8X8 Inc. (EGHT) Q1 2021 Earnings Call Transcript

8X8 Inc  (NYSE: EGHT) Q1 2021 earnings call dated July 30, 2020

Corporate Participants:

Victoria Hyde-Dunn — Investor Relations

Vik Verma — Chief Executive Officer

Samuel Wilson — Chief Financial Officer

Analysts:

Rich Valera — Needham & Company — Analyst

Ryan MacWilliams — Stephens Inc — Analyst

Karan Juvekar — Morgan Stanley — Analyst

James Breen — William Blair — Analyst

Mike Latimore — Northland Capital Markets — Analyst

Tim Horan — Oppenheimer — Analyst

Matt VanVliet — BTIG — Analyst

Charlie Erlikh — Baird — Analyst

Andrew King — Colliers Securities — Analyst

George Sutton — Craig-Hallum — Analyst

Ryan Koontz — Rosenblatt Securities — Analyst

Presentation:

Operator

Good evening. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the 8×8, Inc. Fiscal First Quarter 2021 Earnings Conference Call.

I will now turn the call over to Victoria Hyde Dunn, Head of Investor Relations.

Victoria Hyde-Dunn — Investor Relations

Thank you. Good afternoon, and welcome to 8×8’s First Quarter Fiscal 2021 Earnings Conference Call. Joining me today are Vik Verma, Chief Executive Officer; and Samuel Wilson, Chief Financial Officer. During today’s call, Vik will begin with business highlights of our first quarter performance. Following this, Sam 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 8×8’s future financial performance as well as its business product and growth strategies, including the impact of the COVID-19 pandemic. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from the forward-looking statements as described in our risk factors in our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or duties to update them. In addition, some financial measures that will be discussed on this call, together with year-over-year comparisons, in some cases, are 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.

Vik Verma — Chief Executive Officer

Thank you, Victoria. Good afternoon, everyone, and thank you for joining us today. We continue to experience unprecedented times, and I hope you and your families are staying safe and healthy. Before we begin, I would like to welcome Sam Wilson, our new CFO, to the call. Sam has been part of the 8×8 team for almost three years in various executive leadership roles, including spending the previous six months transforming 8×8’s cost structure through self-service and automation initiatives as Chief Customer Officer. Sam has also led our small business in mid-market sales, Professional Services, implementation and customer support functions. As you will see, Sam has quickly come up to speed in the CFO role, and we are pleased to have his financial leadership and operational acumen as we accelerate into a next phase of growth and profitability. And now to today’s business. I will focus my remarks on four core topics. First quarter results, go-to-market execution, platform strategy and finally, our path to profitability exiting fiscal 2021. At 8×8, our mission is to help businesses leverage enterprise communications to create the new digital workplace. Business today requires resilient communication systems to support increasingly distributed of fully remote workforces. Now more than ever, cloud communications is fundamentally shaping the new campus, the new work group and the new office. Our team had strong execution against the accelerating cloud transformation opportunity in today’s challenging environment.

We started our fiscal year 2021 strong with solid service and total revenue growth and improved operating performance, each exceeding the high end of our financial guidance for the first quarter. Total ARR grew 30% year-over-year with consistent performance across our platform offerings. New bookings accelerated to 33% year-over-year, excluding CPaaS. We achieved our second sequential quarter of solid progress towards profitability, beating our bottom line guidance and reducing our non-GAAP pretax loss by $5 million from the previous quarter. As a result, we reaffirm our path to delivering non-GAAP pretax breakeven exiting the fourth fiscal 2021 quarter, and our cash usage continues to improve as we cut our cash burn by more than half from the prior quarter. As we have previously discussed, we have made substantial investments in our go-to-market over the past two years that are now bearing fruit. This quarter, we saw improved deal execution, continued channel strength and robust pipeline growth with significantly lower customer acquisition cost overall. Specifically, we expanded our enterprise customer base with 38 new ARR deals greater than $100,000, including a new 8-figure total contract value deal. Combined mid-market and enterprise ARR grew 52% year-over-year as compared to 39% growth in Q1 last fiscal year. We delivered a record high bookings quarter overall, led by channel bookings that grew 47% year-over-year. 62% of overall new bookings and nine of our top 10 deals came from channel partners. Our CloudFuel partnership with ScanSource and Poly continue to sign new value-added reseller partners that are focused primarily on accessing 15 million on-premise Avaya seats.

One notable addition is Allegiant Technology, Avaya’s 2019 Cloud Partner of the Year, who joined the ScanSource and Poly CloudFuel VAR Program. They were particularly impressed with our newly developed 8×8 Voice for Microsoft Teams integration, which provides them with a unique value proposition to access the upper mid-market and enterprise markets. Other new ScanSource VARs added to the CloudFuel Program include Gage Telecom, Shamrock Communications and Stack eight Technologies. We’re also pleased to have Lantana Communications join our U.S. VAR Program. In the U.K., Virgin Media Business is ramping ahead of expectations, and we have multiple high-value deals in the pipeline. Globally, we launched our new website and are already seeing improved awareness, a notable improvement in marketing CAC and increased overall pipeline production. Finally, 68% of our customer base is on the X Series platform, up from 43% last quarter. And we now expect to have more than 85% of our customer base on the platform by the end of the calendar year, ahead of our prior target of 80%. Turning to customers. New customer logos in the quarter represented 64% of new bookings, up from 57% a year ago. Customers in key verticals such as health care, manufacturing, public sector and financial services responded to the pandemic by purchasing X Series. We saw an improvement in our business performance and channel dynamics in May and June as economies gradually began to reopen in domestic and global markets. Let me highlight a few notable examples. six of our top 10 new deals were Avaya replacements from customers who selected our X Series solution after conducting competitive RFPs with other cloud providers.

Two noteworthy examples include a 5,000-plus seat win with a global financial software firm in the U.K. and a 2,000-plus seat win with a manufacturing company in the U.S. Both of these deals were channel partner-led and included a bundled 8×8 UCaaS and CCaaS suite. Our newly announced Voice for Microsoft Teams solution made a strong debut last quarter in a number of deals. One example is a global manufacturing company headquartered in Europe that needed a solution that interconnected with Microsoft Teams to enhance their sales and service experience. We won with our 8×8 X Series, UCaaS and CCaaS suite with Secure Pay. We saw strong momentum in the state, local, education and special district segments, also known as SLED, in both the U.S. and U.K. as agencies responded to increasing COVID-19 impacts. Manchester City Council is one of these, and a prime example of how 8×8 was able to keep vital services running safely for its more than 0.5 million residents throughout the U.K.’s lockdown. We also won two major U.S. state contact center deals in this quarter. Our largest win was in North America with an important channel partner, who led a new 8-figure total contract value deal with a health care provider. This on-premise replacement win included more than 20,000 seats of 8×8 X Series. Continuing with health care, we are proud to support providers and employees working on mitigating the impact of the COVID-19 pandemic. We were especially pleased to assist LetsGetChecked, a COVID-19 home test kit services provider with remote contact centers in the U.S. and Europe. Within 10 days, we enable LetsGetChecked’s contact center agents to work remotely and continue providing an uninterrupted customer experience at this critical time.

Finally, last quarter, I spoke about a global financial services customer who needed to rapidly scale a work-from-home contact center operation for employees based in India. We enabled 1,000 seats over a weekend. This past quarter, we deployed another 4,000 X Series UCaaS and CCaaS seats throughout offices in South America and EMEA. This Enterprise customer’s relationship with 8×8 has expanded to over 11,000 seats within nine months. All of these wins are a direct result of the ongoing investments we have made in our go-to-market capabilities. Enterprise have witnessed that on-premise legacy systems do not have the ability to tailor a communication and contact center strategy that adapts to a work-from-home COVID-19 environment. As we continue to reap the benefits of our Open Communications Platform and strategy, we believe this will further position us to deliver sustainable, long-term growth and profitability. Now let’s move on to our platform advancement and market penetration strategy. The 8×8 Open Communications Platform is arguably the industry’s most complete portfolio of operate-from-anywhere enterprise communications. It uniquely brings together all the essential digital workplace elements required for enterprise communications, combining voice, team chat, video meetings, contact center applications and API solutions fueled by shared intelligent communication services like AI-driven, expert routing and predictive analytics, all on a single platform. Our Voice for Microsoft Teams solution is an enterprise-class global cloud telephony solution that is the first to fully integrate with Teams without changing the experience for end users. It works natively with both the Microsoft Teams’ mobile and desktop applications with no download required from 8×8.

Other Microsoft Teams integrations either changed the end-user experience or do not provide global coverage. The benefits of Microsoft Team and cloud telephony exists in virtually every organization that requires collaboration and communications and is further accentuated when it is integrated with a world-class contact center solution. One of Microsoft’s largest U.K. channel partners is working with us on a program to bring 8×8 solution to their thousands of existing Microsoft customers. In the U.S., nearly 1,000 channel partners registered for a kickoff webinar, and we are already seeing a strong pipeline of opportunities for this product with those partners. Due to our continued investment in the business, we own all the essential elements of an integrated platform, resulting in three volume on-ramp that are driving sustainable revenue growth. The first on-ramp is our core technology platform with UCaaS and CCaaS bundled offerings. More and more customers see the benefits from having all of the communications delivered from the same platform. 55% of new bookings of $12,000 or more in ARR were from customers that selected bundled UCaaS and CCaaS. Contact center new bookings grew 194% year-over-year and represented 32% of total new bookings this quarter. Throughout this pandemic, we have seen many contact centers challenge to handle increased call volumes. Artificial intelligence and automation is increasingly key, and we have expanded our offering with conversational AI that captures intent and integrates into Amazon Aurora and an IVR chatbot that offers the ability to send and receive automated SMS messages for instant mobile communication. The second on-ramp is delivering CPaaS globally. We believe that human interaction is redefining the user experience of today’s B2B and B2C application.

There are millions of corporate and ISV developers worldwide, and we believe that a core competency of the coming years will be the ability to add real-time communications into these applications. Last month, we announced the expansion of our Communications Platform as a Service, or CPaaS, programmable applications and APIs to North America and EMEA. This includes our new, powered by Jitsi, 8×8 Meetings API. Our network of more than 130 top tier carriers around the world in 160 countries is powering these APIs and enabling businesses to customize applications and workflows by building an SMS, voice and video communications into both front and back office customer, partner, HR and IT solutions. Our CPaaS pipeline in the U.S. and U.K. is ramping, including many cross-sell opportunities within our UCaaS and CCaaS customer base. This past quarter, we signed more than 50 new CPaaS deals globally, including more than a dozen clients in the U.K. Use cases for new customers include text-to-speech software that turn just text into a voice call and adding SMS messages for customer notification and to enhance security using mobile number verification, 2-factor authentication and onetime PINs. We also signed a new mobile carrier partnership with Telefonica for Europe and Latin America to expand our SMS and voice network connectivity. Our partnerships with both Oracle and Amazon Web Services, who each have a large share of the developer community worldwide, will be an asset here as we ramp this portfolio to developers worldwide. Our third volume on-ramp is our e-commerce platform as a fully self-service entry point for small businesses and work groups. In the U.S., U.K. and Australia alone, there are tens of millions of small businesses. Our e-commerce portfolio was created to address these customers with a low-friction buying, provisioning and support experience. E-commerce is gaining traction and consists of our 8×8 Express and Meetings Pro products.

To remind everyone, this is a self-service, 100% online provisioning solution enabling customers to buy the products with a credit card and be up and running in minutes. Since the inception of our e-commerce business, we have doubled e-commerce logos and more than doubled e-commerce revenue every quarter. We are now adding thousands of new customers per quarter. Our Jitsi and 8×8 Video Meetings growth have now stabilized to the mid-teens in terms of millions of monthly active users. Although we do expect increased activity as school returns to session in September. We expect that our path to monetization of our significant Jitsi user and developer base will continue to ramp through our 8×8 Meetings Pro and increasingly, our newly announced 8×8 Meetings API. With tens of millions of companies in this business segment, we are optimistic that there is a long runway of growth ahead of this portfolio. I also want to discuss one of the most important investments we have made, which is automating the migration from our legacy products to our X Series platform. As we continue to make progress on this transition, our X Series customer satisfaction, churn rates and support infrastructure are all vast improvements from our legacy base. I’m very pleased to share with you today that X Series now represents 68% of our customer base, up from 43% last quarter. We have completed our largest automated migration in the first quarter and now expect to have more than 85% of our customer base on the X Series platform by the end of the calendar year, ahead of our original plan.

These strong returns for the quarter were a direct result of our go-to-market investments, our differentiated platform and continued engineering innovation. The final topic I’d like to discuss is our path to profitability exiting this fiscal year 2021. Over the last two fiscal years, we’ve invested in developing our platform and building our go-to-market engine and channel infrastructure. The company has transitioned from a mainly small business VoIP offering to a full-featured cloud communications platform that’s moving up market. We remain on track to achieve non-GAAP pretax breakeven exiting our March fourth quarter fiscal 2021. Our operating discipline is delivering results as we optimize our global sales, marketing and operations for improved efficiencies. We’re achieving economies of scale on our multiyear investments as evidenced by our improving gross and operating margins year-over-year. We remain steadfast in our assertion that work-from-anywhere will increasingly become a fundamental requirement for businesses of all types and sizes, and we are confident that our 8×8 Open Communications Platform and go-to-market capabilities are well aligned with the market direction. We are pleased with the progress we made this quarter and remain focused on accelerating the execution of our strategic plan. Finally, I want to express my gratitude to all of my 8×8 colleagues for their hard work and continued commitment to our mission.

Now for some additional color on Q1, let me turn the call over to Sam.

Samuel Wilson — Chief Financial Officer

Thanks, Vik, and good afternoon. We appreciate you joining us as we report first quarter financial results. I want to echo Vik’s comments that I hope you and your families are well and staying safe. I’m excited to be speaking with you this afternoon during my first earnings call as a CFO of 8×8. Thank you to Vik and the Board for having confidence in my abilities. For today’s call, I will walk you through our Q1 financial results and then provide guidance for the second quarter and some color on the remainder of the fiscal year. Lastly, I would like to share my initial observations and ongoing priorities over the last 50 days before opening the call to answer your questions. Starting with our first quarter results. We are pleased to have delivered performance that beat our guidance. Overall results were driven by better-than-expected performance from UCaaS, CCaaS and our bundled offerings. Total revenue for the quarter was $121.8 million, an increase of 26% year-over-year and above our $120 million to $121 million guidance. Total revenue was driven by better-than-expected service and Professional Services revenues. Looking specifically at service revenue, we generated $114.2 million, an increase of 27% year-over-year. Please note that service revenue reflects the reclassification action we implemented last quarter and now excludes Professional Services revenue. Including Professional Services revenue, service revenue would have been $118.2 million, an increase of 28% year-over-year. As a reminder, we will not be disclosing the historic reporting of Professional Services after this quarter. Turning to our business metrics. Total ARR was $432 million at quarter end, up 30% year-over-year and solid growth across UCaaS, CCaaS and CPaaS offerings.

This growth was driven by our continued movement upmarket to larger enterprises. Channel was also an essential driver behind increasing our reach in the Mid-Market and Enterprise markets. As Vik discussed, our investments in the channel and product invention over the last two years are continuing to pay off. Our bundled offerings of UCaaS and CCaaS is fit for our customers’ needs. During the quarter, we further expanded our CPaaS offerings into the U.S. and U.K. markets, our largest markets, giving us a further multiproduct platform advantage. Lastly, we announced our Microsoft Teams Direct Routing solution during the final month of the quarter and have been receiving very positive early interests. Over the next several quarters, we are going to lap some large, channel-led deals we’ve closed last year, including an 8-figure TCV deal with more than 30,000 seats we’ve previously discussed. We will also lap our July 2019 acquisition of Wavecell. These will impact our growth rates in various channel and customer segments, which we expect will cause them to bounce around. Our first quarter non-GAAP gross margin was 61.3%, driven by product mix and better-than-anticipated Professional Services revenue. Non-GAAP service revenue margin improved by one percentage point over last quarter to 67.7%. Non-GAAP other revenue margin came in at minus 34.7% for the quarter, a large improvement from the minus 70.5% a year ago. We executed on several rapid deployments with Professional Services engagement in response to our customers’ evolving pandemic needs, giving us better Professional Services revenue. Also, we have continued to grow our hardware rental program, which improves gross margin. We had lower-than-expected CPaaS usage during the quarter, mainly driven by continued COVID-related slowdown in Asia, which began early in the quarter but started to rebound towards the end of the quarter.

As we have previously mentioned, CPaaS margins are significantly lower than UCaaS and CCaaS gross margins. In the first three weeks of July, we see improved usage patterns as certain verticals and markets are reopening for business. We currently expect that gross margin trend will reverse in the second quarter with increased CPaaS usage as the world reopened and our entrance into the U.K. and U.S. markets. This could influence product mix in our overall gross margin profile to come in slightly lower sequentially. Looking at Q1 operating expenses. We are delivering on our goal of aligning the global business to drive both improved execution and efficiency. Non-GAAP sales and marketing expenses improved to 43.4% of revenue in Q1, 3% lower than last quarter. A combination of optimizing our media spend and moving from physical events to virtual events and webinars have driven spending efficiencies. We have also continued to add sales capacity. Non-GAAP R&D expenses came in at 11.8% of revenue in Q1 versus 9.5% last quarter. We continue to prioritize investing in our differentiated technology platform advantage and completing the migration of legacy customers to X Series. Non-GAAP G&A expenses improved to 12.5% in Q1 from 12.9% of revenue last quarter. We hope to gain further G&A advantages as we scale revenue and related operations. Total non-GAAP operating expenses were up 6% year-over-year while total revenue grew 26% year-over-year, a clear sign that we are making progress on our return to profitability. I would like to point out that due to the timing of certain expenses, each expense metric will not necessarily improve each quarter in a linear fashion. However, we have begun delivering returns and we expect to continue efficiency improvement trend in combined operating expenses as a percentage of revenue on a year-over-year basis. Importantly, our top of funnel metrics, including pipeline coverage rates continue to improve, our growth rates remain relatively high, and our margin profile improved.

These results show we are starting to reap the returns of previous investments in demand generation and the channel. We expect to see further improvement in unit economics as we optimize our go-to-market motions. Our non-GAAP pretax loss was $7.6 million for the quarter ending June 30. This was materially better than our $12 million guidance provided in May and a result of a combination of better-than-expected total revenue, margin improvement, operational refinance and the timing related to items such as reduced travel expenses and some currency benefit. We are assuming that timing items will not recur when we are giving guidance. I’m extremely proud of how the team is being very diligent about each dollar spent. Turning to the balance sheet. Total cash, restricted cash and investments ended the first quarter at $186.3 million, including $19 million of restricted cash. This is a decline of approximately $20 million quarter-over-quarter, an improvement of $28 million from the $48 million sequential decline witnessed last quarter. We are focused on further reducing our cash burn, both through operational efficiencies, economies of scale and improved collections. We also experienced some onetime and timing-related benefits in the quarter. For example, we availed of certain tax deferrals and credits from various jurisdictions, which saved us over $3 million in cash usage for the quarter. For the full year, we would expect the cash usage to slightly increase in Q2 and trend lower again in Q3 and Q4. We believe the better-than-expected collections is a good sign that COVID-related risks are manageable. One final item under liabilities I want to discuss is deferred revenue, which increased during the quarter to over $11 million from roughly $8 million the previous quarter. We have started the journey of moving towards billing contracts in advance of service delivery and expect deferred revenue will continue to grow on the balance sheet. Additionally, we have started a number of operational programs focused on reducing the time between booking a deal and receiving the cash.

Turning to the outlook. As we enter the second quarter, we have seen improved sales funnel metrics, increased CPaaS usage in July, and we are offering new products like MS Teams, Meetings Pro and additional CPaaS offerings. Offsetting this is the continued uncertainty in the macroeconomic environment as a result of the pandemic in our primary U.S. market, which more adversely affects our small business installed base. Taking all this into account, we are establishing our guidance for Q2 fiscal 2021 ending September 30, 2020, as follows: We anticipate total revenue to be in a range of $125.5 million to $126.5 million, representing 15% to 16% year-over-year growth. We anticipate service revenue to be in a range of $117.3 million to $118.3 million, representing 16% to 17% year-over-year growth. We anticipate non-GAAP pretax loss to be approximately $7.5 million. While we do not have formal guidance for the full year, we wanted to provide some color on the service revenue growth profile. As we mentioned in our May earnings call, we continue to expect service revenue growth rates to come down as we move out of Q1 and through Q2 and Q3 as we lap the anniversary of the Wavecell acquisition. Considering continued COVID-19 impacts on the global macro economy, we continue to see service revenue growth rate for the full year fiscal 2021 in the area of 17% to 18%. We are conservatively factoring in a range of outcomes-based on what we know today. And so with that, let me turn to my final topic and discuss my initial observations and ongoing priorities over the last 50 days before opening the call for questions. I have had the pleasure of speaking with many of our institutional shareholders and analysts to solicit their feedback and help clarify some misconceptions. 8×8 is a company with a considerable amount of assets and strong monetization potential.

Therefore, my top priority as CFO is capital allocation. As I look forward, the balance between investing in future growth, operating speed and direct return to shareholders is essential. Operational improvements are a must. And as such, we are optimizing spending to improve the overall business performance. Additionally, I remain focused on delivering on our commitment to non-GAAP pretax breakeven exiting Q4 fiscal 2021, the March 2021 quarter. This is important for our customers, our employees and you, our shareholders. Additionally, we intend to have approximately $100 million or more in cash and cash equivalents on the balance sheet at fiscal year-end. Our models suggest we will be cash flow breakeven two to three quarters after. And at this time, we believe we have adequate cash to get the positive free cash flow in fiscal 2022. From an IR point of view, I’ve heard our investors loud and clear, simplify the reporting of financial results moving forward. We provide a vast level of financial detail in our supplemental IR metric sheet, which has created the impression that the business has many moving pieces. This is not the true case. As a first step in this process, next quarter, we will no longer provide the metric we have referred to as new bookings growth excluding CPaaS. When we introduced this metric last year, it was to measure the growth rate of bookings contracts for our core UCaaS and CCaaS business, excluding CPaaS usage and other fees until we anniversaried our CPaaS acquisition. It does not include renewals. It has been a subset of total bookings growth, and now that we have lapped the acquisition and fully integrated the business, we believe it is no longer a meaningful metric. We believe going forward, ARR is a more precise and relevant metric to measure the health of the overall business. In addition, we are not contemplating introducing new metrics at this time. And instead, we look to continue to refine our parameters. We will seek to simplify what we report with your input. To wrap up, we remain well positioned to manage the business for the long term and are committed to accelerating our efforts to deliver better financial performance and enhanced shareholder value.

Operator, we are ready to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Rich Valera with Needham & Company. Your line is open.

Rich Valera — Needham & Company — Analyst

Thank you. Good afternoon and thanks for taking the question. Appreciate you kind of reaffirming the 17% to 18% service revenue growth number. That’s a pretty healthy number. It just seems that you would need to see a significant incremental uptick in the service revenue added per quarter relative to what your guidance suggests in the September quarter. So could you just talk us through how you’re thinking about that sort of acceleration of incremental add of service revenue in the back half of the year? How should we think about that maybe between the two quarters? And what drives that incremental add?

Samuel Wilson — Chief Financial Officer

All right. So this is Sam. I’ll take that one, Rich. It’s straightforward. It’s driven by our modeling and what we have based on our bookings and what is currently in our forecasted model. We gave you the 2Q guidance and the color for the fiscal year. I think what you’ll see is a higher growth rate, year-over-year growth rate in the fourth quarter over the third quarter. But we’re pretty confident what the model shows right now.

Rich Valera — Needham & Company — Analyst

Got it. And then could you just give us any color on what’s going on with churn? Last quarter, you gave a fair bit of disclosure there. You talked about your DD&E being below 100% because of sort of accelerated SMB churn or higher SMB churn. Can you talk about how that’s trended over the last quarter and how we should think about that going forward?

Samuel Wilson — Chief Financial Officer

Yes. I think last quarter, we said that we exited fiscal year 2019 or sorry, fiscal year 2020 with our best churn quarter with the fourth quarter. We did see slightly higher churn in Q1, the quarter we just reported. I think mainly based on COVID, I mean, we did see a little bit of increase in our small business segment. I have to say, though, if you look at the cash flow number, collections were very solid in the quarter. So I think it’s very manageable. And right now, everything just feels like it’s kind of like on the plan that we’re expecting for fiscal 2021. Just one more thing I’ll add. And then as you mentioned, the NDR stuff. So I think you said last quarter that overall NDR was less than one, but X Series NDR was significantly over one. And as we migrate customers to X Series, we are seeing those types of numbers hold.

Operator

Your next question comes from the line of Ryan MacWilliams with Stephens Inc. Your line is open.

Ryan MacWilliams — Stephens Inc — Analyst

Thanks. Just to piggyback off Rich’s question. For the service revenue growth guidance, the 17% to 18% for the full year, you talked about this included 200 bps of COVID-related churn per quarter from the first quarter to third quarter this fiscal year. Can you talk about where that was versus the 200 bps for this quarter? And then going forward, would you consider this like a conservative expectation given the rebound that you saw in end of May and June?

Samuel Wilson — Chief Financial Officer

All right. So I’ll take those in reverse order. I do consider the forecast conservative. As you can imagine, having a global, diverse base like we have and given the fact that COVID is anything but an easily modelable function, we are trying to be conservative with our guidance to make sure that there’s no severe surprises. On in regards to churn, I’m I have the advantage of being the new guy, so I’m really not going to get into giving you churn numbers down to the basis point level. I’ll just tell you, it’s in line with our expectations. There was nothing surprising in the quarter.

Ryan MacWilliams — Stephens Inc — Analyst

Great. And then one for Vik. Some of my checks have highlighted that the 8×8 Voice for Microsoft Teams seems like an interesting integration. With Teams having over 75 million daily active users at this point, how do you think about the size of that opportunity? And what type of customer do you think this fits best with?

Vik Verma — Chief Executive Officer

Yes. So it’s been quite interesting. So we’ve actually already got customers deployed on Microsoft Teams, gives you a sense of how quick the uptick was, and it helped us win a couple of very large global deals. What we are finding that the profile of the customer is large, multinational customers with offices all over the world essentially, which need global voice and potentially contact centers. And so that piggybacks very well with the Microsoft Teams experience, which is primarily a collaboration experience. And the thing that makes us truly unique is you don’t have to get out of the Microsoft Teams environment. It’s completely native. You don’t have to download anything from 8×8. It’s all very tightly integrated together. We had a couple of very interesting events. I think one of Microsoft’s largest distributors in the U.K. has really jumped on it and they had, I think, a webinar, which they said was the highest attended webinar. And then in addition to that, we’ve had I think just out here, we did a webinar and over 1,000 channel partners signed up for it. So we’re seeing good, strong demand. And I think it’s going to be a decent growth driver for us.

Ryan MacWilliams — Stephens Inc — Analyst

Great. Thanks, Vik.

Operator

Our next question comes from the line of Meta Marshall with Morgan Stanley. Your line is open.

Karan Juvekar — Morgan Stanley — Analyst

Hi. Thanks for the question. This is Karan on for Meta. So the first question would be, so you noted that your X Series transition has progressed ahead of plan. So I guess just wanted to know what kind of incentives you’re giving to the channel or to customers to accelerate that transition. And then maybe part two to that question would be, what kind of savings would you bring from just supporting one product?

Vik Verma — Chief Executive Officer

So we’ll tag team this one. So the we are not providing incentives to people. Actually, the as you can think about it, this is a company that is 20 to 30 years old. And so we have a customer base stretching back to the early 2000s that have been on various legacy platforms. We’ve done multiple acquisitions. So accelerating to X Series which, frankly, with all the channel checks we have done, indicated that it’s industry-leading NPS and customer satisfaction. What we are finding is we figured out a way to completely automate the process. And so it’s a seamless experience for customers where we go in and gather all of the data of usage of the various functions and then literally, over a weekend, the customer comes in, in the morning on Monday, and you’re now in a new experience, which is much more integrated, much better user interface, more automation, more self-service, etc., etc. So we’re not providing incentives. What we’re trying to do is make sure that essentially the two costs remain essentially the same. So there’s no real leakage in overall revenue for us, and there’s no extra cost for the customer. With regard to the overall cost savings, as you can guess, that is something Sam will address.

Samuel Wilson — Chief Financial Officer

So I’ll take this one. So right now, I mean, as you can imagine, we just raised the number from 80% to 85%. So we’re still expecting, as we go into next calendar year and maybe even next fiscal year, we’ll still have people and resources attached to it. Probably as we enter next fiscal year, what we’ll do is we’ll reassess at that point. And as we finish our migrations, we’ll either roll the engineering and the support efforts into high ROI projects or we’ll bring it down to the bottom line, whichever seems the right decision at the time.

Karan Juvekar — Morgan Stanley — Analyst

Got it. And if I could just ask one more. Could you just provide some more detail on your team’s partnership and when you think that could contribute meaningfully to revenue?

Vik Verma — Chief Executive Officer

It’s starting to contribute to revenue. I believe there’s 100 active deals in the pipeline. It is just another one of the growth drivers for our UC, CC platform business. So we continue to see traction in that. And that, I think, becomes another differentiator for us. So far, so good.

Karan Juvekar — Morgan Stanley — Analyst

Great. Thank you so much.

Operator

Your next question comes from the line of James Breen with William Blair. Your line is open.

James Breen — William Blair — Analyst

Thanks for taking my question. Just a couple on the sales side. You talked about channel bookings growing 47% year-over-year and 62% of new bookings. How do you think about that over the long term? Where can that go to? Will it be eventually be 80% or so? And then when you look at your breakout of by customer, small, mid and enterprise, are there any [Indecipherable] between the gross margins in those businesses across the three different segments?

Samuel Wilson — Chief Financial Officer

All right. I’ll I guess I’ll take these. I’ll take both of these. We expect that channel, as a percentage of overall bookings, will continue to trend higher over time. But I want to leave you very clear, that won’t be a linear thing, it will be jumpy. A lot of our larger deals, our big 8-year TCV deals, are generally channel-led, and we’re working very close to the channel at that point. So there will always be some lumpiness there. But I would expect over time, we’re investing in the channel. We’re seeing benefits from the channel investment. We love our channel partners, and it’s becoming a very virtuous cycle. On the second question, does channel have any real difference in gross margin, I presume, versus direct? The answer is no. Costs to serve those customers is roughly the same. There’s a little bit of a difference in sort of economics. But remember, while we may give a channel incentive or compensation with a channel partner to close a deal, they’re also providing tremendous value-added services to our end customers that we benefit from the cost savings and it basically equalizes itself out.

James Breen — William Blair — Analyst

Great. Thank you.

Operator

Your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore — Northland Capital Markets — Analyst

Yes, thanks. Very nice quarter there. Maybe can you just talk a little bit about bookings flow throughout like the quarter and even in June and July. You obviously were kind of in a fluid environment. Just kind of curious how bookings have played out sort of April, May, June, July time frame? Has it been elevated throughout? Or has it been building throughout? Just some color there would be great.

Vik Verma — Chief Executive Officer

We have been generally strong throughout. I think April was a little slower and then May and June definitely picked up. But I’ve been pleased overall by our bookings, and I think particularly the channel. I think one of the refrains you guys have always heard me say is that we’re not getting enough at bats. We are now getting a lot about bats, and we thank the channel for that. And I think several of you have done channel checks which are showing that we are being definitely getting more than our share of interest from end-user customers. And so we hope that this trend continues. It seems like it is continuing to where, I think increasingly, we’re getting more and more presence in the channel. And we continue to think that, that will give us more and more at bats, which has been, in the past, one of the weaknesses of the company.

Samuel Wilson — Chief Financial Officer

And if I’ll take the question on the pace of bookings, linearity throughout the quarter was nothing abnormal. I would say it was in the noise level of what we’ve seen over the last couple of years.

Mike Latimore — Northland Capital Markets — Analyst

Great. And then on contact center, just the growth was phenomenal this quarter. Is that a result of kind of COVID-19 environment? Or is that just kind of sales cycles coming to close for you guys?

Vik Verma — Chief Executive Officer

Actually, both. I mean one of the things that is pretty unique is as you know, we have all made the bet that we are all about the platform, which is unified communication and contact center. And until about one year, one and half years ago, we would always lead with unified communication and then drag in the contact center. That trend has started to reverse. And particularly now, because of our ability to rapidly deploy contact centers, we’re seeing a lot of very big deals in contact centers. I think we made reference to, I think, the city of Manchester. Let’s just say that there were others that were of similar size that also went with our contact center. LetsGetChecked deployed a contact center in 10 days. So I think part of the reason that you have seen a big surge in growth of contact center is the fact that, in essence, now people want a rapidly deployable contact center. And right after that, they pulled in UCaaS, but it is all about the platform.

Mike Latimore — Northland Capital Markets — Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Tim Horan with Oppenheimer. Your line is open.

Tim Horan — Oppenheimer — Analyst

Thanks, guys. Can you maybe just talk about the pace of bookings in July? It just seems like you’re very, very well positioned as companies are putting the cloud communications. I’m just a little surprised it’s not kind of building on itself at this point, given the initial shock of the economy.

Samuel Wilson — Chief Financial Officer

I hear your question loud and clear, but I’m sorry, we can’t comment on July quarter. I the best I can tell you is there’s no surprises in July, everything is as expected, and we factored everything into our guidance. But this is an earnings call on the June quarter.

Tim Horan — Oppenheimer — Analyst

Great. And then maybe can you just talk about the VAR opportunity? Kind of where are you with developing that? And what the competition looks like out there for VARs at this point?

Vik Verma — Chief Executive Officer

Yes. No, I’ll take that one on. And actually, we continue to feel very good about it in the sense that two sets of VAR opportunities, as you know, the CloudFuel opportunity, which is the ScanSource, Poly umbrella, and we’re seeing more and more Avaya resellers joining that. I think we talked about Allegiant Technology, which was the cloud partner of the year for Avaya in 2019, and they are basically standardized on this we’re seeing we’ve already seen our first few deals on that close, and we are now starting to see the pipeline start to build quite considerably. Similarly in the U.K., as you know, we have a VAR relationship with Virgin Media, and they’re they’ve got a lot of public sector exposure, and we’re starting to see quite a bit of pipeline develop there as well. In addition, in the U.K., as you know, we have VAR relationships with Charterhouse, Computacenter as well as Softcat. And those also are continuing to expand. So we view VAR as the a very unique way to go after the installed base, where we’re able to go to folks that are used to selling in a particular way and enable them to sell in the exact same way. And so far, so good.

Tim Horan — Oppenheimer — Analyst

Thank you.

Operator

Your next question comes from the line of Matt VanVliet with BTIG. Your line is open.

Matt VanVliet — BTIG — Analyst

Yeah, hi. Thanks for taking my question. I guess looking at sort of the average deal size and revenue per customer, it started to tick down a little bit here in the Enterprise and even the Mid-Market this quarter. But we’re hearing a lot more attach rate on bundled deals and overall X Series growing as a percentage of bookings mix, with the latter two sort of implying that you should see larger deal sizes. Maybe just help us reconcile kind of the strong growth in channel and enterprise overall with those metrics ticking down just a little bit overall?

Samuel Wilson — Chief Financial Officer

Yes. I’ll take this one. I mean I it’s a fair question, but I think let’s just kind of put it in context, right? Over the last four quarters, we’ve been between $40,000 $39,000 and $42,000 in the mid-market, and $166,000 to $174,000. Yes, it ticked down a little bit. I think it’s a combination of we saw a very good deal volume, but customers are a little bit more cautious right now about placing very large orders through the system given the COVID environment. So we are seeing a little bit more of a land-and-expand type of philosophy instead of a larger order upfront. But in terms of deal velocity, we had a record number of active channel partners and all those other kinds of things. So your second part of your question was around channel. I think we’re very positive there. I wouldn’t read anything into the average revenue per customer segment. I think it was just a little bit of noise around the marketplace.

Matt VanVliet — BTIG — Analyst

Yes. And then, I guess, specifically in the channel, our checks indicate that you guys are certainly present in a lot more deals, much like what you’ve been talking about. Curious though what I guess, from here, what’s or how do you get the most mindshare or start winning mindshare of four channel partners to select you as their lead package instead of some of your competitors that maybe they’ve been working with longer, have a larger book of business overall?

Vik Verma — Chief Executive Officer

So our channel checks indicate and I think several of you guys have done similar channel checks, and we’ve seen some consulting reports as well that X Series, when surveyed within the channel community, is viewed to have the best NPS and overall customer satisfaction and the most comprehensive offering of anybody else out there. And so what we have seen is success begets success. It’s very simple. And so you’re starting to see channel partners win bigger and bigger deals using our product. And you’re seeing I mean, we talked about that 8-figure TCV deal. And so the more deals that they win with us and the more deals that allow them to make sure that it’s differentiated with our X Series for some of the other activities that we have, such as Microsoft Teams, etc., we’re seeing that they’re offering more and more of our deals. Sam?

Samuel Wilson — Chief Financial Officer

And maybe if I could add just one more thing. Look, every channel partner has economics at heart, right? And the fact that we offer a combo product with contact center allows a higher per-seat cost for a lot of their transactions. Contact center is becoming instrumental in these platform and UCaaS plus CCaaS deals. And the fact that we have them together, we offer functionality that leverages both sides of the house, is fantastic. And now that we’ve got true mindshare and sustained momentum in the channel, I think it’s, as Vik said, just success begets success.

Vik Verma — Chief Executive Officer

And I think to add to that, I think you saw the number of channel partners has increased quite materially for us. And so the number of active channel partners keeps growing. I think it was 813, I think, in Q1 a year ago. And right now, I think it’s 1,092. So you’re starting to see, again, a level of momentum pick up as people are look to get more and more success with our products in the marketplace.

Operator

Our next question from the line of Charlie Erlikh with Baird. Your line is open.

Charlie Erlikh — Baird — Analyst

I’m hoping you can just talk about maybe the traffic levels on your network over the past couple of months and, I guess, March. Did traffic levels increase at all maybe in March and April? And I’m wondering if since then that kind of leveled off to normalized levels or they’ve maybe remained elevated.

Samuel Wilson — Chief Financial Officer

So I’m going to break that into two pieces. I’m going to break it into the CPaaS side and the more traditional telephony side, contact center side. So what we saw in the telephony, contact center, UCaaS side was definitely a situation where it was a tale of two cities, health care, government, SLED, etc., all increased usage, all ramping really quickly, offset a little bit by lowered usage in retail, hospitality, those types of COVID-related. And I would say net, it was down flat to down slightly. Also on the CPaaS side, because of our presence, our strong presence in some of the ride-sharing, next-generation type of companies in Asia, we did see a decline in usage. A lot of that then has reversed itself as economies start opening back up, right? So starting in May, June, we then saw usage pick up particularly in retail and some of these other segments, back to levels that we saw in January, February. And we have seen solid trends in July, as I mentioned in the script, in our CPaaS business picking back up. We lost no customers in that space, just usage. As ride sharing and some of those things start to pick back up, we start to see that increase. So I really don’t want to draw too big of a conclusion because it has been a tale of two cities depending on what the vertical was.

Charlie Erlikh — Baird — Analyst

Okay. Yeah. That’s helpful.

Operator

Your next question comes from the line of Andrew King with Colliers Securities. Your line is open.

Andrew King — Colliers Securities — Analyst

Hi, guys. Thanks for taking my question. So just on the 15 CPaaS that you mentioned that you closed, how many of those were outside of the APAC region? And then also, given the fast ramp that you’ve had on the CloudFuel and the Virgin Media strategic partnerships, do you see any further investments given your initial expectations than what you had? If you can just talk on that, that would be great.

Vik Verma — Chief Executive Officer

So the CPaaS part, we closed over a dozen, I think is the term I used in my earnings call, in the U.K. And we closed, I think, our first few in the U.S. So we’re starting to see quite a bit of interest and very healthy interest in pipeline for CPaaS outside of Asia Pacific, which is exactly one of the reasons why we made this acquisition. I think the second part of the question I’m sorry. Could you repeat the second part of your question?

Andrew King — Colliers Securities — Analyst

Yes. Can you just talk about your expectations on further investments in your strategic partnerships, given their fast ramps?

Samuel Wilson — Chief Financial Officer

Just I guess the clarification is on the VAR side, I mean, we have a number of strategic partnerships across the company. So I’m just trying to get some clarity.

Andrew King — Colliers Securities — Analyst

Yes. Can you focus on the Virgin Media partnership and then also the CloudFuel partnership?

Samuel Wilson — Chief Financial Officer

Okay. Got it. So on the VAR side. Got it. So let’s put it this way. On Virgin, well into the ramp, fully funded, we’re moving forward, solid road map in place, deals already in the pipeline. Really impressed with Virgin as a partner. They are world-class. And it’s been, so far, just fantastic working with that those guys and really like it a lot. Much the same for CloudFuel. So once again, fully funded, road map in place. As Vik mentioned, signing up VAR partners, deals in the pipeline, revenue produced there. That’s just a matter of scaling it right now. We have everything in place, just really effectively on both sides of the house. The early innings are done and now is just scale it. And the deals are with both partners are there to scale the operations.

Andrew King — Colliers Securities — Analyst

Great. Thanks.

Operator

[Operator Instructions] Your next question comes from the line of George Sutton with Craig-Hallum. Your line is open.

George Sutton — Craig-Hallum — Analyst

Thank you. Vik, as we always try to be looking from the outside, trying to understand the breakdown of some of your spend, here’s what I’ve concluded, and I wondered if you could correct me where I’m wrong. It looks like you’re doing less search spend. It looks like you’re doing less branding spend. It looks like you’re ramping up a referral program. And it looks like you’re spending quite a bit more on the channel, which is obviously working. Is that a fairly representative breakdown of the changes that you’ve been making on the marketing and spending side?

Samuel Wilson — Chief Financial Officer

Vik, I’m going to take this one since I’m deep in the spending side. So at a macro level, I sort of roughly agree with what you’re saying. I think what we’re very focused on, on the areas that you just cited is optimization. So what we’re really focused on is maximizing each dollar spend. You really focused on marketing with your question, so we’re very focused right now on maximizing each dollar of marketing spend to both pipeline creation and closed one deals. And we’ve got very good analytics in place now, and we’ve got enough bats in place now to really drive that optimization process. It’s why you saw a substantial improvement in sales and marketing spend quarter-on-quarter, and it’s why you’re seeing a substantial improvement in operating margin year-over-year, even as we grew R&D.

Vik Verma — Chief Executive Officer

And George, I’ll add to that one because I think you brought this up before. We made a very significant investment over the last year or so in our martech stack. And the whole purpose of that was in the past because we had a lack of brand recognition and our martech stack was pretty historic. We needed to really ramp that up, and we’re starting to see that we can get a lot of customer acquisition costs down because people are coming on to our website, we’re able to do a lot more interesting campaigns and tailor it to different people, drift, etc. So that’s one aspect of it. And second, in addition to that, what we are seeing is the whole evolution of the Meetings product has done a great job of increasing our level of brand awareness. And then finally, what we’re starting to see is e-commerce is also another one that we are kind of driving costs down into the system. We’ve now got three very credible on-ramps onto our product. As you know, we’ve got the unified communication and contact center; we’ve got CPaaS, which includes our Video Meetings, API; and we’ve got e-commerce. And then as I said, coupled with a brand-new martech stack, we’re able to really start to drive much more efficiency into the system.

George Sutton — Craig-Hallum — Analyst

Great. That’s helpful. One other thing, the accounting geek side of me needs to ask, Sam, you mentioned you’re starting to build contracts in advance of contract delivery, can you just kind of explain the thought process behind that?

Samuel Wilson — Chief Financial Officer

Yes. So I mean we’re as we SaaS-sify the business even more, we’re basically moving I think more commonly referred to as prepaid. But it’s not really prepaid. But like most SaaS businesses, we’re starting to build 12 months annual prepaid for our contracts. And I think that was something that we historically haven’t done, and it’s why we have to have a working capital balance. I’d very much like to get us to a pure SaaS company where we can have either a 0 or negative working capital balance and become more capital-efficient over time. I think it’s doable. I think it’s achievable. We’ve started the plans in place, and we’re already seeing the results. It’s why we expect that we don’t need to raise any capital at all to become free cash flow positive and why we think the balance sheet is in a very good position right now.

George Sutton — Craig-Hallum — Analyst

Okay. Helpful answer. Thank you.

Operator

Your next question comes from the line of Ryan Koontz of Rosenblatt Securities. Your line is open.

Ryan Koontz — Rosenblatt Securities — Analyst

Hi. Thanks. I want to circle back to your contact center comments and the great metrics so far. How do you what’s your kind of strategy as you approach this market? Are you more of a disruptor here from a pricing perspective, coming in against bigger legacy incumbents? Can you maybe talk about that a little bit? Appreciate it.

Vik Verma — Chief Executive Officer

So I’m very proud of the work that the team has done in completely revamping our contact center over the last three, four years. But what we really are about is a platform business. So what we’ve got is one platform where we’ve got contact center, unified communication, video conferencing, chat, all with an underlying layer of analytics. So what that allows us to do is mix and match for different customers. Some customers lead with contact center, and what we’re seeing is we can win some very big deals with contact center. Manchester City comes to mind. There were two very large state governments that basically went with our contact center in the U.S. Manchester City’s sister city over in the U.K. that also competes with them on the U.K. Premier League, went with us on the contact center. So you’re starting to see contact center become a way that we lead into the business, and then it brings in unified communication as a very differentiated asset into the mix. So on the whole, what we are able to do is we’re able to provide the entire platform for a significant cost advantage. And Sam, you may want to jump in.

Samuel Wilson — Chief Financial Officer

I just want to add maybe one more small thing. When you talk about legacy providers, I have a tendency to think of the really high-end guys, and that’s not where we’re focused. We’re not focused at the 5,000, 10,000 contact center agent market. There’s a very large mid-market opportunity where they want someone else running the infrastructure. They want someone else providing all the features and functionality. And especially when we can spread that across CPaaS and UCaaS, it becomes a very compelling value proposition for that mid-market segment.

Ryan Koontz — Rosenblatt Securities — Analyst

Great. Thanks so much.

Operator

[Operator Closing Remarks]