Good day, ladies and gentlemen, and welcome to the first quarter 2017 8x8, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then 0 on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to turn the conference over to Director of Investor Relations, Joan Citelli. Ma'am, you may begin.
Thank you, Sabrina, and welcome everyone to our call. Today, I'm joined by 8x8's Chief Executive Officer, Vik Verma, and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's first fiscal quarter of 2017 financial results for the period ended June 30th, 2016. The earnings press release, which was issued today after market close, is available on the Investors tab of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions. Before I turn the call over to Vik, I would like to remind all participants 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.
Expressions of future goals, including financial guidance and similar expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact, are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the Risk Factor sections of our annual report on Form 10-K, in our quarterly reports on Form 10-Q, and in our other SEC filings and company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. Thank you. With that, I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.
Thank you, Joan, and thank you, everyone, for joining us today as we discuss 8x8's first quarter of fiscal 2017 financial results. I'll begin with a high-level summary of the quarter and then turn the call over to our CFO, Mary Ellen Genovese, who will cover the financial results and metrics in greater detail. We're off to a great start in fiscal 2017 as the transition to cloud for business communications and collaboration solutions is well underway, and our strategic focus on broadening our capabilities to serve globally distributed mid-market and enterprise customers continues to bear fruit. Our total revenue in the first quarter of fiscal 2017 grew 25% year-over-year to $60 million. Service revenue of $55.3 million also grew 25% year-over-year, both on an organic and inorganic basis.
For the 25th consecutive quarter, 8x8 remained profitable on a non-GAAP basis with non-GAAP net income of $5.4 million. Service revenue from our mid-market and enterprise customers grew 44% year-over-year and now accounts for 52% of our total service revenue. While our direct enterprise field sales force and channel sales teams are driving the majority of this revenue, I'd like to note that in general, we are signing up larger customers across the board with our inside sales team continuing to book mid-market deals without ever visiting the customer on site. As you know, we are focused on three key strategic initiatives. One, increasing the adoption of our solutions by mid-market and enterprise customers. Two, expanding our global service delivery capabilities. Three, advancing our technology and service offerings. I'd like to touch upon each of these with a brief update on our progress this quarter.
We continued to execute well in the first quarter of fiscal 2017 on our first strategic initiative with new monthly recurring revenues sold to mid-market and enterprise customers and by channel sales teams increasing 62% year-over-year, accounting for 58% of total monthly recurring revenue booked in the quarter. Today, I'm pleased to announce a new contract with a major office supply retail chain that was just awarded earlier this month. It was brought in by our enterprise sales team following the successful completion of a proof of concept trial last quarter. The initial 50-store Virtual Office deployment has already begun, and we are planning to roll out our services in over 1,000 locations nationwide. I'd like to also mention a few new enterprise and mid-market customers that were brought on during the quarter by our channel sales team, which continues to perform exceptionally well.
The first is a major workforce solutions provider with offices throughout North America. Following the successful completion of an initial proof of concept deployment, 8x8 was selected to replace their premise-based solution with over 2,000 Virtual Office and Virtual Office Analytics seats across 500 locations. The second noteworthy win is a 1,200 Virtual Office and Virtual Office Analytics seat deployment for one of the largest dental providers in the U.S., with over 180 locations. Third is a rapidly growing mortgage lending company with over 60 offices in 26 states, for whom we will be deploying more than 500 Virtual Office and Virtual Office Analytics seats. Finally, from our U.K. team is a combined Virtual Office EasyContactNow deployment of over 300 seats for one of the world's leading commercial suppliers of water treatment services.
Our second area of focus is building the industry's highest quality, most reliable global communication network while maintaining industry-leading service margins. As we announced earlier this week, we are in the process of adding three new data centers in Singapore, the Netherlands, and Brazil, which will broaden our international footprint to 12 data centers in eight regions of the world. Coupled with our patented global media routing technology and localized telephony services, this expanded network enables us to serve our many multinational customers with high availability, high quality, low latency voice capabilities throughout their organizations. By the end of the calendar year, we will support a total of 13 languages in addition to English for core services. Plus, we'll be supplementing our global customer success network in the U.S. and U.K. with new support centers in the Philippines and Romania, bringing the total number of centers to seven.
Our global expertise is a key differentiator that consistently positions us favorably with prospects that maintain multiple international locations, particularly when proof of concept trials are involved. Third, on the service innovation and technology front, I'm pleased to report that we have rolled out our new completely redesigned Virtual Office Meetings solution, which delivers audio, web, and high-definition video conferencing at a single click and from a single client. This enables instant seamless collaboration with the ability to share content from cloud applications such as Dropbox, Box, iCloud, and Google Drive. Studies have shown that over a third of an employee's time each day is spent looking for information versus being productive. Virtual Office Meetings help solve this problem by delivering integrated communications and workflows from a single platform.
Our customer deployment and success teams continue to make solid progress rolling out our services for new customers like GameStop and Movement Mortgage, as well as existing customers like NetSuite, SPS Commerce, OFX, and Regus. For NetSuite, we deployed another 200 Virtual Office seats this quarter, for SPS Commerce, over 500 combined Virtual Office and Virtual Contact Center seats, and for Sydney, Australia-based OFX, over 300 combined Virtual Office and Virtual Contact Center seats. We are also in the process of rolling out our virtual contact solutions for Regus in the U.K., Spain, Cyprus, Denmark, Finland, Greece, Italy, Norway, Portugal, Sweden, and Malta. I believe we are well ahead of our competition in our ability to quickly transition customers over to our services, thanks to our Elite Touch methodology, our extensive global presence, and the fundamentally solid nature of our core network architecture.
One year after the acquisitions of DXI and QSC, I'm pleased to report that we have fully integrated our two U.K. entities under common leadership and a combined sales team now selling our full portfolio of products. QSC has been integrated with our global engineering, DevOps, and customer support teams. We now have approximately 250 employees in the U.K. and Romania, including an awesome UI/UX design team in London, and our research and innovation center in Cluj, Romania, which we expect will be staffed by roughly 100 employees, the vast majority of them software engineers, by the end of this fiscal year. These sales, operations, global customer support, and R&D resources are contributing greatly to the growth of our international customer base, as well as the speed at which we can deploy and deliver new enterprise-grade features and capabilities.
With that, I'll now turn the call over to our CFO, Mary Ellen Genovese. Mary Ellen?
Thank you, Vik, thank you all for joining us on the call today. In my prepared remarks, I'll cover highlights from our income statement, key operating metrics for the quarter, and a summary of our balance sheet. Financial results for our first quarter of fiscal 2017 were very strong, with total revenue of $60 million and service revenue of $55.3 million, both representing a year-over-year increase of 25%. On an organic basis, adjusting for approximately the $1.5 million of revenue received from a technology license payment in the first quarter of fiscal 2016 and two months of inorganic revenue from our DXI acquisition in the first fiscal quarter of 2017, total revenue grew by 26%, service revenue grew by 25%. 52% of our total service revenue is now derived from our mid-market and enterprise customers, that portion of our revenue grew 44% year-over-year.
Our revenue growth was driven by both new subscriptions sold to larger customers and expansion revenue from existing customers. Expansion revenue generated by customers increasing the size and/or scope of their deployments typically accounts for approximately 50% of new monthly recurring revenue booked each quarter. GAAP net loss for the quarter was negative $0.5 million, or a negative $0.01 per share. Non-GAAP net income for the quarter was $5.4 million or $0.06 per share, representing 9% of revenue, compared with $4.5 million or $0.05 per share, also representing 9% of revenue in the same period a year ago. GAAP gross margin was 73.8%, compared with 73.2% in the same period last year. On a non-GAAP basis, gross margin improved 130 basis points from the year-ago quarter to 75.4%. GAAP service margin was 81.5%, compared with 80.8% in the same period last year.
On a non-GAAP basis, service margin improved 140 basis points from the year-ago period to 83.2%. GAAP sales and marketing expenses increased year-over-year by approximately $8 million to $31.7 million, due primarily to additional headcount of deployment engineers and additional headcount for sales professionals across all segments of our sales force, as well as the acquisition of DXI and commission-related expenses stemming from the success and growth of our channel partners. Our GAAP tax expense for the quarter was $37,000, non-GAAP tax benefit was $44,000. Turning our attention to key operating metrics for the quarter, new monthly recurring revenue, or MRR, sold to mid-market and enterprise customers by our channel sales teams increased 62% year-over-year, compared with an increase of 38% in the same period last year.
This new MRR accounted for 58% of our total new MRR booked during the quarter, compared with 46% in the same period last year. Average revenue per business customer was $399, compared with $353 in the same period a year ago. Average revenue per mid-market and enterprise customer was $4,230, compared with $3,846 in the same year-ago period. Gross monthly business service revenue churn on an organic basis, which excludes DXI, was a half a percent, compared with 1% in the same period last year. Cash equivalents and investments were $167 million at June 30th, 2016, compared with $157 million in the same period last year. Cash flow from operating activities was $6.5 million in the first fiscal quarter, capital expenditures, including capitalized software, were $2.3 million in the quarter, or 3.8% of revenue.
I'd like to note that as a result of the recent weakening of the British pound, we are estimating a potential impact to our consolidated revenue of approximately $600,000 per quarter for the remainder of fiscal 2017 due to the conversion of our U.K. revenue at a lower rate. Despite this, we are reaffirming our fiscal 2017 guidance of annual revenue of $249 million-$253 million. Full-year non-GAAP net income in the range of $16 million-$20 million, representing non-GAAP net income as a percent of revenue of 6.5%-8%. That concludes my prepared remarks, and I will now turn the call over to Vik.
Thank you, Mary Ellen. 8x8 continues to make great progress across all of our strategic initiatives while building a coveted reputation as the only provider capable of delivering enterprise-grade cloud communications across the globe. We've established a solid foundation for continued growth and are well-positioned with our competitive differentiation and successful track record to capture an increasing share of the demand for cloud that is yet to come. With that, we'll be happy to take on any questions you may have for us today. Operator, please open the line for any questions.
Thank you, ladies and gentlemen. At this time, if you have a question, please press star, then the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit to one main question and one follow-up question. Our first question comes from the line of George Sutton from Craig-Hallum. Your line is now open.
Thank you very much. Again, nice results, guys. Vik, you specifically referred to proof of concepts being an area where if you get into a proof of concept, particularly in your global situations, you come away as the winner. Can you give a little more perspective on what is happening with other vendors? Why are you winning in those cases?
Look, I believe we have a comprehensive solution that works in tough network environments, and I think, as you know, we're a company of techie geeks, and we have built a really solid technology. I think you probably noticed we don't use the term, but the terminology that was formerly known as Whale, we announced our seventh one today, which came after a pretty extensive proof of concept and a few things that they were going through internally. We seem to have a very good track record that once we go in, deploy our technology, show the customers the value of our solutions, show the fact that we take our commitments to customers very seriously, good things happen.
Now, one of the other reasons I know you've been winning relates to the call center, your integrated call center capability and our contact center capability. Can you talk about, with all the M&A that's been going on in the space, has that changed your go-to-market plans, your pipeline, your close rates, anything like that?
No, actually, the strategy is working in the sense that I'm actually increasingly pleased. I think if you think back, George, over the last couple of years, we've fundamentally transformed the business from essentially an SMB business to a mid-market business, where mid-market is now the majority of our revenue, and it represents the fastest-growing segment of our revenue. A key element of that is the fact that we are the one-stop-shop communications platform. Part of the reason we are going out and really investing in building out this global network, and by the way, all the expenditure that we're talking about is all planned and part of our guidance, is we want to build the premier real-time global communications network platform.
For us, a network platform means voice, video, SMS, plus the integrated call center, plus over time, a contact center, and plus over time, the ability to do line of business applications, et cetera. For example, of our top 10 deals, once again, five out of our top 10 deals bought both our Virtual Office and Virtual Contact Center. You're also seeing, I think, six out of our top 10 deals also bought our Analytics Solution. I think this is the thing that we have been able to do, is build this out and continue to build this low-latency global communications network and keep building on top of that, and that's why I think we win.
Super. Thanks, guys.
Thank you. Our next question comes from the line of Nandan Amladi from Deutsche Bank. Your line is now open.
Hi. Good afternoon. Thanks for taking my question. The first question is for Mary Ellen. I think the question we'll get tomorrow is about the guidance in spite of a significant beat over $2 million from consensus. You're not raising guidance. Obviously, you said the FX impact plays a big part of that. Were there any other factors that you considered?
No, not really. Nandan, it's first quarter, it's still early days within the year. We're seeing strong demand. However, we want to be cautious as it relates to how the pound and the US dollar trade. We expect that that might be a $600K, as I had mentioned in the script, per quarter impact. We don't know for sure, of course. The pound's been suggested that it might go down as low as $1.20, but it seems to be holding pretty well at the $1.32, $1.33 mark. I think we're just staying with our guidance. We think it's strong guidance. Again, the demand is strong, and this is early days.
Thanks. A follow-up for Vik. With all of these global proof of concepts that appear to be getting larger in size, do you feel like you have enough services staff appropriately placed in those geographies? Do you really need to have many people on site when you do these proof of concepts and eventually deployments?
No, actually, we don't. That we brought on board, as you know, a new head of global support and global delivery, Jeff Romano, who has a track record. Larger customers require a different level of service than SMB customers. We've built up a lot of various tools, et cetera. I don't expect to have a lot of people on site. We are leveraging our localized partners where we can to basically provide support. Now you're seeing that we have now 12 centers around the world. The part I'm proudest of, I think as you reflect back, because I think you followed us for a couple of years when we started on this journey, our company was essentially an SMB company, which was primarily domestic.
Over two years, with very few people really noticing, we managed to build a global company focused on mid-market and enterprise. Now as you look at it, we keep announcing bigger and bigger deals. It's now like a consistent metronome to the extent I think last quarter, I indicated I would not be highlighting whales anymore because that whales becomes ordinary course of business. Now getting bigger and bigger deals is part and parcel of our daily operating rhythm. I think we'll continue to mature as a company. The goal is to be able to provide as personalized a service as you can with the least amount of touch.
That's one of the secret sauces that we are trying to develop, which is bringing tools where you can have automated ways to test out people's networks, different things that we can do, different tiers of people that can provide different levels of support. That's part and parcel of growing up as a company. I think we're making good inroads into that.
Thank you.
Thank you. Our next question comes from the line of Dmitry Netis from William Blair. Your line is now open.
Great. Thank you. Very nice quarter.
Thank you.
Okay. Mary Ellen, I have a-
Dmitry, let me see the term you're looking for is awesome.
I'll let you say that, Vik. All right. The kind of ties to the question about the full-year guide. I get the currency effect, which sort of explains the thought process there. Also, if I look at the service versus product revenue split, Mary Ellen, it seems like product came a little bit ahead of expectations this quarter. If so-
Yes
what are you thinking kind of as we go through the year? How should we be modeling this? Maybe that sort of plays into that full-year guide, is that kind of ramps down as we go through the year. Help us understand that a little bit.
Yeah. No, that's very true, Dmitry. As we had mentioned last quarter, we don't expect our product revenue to be as significant this year as it was last year. In this particular quarter, we did have some of the-- Well, we're not supposed to call them whales anymore, but some of the whales that we did book in our fourth fiscal quarter did roll into shipments this quarter. We shipped product to Regus. We shipped product to Movement Mortgage. We shipped product to GameStop. We had quite a few larger customers that we shipped product revenue to. I think, again, our focus is to try to, again, really work with our customers and potentially get more and more of our customers using our virtual desktop, which we have spent a lot of engineering dollars focused on, and we really believe it's a high-quality product.
We'd like to see that shift because as you know, we don't make a profit from our product revenue.
Right.
I think that our guidance for the full year on product will be very similar to what we saw product last year, but as a % of overall revenue, it's lower.
What do you think that % is on a year-over-year basis?
We're forecasting that that's going to be flat year-over-year on a product basis.
Yes.
Our service revenue, as we had said last year, last quarter, excuse me, will continue to grow on the same average as last year, which was 23% on a service year-over-year growth.
Okay. That's helpful. All right. Very good. My next question on the sort of just this big deal, the Whale deal, Vik, that you guys won. It was nice to see that come in the quarter. Can you talk about maybe the number of seats? I know you mentioned 1,000 locations, 50 stores. How many seats approximately that entails? Also whether this was a competitive bid, and if so, who were you up against?
Competitive bid. We don't typically talk about who we're up against. This week just closed this, and so you know the company, and so at the right time, we'll give a lot more information on it. It's one that has been in the works for. This was one of my original 10 Whale pipeline. They did a little detour where they were involved in something. They came back. We think this is a great opportunity. A great opportunity to really go in and deploy. Also opportunities for strategic alliance. Beyond that, I don't want to give you too much more details on the seats because I think you'll figure out who they are right after that.
Okay. All right, last question real quick. On the balance sheet, you have $167 million now. What do you plan to do with that cash, Vik? Just kind of give us an overview of your thought process there.
Again, you know my views on acquisitions. I like to do them very carefully because we need to make sure that they get integrated very tightly into the company and add value. I feel like we've spent a good amount of time digesting both the QSC and DXI, and I'm feeling good about both. I think one in particular, the QSC, has been an absolute home run for us. we are seeing a lot of other opportunities in various technologies as well as in geographies. we have an active M&A pipeline of tuck-in acquisitions, is the term I use, which is relatively small acquisitions that either integrate with your platform and provide additional capabilities and/or give you a bigger geographic footprint. That's where we're continuing to focus. I like to do them at a certain rhythm.
I don't want to get ahead of our headlights because, again, the goal of an acquisition is it sounds great going out and doing deals, but you want to make sure you tightly integrate them and you get success out of them. So far, I think we've been doing a good job of that.
What's your view on the CPaaS and UCaaS colliding? Certainly, Vonage had executed a deal here, and Twilio came out, and there's a big tone around the two markets maybe kind of merging. What do you think? Is that the case? Has it hurt the UCaaS side of the market just yet? If not, maybe this is an adjacent-
Not even close.
Okay.
Not even close. Think about what we are trying to do, I think that makes us truly different. We are building a global communications and collaboration capability. Think about it. We're going to have one of the premier platforms and networks for global communications and collaboration. It's a very full PBX and contact center functionality. Little by little, we are exposing all the APIs, except our APIs are not just as simple as making telephone calls or two-factor authentication. Our APIs will give you the ability to access right at the endpoint, and also the ability to modify call flow. It gets very sophisticated because we're able to do all of this on a global basis. Add one more thing to that, access to all of this data that flows and the ability to do analytics with it once you get the right APIs.
That's our vision. We think that's very different than a simple cloud telephony type application where you do peer-to-peer type communication. We're going after a very different type of market. We think it's a much more lucrative market, the complexity of this market, the ability to have local dial plans, the ability to have toll-free number capability in different countries, the ability to do emergency services in different countries, as I said, expose all of that as APIs, becomes truly differentiated. We think we're in an awesome position, and we feel comfortable with our strategy.
Okay. Thank you very much. I'd like to understand that vision over the course of the quarter a little better, it sounds like you're on the right track. Thank you very much.
Thank you. Our next question comes from Rich Valera with Needham & Company. Your line is now open.
Thanks very much. Vik, first a question for you on where you stand with your channel of strategy. As I understood it, you undertook a plan to pare down your channel partners to higher quality, more strategic ones, and you're in the process now, I think, of gradually adding some strategic channel partners. Can you give us a sense of where you stand on that and how that's progressed relative to expectations?
Phenomenal. Those guys are absolutely phenomenal. I've never quite understood that addition by subtraction could prove that effective. Channel is by far the fastest-growing segment, and channel is truly global for us. For example, some of these Australian deals are coming from CSG, which is our Australian channel partner. We're seeing global success with all the channel, and the goal is to step and repeat. The key here for all of us is we want a limited number of channel partners, but then hug them tight, provide them all the support that they need, make sure that their customers' customers are successful. We don't want this approach where we're going out and signing thousands of channel partners just so you can have a notch on your belt.
What we're trying to do is pick targeted number of channel partners and then give them tremendous amount of attention. Again, not early indications, but channel has been by far the fastest-growing segment of our business, and we're more and more bullish about channel.
Do you have any planned additions, not that you can necessarily mention them now, but in the relatively near future to sort of bolster that further?
Yes.
Got it. That's great. Just one for Mary Ellen, if I could, again, on the guidance, I wanted to just ask you about your net income guidance. You outperformed there pretty dramatically by roughly $2 million, I would say, versus the consensus, yet you maintained the $18 million-$20 million of net income for the year. Can you talk about, one, how much currency has impacted that net income or how much you estimate currency to impact that for the course of the year, and if there are any other factors that would cause this to be substantially lower than the first quarter as we move through the year?
No, actually, currency in this particular case is going to help us just a little bit because as you know, we're naturally hedged in our U.K. operations and even in the remaining operations. We're naturally hedged. We have a slight loss over in the U.K. operations, now we have less of a loss, if you will.
Got it.
The real reason for the same guidance on a non-GAAP net income, Rich, is that we truly believe that we're the leaders in this market. This market is very large, it's under-penetrated, and it's growing very nicely. We find ourselves very nicely positioned, I would say uniquely positioned to capture more than our fair share of the market. We are going to reinvest into our R&D and into our sales and marketing. We're still going to maintain the profitability that we committed to The Street. We're good stewards of the shareholders' money. We have been profitable now for 25 consecutive quarters. We still intend to be profitable, there's a large opportunity out there for us, we need to invest, we're going to continue to invest because we think that's going to continue to help us grow our revenue.
Rich, I can add a little more color to it. I gave our team a challenge because we gave our guidance, as you know, of 6.5%-8% of non-GAAP net income as a percentage of revenue at the beginning or at the end of last year, which actually was about two months ago. The challenge I gave our team is because there was 50 projects or more that they all felt were worthy, they were all on the chopping block outside Mary Ellen's office. We said, "Great, outperform, any extra money we'll find a way to fund." That's generally the tack we're taking. We want to be good stewards of the shareholders' money, we made commitments about 6.5%-8%. We're going to honor that commitment.
Any excess over that, what we're trying to do is plow it into the business we can continue to grow faster and faster.
That's helpful color. Thank you both.
Thank you. Our next question comes from the line of Nikolay Beliov from Bank of America. Your line is now open.
Thank you for taking my questions and adding my congratulations on nice results in the quarter. Vik, from competitive standpoint, what are you seeing in the marketplace? If you can specifically comment on what Skype for Business is doing out there and maybe Cisco and Avaya.
Yeah. Look, the good news is, as I think you and I have talked, Nikolay, I actually find the fact that we have bigger people entering the space heartening because too many times I have heard people keep describing a market as huge, but if large competitors are not paying attention to it, then is it really real? This tells me this market's real because one of the largest on-premise vendors, Cisco, is now talking about moving into the cloud, and they are the incumbent. When the incumbent says the future is along the lines of what 8x8 does, I view that as massive validation. Skype for Business is interesting. If you think about it, they're going through some of the challenges that we predicted, which is the idea that they have to now evolve from a peer-to-peer network to cloud. They got to build data centers.
They cannot be tied to Azure platform because it's not necessarily a pure real-time platform. They got to have localized data centers. They've got some work to do. We like to think we are ahead, and we like to think what we have is pretty differentiated for everybody, and we're building out this global communications platform that we think is going to be second to none. We haven't seen them yet, but I always operate on paranoia that others will come, but I like to think we have a lead, and our intent is to grab that and keep driving.
What about other players in the marketplace? Any changes there?
No. Look, there are different competitors. I like to think our strategy is working. I wish everybody well until they compete with us, in which case I wish them ill. I want everybody to do well because it's a big market. If you add up all the players in this industry that are providing a cloud-based service and getting revenue from cloud, it probably adds up to a little over a billion something dollars in a market that is $50 billion. From that perspective, there's room for a lot of different players. My goal is to ensure that we're at the top. We keep driving. Again, our target focus is mid-market and enterprise. I think, Nikolay, you've known us for a while.
My management team has a general view that I can only see all the things that we are doing wrong and never what we've done right. We almost had a séance a few weeks ago where they were telling me to reflect on how far we've come. We came from basically being essentially an SMB domestic play to having 52% of our revenue now coming from mid-market and enterprise. That is growing 44% a year. Some very good things are happening. I think that's the market. The mid-market enterprise being able to provide that globally. The fact that we're building out this differentiated communications platform that we will then start to expose all the APIs on, we think is the winning formula.
Thank you. My last question is around analytics. If you can give us maybe a little bit more color, what % of the install base do you think analytics will be applicable to in the long run? What type of ASP uplift you're seeing? Maybe if you can just give us a sense of what are the most widely used cases right now on the product.
We are seeing it particularly for the larger customers, and they use them in different ways. The IT may use it to basically have a global IT that can look at the global health of the network and performance of voiceover IP all over and set the appropriate SLAs. Global IT networks like that, so that when somebody calls and says, "Hey, something's not working," they're able to point out, "Hey, it's your network versus something else." That's one. We're seeing an increasing trend, and this is what I think is the killer app. We had version 1.0 of that, which is people using it to look at how many calls did I get? Who called? When did they call? How long did it take my people to respond? How much time did they spend on the phone? How many voicemails were left?
All of that kind of call detail record and the ability to do that for individuals spread globally by managers offsite is starting to become an increasingly part of the operations of our system. As part of that, we'll be introducing this line of business product in our Q3 timeframe. Fiscal Q3, which is between the October-December timeframe, which allows, for example, a sales manager to get an idea of what their best-in-class salesperson is doing, what their worst-in-class salesperson is doing, how many times are they updating CRM, is every interaction being updated on CRM? It takes essentially analytics and then ties it very tightly to CRM and basically then allows you to be not just a monitoring function but also a compliance function. We see that evolution happening next. As an ASP, we see it add probably 5% or so to the larger customers.
It's not widespread for our smaller customers, because I think they don't necessarily need the analytics per se, but the larger customers tend to kind of want the analytics, and they need the analytics. From that perspective, we're seeing good uplift for our mid-market and enterprise customers. As they become a bigger and bigger part of it, over time, I think it's going to become table stakes. As I told you, this line of business, I believe, is going to be the killer app because that becomes not just a monitoring function, which is important, but a compliance function where you can ensure that every salesperson updates CRM in a certain amount of time, and if they don't, you get pinged. Those are the kinds of applications we start see coming out.
Nikolay, you're seeing that in our ARPU as well. Total ARPU moving from $385 last quarter to $399 this quarter, year-over-year, $352 to $399. Significant increases in our ARPU. Looking at the mid-market ARPU, going from $3,800, first quarter of fiscal 2016 versus $4,200 in the first quarter of this past quarter. Significant increases in ARPU, and a lot of that is being driven by analytics. Now we think that will continue to be driven higher with our new virtual meeting and video conferencing system as well.
That was all very helpful. Thank you.
Thank you. Our next question comes from the line of Catharine Trebnick from Dougherty. Your line is now open.
Thank you for taking my question. I have two. One is on towards the January, February time, there was a lot of concern on Microsoft Skype for Business, et cetera. Are you seeing them in the marketplace? Are they at all a competitive threat? If they are, do you see them more in the large and mid-market or more on the SMB side?
I mean, we haven't seen them yet. I would have thought they'll definitely go after some of the really giant deals, is my sense, and I think they'll go after the smaller deals, because in essence, it can become essentially a bundled offering along with Office 365, et cetera. In our sweet spot, we have not seen them.
Have you seen competitively, would you say, do you see still are on the mid-market, are you still maybe replacing more legacy IP-PBXs, or would you say when you go to the deal, is it some of the cloud providers too you see at the table?
We'll see different people at the table, but more often than not, the incumbent is the legacy PBX. It's amazing how much legacy PBX is out there. I think you know some of the common folks we've been dealing with, but you see legacy PBX across the board, and that opportunity to replace them is wide open because I don't think legacy PBX can compete anymore.
One question, just I'd like to get your opinion. This whole UCaaS and contact center, we've had a renaissance back in the '80s and '90s. I guess I'm dating myself. I wasn't around in the '80s, but in the '90s. Everything was sold integrated, then you had IP and then SIP trunking, and now you see this renaissance where it's more integrated. I guess I'd like to get your thoughts on the direction and how well you feel comfortable competing against more of some of the pure plays with your contact center solutions.
I mean, we're getting there. I think the classic example is Microsoft. If you were to look at it, Microsoft Office as individual items probably did not compete that favorably. I think WordPerfect will still maintain WordPerfect is a better word processor than Microsoft Word. I think if you look at the two relative market caps of those two companies, you can tell whether the suite won or whether the best-of-breed solution won. I see the exact same thing happening in communications. In essence, people first and foremost say, "Okay, give me an integrated solution." Then they look at the contact center and say, "That's good enough." The more bells and whistles you can add, that gives you gravy. They look for the fact that it's an integrated solution more than they look at, I want the absolute best of breed.
That's the bet we made, and we're seeing it pay off in spades, as you can see with our results over the last year and so.
Yeah, what 20% of your business now would you say related to the contact center?
About 20%, give or take.
All right. Yep. Thanks.
Thank you. Our next question comes from the line of Mike Crawford from B. Riley & Co. Your line is now open.
Thanks. Regarding the analytics that you're going to come out to help differentiate line of business , are you organizing your own enterprise sales channels along geography or line of business yourself?
No, what we are finding is it's that same concept that Catharine just talked about, this concept of an integrated platform. We can provide you with global telephony. We can provide your contact center business unit with our contact center software. Oh, by the way, if your sales team is out there, we can help provide this line of business application for your sales team that basically can monitor your sales team's performance as well as help them comply with the directives that management has and/or other compliance elements that are necessary. For us, it's going to be the exact same team, exact same channel, and that's a fundamental element of the way we run our business. I think we've talked about it.
I'm not a big fan of this. You have three different sales team to sell three different products to three different players. You have essentially a consolidated sales team, if there's specialization required, you do overlays. That's the same thing that you do with channel. Certain channel need domain expertise to help contact center, great, you provide them with specialists. The core sales team, the core channel, should be the same, they should be able to sell the same product, because otherwise you have very little synergy. That's essentially the way we run the business, that's what we intend to do with line of business application.
Mary Ellen, back to the model. With the additional engineers being hired in Romania and then the expansions in Brazil and Philippines and Romania, are we seeing then sales and marketing bump up $2 million a quarter from where you are now, and in then R&D as well? Is that kind of the delta in the model to bridge your guidance?
That's correct. We will, in fact, continue to invest in R&D. We're having very nice success with our Romanian team. It's an agile team, and we're having very good success in our Romanian team. As well as Vik had mentioned in his script, we're having very nice success in the U.K. with our DXI team. They're focused on the UI/UX, and we have a strong design team there. We will continue to invest where we see the programs working. From a model perspective, I think you can look at the same model that we provided last quarter. On a non-GAAP basis, we would grow our R&D to, right now we're a little bit below 10%, and we'd like to see that at least at 11%.
I would expect that our sales and marketing, right now it's 49% on a non-GAAP basis, but 50-ish percent, 49%-50% in that category. The G&A, I would still say, would be about nine percentage points. Certainly R&D and maybe we'd bump up the sales and marketing. It all depends. We look at each and every project. We do an ROI. We decide how we want to spend our money. We know how much we want to deliver to the shareholders, and then we make our decisions on the projects. Some of them will be R&D projects, some of them will be sales and marketing, maybe sales and marketing moves up to 51%. I think we're still staying pretty consistent with where we are from a model perspective.
Okay, thanks. Just final question is, are there any thoughts about ever trying to bring network as well to be a network provider as well as these suite of services?
No. When all is said and done, we are essentially an application. We run on top of the core internet infrastructure. We are much more around the ability to have. Even though we've got essentially, think of us as a communications app or communications platform running on an overlay of somebody else's third-party internet connection. We don't ever want to basically be providing the network itself. I think even our SIC code is being changed to reflect that. I think we're now classified as a software and a service
Applications company.
Yeah, a software applications company. I think that'll go into effect on July 29th.
As opposed to, a telco or something to that effect. Increasingly, we are becoming reliant, or not reliant, but I think it's one of the greatest advantages we have is third-party network. Network coverage is ubiquitous. Broadband is ubiquitous. Our app runs on top of it, and oh, by the way, you have no hardware per se, with the exception of the phone.
Great. Thank you.
Thank you. Our next question comes from line of Mike Latimore from Northland Capital. Your line is now open.
Great. Thanks a lot. Great quarter, guys.
Thank you, Michael.
Thank you.
In terms of the suite that you offer, in terms of video conferencing and web conferencing, are you seeing kind of consistent growth there, or is there accelerating growth? How much does that be used overall?
Interesting. Yeah, we're seeing more. In the sense, video conferencing has been almost there for I can't remember how long, right? We're starting to see adoption. It's not hockey stick. First people want initially the whole unified communications, the mobile application, we're seeing increasing. Mobile is now becoming ubiquitous. Everybody wants this one number to reach you all no matter the device. That's starting to be huge. We are seeing a decrease in telephones. Desk phones are definitely going down. We're seeing, particularly with the larger customers, video is starting to become more and more interesting, which is why we're making this one-stop shop. Even for us as a company, every Monday morning staff meeting I have with all our global team is on video conference. Normally it would've just been an audio conference call.
We are definitely seeing the beginnings of video becoming more and more ubiquitous as a business tool, as opposed to just, "Hey, I'm downloading this YouTube video, dot, dot." I think that we're at the right stage for video to really become much more ubiquitous.
Got it. Then just in terms of the sales headcount, what, in terms of either absolute numbers or % increases, how much do you think you'll increase your sort of mid-market enterprise sales team this year?
We actually don't release that information as far as what our headcount is. We are, as you know, we're investing in our channel team, we're investing in our enterprise team. We see that there's a large opportunity, we're going to invest where it makes sense. We're not going to necessarily put a stake in the ground and say we're going to go out and hire X number of people and stick to it. We're going to add people as we need them. As long as they're bringing in revenue and hitting their quota, we're going to keep adding folks.
Got it. Okay, great. Then in terms of the office supply deal, I know they're going to use it internally. Will they also be a channel for you guys or is this more of an internal?
Stay tuned.
Okay. All right. Thanks a lot.
You're welcome.
Thank you. Our next question comes from the line of Jonathan Kees from Summit Redstone. Your line is now open.
Great. Thanks for taking my question and congrats on the quarter. Won't add to that. I want to start with a follow-up first. Vik, you were saying that that large customer was one of the original 10. If my count is correct, that's seven out of the 10, the original 10 you talked about, that you won, which is a great ratio. Just out of curiosity and looking at the flip side there, the ones that you didn't win, when you did a deal review, why did you not win it? Was it pricing? Were they just not impressed with that global platform or that one-stop shopping? Just curious about that.
No, I think one kind of changed their mind, and we ended up no bidding, and the other two are still in play, so who knows?
Stay tuned.
Okay. All right. Stay tuned. Used again. All right. Then, second, you talked about the currency impact. Is the international revenue still less than 10% for the quarter? Do you expect that to be the case for this fiscal year?
Our international revenues are approximately 12% for the quarter.
Oh, okay.
Yeah, 12%. There was no currency impact in the first fiscal quarter. Remember, Brexit just happened very recently, the average pound to the U.S. dollar was about 1.43, which was the same as what it was in our fourth fiscal quarter, no impact this quarter. What we're looking at going forward, if you look at 1.4 versus 1.32, that's less than 1%, the impact will be less than 1%.
Okay, I know you had said that you're still seeing strong demand, especially since it's over 10% now, your international revenues. For U.K. and for Continental Europe, you haven't noticed any hesitation, any pause in terms of their buying or their interest in buying?
No. Actually, we have not seen that yet. Now, the good thing is with business communication systems is that everybody needs one, right? In times of slowdown, if in fact, some people say that the U.K. may, in fact, go into a recession, if they do, and if they're looking for cost savings, our business communication systems are a good way to save some cost. Right now, we haven't seen any slowdown.
By the way, anytime people do campaigns, that's good for us because in our U.K., for example, we have the outbound calling capability, which is somewhat seasonal. Whenever people want to do outbound reach-out campaigns, they can leverage people like us. I think we see U.K.'s solid. The biggest surprise to us is the GBP, which again, I'm sure different people had different prognostication. Brexit surprised me a little bit. We had anticipated GBP would be in the 1.4-
Yeah, GBP 1.4
four something. I think we're now modeling it to be a little bit lower than that.
Okay, great. Glad you're taking that into account. Yeah, Brexit surprised a lot of people. Then last question, if I may here. Your Virtual Office Meetings, and saying it's not going to be a hockey stick, but I guess, do you envision it to be something where it's going to be like a VCC, where it's going to pull in sales of Virtual Office and vice versa, where Virtual Office will pull in sales of video, that kind of dynamics?
Typically, we see Virtual Office as the core, which is basically the core telephony, PBX-type functionality, and then you can add on the Virtual Office Meetings, high-definition video, et cetera, on top of it. What we see increasingly more people asking for the high-definition video and the video conferencing and document sharing, et cetera, to be included as part of it. We see a steady uptick, which then results in higher ARPU, that's essentially how we see the market evolving. My big thing is I want to make sure people start to use it because I think once you start to use it, and you use it for a month or two, you're hooked.
Okay.
Virtual Office Meetings, suddenly knowing somebody's facial expression actually matters in every communication. The problem has always been is using the legacy system, you have to futz with this and bring in an IT guy, then he has to stand on his head and connect this cable. If you can do it with one click, where with one click you can go from a voice call to essentially a video call, we can have four, five, six people and it can be mobile or it can be desktop, or it could be your TV in your office, that starts to become really attractive. I think the more we can get this in people's hands, the more I think over time, people will get hooked.
I think the biggest impediment to video, which has almost taken off for the last, I don't know, 10, 15 years, has been the amount that you have to almost have a 10-minute overhead in every meeting to set up the video conferencing, right? If you can make it so it's idiot-proof and even somebody like me or a CEO can set it up without calling up an IT guy, that makes a huge difference, I think that's where we're evolving to.
Okay. Sounds very convincing. I hope that's the case. Good luck with that. Thanks a lot for taking my questions.
Okay, thank you.
At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Vik Verma for closing remarks.
Thank you. 8x8, again, we appreciate all of you taking the time to listen in on today's call, and we look forward to providing updates on our progress at our various upcoming investor conferences. Thanks again.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect.