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Edited Transcript of EGHT earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q2 2020 8x8 Inc Earnings Call

SANTA CLARA Nov 1, 2019 (Thomson StreetEvents) -- Edited Transcript of 8x8 Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Steven H. Gatoff

8x8, Inc. - CFO & Principal Accounting Officer

* Victoria Hyde-Dunn

8x8, Inc. - IR

* Vikram Verma

8x8, Inc. - CEO & Director

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Conference Call Participants

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* Charles Erlikh

Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst

* Erik Taylor Lapinski

Morgan Stanley, Research Division - Research Associate

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* James Dennis Breen

William Blair & Company L.L.C., Research Division - Communication Services Analyst

* Jonathan Allan Kees

Summit Insights Group, L.L.C - MD & Senior Application Software Analyst

* Matthew David Van Vliet

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Michael Joshua Nichols

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Nate Hitchcock

Needham & Company, LLC, Research Division - Research Analyst

* Ryan Patrick MacWilliams

Stephens Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good evening. My name is Roshay, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8x8, Inc. Fiscal Second Quarter 2020 Earnings Conference Call. I will now turn the call over to Victoria Hyde-Dunn, Head of Investor Relations.

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Victoria Hyde-Dunn, 8x8, Inc. - IR [2]

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Thank you. Good afternoon, and welcome to 8x8's Second Quarter Fiscal 2020 Earnings Conference Call. Joining me today are Vik Verma, Chief Executive Officer; and Steven Gatoff, Chief Financial Officer.

During today's call, Vik will begin with business highlights of our second quarter performance. Following this, Steven will provide details on our financial results and guidance. After these prepared remarks, we look forward to taking your questions.

Before we get started, just a reminder that our discussion today includes forward-looking statements about 8x8's future business, products and growth strategies that are pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements as described in our risk factors and our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duty to update them.

In addition, some financial measures that will be discussed on this call, together with year-over-year comparisons, in some cases, were not prepared in accordance with U.S. generally accepted accounting principles or GAAP. A reconciliation of non-GAAP measures to the closest comparable GAAP measures is provided with our earnings press release and PowerPoint presentation deck, which are available on our Investor Relations website.

With that, let me turn the call over to Vik.

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Vikram Verma, 8x8, Inc. - CEO & Director [3]

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Thank you, Victoria. Good afternoon, and thank you for joining us today.

We delivered strong second quarter results with service revenue up 28.5% year-over-year and total revenue up 27.8% year-over-year, exceeding the high end of our financial outlook. These results were driven by our upmarket focus on mid-market enterprise customers, continued strong channel performance, good early CPaaS contributions and accelerating traction internationally. These results reflect the improved go-to-market execution across our business. We have seen solid growth in both direct and channel pipeline creation and good execution by our sales team in all geographies and for customers of all sizes.

Our strategy of owning a single global cloud technology platform enables us to innovate faster to disrupt 4 massive markets: unified communications, contact center, video meetings and now communications platform as a service.

Today, I would like to focus my remarks on 3 topics: bookings performance, competitive environment and platform innovation.

First, total Q2 organic bookings grew 35% year-over-year and reached a new quarterly record. Bookings growth was strong across the board, and our results in mid-market and enterprise were particularly encouraging. Based on these strong bookings and contributions from CPaaS, mid-market ARR grew 53% year-over-year, and enterprise ARR grew 83% year-over-year. Contact center bookings represented about 1/4 of our total new bookings and grew 41% year-over-year. All geographies had strong bookings growth this quarter, but our U.K. business was particularly notable with an excess of 100% bookings growth year-over-year. We closed a number of large global deals, including a record 8-figure TCB deal with more than 30,000 seats.

A significant contribution to our strong organic bookings performance came from our global channel partners. We had several important channel accomplishments this quarter. Channel bookings grew 80% year-over-year, and channel partners were involved in 7 of our top 10 deals. We expanded our channel program to 19 strategic masters, including the addition of Telecom Consulting Group and Converged Network Services Group. Our channel program now has over 900 active partners.

8x8 was honored to be named the Partners' Choice Award - Top Overall Supplier by Intelisys for demonstrating the highest level of excellence, dedication, support and value to Intelisys and its sales partners. 8x8 was also honored with the Top Vendor Sales Award at AVANT Special Forces Summit Europe event last week. We know our channel partners are critical to our ongoing success, and we remain focused on winning together.

Our partners confirm that our fully-owned global technology platform is driving the market to 8x8. A great channel win this quarter is an over 5,000-seat deployment with Indeed, a leading U.S. job search firm with a presence in over 60 countries. They have been experiencing tremendous business growth and were looking for a technology provider that could scale and rapidly deploy solutions to their expanding global offices and replace a legacy, on-premise ShoreTel system. Indeed considered several other cloud providers, and in the end, chose the 8x8 X Series, including Contact Center.

I also want to highlight recent momentum in the government vertical. In the U.K., we secured a 3,000-plus seat win with a local government service, which supports libraries, social services and a local education authority. 8x8 was able to replace legacy systems with 8x8 X Series, including Contact Center.

In the U.S., we have been awarded a place on a cooperative government contract by NASPO, the National Association of State Procurement Officers. This NASPO value point contract for SLED agencies, state, local, education and special districts, empowers 8x8 channel partners to work with these organizations through a simplified procurement process. They are now able to purchase cloud communication solutions, including voice, chat, contact center, video meetings and team messaging directly from 8x8. Early channel conversations indicate that the SLED market is ripe for cloud adoption.

Another contributor to bookings growth was an expansion of more than 20% in the number of new logos added during the quarter. A major driver of this result was the launch of 8x8 Express, our e-commerce offering that provides an easy self-service path for small businesses to instantly move their communications to the cloud. 8x8 Express will be launching in the U.K. in the near future as well.

As a final comment on bookings, I'm delighted to see the land and expand continues to be the norm with our mid-market and enterprise customers as they see immediate value from initial deployments and look to standardize globally. A great example of this is 8-figure TCB deal I mentioned earlier. This customer started with us a year ago with 1,000 seats, and this quarter, they signed for another 30,000 seats globally on the 8x8 X Series platform.

The second topic I want to address is the evolving competitive environment. There have been a number of interesting developments in the competitive landscape over the past few weeks, from a cloud UCaaS vendor linking arms with a legacy provider to a cloud video meetings provider that partners with the same UCaaS vendor announcing a competitive offer in the UCaaS space. We have been asked whether any of these ecosystem changes create headwinds for 8x8's disruption of the $60 billion market available to us. The short answer is quite the opposite. If anything, these changes are accelerating our opportunity. Let me explain why.

First, any time a legacy on-premise provider with a large installed base announces that the future for their customers is cloud, it brings more opportunities to us -- for those of us who are in the cloud to begin with. Any time customers make a change, and moving to cloud is a change, they want a choice. Pushing more customers to change just pushes more customers into evaluations with 8x8. It is increasing the number of add backs that we are getting.

Second, for customers considering a shift to cloud, the benefits of a single cloud platform technology are clear. Do you want a unified data model so you can optimize across your business? Are you confident that your cloud road map is protected from future technology changes? How would you like it if your UCaaS provider changes its contact center partner just after you made a purchase? How can you be sure that your video meetings will integrate well with your communication services? We have a consistent strategy and a consistent technology platform. It helps us when other providers change horses mid-race and when former partners begin to compete with each other.

Third, something else we know is that migrating smoothly to the cloud requires a close partnership between the customer, cloud provider and channel partners. This is what we do every day, migrating customers from Avaya, Cisco, ShoreTel, Mitel and other providers on-premise solutions to our unified cloud platform. There are more than 315 million legacy seats out there, and we have solutions available today to migrate them to the cloud, no need to wait for announcements to maybe turn into a product sometime in the future.

Finally, we can do even more to help these customers successfully move to cloud solutions. This morning, we announced a strategic partnership with 2 industry leaders, Poly and ScanSource. This joint global program named CloudFuel will accelerate the process of replacing legacy on-premise communications infrastructure while ensuring organizations have proven technology to meet all of their needs across unified communications, collaboration and contact center. This is the first time a comprehensive, frictionless hardware replacement and cloud migration program will be offered to the VAR community.

In addition to the agent community, which remains a major focus of our efforts going forward, we strongly believe that VARs are an important and distinct paths to the legacy installed base. The VARs have developed long-term relationships with end customers and continue to serve as their trusted advisers as the world shifts to cloud regardless of the original equipment vendor. Using 8x8's award-winning unified communications and contact center solution on 8x8 single technology platform, along with best-in-class equipment from Poly and an extensive ScanSource network of more than 35,000 resellers, CloudFuel will provide access to hundreds of thousands of customers across the globe. Importantly, this program will allow VARs to continue to sell the way they are used to selling, for the first time, bringing 2 cloud communication services into the VAR model in a natural way. This offering includes the full range of 8x8 X Series and stand-alone solutions and will leverage frictionless migration to and deployment services. 8x8, alongside our partners, intends to invest in this partnership through various forms of incentives, equipment buyback programs, joint development funds, dedicated resources and migration tools. Since the product exists today and the ScanSource sales team are already familiar with 8x8 Solutions, we will be able to begin selling under this program in December. This is a game changer for the industry, and we are honored to partner with both Poly and ScanSource to help accelerate customers move to the cloud.

The last topic I would like to highlight is the accelerating pace of innovation on our single cloud platform. Since we own the technology and have built it into a single platform, we can now innovate much faster than ever to deliver the future of business communications. Let me touch on a few recent high points.

In September, we launched 8x8 Video Meetings, a completely reimagined meetings solution available for all X Series and Express customers and provided complementary as part of their service subscription. We have received very positive early customer feedback and recently rolled out 8x8 Video Meetings to all classic customers as well.

We are also working with early access customers and videoconferencing equipment partners to launch our 8x8 Meetings Rooms solution. The goal is to bring easy video collaboration to every huddle and conference room space with an intuitive interface and smart pairing technology to connect to devices. This will be yet another opportunity for our partners and especially our VAR community as many businesses prefer to have on-site installation handled by a reseller working directly with their cloud communications provider.

Next month, we will also be launching a stand-alone 8x8 Video Meeting service for new customers. This new stand-alone service allows users to easily schedule, start and join audio and HD video and audio conferencing from any device or room without the need to register or download software. 8x8 Video Meetings will provide personalized meeting IDs and meetings rooms, screen sharing, remote keyboard and mouse control, host and participant collaboration tool and meeting control for all participants, and it will support meetings of any duration. In this initial phase, we plan to offer video meetings free to new customers to encourage adoption. The natural expansion opportunity is to then sell those customers softphones, voice, chat or contact center solutions via our X Series offerings on the same platform.

Turning to CPaaS. I'm pleased that integration of the Wavecell acquisition is ahead of schedule. In fact, we have seen cross-sell opportunities in both directions materialize faster than we expected. We are in discussions with several large 8x8 customers in both the U.S. and U.K. who are interested in leveraging CPaaS APIs to customize and extend our voice, chat, video and contact center capabilities across their businesses. This is in line with our strategy of tightly coupling CPaaS capabilities with our prepackaged contact center solutions to enable a new level of customer engagement. As we discussed when we've announced the acquisition, this customization further increases both customer value and stickiness, which is why the land-and-expand part of our market becomes such a huge opportunity for us in our installed base.

We also continue to sign exciting new CPaaS customers onto the platform such as one of the fastest-growing global hospitality companies with over 23,000 locations in over 800 cities. This customer is using our platform to differentiate and enhance their customer experiences with messaging that provides directions, booking confirmations, cancellation and payment services.

Finally, I am pleased to highlight industry recognition that further validates 8x8's leadership. 8x8 was named a leader in the 2019 Gartner Magic Quadrant for Unified Communications as a Service worldwide for the eighth year in a row, unique in our industry. We were also named a challenger for the fifth consecutive year in the Gartner Magic Quadrant for Contact Center as a Service, North America. Also, 8x8 was named the 2019 Best Cloud Communications Provider by UC Today, which recognizes organizations that have proven market success and continue to push the boundaries of innovation. These awards speak to the success of our strategy of innovation and how our single cloud technology platform helps companies to transfer communication and unify the needs of a global mobile workforce to enhance productivity for both employee and customer engagement. Overall, approximately 32% of our installed base is on the 8x8 X Series platform, up from 26% last quarter.

In summary, I am pleased with our Q2 results. Our cloud technology platform and go-to-market execution are driving strong results across our business. We see more customers turning to cloud and looking to us for solutions that are available today.

We're excited about CloudFuel, our partnership with ScanSource and Poly. I'm excited about the accelerating pace of innovation on our platform. Building on this momentum, we look forward to the second half of our fiscal year.

I also want to take this opportunity to thank our 1,800 global employees for their hard work and dedication as well as our customers and partners for their continued loyalty and support.

On to Steven.

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [4]

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Thanks, Vik. Good afternoon, everyone.

Let me start first by reviewing the financial results for Q2, then I'll discuss our outlook for Q3 and the remainder of fiscal 2020. We'll wrap up, of course, by opening the call to your questions.

Starting with our Q2 financial results. We executed very well across a number of fronts and a strong demand environment for the 8x8 cloud technology platform. Our differentiated and multiproduct growth platform is now bolstered with very strategic CPaaS capabilities and is centered around our focus on improving our go-to-market execution and driving operating efficiencies. All of these elements came together in Q2 and generated solid financial results and a compelling path forward.

Total revenue for Q2 grew to $109.5 million, up 27.8% year-over-year. Service revenue came in at $104.5 million, an increase of 28.5% year-over-year. These top line results exceeded the high end of our guidance and were driven by 4 primary factors: one, strong execution in our go-to-market initiatives, particularly around pipeline generation and continued strength with our channel partners; two, execution with mid-market and large enterprise customers; three, strong organic bookings growth of 35% from our UCaaS and CCaaS business across both new and existing customers; and four, solid contributions from our CPaaS offerings that includes the Wavecell acquisition. This drove execution across geographies, customer sizes and product offerings. More data points with our investments in pipeline generation activities and the channel are continuing to take root and drive sequential organic growth.

With that, I'd like to briefly address our continued growth in ARR, where total ARR came in at $390 million for the September quarter, a solid 34% year-over-year growth. This came from a combination of solid organic growth in our UCaaS and CCaaS business and contributions from our CPaaS offerings. A meaningful driver of Q2 ARR growth included closing 30 new deals in the quarter that had ARR in excess of $100,000, and that represented 41% of new bookings, up from 35% in the prior year. In total, we had 536 customers generating ARR greater than $100,000 in Q2, a strong 61% year-over-year growth.

And so far as ARR by customer size, we saw another quarter of solid sequential growth in Q2. ARR grew above market in small business at 18% year-over-year, 53% growth in the mid-market and 83% year-over-year growth with our enterprise customers. Combined mid-market and enterprise ARR grew 63% year-over-year, up sequentially from 39% in Q1. We continue to focus on mid-market and enterprise customers that drive higher lifetime value and lower churn.

Turning to Q2 operating expenses. The key takeaway is that we delivered on our operating efficiency improvement that we committed to, both in total and on an individual line item basis. Non-GAAP sales and marketing expense improved to 46.9% of revenue in Q2 from 51.2% in Q1. R&D improved to 13.5% of revenue in Q2 from 15% in Q1, and G&A improved to 12.8% in Q2 from 14% of revenue in Q1.

Finishing things out on Q2. Non-GAAP pretax net loss for the second quarter was approximately $15.8 million, better than our guidance and driven by both revenue outperformance and OpEx efficiencies.

With that, let's turn to our financial outlook for the rest of the fiscal year. We continue to gain traction and execute on the channel as we are displacing on-prem legacy systems with more momentum. Our UCaaS and CCaaS offerings are being bolstered with a very strategic and high-growth CPaaS technology and capabilities from our expanded open API framework, and we're actively engaged with new and existing customers on numerous fronts. As stated in this morning's announcement, we're aggressively going after the on-prem UCaaS space to provide our unique and compelling single technology platform offerings to this untapped market.

As you just heard from Vik, we partnered with ScanSource and Poly, key players in this space and the ones who actually have direct access to and own the customer relationships to deliver a unique and compelling value prop to the VAR community.

To drive our readiness, go-to-market launch and accelerate custom migration tools with this new partnership, we're making a onetime investment of approximately $6 million to $8 million over the next 2 quarters, that's Q3 and Q4 fiscal 2020, in 8x8 migration tools, marketing campaigns, training and enablement activities and deployment services. This investment speeds our execution of bringing legacy Avaya, Cisco, Mitel and other on-prem solutions -- customers, rather, onto the 8x8 platform. It's important to reiterate that this spend is nonrecurring. It should not be baked into our run-rate expense profile exiting fiscal 2020, and it does not change our path to profitability that I'll cover more in a moment. This strategic partnership and our conversion of legacy on-prem accounts to the 8x8 platform is another data point on why we're bullish on both our continued bookings and revenue growth and our ability to drive operating efficiencies.

Pulling this together, we're establishing our guidance for Q3 fiscal 2020 as follows. We anticipate total revenue to be in the range of $113.5 million to $114.5 million, representing 26% to 27% year-over-year growth. We anticipate service revenue to be in the range of $109 million to $110 million, representing an increase sequentially year-over-year revenue growth of 27% to 28%, and we anticipate non-GAAP pretax loss to be approximately $16.5 million.

Looking at the full year fiscal 2020, we are raising our previously issued revenue guidance. We anticipate total revenue to now be approximately $440 million, representing 25% growth over fiscal 2019, and we anticipate service revenue to be approximately $422 million or 26% year-over-year growth. On non-GAAP pretax loss, we're adding $7 million of nonrecurring expense to our existing guidance of $53 million for investments in support of our new ScanSource, Poly partnership. That brings our full year fiscal 2020 non-GAAP pretax loss to approximately $60 million.

In summary, we're very pleased with our revenue, ARR and operating expense performance in Q2. We saw strong combinations and contributions from our mid-market and enterprise businesses, and the channel overhaul that we drove at the beginning of the year continues to perform and show momentum.

We're equally encouraged with the trajectory that we're on that's both driving and benefiting from continuing revenue growth acceleration and operating efficiency improvements. We continue to follow our path to profitability, and we're on track to achieve non-GAAP breakeven exiting next fiscal year-end, March 2021, as we previously communicated. We remain well positioned in the $60 billion cloud communications market as a leading provider of voice, video meetings, chat, team messaging, contact center and an enterprise grade API platform.

We expect to continue winning business from legacy on-prem solutions, and we continue to differentiate ourselves from other cloud providers.

With that, we appreciate your support, and we'll now open the call for any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question on the line, Meta Marshall with Morgan Stanley.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [2]

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This is Erik on for Meta. Maybe just to start you off with tough one, and congrats on the quarter. But just taking a look at gross margins, can you help us better understand what drove the sequential decrease, whether it was the growth in larger deals or the contribution from CPaaS or just anything that will help us get a better sense of the driver there?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [3]

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Sure. Sure. Thanks. It's really 3 things in almost equal measure. One, it was what you said, which was the contribution from the CPaaS product offerings that have a little bit lower margin profile, and the revenue on that piece of the business outperformed a bit more, so we had more of that revenue.

Two, we have been off-shoring some of our cost structure both on a COGS basis as well as on the OpEx side, and we had a little bit of a delay, probably a 30-day delay, on moving some of those off-shore. We've since done that, but that contributed to a little bit higher cost structure.

And then third, you probably saw also that we had some nice growth in product revenue, and that comes with a little bit lower margin -- gross margin.

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Erik Taylor Lapinski, Morgan Stanley, Research Division - Research Associate [4]

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That's helpful. And then just on the smaller end, is there anything you're seeing around kind of increased pricing competition, particularly as some newer competitors may be entering the market? Is there anything we should be mindful of there?

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Vikram Verma, 8x8, Inc. - CEO & Director [5]

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Yes and no. So the no part is e-commerce actually, which we launched around July time frame, has performed much better than expected, and that's for the 1 to 9 seats, which is completely self-service and completely automated. So you can order, provision and get support, et cetera, and it's completely automated and a limited amount of effort involved. And that's priced in the, I think, $1,299 or so range. So the idea is that, I think, has given us a huge competitive edge because, for us, that's a very attractive entry point because, in essence, you're not using any salespeople for that. It's completely e-commerce. So that's addressed that lower end of market, and frankly, that drove quite a bit of new logos, which over time are upgrading to X Series and others. We saw a 20% sequential increase in new logos, and e-commerce was a key contributor. And keep in mind, it was only on for 2 months of the quarter.

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Operator [6]

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Your next question in the line of George Sutton with Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [7]

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Vik, I wondered if you could walk through the uniqueness of the go-to-market with the Poly and ScanSource. And I ask it in this context, they obviously have other partners. I actually spoke with a couple of Poly salespeople today. They really couldn't explain what was different. So I'd love you to walk through that if you could.

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Vikram Verma, 8x8, Inc. - CEO & Director [8]

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I highly recommend you reach out to Joe Burton, and he should, he's the CEO of Poly, and he should be able to explain because he is very excited about the partnership.

So let me kind of address it at a macro level. The macro level is we obviously have had a lot of luck with the agent community and the master subs, and we continue to expand and accelerate that.

What our learnings is, is that in -- for the legacy on-premise guys of VARs, have a lot of the relationships and frankly most of the power.

ScanSource is Avaya's, I believe, largest distributor and has approximately 35,000 resellers. And in the neighborhood of 10 million to 20 million seats are controlled through Avaya VARs, or through ScanSource's VARs who basically sell Avaya equipment. So they have all the knowledge of the customers.

Poly and ScanSource and us, Poly is going to make a program available through this program called CloudFuel, where we will be able to subsidize the move from Avaya phone. Some other folks have basically said they will try and support obsolete Avaya phones. We'll be able to basically provide a modern phone, and Poly will subsidize that and create a buyback program.

ScanSource will basically enable and train their VARs to be able to sell a cloud offering, and we will have a wholesale relationship with ScanSource and's we will train ScanSource which will then go out and train their VARs.

The reason this is interesting is, it comes down to the fact, as you know, the traditional telco market has been controlled to a large degree by VARs, and they are used to providing value-added services to their end user customers. This allows them to sell exactly the way they have been used to selling. And because we have one unified platform, they can start with UCaaS, but they can also sell contact center, they can also sell meeting rooms, which provides opportunities for value-added services and makes them hugely relevant. So for us, we think for a fraction of the investment of anybody else, we have gotten to the VARs who control the end users which -- as opposed to the original equipment manufacturer. That's why we think this is such a great deal, and it's been a long time in process.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [9]

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Great. I wondered if you could also walk through the 30,000-seat deal, which is a significant size deal. How did that come along? How did that migrate from the 1,000 seat? Just wanted a sense of how replicable this is over time.

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Vikram Verma, 8x8, Inc. - CEO & Director [10]

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A key element of our business is land and expand, and one of the key things is we deployed approximately 1,000 seats primarily in North America. And they we're very happy with the service, and they've expanded it globally, and it's about 30,000 seats. It's a very large company, and they're using this essentially to do a complete transformation of their entire business. We started off essentially with a local office here. Headquarters heard about it. We rolled it out to headquarters. Headquarters loved it. They rolled it out everywhere, and that was the key. And so it's -- this is the great idea for SaaS business, but more importantly, also the concept of one unified platform. Once you're able to go and provide one set of services in one geography, you're able to add additional services and you're able to add everything from contact center to meetings to whatever. And in this particular instance, as I said, we started off with a local office in the U.S. and expanded globally, and 30,000 seats is probably the largest initial order we have ever had.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [11]

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That's a great deal. One thing for Steve, if I could. Did you give the Wavecell revenue impact in the quarter?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [12]

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We haven't. We didn't break out that product line consistent with how we don't break out the others.

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Operator [13]

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Your next question, in the line of Ryan MacWilliams with Stephens Inc.

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Ryan Patrick MacWilliams, Stephens Inc., Research Division - Senior Research Associate [14]

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Congrats on the quarter. Just one question for me today. Looks like Contact Center sales and bookings have been picking up. Is there anything in particular here that are resonating either with the channel or direct sales force?

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Vikram Verma, 8x8, Inc. - CEO & Director [15]

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Yes. Two things. So one, I want to emphasize this part, from top to bottom. Total bookings, which is not a metric we have traditionally disclosed, but the reason we chose to disclose it is we wanted to give you guys a sense of the core health of the organic business, 35% growth of the organic business in terms of total bookings and the total new bookings. And this is from one seat all the way up to 30,000 seats.

Second, Contact Center represented about 1/4 of that total bookings, and that grew 41%.

So what it's telling you is we were relatively late into the contact center, and our contact center has been growing up. What it's starting to tell you is both as combo deals as well as stand-alone contact center starting to come into its own and now represents about 1/4 of our new bookings, and we see that accelerating. I mean it's obviously growing faster than the overall total bookings of the company.

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Operator [16]

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Your next question, in the line of Matt Van Vliet with Stifel.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [17]

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I guess, first, I wanted to dig in, in terms of what the early reaction has been to the new video meetings product and how you're going to position that from the go-to-market perspective when it's more generally available.

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Vikram Verma, 8x8, Inc. - CEO & Director [18]

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Got it. So I'll break it into 2 parts. So the meetings solution is -- initially, what we did is we offered it to all of our X Series folks as a complementary basis. And actually, it was a good reaction there. Because I think the view is it's very comparable to be industry-leading. It's high definition. It's WebRTC, so you can actually enter from a web browser without having to download an app. You have all of the basic, participant control, content sharing, high definition, and obviously, we are well known for voice. So across the board, the reaction is good. We then rolled it out to all our classic legacy users as well, so that everybody had access to meetings.

Our initial -- around middle of November is when we will be launching our stand-alone meetings product. The stand-alone meetings initially will be provided free, where you literally will be able to get into a website, not even have to register and get involved and start using it. There will be no limits in terms of the meeting duration. And the key goal for us is to drive adoption. That's the #1 goal for us. Remember, for us, it's all about the platform. Meetings is one part of the platform. Meeting then gives us a very logical way for us to upsell softphones, voice, contact center, et cetera to that customer base. And then over time, we'll continue to add more and more features to meetings and make it, as I said, even more valuable.

But the part that I think you will find when you do a comparison between us and all of the various other meeting products, and we'll make sure that you guys have all of this information mid-November, you'll get a sense what we've got is very close to the top of the line in the industry.

Second part is we have also launched an early access to meeting rooms. This is conference rooms. And the thing that is unique about us is we are able to leverage essentially commodity hardware. So you can use a TV, you can use an iPad, and you can use simple cameras. And now you've turned yourself into a complete high-definition conference room, and you can have these conference room meetings where you can do one touch. We did early access for a few key customers and a limited number of VARs. There has been a lot of excitement about that, particularly amongst the VAR community because they view this as an opportunity to go in and create conference rooms for all of their customers where they'll go in and they'll install the TV and the cameras, et cetera, and we provide all of the software. So we see big opportunities for adoption there as well, and that one obviously will be a paid service. So this acquisition, we did less than a year ago, and it's been phenomenal for us.

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Matthew David Van Vliet, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [19]

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And then turning to the international opportunities. Obviously, Wavecell opens up a market that maybe you haven't historically been as penetrated in. Curious if you're seeing any early traction in terms of selling your platform into the existing Wavecell customers and any -- or what the pipeline is looking like as you turn to those existing relationships in a cross-sell/upsell opportunity.

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Vikram Verma, 8x8, Inc. - CEO & Director [20]

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That -- actually, as I mentioned in my remarks, we have been actually pleasantly surprised by how quickly their -- or how much demand has picked up both within the Wavecell installed base which -- particularly for contact center. And this is why I think there was an earlier question about contact center coming into its own. There is a huge pool for a lot of Wavecell customers to add contact center because CPaaS and contact center go very well together because, in essence, it's a way of customizing your interactions with customers and enhances customer engagement. We're seeing exactly the same thing happen with some of our largest customers in U.S. and U.K. that have contact center. They actually want the CPaaS added very quickly and to the extent that we are actually accelerating the move of bringing the Wavecell capability into the U.S. and to U.K. And as a matter of fact, we'll have a few announcements over that over the next few months. But the uptick and the tight integration between our contact center and CPaaS has been much more than we anticipated.

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Operator [21]

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Your next question, in the line of James Breen with William Blair.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [22]

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Can you just talk about -- you mentioned that you saw a little better performance in the CPaaS business this quarter. Wondering what you thought drove that. And if you can give any examples of use cases you're seeing as you're talking to customers. And additionally, within that segment, how does that overlap with some of the other offerings?

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Vikram Verma, 8x8, Inc. - CEO & Director [23]

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So I think you were asking for use cases for Wavecell. I mean the -- I think it's more CPaaS, so let's start talking about some of our larger customers. One of our largest customers does everything from bookings of rental units, et cetera. They want to now use CPaaS capability to go in and do the bookings confirmation and send the alerts as well as information of where the keys are, and also they want the ability to know when somebody is geographically in a close enough area so they can go alert the homeowners, et cetera. So that's the kind of applications where people want.

We are -- we gave an example today of a major hospitality chain, which is using CPaaS technology to go in and do everything from directions to being able to basically do billing, all via mobile phone.

And then finally, we're seeing chat applications for contact center. We're seeing that people want to integrate contact center to WeChat, WhatsApp, et cetera. And those capabilities is enabled by CPaaS. And we are finding that, that is what -- and that actually has been an interesting one, where chat applications tightly integrated with contact center is how customers want to communicate with contact centers, and CPaaS enables that. And U.S. and U.K. customers are increasingly focusing on WhatsApp and WeChat and other chat applications as a tight integration into the contact center, and CPaaS enables that.

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James Dennis Breen, William Blair & Company L.L.C., Research Division - Communication Services Analyst [24]

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And you mentioned that growth in that segment was good in the quarter, maybe a little ahead of your expectations. Is it -- they're all coming from existing customers or some of the new logos?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [25]

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Yes. So it's a little bit of everything. It's growth from usage of existing customers, adding customers and adding geographies. So it's really all 3.

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Operator [26]

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Your next question, in the line of Andrew King with Dougherty & Company. No response from Andrew's line. Next question comes from the line of Charlie Erlikh with Baird.

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Charles Erlikh, Robert W. Baird & Co. Incorporated, Research Division - Junior Analyst [27]

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Congrats on the quarter. So with that 35% organic bookings growth, which is really excellent, and continued strong channel bookings as well, I guess my question is, why not raise guidance by more? I mean it seems like those are really strong numbers and kind of wondering how those play into the guide and what we can expect for those bookings numbers going forward.

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [28]

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Yes. Hey, Charlie, thanks. So I mean, candidly, we're very pleased with the quarter. We're pleased with the trajectory. We like what we're seeing. And candidly, we're one quarter out on really growing the CPaaS business organically and inorganically both. And we are just playing it candidly very thoughtfully and watching as things go, and no one wants to get out over their skis and be silly about managing expectations internally or externally.

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Vikram Verma, 8x8, Inc. - CEO & Director [29]

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And I'll add one more. I mean as you think about it, I don't know what your thoughts are, but the currency has been quite fascinating because we had this beat this quarter despite some currency fluctuations, and you're seeing all of that happen all over the world. So from that perspective, we feel pretty comfortable with the guidance we have provided.

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Operator [30]

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And your next question, in the line of Rich Valera with Needham & Company.

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Nate Hitchcock, Needham & Company, LLC, Research Division - Research Analyst [31]

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This is Nate Hitchcock on for Rich. Just want to look at contact center a little bit more. So I know last quarter, you guys provided metrics regarding 30% of MMA and enterprise bookings were stand-alone and then stand-alone CCAR was up 35%. I was wondering -- I know you gave the 24% of total bookings metric for this quarter, but I was wondering if you could provide any additional context there. And then, yes, we'll start it there, I guess.

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Vikram Verma, 8x8, Inc. - CEO & Director [32]

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Yes. So I mean the point I would make is strength across the board. I mean, the reason we provided -- if you think about it, mid-market and enterprise bookings is approximately, I can't remember, 60-odd-percent of our bookings. We said, contact center this quarter was approximately 25%, 1/4, of our total bookings.

Contact center is now starting to permeate every segment of the market, all geographies. That's great news for us. Because that basically says that, that one platform that we are coming up with applies to every segment that we go after. And total contact center SKUs grew essentially by 41%, so faster than our total bookings. So I mean I can't be more pleased with contact center. It tells you that the investments we have made in contact center over the years are starting to bear fruit, and it also gives you a sense of the strength of our model.

Because we have one platform, that one platform has essentially a PBX replacement, it has meetings, it has contact center, it has APIs and it has the ability to do collaboration. And so when you add all of those things together, we are able to mix and match different things. And each of these things has different growth rates that we can leverage, and we are able to be flexible so we can partner where we need to. And we are not this one-trick pony, where, oh, by the way if somebody enters this particular market or somebody starts to compete in that particular market, we're stuck. We're able to move around, and different parts of our portfolio grow and add value to different customers.

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Nate Hitchcock, Needham & Company, LLC, Research Division - Research Analyst [33]

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Okay. Great. So then I guess switching gears a little bit, looking at more into the 8-figure TCB deal. So I'm thinking about how the rev rec for that deal and how to look at that. And if you can provide any additional context around the duration or anything there, that would be really helpful.

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [34]

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Yes. The duration is pretty consistent with the enterprise contract in the 3-year ZIP code. And it's a SaaS model, so there is no magic, and so far as rev rec begins basically being taken on the subscription piece ratably. It does include some amount of services obviously, but the subscription portion kicks in immediately.

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Operator [35]

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Your next question, in the line of Jonathan Kees with Summit Insights Group.

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Jonathan Allan Kees, Summit Insights Group, L.L.C - MD & Senior Application Software Analyst [36]

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Great, and my congrats also to the numbers. I wanted to ask about the new partnerships with ScanSource and Poly. You guys talked about the training and the investment that you're going to make in terms of getting the resellers, getting the partners up to speed in terms of the 8x8 solution and even, I guess, purchasing some of the old Avaya phones. I guess on that tenor, what's kind of financial incentives are you providing? Or are you for like ScanSource resellers to sell your solution versus Avaya's new cloud partner?

And also for Poly, I noticed that video was not there in terms of the partnership. If you have customers asking for video, what happens there? And is there also a financial incentive there for Poly to sell your solution versus someone else's?

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Vikram Verma, 8x8, Inc. - CEO & Director [37]

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Yes. So a couple of things. So let's macro it up. We don't fully understand, and I think neither do ScanSource or Avaya resellers, as to exactly what the other offering is. There seems to be quite a bit of confusion, and it's unclear who's paper it's being sold on.

What the main model that we are doing and the reason ScanSource came to us and Mike Baur, Joe Bolton (sic) [Burton] and I have been spending some time on this, the idea is, ScanSource believes that their VAR community wants to be able to sell the way they are used to selling, and they feel like that has been disrupted right now with some of the changes in the industry. The way they're used to selling is essentially on their paper, essentially buying wholesale from the original equipment manufacturer and then selling it on their paper and providing value-added services. That is not the model that is being currently contemplated by some of our competitors.

So the way we're doing it is, because we own the entire platform, I have everything from voice, video, contact center, collaboration, data analytics all built into one platform, we have also spent a lot of money over the years on biz apps tools. And the idea is we've created something called PartnerXchange, where a distributor or a VAR can buy essentially wholesale from us, and then on their paper, provide a quote to their end user customer, and everything gets provisioned instantly. So you get the benefit of cloud. So literally, the moment they place an order with us, it gets instantly provisioned for the end user, but the VAR is providing it on their paper. From our perspective, we love it because, in essence, the VAR has a level of customer intimacy that we do not have and nor can we ever recreate it because it's years and years of time and energy. And so it is a frictionless way for us to ensure that we get much more add backs.

And again, that's why I said ScanSource as a distributor. ScanSource, I believe, is Avaya's largest distributor and has tens of millions of end users or seats, Avaya seats, that are controlled through their VAR channel. Their VAR channel has been clamoring for a solution that they can resell and provide value-added services, where logical value-added services you provide is on contact center. You provide it in huddle rooms and meeting rooms. These are all capabilities. So the training that we're doing is basically ScanSource is setting up training centers, which they do as part of their current on-premise business but then they'll with migrate to their VAR business, where they will train all of their VARs, enable all of their VARs, create the collateral material to help their VARs go to end user customers.

So it's a new way to go to market, but it's using the traditional way that VARs have been used to selling. And the big misnomer has been that the original equipment manufacturer does not have control over the customer. The VARs have control more often than not because they are the trusted adviser, and we're enabling VARs to sell the way they're used to selling. We think the way we are moving about it, we obviously monitored the Avaya deal for quite some time and obviously had some thoughts on it, but we felt this was a better way to go to market because we felt that the real power was with the VARs.

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Jonathan Allan Kees, Summit Insights Group, L.L.C - MD & Senior Application Software Analyst [38]

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Okay. All Right. That certainly makes sense, Vik. Next question is for Steve. I get what you're saying in terms of you don't want to disclose Wavecell's revenue contribution. But can you at least talk about the growth -- year-over-year growth for the CPaaS business?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [39]

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Yes. It was really strong, north of 50% for sure. And candidly, as we get more time in the business and becomes more seasoned, we'll look to provide more metrics on the business as we have. Every quarter, we have come out with additional operating metrics to give people a sense. We're about 90 days in or so, and so we'll definitely provide more. But the business is growing strong, and it's been consistent with what we've seen and what people have known us out there, and so it continues to perform well. No surprises in either direction.

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Operator [40]

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(Operator Instructions) Your next question, in the line of Josh Nichols with B.Riley FBR.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [41]

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Since the Q is not yet -- could you just give me a breakout for the revenue split between U.S., U.K. and APAC?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [42]

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The Q will be out tonight most likely. It may hit tomorrow. Generally speaking, the revenue contribution, which is different than our bookings contribution, right, for example, revenue out of -- outside the U.S. is in the 15% ZIP Code whereas it's roughly 25% of our bookings.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [43]

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Okay. And you said -- so historically, like last quarter, like U.K. has been 10%, right? But you're saying now revenue from outside the U.S. is 15%, but 25% of bookings, correct?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [44]

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That's right.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [45]

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I got it. And then I guess I just want to get a little bit of a better handle. So Wavecell is growing faster for the CPaaS business. So I guess fair to assume for the margin outlook, is this level of Q2 margin probably maybe going to come down a little bit further since Wavecell or CPaaS is growing faster and there's generally lower margins associated with that business? Is that relatively a fair assumption to think about going forward?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [46]

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No. Not materially. And so we expect the margin profile to increase over time to the extent that the CPaaS business globally accelerates and performs even more. That might be a reason why gross margin could come down a bit, but that's not what we expect.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [47]

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And then do you have any targets -- we used to talk about operating targets for like the common size, R&D, sales and marketing now that this acquisition has been done. What you're thinking for the 3Q or as we look a little bit a few quarters out for what those targets may be on a percentage basis?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [48]

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So we have not laid out specific numerical targets, but we have communicated and committed to and candidly delivered in this quarter and expect to continue to deliver is improvement on our operating efficiencies. And so the whole notion of business model efficiency on the OpEx line for all 3 areas, sales and marketing, G&A and R&D, is something we delivered in Q2, and we expect to continue to see efficiency improvements through the year, through each quarter. Not every line item, every quarter, a big improvement. But net-net, it should improve, and most line items should improve as we continue to move forward.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [49]

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And then just trying to guide back towards -- from the GAAP to non-GAAP, like the add back items must have increased a lot, and cash burn has kind of accelerated hitting a peak of like $36 million, it looks like free cash flow for this quarter on the burn rate. Is that fair you're probably going to expect to see like this $25 million level of add back items going forward once you factor in the amortization, D&A, stock comp and all the other items? Is that a fair run-rate?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [50]

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Probably a fair run-rate on the recurring depreciable base. It shouldn't materially be different next quarter for some of those noncash items.

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Michael Joshua Nichols, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [51]

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And then last question, I just kind of wanted to get a little bit more clarity someone asked before. So understand that the company has been potentially only one quarter with Wavecell, so only taking guidance up modestly for the year. But I'm a little bit surprised given that you had this big 30,000-seat win. That's the largest in the company's history. And then on top of that, you have this new partnership that's going to be launching in another month or so. And you're investing $7 million in that partnership, but you're not really taking revenue guidance up very materially. And just kind of triangulating all those 3, like what's the explanation for that besides just Wavecell and potentially being conservative on that front?

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [52]

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The explanation is that the company has been posting revenue growth in the 18%, 19% ZIP Code for the last several quarters. We committed to growing revenue. We did a terrifically strategic and important product addition to the platform that's generating revenue and being integrated nicely. And we just raised the guidance effectively from -- after delivering a quarter of 28% revenue growth, and now we're guiding to similar levels of revenue growth. And we and our largest stockholders and our Board feel pretty good about that. So we don't have an issue with that.

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Vikram Verma, 8x8, Inc. - CEO & Director [53]

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Right, and I'll add one more on the ScanSource one. ScanSource is enterprise customers. From the time you invest to the time it turns to revenue is a 9-odd-month time frame. As Steven said, we're very comfortable with the guidance, increasingly bullish about the company. Pretty much every geography performed well. ANZ did very well. U.K. had their best quarter ever. Wavecell continues to perform. Contact center is performing well. The concept of one platform is starting to all come together. We just need to develop the muscle of continuing to have solid guidance and keep beating it. And then one quarter does not a trend make, but keep going, and then I'm much happy to keep raising it more.

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Operator [54]

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And there are no other questions at this time.

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Steven H. Gatoff, 8x8, Inc. - CFO & Principal Accounting Officer [55]

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Thanks, operator. Thanks, everyone.

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Vikram Verma, 8x8, Inc. - CEO & Director [56]

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Thank you, everybody.

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Operator [57]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.