partners, and you can start to see people going, "Holy smokes, this is a one-stop shop. This could be huge." We're starting to see uplift. I actually believe there is a lot of headroom in channel, and we'll see how it all plays out. Right now, we're seeing quite a bit of opportunity there.
Great. Thank you.
Once again, if you would like to ask a question, please press star then the number 1 on your telephone keypad. Your next question comes from the line of Michael Latimore from Northland Capital Markets. Your line is open.
Yeah, great. Thanks a lot. On the idea of upgrading the base, Vik, I think you said you plan to do that on renewals and then upsell when those renewals occur. I guess, what does that imply in terms of when you might get through the base? Is that sort of a 12- to 18-month process then, or how long should that take?
In that 18-month timeframe is what we're going to do. We want to do it in a way that it is absolutely no impact or minimal impact to a customer, and only impact should be goodness. We've started this migration from the small customers, where it literally is one click, but the intent, the number one intent of this migration is it should be absolutely non-disruptive to our customers, and they should have more than they had in the past. I think that's what X Series allows us to have happen. The customers will have no disruption, and they will have more value. For our small businesses, we've started the whole process. Again, we'll do this very systematically, approximately 10% of our install base is X Series, and on the new platform.
Over time, as I said, over 18 months or so, we'll do that. I'm more focused on making sure it's non-disruptive for our customers and that they always get more value from the X than what they had previously.
Got it. I just wanted to make sure I'm synced up correctly on the 25% exit growth rate. Does the year guidance that you're given for service revenue, does the midpoint sort of sync up with that view? Constant currency, ex DXI, or where do you need to fall within your guidance there to hit that 25% exit rate, let's say?
Mike, that's a great question. If you look at the Q4 implied number, that actually gets us close, very close, because you have to add back in constant currency. Remember, last year in the fourth fiscal quarter, the pound to the dollar was 1.38 versus where it is today at 1.28. That's going to be a huge adjustment that you'll see. Also take out the DXI. When you look at it on a constant currency without DXI, you're going to be very close to that 25%. If we do a little bit better than the midpoint, you're going to be at that 25%. It is contemplated in the high end of our guidance, but you can get very close at the midpoint.
Got it. Just last one, since you just made a video acquisition. Can you give any color just on video usage across your platform? Has it been accelerating, same as it's always been?
No, trending up. Video has become much more popular. I tell you, it's been a fascinating journey because for us, initially, it used to be all around telephony. We started to see more and more collaboration, and that's become very popular. We started to see contact usage, even for people not using contact centers, non-traditional contact centers, start to leverage help desks, et cetera, all the contact center functionality. We have been watching our customers trending up on video usage over the last probably year and a half, that's why we've been very thoughtful about what we wanted to do. We architected it in such a way that we could basically go in and plug in this next-generation technology but not touch the front end, except we will continue to make it more user-friendly and easier to use.
I am beyond thrilled about this Jitsi acquisition. It's an amazing team, and some really cool stuff's going to come out of it.
Great. Thanks a lot, and best of luck, Mary Ellen.
Okay. Thank you, Mike.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you, folks. I appreciate all of you listening in to our second quarter earnings call. Steven and I will be on the road, and we look forward to seeing you at various other earnings calls. Mary Ellen will be heading over to London, where she will develop a taste for warm beer. Again, thank you, and look forward to talking to you over the next few days.
That concludes today's conference call. You may now disconnect.