Oct 27, 2016
Operator
Good day, ladies and gentlemen, and welcome to the Second Quarter 2017 8x8 Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would like to introduce your host for today's conference, Joan Citelli, Director of Investor Relations. You may begin.
Joan Citelli
Thank you, operator, and welcome everyone to our call. Today, I am joined by 8x8's Chief Executive Officer, Vik Verma; and our Chief Financial Officer, Mary Ellen Genovese, to discuss 8x8's second fiscal quarter of 2017 financial results for the period ended September 30, 2016.
The earnings press release which was issued today after market closed, is available on the Investor section of 8x8's website at www.8x8.com. Following our comments, there will be an opportunity for questions.
Before I turn the call over to Vik, I would like to remind all participants that during this conference call, any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals including financial guidance and similar expressions using the terminology; may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which reflect something other than historical fact are intended to identify forward-looking statements.
These forward-looking statements involve a number of risks and uncertainties including factors discussed in the Risk Factors sections of our annual report on Form 10-K and our quarterly reports on Form 10-Q and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties.
The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call, except as required by law. I would also like to note that during this call, we will provide financial information that has not been prepared in accordance with Generally Accepted Accounting Principles, in addition to our GAAP results.
Management uses these non-GAAP financial measures internally in analyzing our financial results and believes they are useful to investors as a supplement to GAAP measures in evaluating the company's ongoing operational performance. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures.
This reconciliation has been provided in the financial statement tables included in our earnings press release. And with that, I'll turn the call over to Vik Verma, Chief Executive Officer of 8x8.
Vik Verma
Thank you, Joan, and thank you everyone for joining us today as we discuss our second quarter of fiscal 2017 results. We will follow the same format as in the past beginning with a high level summary of our accomplishments, followed by a more detailed discussion of the financial results and metrics by our CFO, Mary Ellen Genovese.
8x8 continue to execute very well in the second quarter of fiscal 2017 with year-over-year increase of 24% in total revenue to a record $63.2 million and 23% increase in service revenue to $57.7 million. We also witnessed strong organic growth in service revenue from our mid-market and enterprise customers of 36% year-over-year.
Revenue from these larger customers now accounts for over 53% of our total service revenue compared with 48% one year ago as we continue to see good traction moving up market. A combination of healthy cash flows, strong margins and disciplined financial management lead to our 26th consecutive quarter of profitability on a non-GAAP basis with non-GAAP net income of $5.3 million or 8.4% of revenue.
With the digital transformation and communications now being embraced by larger businesses, the benefits of our differentiated enterprise communications as a service solutions are becoming even more apparent and compelling beyond a significant cost savings they inherently deliver. Last month at our annual CIO forum, the IT executives at our top global enterprise customers spoke about the tremendous improvement in productivity, customer engagement and overall business performance they are experiencing with a fully integrated stack of cloud communications, contact center and analytic solutions.
With our global pure cloud footprint, enterprise class features and industry leading quality, reliability and security; these customers the finally able to focus their attention on improving their core business rather than managing a complex communications infrastructure. 8x8 is taking this value proposition even further by leveraging the power of cloud for global real-time communications and actionable analytics to enhance business productivity and performance.
Our solution is not just a replacement for legacy, premise space PBX and context at our systems, more importantly it is a complete data and analytics platform that automatically captures communications data throughout your organization, combined this with rich relevant context from internal and external sources and derives actionable insights to accelerate business workflows and improved business outcomes. It is the combination of our technological expertise, the integration of our services on a single platform, our ownership of the underlying technology and data and the 86 million analytic reports we collect each day that gives us the unique ability to bring this vision to life.
Our new line of business sales acceleration product which I'll discuss in a moment is a good example of this. Let's review the progress we have made in the key strategic focused areas of our business increasing our footprint in the mid-size and enterprise market segments enhancing our global service delivery and support capabilities and developing innovative new features that enable customers to even greater value from our core communications solution.
First, as I mentioned previous we continue to see good traction moving up market with the addition of over 100 mid-markets and enterprise logos; as well as the expansion of our offerings with existing accounts. 65% of the new monthly recurring booked during the quarter, came from these larger customers and our channel sales team.
While this was derived primarily for mid-size accounts with 500 to 1,000 users, we continue to see a strong pipeline of large enterprise deals are in the proof-of-concept stage with many of these prospects. Earlier this month we were awarded a contract with GMC Holdings, a worldwide health and wellness retail chain falling initially for the deployment of our virtual context enter solution to the helpdesk contact call centers.
Our integration with Zen-Desk along with our robust reporting and analytics capabilities were key to this high profile win. The enterprise retail segment is increasingly becoming a strong vertical for 8x8 with other customer wins that include game-stop and the 1,000 plus location national office supply retail chain we announced last quarter.
Our growing adoption in this segment has been due in large part to the strength and flexibility of our data analytics platform to provide unique insights into consumer behavior and enable dynamic handling of each call or interaction. The Boyd Group, one of the largest non-franchise collision repair centers in North America shows 8x8 to replace their ageing premises based systems without virtual office, virtual contact center and virtual office analytics solutions.
Initially or over 600 usages in corporate headquarters and across 50 U.S. locations, expanding to another 2,500 users in 250 additional locations.
A leading provider of rehabilitation products worldwide selected 8x8 for a 500-seat combined virtual office, virtual contact center deployment with quality management and workforce optimization. Gruber Scientific, the parent of companies that supply software and hardware systems for a variety of industries choose 8x8 to deploy both virtual office and virtual contact center services to over 500 users in 13 global locations.
Our virtual contact center solution was selected by a leading integrated retailer that operates full line and specialty retail stores across the United States for initial 180 seat deployment in two U.S. locations.
Another contract with one of the largest independent power producers in the U.S. was finalized during the quarter calling for over 850 virtual office seats in corporate headquarters with expansion potential to 28 additional locations.
While some of these larger customers may start off with small initial deployments, historically they continue to grow with us adding seeds and services as their needs evolve and they begin to understand the full business potential of our solutions. During the quarter our account management sales team booked well in excess of $50,000 each in additional monthly recurring revenue with both regions and outer Europe.
SPS Commerce, an home point financial, each added nearly 500 virtual office, virtual contact center and real analytic seats and nutanics [ph] added nearly 200 additional virtual office and virtual contact center seats. Approximately 50% of our monthly recurring revenue each quarter comes from add-on services sold to existing customers.
Our integrated virtual office, virtual contact center solution continues to different us from competitors helping us win and retain these larger accounts. Six of our top ten deals closed in the second quarter -- called for both virtual office and virtual contact center deployments.
Two of our Top Ten deals were for virtual contact center, only services; illustrating the tremendous value this offering is bringing us, not only just as part of an integrated solution but as an increasingly competitive standalone service with significantly higher ASPs than voice and UC services. Revenue from our virtual contact center offering has been accelerating steadily over the past several quarters.
Moving onto our second area of focus, ensuring our customers receive the highest quality service and support on a global basis. I'm pleased to report that our new customer support center is now lie and at additional support center includes Romania, it's said to go live by end of the calendar year.
These new technical support operations outside of the U.S. will expand our 24/7 worldwide support capabilities while favorably impacting our margins through reduced customer support cost.
Additionally, all of the three data centers we announced earlier in the quarter; Amsterdam, Brazil and Singapore have gone live and are supporting customers and end-users based in those regions. I'd like to note that as we continue to deploy our services to increasingly larger businesses with users spread across the globe, we are not simply building a cloud-based infrastructure to enable communication and collaboration between various end points.
That is cloud communications 1.0 which 8x8 has proven to do very well. As I mentioned previously, we're building a powerful real-time communications and data analytics platform that gives us the framework to develop a myriad of cloud based applications to help businesses achieve higher levels of business performance.
Imagine how much more value a business can derive from its communications when instead of disconnected systems and endpoint, all employees utilize a common app on your desktop or mobile device that is tied to the company's internal data and monitored in real-time to unlock and distribute value information across the enterprise. On the research and development front, I'm pleased to report that our new cloud native quality management solution.
A product developed by a closed Romania team which has expanded to 75 full-time employees is now available as an add-on share for our virtual contact center solution. This tightly integrated offering enables contact centers to maximize agent performance and customer satisfaction in a simple and painless fashion.
Unlike legacy quality management which are still being used by many contact centers today. 8x8's management solution leverages cloud technology combined with deep virtual contact center integration to deliver an easy to install use and manage framework for monitoring and improving the quality of a customers' contact center operation.
Customers are already reporting call center improvements such as a 20% reduction in onboarding time. 15% increase in agent performance and a 5% increase in customer satisfaction scores within just the first few weeks of use.
We believe our quality management solution offer significant advantages over competitive offering delivering simplified set up and management actually a fraction of the cost of existing alternatives. I'm also very pleased to announce that our virtual office for sales solution which I referenced earlier is now available to 8x8 customers and prospects.
This unique and powerful applications doesn't just retrieve CRM records for manual updating, its streamlines, the entire sales process with built-in you see integration across all virtual office connected devices including mobile. The solution creates a constantly updated view of communication activities rich with context from Salesforce.com providing detailed analytics on team, individual account -- and individual account performance.
With features like automated call logging and correlation of real-life sales activity to opportunity value and revenue, this will enable teams to focus more on customer engagement, closing deals and how those functions work together to influence pipeline progression rather than on record keeping and manual reporting. As we've mentioned before, sales is the first line of business we are targeting with a focus on the acceleration and optimization space, and we are currently developing solutions for other functional business areas such as finance, HR and relevant verticals such as retail.
We believe the business value provided by these analytics solutions will enable us to continue driving healthy service margins and further differentiate us from low margin basic communication services providers. Last but not least, 8x8 was once again honored this past quarter to be named a leader in Gartner's magic quadrant for unified communications as a service worldwide for the fifth consecutive year.
We were also named a challenger in Gartner's magic quadrant for contact center as a service North America for the second consecutive year. These are tremendous endorsements of the strength of our Company and products, and the continued progress we are making, developing and delivering the industry's most advanced enterprise cloud communication solution.
I'd like to thank our 1,000 employees worldwide for their dedication and hard work that is keeping us at the forefront of our industry. With that, I'll now turn the call over to our CFO, Mary Ellen Genovese.
Mary Ellen Genovese
Thank you, Vik, and thank you all for joining us today. Let's begin with some highlights from our income statements.
8x8 posted strong top and bottom-line results for the second quarter of fiscal 2017. All the numbers being reported this quarter are organic following the June 2016 anniversary of our DXI acquisition.
Our total revenue was a record $63.2 million, an increase of 24% year-over-year. With service revenues at $57.7 million, an increase of 23% year-over-year.
On a constant currency basis, total revenue increased by 26% and service revenue increased by 25% year-over-year. On a year-to-date basis, our total revenue increased 25% year-over-year and our service revenue increased 24%.
On a constant currency basis, both total revenue and service revenue increased 26% year-over-year. Service revenue from our mid-market and enterprise customers increased 36% year-over-year, this is 40% on a constant currency basis.
We continue to see a greater percentage of our revenue coming from larger mid-market and enterprise customers each quarter with over 53% of our total service revenue coming from these larger customers compared with 48% in the same period a year ago. Non-GAAP net income for the second quarter of fiscal 2017 was $5.3 million, representing 8% of revenue compared with $3 million, representing 6% of revenue in the year ago quarter.
This is 8x8's 26th consecutive quarter of profitability on a non-GAAP net income basis. On a GAAP basis, we posted net income for the quarter of $27,000 or $0.00 per share.
Our GAAP gross margin was 73.7% compared with 72.9% in the same period last year. On a non-GAAP basis, gross margin improved 60 basis points from the year ago quarter to 75.3%.
GAAP service margin was 81.2% compared with 80.4% in the same period last year. On a non-GAAP basis, service margins improved 63 basis points from the year ago period to 83%.
Non-GAAP sales and marketing expenses in the quarter were $31.6 million or 50% of revenue compared with $24.9 million or 49% of revenue in the same year ago period. The increase in sales and marketing expense was due primarily to additional headcount of deployment engineers and sales professionals, increased marketing and region [ph] expense and consolidation of our worldwide sales and support systems under one unified salesforce and service cloud platform.
Our GAAP tax benefit for the quarter was $15,000 and our non-GAAP tax impact was $109,000. Turning our attention to key operating metrics from the quarter; new monthly recurring revenue, or MRR, , sold to mid-market and enterprise customers and by our channel sales teams increased 30% year-over-year, and represented 65% of our total MRR booked during the quarter.
On a constant currency basis new MRR sold to mid-market and enterprise customers and by our channel sales teams increased 40% year-over-year and represented 67% of our total new MRR booked during the quarter. You may recall that in the year ago quarter, three of the largest enterprise deals in the company's history closed simultaneously which contributed to exceptionally strong MRR growth that quarter.
Our average revenue per business customer was $409 compared with $360 in the same period a year ago. Average revenue per mid-market and enterprise customer was $4,351 compared with $4,053 in the same period a year ago.
Gross monthly business service revenue churn on an organic basis, which excludes DXI, was 0.6% compared with 0.7% in the same period last year. Cash, cash equivalents and investments were $170 million at September 30, 2016, compared with $149 million in the same period last year.
Cash flow from operating activities was $6.9 million in the second fiscal quarter compared with $2.5 million in the same period last year. Capital expenditures were $5.4 million representing 8.5% of revenue compared with $1.3 million or 2.5% of revenue one year ago.
The increase in CapEx was due to the capitalization of software expenses related to our ongoing investments in R&D, development of our back office systems, the launch of our service platform in three additional data centers, an upgrade to our contact center infrastructure for our next-generation analytics, and the implementation of our easy contact now infrastructure in the United States. Effective this quarter, we are discontinuing the non-core voice message broadcasting segment of our DXI operations, due largely to the emergence of a more challenging regulatory environment in the UK for customers using these services.
Voice message broadcast it was a standalone legacy DXI business, operated separately from our easy contact now business, which is our simple to use solution for outbound and blended call centers. We had anticipated a gradual wind down over a voice message broadcasting business, over several years, by accelerating the wind down we anticipate 1.5 million of impact on our revenue, in the second half of this fiscal year.
Additionally the British pound continues to depreciate against the U.S. dollar, and we now anticipate an additional $1.1 million impact on our revenues.
Despite these headwinds of approximately 4.4 million for the full year we are increasing our fiscal 2017 annual revenue guidance to a range of 251 million to 254 million from our previous revenue outlook in the range of 249 million to 253 million, we are maintaining our full year non-GAAP net income guidance in the range of 16 million to 20 million, represented non-GAAP net income as a percent of revenue of 6.5% to 8%. This concludes my prepared remarks and I will now turn the floor back over to Vik.
Vik Verma
Thank you, Mary Ellen. I am very proud of the pioneering role EGHT by EGHT continues to play in the deployment -- development adoption and deployment of digital communications worldwide, as more and more eager new market participants are beginning to realize; delivering real time communication globally in a reliable, secure, high quality manner is no easy task, and we are very fortunate to have made the necessary investments over the years, to be in the position we are in today.
However, I'm even more excited about EGHT by its role posturing in the next generation of integrated cloud communications and data analytics technology which will further enhance the value businesses derive from our solution. With that we will be happy to take on any questions you may have for us today, operator please open the line for any question.
Operator
[Operator Instructions] And our first question comes from George Sutton of Craig-Hallum. Your line is now open.
George Sutton
Thank you, nice results guys, so Vik you spent a fair amount of time on the analytics service and I want to make sure we put it in the context, if we look forward a few years, how large might that represent an opportunity, for example your current art to [ph] for a customer's just over $400 a month, can you give us a sense of how that might get expanded through the service?
Vik Verma
Thank you, George, I mean this is something, I mean we've been hinting at and been working out for several years. Here is what we realized our, you've had you know our customers helped us realize, so we should give them the credit we can't take it, but if you are talking about an enterprise today, the one thing that every person that is an employee of the enterprise has, is typically a mobile phone, and one of the biggest things that we provide is you can have an app on the mobile phone, which where the company provided phone number is resident which gives them access to the company's directory, as well as any relevant CRM and ERP system.
What that tells you is; we are at the nexus, so think about a global company, every real time interaction, every outbound call, every inbound call, every text message, every video conference, along with the relevant CRM or back office system or LinkedIn or whatever context; is available to us, how valuable is that, increasingly we are seeing that over time we will become more and more focused on the specialty apps, I mean the one that we just talked about for sales force analytics, it's quite fascinating, it takes away, I mean anytime a sales person calls a prospect, it immediately update salesforce.com on whether how long the call was, who was called, whether it was a commit, a pipeline or best case category, and all the information is entered automatically and this person can be on their cell phone, they don't even have to log it to sales force in order to do, that when they log in the information is automatically updated. So increasingly we see that as becoming more and more critical, because we literally out the hub any type of real time communication, more and more I think you'll start to us leading with those apps, it's early days, we have released the first two or three of those type of apps, we released analytics 1.0 about a year ago, which gave our customers a chance to play with stuff, and candidly this is what they suggested we kept hearing from our customers, hey, if you can take our sales team and tell me on a daily basis which of my sales people, how long of my sales people on the phone?
Who they're calling? When they're calling?
This person that they're claiming that they're going to commit and close this quarter, when was the last time they called them, at the same time is that person that they have talking to, to trying to close the deal this quarter, calling support because unhappy about something. We want that integrated view so it's a dashboard that can become in every day and look at and help prioritize our activity.
So we basically pilot did initially with sales force, we then start a beta tested several customers and we're releasing it to customers this quarter. And that one will be in the $75 per seat.
Again, we are evolving the company to be able to sell more and more of these high end value added applications, and the communications increasingly will become the drive along, so it'll take two, three and four years, but increasingly we see communication is tightly integrated with these kind of capabilities, because if you think about it, who has that, how valuable is information about every person that called into your company? It lets you then HR application if suddenly a lot of competitors are calling into approach your employees, and you can kind of track that down, they can be directed to the nearest police station or whatever else is relevant, am joking by the way on that one, but we have that ability today, but that kind of tells you how this whole market is going to evolve, because as I said all the data comes to us first.
George Sutton
It's fascinating potential, just a one other question for Mary Ellen relative to your out performance on non-GAAP income this quarter, you suggested and you did guide for the numbers to be unchanged for the year, so clearly, you're taking that access and you're investing it somewhere. Can you be somewhat specific as to where you're investing the incremental profitability.
Mary Ellen
Yes, absolutely. One of the areas that we want to continue to invest that we started to invest was in modernizing our system.
So, we've gone live on a new cloud aero pieces [ph] in this past quarter, as we mentioned we went live on the stage one of our service cloud, we've unified the entire all of our global sales team in service teams under one sales force instance, and one service cloud instance. We want continue to develop it, continues to move forward on these types of types of modernization in fact the Systems originally our back office systems were built for SMB business, but now 53% of our revenue is enterprise and we need to do things differently, so there's a big focus on that, so that's where some of our dollars are going.
And surely will want to continue to develop our team on the mid-market size, we're seeing great traction on the channel, we're going to bring in some additional channel sales people and we're going to be investing in modernizing and continues to increase our region engine. There is a line of business out there and we believe that we're at the forefront of for the enterprise accounts especially the global accounts, we believe that we're uniquely qualified to capture a market, so we're going to continue to invest.
George Sutton
Super, thanks for the detail, good job.
Mary Ellen
Thank you.
Operator
Thank you and our next question comes from Dmitry Netis from William Blair. Your line is now open.
Dmitry Netis
Thank you very much guys, very next quarter.
Mary Ellen
Thank you.
Dmitry Netis
Okay, I got a couple of sort of metrics questions, one is on the channel side I think Mary Ellen you just mentioned sort of the traction there, can you qualifies as far as the growth in that segment, in terms of that the amount of revenue that channels bringing in, and then secondarily if you could talk about the International as a percent of revenue, where it is today, where it was last quarter potentially, a year ago have we seen sort of improvement on that front as you kind of went out globally with your platform.
Mary Ellen
Okay, good. Let me take the second part of question first, the international part of our revenue.
Last quarter was directly about 12% of our revenue came from our international operation, about a year ago it was approximately 10% of our revenue came from international operations. Today we're looking at 10%, this is most current fiscal quarter was 10% but that's mostly due to the significant decrease year-over-year in the pound versus the US dollar.
If you actually look in constant currency is over a plate solution business that we acquired in in December of 2013; that company has been growing well over 30% year-over-year in constant currencies. So we're doing very well in the U.K.
operation, unfortunately with this significant decreasing year ago the average exchange rate between the pound and the U.S. dollar was a $1.55 compared to an average exchange rate in this past quarter of $1.31.
So we've see a significant decrease there on exchange rates, but that's what the core businesses are growing very, very well and in local currencies. Now on that channel side as you know we don't break out our channel revenue separately but as we have said is the fastest growing segment of our sales teams, our channel business is going very nicely so we don't break that out separately but it is going very nicely.
Dmitry Netis
Okay, I think that the numbers I recall you guys talk about last couple quarters was in triple digits, it was still there close to that number. Anything you can.
Mary Ellen
Yes.
Vik Verma
It fluctuate up and down depending on the -- they tend to build some of our largest deal to fluctuate up and down. But look increasingly we are finding that Channel is becoming a bigger and bigger portion of our focus, because we really do think we have a differentiated offerings and the fact that we can now start to offer analytics, as part of a communications solution is something our channel partners a very excited by.
We've had a couple of channel partners particularly in retail, they're better than our -- no disrespect to our direct sales team which is fantastic but in some instances because of the relationships that they have, they are actually acting almost like surrogate inside our direct sales people. So we see more and more focus on channel going forward.
Dmitry Netis
Okay very good, and then if I may one other question I had was on the mid-market MRR which decelerated somewhat, can you do to qualify that it sounds Mary Ellen you mentioned this could have been a tough comp with the three big deal booked a year ago, so I guess I'm referring to that 30% of MRR growth of in terms of booking, as a percent of total bookings. Could that number essentially slide up going forward because they easier comp or that sort of the steady state we should be expecting here going forward.
Mary Ellen
Yes, so again that was 30% is what I had announced in our mid-market new monthly recurring revenue bookings, however again a large piece of our revenues coming from the UK and the next -- and again they are doing very well some constant currency that was 40%. So that 40% actually compares very nicely to last quarter on an organic basis which was -- which was 36%.
So we're in the ballpark, certainly a year ago quarter that number on an organic basis was much higher but again we had closed significantly, we had announced next week, that was a year ago quarter, excuse me, and the one customer that has 7,000 employees -- global employees. So I would suspect in the mid-30s to 40% is a reasonable organic growth rate in the mid-market, and you're going to see that fluctuate up and down because we are we have a very nice pipeline we're going to close the deals, and they can be a little -- were focused on the mid-market of course so when those big deals come up that's going to increase the numbers and then and then the next quarter you may not get a big deal.
But I think comparably speaking we're doing great compared to the large comps that we had last quarter, a year ago quarter.
Dmitry Netis
Fair enough. Maybe Vik, just one last one for you, just competitively speaking.
Well, you seeing -- if you qualify your take on the competitive environment as far as maybe Microsoft type of business, sort of changes that we have seen there over the past quarter. Have you seen any traction there or have the competitive environment against Microsoft -- potentially?
And on a comparison side, I was just going to say there has been a fair amount of consolidation there as well, and just whether that's impacting you positively or not, I'm just curious.
Vik Verma
Actually yes and yes in both. And so the comment on Microsoft is quite interesting because it does seem like and again, I don't speak for competitors; I mean Microsoft is an amazing company led by an amazing CEO but we don't see them Skype for business.
And it seems like the press from Skype for business also seems to have gone down. We were at a recent Gartner event and I don't think they were present, or if they were, it was a very small presence.
So, again -- I stay paranoid but I haven't seen much Skype for business and they are not the ones that we typically face. Going back to your comment on contact center; we're thrilled about that because as I said, little-by-little I think I very deliberately inserted that statement about that contact center is starting to grow very steadily.
I mean those growth numbers for our contact center are comparable to -- right around; they are faster than our revenue growth rate. So that's the very good news, right.
So they are high 20s, low 30s, which is starting to feel good because we're being able to sell it now as a standalone product. And we now have this integrated contact center offering on one platform.
So we have global tenants; so basically to follow the same contact center, we have the fact that our virtual office and virtual contact centers fully integrated and now we've got this quality monitoring software that is delivered purely on the cloud on a per seat basis with no or very little professional services. So that's something that we think is now starting to give us something that is truly differentiated and it also helps that a lot of the folks that who can't compete with and being acquired.
So we appreciate that.
Dmitry Netis
Excellent, keep up the good work guys. Thank you.
Operator
Thank you. And our next question comes from Catharine Trebnick from Dougherty & Company.
Your line is now open.
Unidentified Analyst
Thank you. This is Jack [ph] on the line for Catharine.
One quick question for Vik, can you give us some additional color on the upcoming release of easy contact in North America? How does this really shape, I mean your contact center opportunity in the region and assuming this is the lower AFP than VCC, does this impact margins at all?
Vik Verma
No, I mean -- it won't -- we don't anticipate it impacting margin materially but here is the part that it's significantly higher ASP than our virtual office. So keep that in mind because virtual office represents approximately 80% of our revenue, 20% of our revenue is contact center.
This easy contact now solution, I mean that's the reason we've bought DXI, it's an awesome product because we're now starting -- we always start with -- we drink our own bath water or drink our own champagne, there is some analogy like that but we've been piloting it with our own sales team. And it's essentially a non-traditional contact center with the ability to do outbound calling as well as inbound calling, it enables our customers to be TCPA compliant and the efficiency that they are getting is phenomenal; I mean literally the ability to get an entire lead list and you go out and you start dialing them and then the right lead gets connected with the right agent, with the right context and the efficiency is significant.
And so we are on-track to release it in January. And again, the intent is you start up with that and then you can couple it overtime with our salesforce analytics function where you can then tie into every activity of every sales person on an aggregated basis so you can get supervisory level looks, as well as individual agent looks, performance of inside sales agents and how what they are doing is correlated to customers by category of customers and by amount of revenue each generate, and by the time that you anticipate closing them.
So we'll be able to provide this entire complete and comprehensive solution that will optimize the operations of inside sales teams. And so we view this as -- I don't anticipate it having a negative impact on our margins I anticipated, helping our margins going forward.
Unidentified Analyst
Okay, great. Thank you for taking my question.
Mary Ellen Genovese
And just by the way, we're using it internally as well and with great performance.
Unidentified Analyst
Got it. Congrats on the strong results guys.
Vik Verma
Thank you.
Operator
Thank you. And our next question comes from Amir Rozwadowski from Barclays.
Your line is now open.
Amir Rozwadowski
Thank you very much, and I very much appreciated the color on Microsoft but there has been some -- at least some concerns about several quarters ago as well as some of the premise -- larger premise space companies out there making a bigger push in the marketplace. I was wondering if you could give us a little bit of an update on the competitive front from that side.
And then thinking about the competitive landscape, you folks have done a remarkable job of expanding your product suite organically in terms of developing additional applications and additional functionality into your product base, wanted to upsell into your customers. And have also been selective about inorganic applications in order to improve the product suite.
As this market continues to mature and we've seen still a fragmentation in the marketplace, is there an opportunity to sort of bolt ahead of your competition thinking about things inorganically in order to do so? Thanks very much.
Vik Verma
Thank you, Amir. So I mean -- we see competition from different folks.
We have not seen a concerted push into this market from any of the big names. We've seen announcements but we haven't seen it really impact any of the customers that we are in on a day-to-day basis.
Having said that I just always operate on paranoia, I respect everybody, they are good people out there. I'd like to think what we have is, frankly, significantly better and it's stuff that we have spent a lot of time and energy and some amazing engineering talent to build.
Global communications where you have high quality, high reliability, the ability to recover anytime that there is a fault, local number dialing capability, toll free numbers, the ability to do emergency calling, and then tie all of this stuff so you have one unified view of all the data flow and all the information globally in an enterprise is pretty difficult to do. We've got 12 data centers out there.
So I like to think we have something unique and then the fact that we architected it in such a way that every endpoint is collecting data and sending that data to a Big Data environment or Hadoop environment out here. So you've got 86 million interactions that we are actually logging every day.
So we think those things help differentiate us, and the fact that we are now providing these very niche applications that basically leverage the fact that we have the first access to the real-time communication interactions, both inside and outside of the company starts to really provide greater and greater value to our customers. So we think that's a pretty sustainable thing.
The other thing I'm very proud off and I apologize if I sound like a proud papa; our engineering team is awesome. I mean those guys are freaking amazing and I'm sure those are probably not the right choice of words but they are great people.
And so the thing that we have been able to do is, we have architected our platform in such a way that it really is, we have a very efficient engineering team. I think you look at what we spend on engineering versus what some of our competitors have to spend to even do half of the kind of products that we have and it tells you what we have here.
And so the ability to do bolt-on acquisitions and keep adding to that platform through this architecture, we think is a huge opportunity. I think you're seeing it in quality monitoring which is the company in Romania that we brought that I would personally tell you, it's probably the best acquisition I've ever done in my career.
They were six people, they're now 75 people, they've become a core engineering function in Cluj, Romania and the people we are getting are on-par with anybody we would get in Silicon Valley, if not better. And they are very cost effective, and so we're very pleased with that and we've basically built out a very significant facility in Cluj, Romania to kind of keep evolving that.
So what I think we've got is, we've got such a low engineering cost compared to everybody, we've got such a robust platform that the more applications we can keep adding to our platform that leverage our real-time data, the greater value we can provide to our customers. So we think that's a very sustainable and very core advantage, and we think we can build a very big company on the basis of that.
Amir Rozwadowski
So it seems like the way we should think about it then is really sticking through some of your knitting -- organic development in bolt-on acquisitions is really the primary focus of the strategy at this point.
Vik Verma
Right, that is the primary focus. From time to time, we maybe opportunistic, if the right opportunity presents itself but ultimately, I think that strategy is working and the goal is to keep doing these bolt-on acquisitions which either enhance our global footprint or add key functionality to our core platform that we can then turn into an integrated product offering for our customers.
Amir Rozwadowski
Thanks very much for the incremental color and again, congratulations on the results.
Operator
Thank you. And our next question comes from Nikolay Beliov of Bank of America.
Your line is now open.
Nikolay Beliov
Hi, thanks for taking my questions. Mary I missed the constant currency subscription that I mean -- I think on a reported basis was 23%.
What was it adjusted [ph]?
Mary Ellen Genovese
For the revenue – subscription revenue?
Nikolay Beliov
Yes, subscription revenue, correct.
Mary Ellen Genovese
So for the second quarter it was 25%.
Nikolay Beliov
Okay. So it looks like the trend of subscription revenue acceleration is continuing and the reason I'm asking is, last quarter for the year you said subscription revenue was organically is going to be flat in terms of growth rate versus last year and product revenue is going to be flat.
Maybe you can update us on these numbers for the second half of the year, that will be great.
Mary Ellen Genovese
No, we did give guidance. As you said, we increased our guidance, certainly have some headwinds and we have that one discontinuing piece of our business that we're going to be winding down.
But if you look at us from apples-to-apples comparison, we would expect certainly to continue in the 23% to 25% to 26% range from a subscription revenue perspective. We don't see any deceleration.
As we continue to move up market, some of these big customers that we acquired are going to take longer to deploy but we're still continuing to focus again on the market and our S&B is still going strong, I know it's the point of that revenue that put us very quickly. So the only thing I'm afraid of quite honestly is the deterioration of the U.S.
-- to the pound to the U.S. dollars, hopefully it won't get much worse than where it is today.
Nikolay Beliov
Got it. And one question for you Vik, what is your strategy in collaboration, especially for system collaboration, I think you had an update on the product, maybe early in the summer and what do you think like -- how you're going to be offering [indiscernible] functionality at some point in the future?
Vik Verma
Great question. Dmitry will have something to show you in the not too distant future.
Nikolay Beliov
Okay, thank you.
Vik Verma
I think the phrase I've used in the past is stay tuned.
Operator
Thank you. And our next question comes from Mike Crawford from B.Riley.
Your line is now open.
Mike Crawford
Thanks. It's nice to see the application, integration in the NOX you're providing.
What do you do for customers that want to integrate communications into their own application platforms?
Vik Verma
Yes, I mean we have the APIs to enable people to do that. That is -- that's part of the reason, so this is one of the things our APIs that we have developed are intended to control your PBX, it's not supposed to be simple widget that I allow Mike to call Dmitry or Mike to Mary Ellen and it's just a simple thing like a new driver calling another customer or something like that.
Our thing is, you control the entire PBX so examples of what we do with our APIs -- that some of our customers are actually -- retail customers are not leveraging. So example; if you have a high value customer and they call -- the core line, not even just the customer service line and this is not one where there is a context center sitting there; it can be based on a number, it can be directed to different things.
So if it's -- I'm using the smaller as an analogy but if high value customers can be directed to a totally different line, then for example, somebody that may go to a general line. So that's one part; and then as part of that you have to integrate to somebody's back office system so you can get the context and that data because again, the platform we have provided and we have done this overtime is every call, inbound and outbound; every message, inbound and outbound; every video conference, inbound and outbound; including how long, who, what was the number and that -- we have resonant in our cloud-based system.
Now we just need context and it's easy to context, you get reintegrated to LinkedIn which gives you complete context. And by the way, now I understand why LinkedIn was so valuable, because you get that context with -- okay, this person is ABCDE; you can then look in, hook into somebody else's database system that says customer ABCDE, if they call, they are a big spender therefore send them here or this customer calls a lot, send them here.
So those are the kinds of things that you can start to do because now it's no longer communications 1.0 which is we're not just going in and think rip out PBX, we'll provide you a phone system that is cheaper, better, etcetera, etcetera and has more functionality. We're saying we will provide you all of that but what we are providing you is data that allows you to look at buying patterns and behavior; one of the fascinating things one of our retail customer discovered -- actually in this particular case it was a restaurant chain, is that reservations were being made between a certain amount of time, I can't remember it was six to nine which was apparently, or sorry, five to seven, which is also the time when they had a whole influx of customers so the phone would keep ringing.
And so when they started to see those patterns, they were able to kind of go in and staff differently and make sure that there was a dedicated person taking reservations at those times and then at different times you're seeing no calls coming. So those patterns -- so now you've got all of this data, particularly when you're tied to the context of the customers back office systems.
So increasingly backs our focus.
Mike Crawford
So what is it that -- like a Twilio could do it or perhaps you couldn't do or is that not the case?
Vik Verma
So -- one, I have tremendous respect for Twilio. What they have done is, go after very simple messaging.
So hey, I want to send a broadcast message, I'm the football coach, I want to let everybody on my football team know that there is going to be two day practices or something. So you can program that and what they have done, the allegiance of what that company has done is make it very easy for non-technical people or people who don't have necessarily all the relevant skillsets to be able to go in and do that.
So that's why they held a large developer communities etcetera. For global communications where high reliability quality, compliance, security etcetera is critical; I think we do that better than everybody else.
We can do what Twilio does, we don't it -- we don't have that developer community but we are not targeting a developer community; we are targeting professional services organizations that can go in and control your entire PBX so that they can derive business aide. Imagine a large global hotel chain, and let's just say in the Philippines you get a 911 call that is made out of your hotel; it would be good for the security office in corporate headquarters to be alerted, right.
You may not rely on the local employees to do that, you could suck those kind of rules up with our system. So basically imagine any inbound and outbound call with regard to how it's dispositioned, where it goes to, how it's recorded, how tabulated we give people APIs to control.
So think of us as focused on professional services and enterprise, and not focused on the casual high volume developer community. We are focused on the complex systems where we think we can provide very differentiated high margin business.
Mike Crawford
Okay, great, thank you.
Operator
Thank you. And our next question comes from Jonathan Kees from Summit Redstone.
Your line is now open.
Jonathan Kees
Great, thanks for taking my question and my congrats also on the quarter. I wanted to -- I guess ask high level questions in regards to the tractions you've had with the mid-market and enterprise, certainly it's the larger part of your revenues now.
Usually they have a bidding process, and I guess if I can ask them, can you give some color in terms of your win rates, in terms of these bids, have they gone up overtime?
Vik Verma
Yes, so -- more often than not it's competitive, one of the things we need to get better at is being able to -- maybe which we have finally starting to invest, pretty much all the demand generation has been very simple. I mean it's all inbound, we get called by somebody and then we participate.
I would say there are lot of things we do well as a company but I don't tell you we can do a lot better demand generation in marketing area where we can get more recognized. Having said that as you can see from our revenue, we have great upside if we could start to get that part of our business better and we're starting to invest in that area.
So typically I would say our win rate -- and I don't have the exact numbers in front of me but I think if we are in the process, I would tell you more often than not, it's definitely more than 50%. I would say it's significantly higher than -- we very rarely lose if we're in a very competitive bidding process but I don't have the exact number with me right now.
Jonathan Kees
Okay. So it sounds like now is there a room to grow there in terms of rate but it has already been pretty high to begin with.
So it -- I also know she didn't talk about any of those big 10s in which you've already had seven and there was like three more that's -- that could still be now and talked about later. So I guess that's still something to be stay tuned for.
Let me ask in regards to the competition and not so much from Microsoft and I'm sure it's the same thing where you're winning a lot of this from legacy and from those who can have the global services and the crowd solutions that you're providing but more -- what is your -- how you're faring against your peer crowd peers? And how is that been going again ex-Microsoft?
Vik Verma
No, and I think -- again, I feel pretty good about that. If it is a global deal, if there is an integrated platform, if it is on the larger side, I think we will win significantly more than we will lose.
So I feel pretty comfortable that if we are in the mix, I think several of our competitors doubt the fact that they get deals where there are uncompleted, God love them, that's great, that's one of the things that we aspire to, in other words, but I think if we compete it, we'll be in a very good position and as part of our investment and demand generation, I want to make sure I start to get some of those deals, and/or make sure I'm at least in the mix, I actually don't mind the competition, I just want to make sure that we are there so that all the uncompleted deals step-by-step go away because if they are completed deals, we feel very good about our chances.
Jonathan Kees
Okay. And like you could just show up here, you have a high chance of winning.
So good luck with that and hope more of that to come.
Vik Verma
Thank you.
Operator
Thank you. Our next question comes from Will Power from R.W.
Baird. Your line is now open.
Will Power
Great, thanks. Just a couple of follow-up questions.
You all -- I guess Vik and Mary Ellen, both talked about some of the context and our traction, it sounds like some -- very nice trends on that front. I guess I'm just wondering as you think about the higher ASPs, what that actually means for the margin profile of the company going forward, both thinking about gross margin impacts and operating margins?
Mary Ellen Genovese
That's a good question, Will. So as you know, at of our Top 10 fuels [ph], six of the Top 10 this quarter was channeled with -- I'm sorry, it was context center as well as virtual outfit.
And we've been averaging about that same number around five or six for the last couple of quarters. So we aren't definitely moving up.
In many cases, we used to leave with virtual office and then bring the context, now we're able to actually leave with context center and bring the virtual office in. Obviously the more and more context center, the higher the service revenue is because it's a pure software.
So we're doing -- I don't exactly when it's going to moving into future years but I would suspect that we've done a very, very nice job on our service margins and improved in our service margins, and now would expect that we will continue to do that and part of that success will come from more and more contact center revenue, including the easy contact now that we bring here to the U.S., that will be available in January.
Vik Verma
And don't forget some of the newer decision support, analytics engine that we are bringing to the market such as the Salesforce analytics, such as quality monitoring etcetera. I think we started this process of transforming the company about two to three years ago and it is amazing; in order to sell a core telephony service, particularly selling a core telephony service to S&B [ph], going up market where you're selling a complete comprehensive solution with analytics and decision support software, and the ability for business process improvement and productivity enhancements, it's a very different skillset.
And we have been moving our sales team, I think we've brought in a whole -- a very amazing direct sales people, we've been augmenting our channel team, we've been augmenting by bringing on board a comprehensive professional services team that knows how to go in and do business process consulting. So that process, we have been doing and we've been kind of evolving to it and now you're starting to see that the products are kind of heading in that direction also.
So it will take us a few quarters to kind of just continue this evolution but I think we feel good about where we are.
Will Power
Okay. And Vik, maybe just a follow-up; just quickly on the previous API commentary, the opportunity there -- it sounds like you think you're well positioned there.
I guess I'm just curious is there a bigger opportunity to push that more aggressively, have more dedicated folks there? Or is that more of a one-off, inbound professional services work for customers that are looking for particular solution, I'm just trying to understand…
Vik Verma
It's very valuable strategically. And the key there -- but again, we're going at it slightly differently.
Again, I'm not trying to get $0.10 for every message or anything like that, that's not us; we're much more above -- we want to be able to charge high ASPs for customers and provide them very significant value at a per seat basis, our model is either subscription or we're adding elements of pay as you go but generally its subscription based model. So we see APIs as very core to that and on the one hand APIs are very critical because they have been critical for winning some of our larger retail customers because you have to integrate with their back office systems and your -- they also want -- every one of them wants customization of various business rules and could you do it in such a way that if the CFO calls, it gets routed immediately to these seven people.
All those start -- they all start to be very customer rules; and so we've developed a language called script-date [ph] that has been in process for some time and we'll demonstrate it to you guys, we'll not release it formally for probably a quarter or two but we'll show it to you guys in the next few months. But we are now finding that push is going to increase and so we're looking for -- we have -- we'll unveil a lot more on this in the next quarter or two but API is a very significant portion of our strategy but the target is around enterprises as opposed to the developer community.
Will Power
Got it, okay, that sounds great. Thanks.
Operator
Thank you. [Operator Instructions] And our next question comes from Mike Latimore from Northland Capital Markets.
Your line is now open.
Mike Latimore
Great, thanks. Just on the enterprise market, can you talk a little bit about the pipeline there; maybe -- actually how much it's changed and suppose it started with the fiscal year?
Vik Verma
No, the pipeline looks very strong. As a matter of fact, we are continuing to see it increase, we've got a few things going that I'm sure we'll be in a position to talk about a little bit later on but the park that has changed and it is quite dramatic and I think Mike, you have followed us for a long time, and you've followed the space for a long time.
You can just see in the logos that we're announcing and it starts with people almost having a cloud first mentality which I'm very grateful for, I just wasn't used to it for the last year to two years. So we are increasingly starting with people who actually want to talk about cloud.
And then the part that has been fascinating is the level of communication, particularly at our CIO level that we are starting to now interact with has changed with this concept of being able to have hardcore communication data on a global basis with all the relevant context and what can I do to make business decisions. And I think increasingly that's becoming our focus.
So we see that becoming something that -- legacy PBX have no hope in hell of doing; and so because of that we think that the cloud trend for enterprises will continue to accelerate. So we feel good about that space which is why I think you see it, you're seeing now that that's was 65 or 67 depending upon currency.
Mary Ellen Genovese
65% and 67% on constant currency.
Vik Verma
Constant currency of our new bookings. So we're increasingly seeing that the larger customers are adopting and the other part that we are seeing is that channel is starting to become comfortable with selling cloud to the extent you're not having to do the same level of handholding you used to do previously, and then the ability to sell these value added services through the channel becomes even more valuable to us.
So I think from that perspective we see good things happening at the enterprise level.
Mike Latimore
And just on the deployment of the enterprise deal, you have one -- were there any major sort of tranches of deployment in the quarter and we have a quick update on deployments of this bigger deal?
Vik Verma
No, actually all move in across the board, I mean all good. Some are moving very fast and pushing us.
I mean there was one customer where 4,500 seats were deployed, I think that was actually -- one of the CIOs made that comment to me; he said 4,500 seats were deployed over -- I think a two/three day period over the weekend. So yes, we seem -- I mean, look I'm very fortunate; we've got some amazing employees, I mean we have about 1,000 people which I think tends to be smaller than most but we have some amazing people here and the fact that you can get 4,500 seats deployed over a weekend it's pretty amazing.
And so I think we are continuing to see deployments steadily and then we've brought on board a professional services, global services person in Jeff Romano [ph] and he's just added another layer but he's building this whole global model with support centers in different parts of the work and just kind of continuing to add greater program management capabilities, etcetera. So, so far so good.
Operator
Thank you. This does conclude our question-and-answer session.
I would now like to turn the conference over to CEO, Vik Verma for closing remarks.
Vik Verma
Thank you all for listening into today's call. We look forward to meeting with you over the coming weeks and updating you on the current quarter results in January.
In the meantime, have a very happy holiday season. Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program.
You may all disconnect. Everyone have a wonderful day.