8X8 Inc /De/ Q3 FY2021 Earnings Call

Good evening. And welcome to the 8x8's Third Quarter Fiscal 2021 Earnings Conference Call. Speaking on our call today is Dave Sipes, Chief Executive Officer, and Sam Wilson, Chief Financial Officer. Before we get started, just a reminder, our discussion today includes forward-looking statements about 8x8's future financial performance as well as its business, products and growth strategies, including the impact of 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 and our reports filed with the SEC. Any forward-looking statements made on this call reflect our analysis as of today, and we have no plans or obligation to update them. In addition, some financial measures that will be discussed on this call, together with year-over-year comparisons, in some cases, were not prepared in accordance with US Generally Accepted Accounting Principles or GAAP. A reconciliation of these non-GAAP measures to the closest comparable GAAP measures is provided in our earnings press release and PowerPoint presentation deck, which are available on our Investor Relations website.

Thank you, Victoria. Good afternoon, everyone. I hope you and your families are healthy and safe. I'm pleased to speak with you today on my first earnings call with 8x8. I will cover business highlights from our third quarter results and Sam will walk us through financial results and guidance for the fourth quarter and full year. I will then share my observations from my first 50 days and initial thoughts on the company's next level of growth. Now let me start with Q3. Q3 was a good quarter; total revenue grew to $137 million, a 15% increase year-over-year and above the high end of our guidance range. Key drivers of the growth were strong demand for bundled CCaaS and UCaaS offerings, continued up market focus, new logo acquisition, channel contribution, and improving operational execution. Our fully integrated CCaaS and UCaaS solution is a clear differentiator for us. As mid-market enterprise organizations replace legacy on-premise systems and shift employee and customer engagement to the cloud. The industry continues to recognize the value of 8x8's fully integrated platform. For the ninth consecutive year, Gartner named 8x8 as a leader in the Magic Quadrant for unified communications as a service worldwide. Also in the quarter, for the sixth year in a row, Gartner named 8x8 as a challenger in the Magic Quadrant for contact center as a service. Of note, 8x8 is the only UCaaS Magic Quadrant leader that is also in the contact center as a service Magic Quadrant. Furthermore, we achieved our fourth sequential quarter of improved profitability. We exceeded top and bottom line guidance, improved operating efficiency, and strengthened our cash position. With a clear line of sight to improving revenue growth and profitability in the fourth quarter, we are raising full year guidance and cash balance outlook for the fiscal year. Sam will speak to this in a moment. Now let me turn to highlights from the quarter. We are pleased with the success we are seeing from our channel strategy and up market focus with mid-market and enterprise customers. We had a record quarter of market with over 730 customers with greater than $100,000 in ARR, a 24% increase year-over-year. This was a result of strong execution across sales, marketing and channel, and a combined product solution that is fit for the purpose for enterprise customers. Channel execution was strong again, driving 64% of bookings in the quarter. Eight of the top 10 deals and enterprise ARR growth of 46%. The channel team across all regions delivered their highest bookings quarter on record. Channel partners are turning to 8x8 because our integrated contact center and communication solutions deliver exceptional value for our mutual customers.

Thanks, Dave, and good afternoon. We appreciate you joining us as we report the third quarter financial results. I want to echo Dave's comments that I hope you and your families are staying safe. We are pleased to have delivered results that exceeded guidance, improved operating leverage, and reflect increased confidence in achieving profitability. Key drivers were better than expected performance from product categories, UCaaS and CCaaS in bundled offerings. Total revenue for the quarter was $136.7 million, an increase of 15% year-over-year, and above our $132 million to $133 million guidance. We had good sales linearity in the quarter unexpectedly; hardware grew sequentially as enterprise customers accelerated deployment, and professional services were strong. Looking at service revenue, we generated $127.1 million, an increase of 15% year-over-year and above our $124 million to $125 million guidance. Total ARR was $494 million at quarter end, up 20% year-over-year. Our strategic investments in the channel and product innovation over the last few years are delivering strong results. Third quarter non-GAAP gross margin was 59.6%. As expected, lower sequentially and driven mainly by product mix. Non-GAAP service revenue margin declined 80 basis points over last quarter to 66%. As we have previously mentioned, CPaaS margins are significantly lower than UCaaS and CCaaS margins. CPaaS usage increased during the quarter from holiday activities. Non-GAAP other revenue margin came in at minus 25.6% for the quarter, a large improvement from the minus 73.5% a year ago and sequentially improved from the minus 27.7%. Key drivers were continued growth in our professional services and the flex hardware rental program. Looking ahead to the fourth quarter, we currently expect overall gross margins to improve mainly due to better product mix and from CPaaS usage returning to pre-holiday levels. Turning to the third quarter operating expenses; we continue to align the global business to drive both improved execution and efficiency. Non-GAAP sales and marketing expenses improved to 39.1% of revenue in Q3, 2.2% lower than last quarter. The combination of leverage from our digital marketing programs, optimization of media spend, and moving from physical to virtual events has driven spending efficiencies. We've also added domestic and international sales capacity and have improved sales productivity.

Thank you, Sam. In closing, I'd like to share some of my initial observations and thoughts. This is now my 50th day, and I've been spending time with our employees, customers, and partners to better understand our strengths and where we can focus to make meaningful improvements. I have a deep appreciation and respect for the strong technology our team has built. I joined 8x8 because I believe we have an incredible market opportunity in front of us. Additionally, I'm very encouraged by the talent and dedication I'm seeing amongst the 8x8 team. Looking forward, I see the opportunity to leverage my 20 years of experience to drive improved operational execution and transformation to help the company reach its full potential. First, as has been demonstrated for years now, the resiliency of the business model really is special. And the market opportunity is massive. Not many SaaS companies have reached the $0.5 billion revenue size that 8x8 is today. Yet, we're just scratching the surface. Moving business communications to the cloud is one of the largest SaaS market opportunities there is. That transformation is still in the early innings. Yet recently, we have seen it become a top business priority. The urgent adoption of work from anywhere has accelerated the timeframe in which companies are making and planning to make the move to the cloud. Enterprises now see cloud communications as a critical component of employee enablement, customer connection, and business continuity. Having been a pioneer in cloud business communications from the beginning, 8x8 is well-suited from a product and experience base to capitalize on the accelerated nature of this transformation. Second, we have a unique technology to capitalize on this opportunity. I have spent a considerable amount of time with our engineering and product teams and strategic business review meetings. Based on my initial evaluations, I'm confident in the platform and the product suite of solutions. 8x8 has developed an integrated platform leveraging a decade plus of innovation, we have consistently been recognized in two Gartner magic quadrants, both UCaaS and CCaaS, a tremendous business and customer base has already been built upon these products yet. And I find this an exciting positive, there's even more we can do to fill the promise of cloud communications to deliver amazing experiences for the customers. In the quarters and years ahead, we will continue to be a customer-first, product-first, and team-first company that consistently delivers amazing innovation for the business user. Third, we are focused on execution. I have been impressed with the progress that has already been made towards revenue growth and profitability. And in today's announcements, you've already seen some of those hard-earned results. I do believe there are further additional opportunities to become even more efficient and streamline processes. We're reviewing everything from top to bottom, including where to best focus our resources and drive stronger operational excellence. Building a highly scalable, efficient, streamlined go-to-market engine will be a strategic area of focus in the coming quarters. I am excited about leading 8x8 to this next level of growth. I'm confident that through our focus on execution, our differentiated technology, and this unique massive market opportunity, we will progress down the right path to provide the best communication solutions for our customers and partners and will be recognized and rewarded for such. I look forward to discussing our strategies more in the future. Lastly, I'd like to thank our customers and partners for their continued support, and the 8x8 employees for making me feel welcome. With that, Operator, we are ready to take questions.

Your first question comes from the line of Matt VanVliet from BTIG.

Hi, good afternoon. Thanks for taking my question. And welcome to the team, Dave. It's great to have you aboard. And I guess my first question kind of goes on the press release from this morning, and you touched on it quite a bit, but the Microsoft Teams acquisition or integration, and all the capabilities you've built out there, in our work, we continue to hear and it's no surprise to anyone that teams is very well proliferated across the enterprise. But can you just help us understand sort of what the opportunity is for 8x8 from total addressable market, and how maybe the margin structure or the contract structure is a little bit different than going in with more of a direct sale on the X series?

Sure, I'll talk to the market opportunity; I'll let Sam talk about the last part. This is Dave, so on what we're providing with the Microsoft Teams Direct Connect is an ability for our customers to utilize the Microsoft Teams endpoints with our market-capable UCaaS and CCaaS offerings and it brings an ability for customers like that fast-growing retailer we talked about to utilize their current Teams environment. Additionally, because we have our unique capability in providing that direct routing, it enables the contact center agents and other employees like frontline workers that might not be in the Teams environment to create a mixed environment for those customers. And that's where we're seeing quite a tremendous amount of pickup in that product capability. We also launched some capabilities there, including the ability to set settings from within Teams, and in and out of call queues. So there's continued innovation that we're putting into that product to create differentiation. The market TAM is large as there's a substantial ecosystem around Teams chat, that has been adopted today and through the pandemic, and probably about 115 million daily users is the size of that and growing. We commissioned research with Hanover Institute that says about three-quarters of those companies are going to institute third-party integrations for UCaaS telephonic capability. So the market opportunity is large. We're leading in some of the capabilities there and are having success both in the channel and directly with customers.

Okay, now on the topic of Microsoft Teams margins, we don't see a materially different margin between a Teams seat and a non-Teams seat. Particularly when we look at the bottom line on the top line, there might be a slight decrease in margin, but that's usually more of an effect that we're selling to a larger company, and they're buying in large volumes. But when compared to the bottom line with reduced support costs and those kinds of things, it's effectively the same. We're agnostic to either one. And I think that's one of our great benefits is we want to do what's right by the customer, not necessarily push them one way or another.

Great, and then on the contact center side, obviously a ton of traction here, and we continue to come across more and more usage, more and more focus on how you're going to meet your customer in the digital world, as everything shifts to e-commerce, given the pandemic. What are you seeing? Is this mostly still rip and replace of some or consolidation of multiple vendors that are in a customer? Or are you really starting to see kind of net new use cases? I know you highlighted maybe NHS in Scotland as one that are helping roll out the vaccine, but are you seeing enterprises look to stand up maybe small contact centers, where historically they've not had anything?

Probably the mass majority of the market is still on legacy solutions. And so bringing that to the cloud with a modern solution that combines both contact center and unified communications is a massive opportunity and is where the bulk of the new logo acquisition comes from ultimately, and like we're in the early innings of this market transformation. And the change of work from anywhere that's occurred has created increased urgency in that transformation. But we're still in that early phase of early customer adoption and then people planning the adoption of replacement of the older systems.

Your next question comes from the line of Brian Williams from Stevens.

Congrats on the results. Dave, I appreciated the color about what attracted you to 8x8. I love to hear how you think your experience and skill set can help the next leg of growth.

Sure, I found it invigorating so far, there's been a very warm reception from employees and partners and customers, even investors as an analyst. And part of that is there, there was felt there was a good fit, right, between myself and the organization, with my knowledge of the customer, and my operational bent, as well as good market expertise. And I feel that is largely playing out. So it feels like the right opportunity at the right time. Additionally, with the increased elevation of moving organizations from legacy to cloud, as the profile of the whole category is increased, that is creating even tremendous opportunity. So, overall, it feels like a strong combination at this point.

Excellent. Yes. And the travel hospitality and retail wins, you mentioned, certainly, one of the first to come to mind this macro environment, but what the channel bookings in the quarter be encouraging the celebration of growth you saw there. Can you just talk about the composition of what your pipeline looks like, heading into 2021? And are there larger deal sizes in there? Thanks.

Channels, obviously, an area with momentum, and I think it's attributable to consistent execution and great leadership that we have at 8x8, that's building strong relationships with the channel. We are seeing strong congruence between mid-market and enterprise customers. And I would say pipeline-wise is healthy. Our goal is to continue that momentum and growth of our channel capabilities and marrying that with our ability to help the channel close those deals and accelerate the penetration into that category for combined UCaaS and CCaaS offerings.

Your next question comes from the line of Rich Valera from Needham.

Thank you. And let me add my welcome, Dave. Glad to see you aboard. So, Dave, I wanted to ask you about the channel, since that's something that you've clearly been involved with a lot in your career. Just give your assessment of where 8x8 is in terms of presence and mind share on both the bar and master agent side of the channel. Do you see an opportunity for them to increase their mind share while also improving unit economics? Obviously, there have been some issues in the industry historically, with folks sort of buying channel presence that maybe wasn't economically wise. But in any case, just your thoughts on where you guys stand on the two parts of the channel?

Yes. So like I said, channel momentum has been good. And there's been an element of catch-up to some degree. But I think there's also a preference that's being created at this point. Through consistent execution, the economics, we like the economics, we think there's a good mix between challenges we are at today. We are encouraged by that, and we saw, obviously, overall momentum, but the bar and the UK continues to be a shine with generating 40% of the channel pipeline. That is a differentiated model. That is an opportunity to continue growing that in that market, as well as probably an opportunity to move into additional countries beyond the UK for that.

Great. That makes sense. And then a question on the API business. When that was, when that acquisition was done, one of the thoughts was that you'd ultimately be rolling that out in some higher margin geographies that would help the margin profile. I am just wondering we have any update on sort of where you stand in terms of rolling that out beyond some of the initial geographies when you bought that property?

Yes, and I think we mentioned in our last quarter's call that we did roll some limited availability of the API business into the US, UK. We have close customers ' and existing customers on to that. I mean still the vast majority of the business is in Asia, we expect it to stay in Asia, because it continues to be robust growth there. So I think stay tuned. It's definitely a source of differentiation, particularly when we mix it with our contact center product.

Your next question is coming from the line of Tim Horan.

Thank you and welcome, Dave. Can we dive into Teams, please? It's been really an incredible 18 month growth for Microsoft really unprecedented. And almost I think, very few of these customers are in UCaaS at this point. Can you talk about the benefit of customers using Teams? What's your go-to-market strategy there? And why would these customers use you over the many other options that they have, and I guess how unique are you? And then lastly, like, can you give us a sense of how important this is to your growth or percentage of growth of incremental customers you expect in a year or two? Thank you.

Yes, I'll answer the first part of that. So being able to light up the Teams chat application with full-blown UCaaS and telephony capabilities is really kind of like at the broadest stroke of what the opportunity is. Doing that in the approach, we've done it with direct routing, creates a high-quality interface. Doing that with a reliable, high-quality, dependable vendor is really what the customers are looking for in that case. Additionally, we provide the ability to bring in things like contact center agents, which is differentiated and unique. In addition to other types of workers that might not be on the Teams environment, even in a large organization. As you can imagine, there's different types of deployments within those organizations. So this allows you to mix and match a customer to enable their entire organization with real-time communications with that asymmetric communication platform that Teams is providing.

I just want to add a small point to what Dave mentioned. Teams is typically purchased by the IT department, and we primarily sell to them. We provide a global solution that's a one-stop shop with direct routing, ensuring that end users aren't burdened in their use of Teams. It's a streamlined solution for IT that doesn't require extensive telecommunications expertise. We collaborate with local carrier partners across different regions worldwide. For the IT department, this means it's a one-stop solution that offers great total cost of ownership and low manageable operating costs. It's beneficial for everyone involved. According to Hanover research, 75% of all Teams customers are expected to utilize a direct routing solution, which reinforces this idea. It's one of those rare instances. Microsoft indeed has a strong product, but the IT department still needs to implement it globally and ensure it functions effectively. We serve as a complementary solution to that.

And so what's your go-to-market strategy there? And how important will it be to growth in a year or two from now?

I mean, I think the easy answer to that is I don't want to say something sophisticated, right? We hit the digital channels, the regular sub-agent master channels. We've also targeted a bit the Microsoft channels because they are super interested. Remember, last quarter we signed up Pax8, which is a traditional Microsoft partner. We have some of the largest Microsoft partners in the UK, who are selling our products. So we're targeting mid-market enterprise customers; we're a little bit more channel-focused. So we hit them through the channel; through the smaller customers, we hit them through the traditional digital route.

Your next question comes from the line of Jonathan Kees from Summit Insights Group.

Great. Thanks for taking my questions. And I'll add my congrats on the quarter and the welcome for Dave. I wanted to ask about I guess two product lines here. Obviously, your UCaaS and CCaaS are doing well, wanted to double click first on your CPaaS. You talked about the holiday usage that came back from previous quarter. It sounds like it rebounded enough so that it brought down the margins, I guess, with that particular product line. Can you talk about what your expectations in terms of the growth could be for that product? I know you're trying to integrate it with your other products offering portfolio, but it's still being sold separately, it's still not completely bundled with the other products. So if we can just talk about rates for the growth for that product would be in terms of where you're trying to deploy it. And the second thing I wanted to double click on the product-wise would be your video. Video is obviously pretty hot during the pandemic, during a lockdown. Can you talk about maybe this is more for Dave, what your vision is for the video, and the development for that, and where you see that going? Thanks.

All right, I'll take CPaaS and I'll give the video to Dave for your suggestion. On the CPaaS, look, as we had said, last quarter, we expected gross margins to be down sequentially. I mean, we generally see a pickup in the traditional SMS portions of the CPaaS business and some of the lower margin portions during the holiday season. That was reflected in the financial statements. Correspondingly, post-holidays, now we expect that rebounding gross margins. It's a fully integrated segment into our business. So I'm really not going to break out the growth rates separately for a host of reasons. But strangely, it is a faster-growing piece of the overall business. I think right now we're very focused on next steps. And I think that's great about having Dave on board; he brings a fresh set of eyes to it about the next steps that we want to take with that business.

Yes, on video. With our Gipsy community, we've had a great opportunity and launched a product called Jazz, which is Gipsy as a service. It creates a differentiated approach to bringing video meetings into other app developers. It allows organizations to embed a full meeting experience at a high level of APIs into different applications or workflows. That's a product that we put into beta; we have over 1,000 developers on it. Its uniqueness is its simplified pricing model based on monthly active users. That allows those organizations to implement it fairly risk-free into their products. Additionally, it has portability capabilities across different cloud environments. That's a number of differentiations; this is an early launch of an interesting product that we will be watching and working on building successfully.

Your next question comes from the line of William Power from Baird.

Okay, thanks. Yes. Hey, Dave. Yes, congratulations. Great to chat again. Hey, I guess, one of the big questions for us, I think investors generally is, as you look forward, and you look at some of the cloud communications industry leaders in growth rates, I think we're just trying to understand what some of the challenges are you face to close that gap with some of the industry growth leaders versus some of the advantages you might, in fact, have over some of the other leaders. I know you spoke to the strength you are seeing in the channel; I think even some of our own survey work kind of validates that. So how do you think about that? I mean, what are the big challenges, what are the advantages, and what helps you to close that gap over the next couple of years?

Yes, well, good talking again. I think about it in a few different ways or different steps. I am going through in-depth reviews of the organization and its capabilities, but always looking for opportunities to reinforce success. You're seeing a number of those even on the call today with the channel, with the UK, with the combination of CC and UC, and Microsoft Teams. Where there is strong muscle, we'll continue to build stronger muscle and effectiveness in those areas. Also, creating more operating efficiency in the organization is key. That's something that there have been great strides in. Sam is a great CFO to have on that, and he's all over that, but there are further opportunities to be world-class in how we operate, how we go to market, and how we serve customers. That will help and smooth out and create opportunities for investments into those areas that are working well. Then obviously, improving go-to-market motions and playbooks, everything from how we position and message to how we talk to prospects. So all of those will help smooth out and create a strong drive train between applying force and seeing results in the market. Obviously, these things take some time, and you have sales cycles that are nine months in enterprise, so things won't happen overnight. But working across those key areas, I know will create better capabilities and opportunities to get market-leading growth.

Okay. And just as a quick follow-up, just as I noticed a big focus on enterprise, and you've seen generally improving trends there. Is there any low-hanging fruit to help improve the growth rate of the SMB business? Because I know it's one of the elements from a mix standpoint that's holding back the overall growth.

Look, I mean, we have good growth in SMB in the UK, and we're obviously rolling out the e-commerce initiatives to both increase the number of new logos we're bringing on board and bringing them on more efficiently. If you look at a lot of the third-party research, the SMB business overall in the US isn't growing that robustly fast. I think we're at or above market growth rate. So I think it's more about growing profitably and smartly than it is about just putting up a raw number.

Your next question comes from the line of Peter Levine from Evercore.

Thank you and congratulations on a successful quarter, Dave, and welcome to the company. I believe many of us are aware of the success you've had in your previous roles and we hope to replicate that success here. What challenges did you identify from day one that needed immediate attention? I'd like to hear more about the opportunities you see in the first 100 days, whether they be in operations, products, or partnerships, and what your initial priorities are.

There's always a strong product background with 8x8, and applying world-class go-to-market capabilities always feels like a good fit and opportunity. Those are the areas we're digging into. I'm not going to go into like depth at this point. Those are things we'll come back to you as investors and lay out how we see that playing out. But those opportunities to create greater capabilities, greater awareness, and better deal velocity, these are all general areas where we'll combine the strong product capabilities with a world-class go-to-market capability for the organization.

Okay. And maybe for you, Sam, do you see a materially different post-COVID expense profile for 8x8 as it relates to sales, marketing, travel expense, real estate, just curious to know how you're kind of managing the business as we turn the corner on COVID?

Oh, I would say you're reading the CFO journals. That's what we all talk about in there. Look, I believe in corporate America, there's been a very clear realization that we don't need to travel as much and do as much T&E to generate business like we did in the past. I think it's on both sides. It's both on the seller side and the buyer side. So I think we're open to the idea of more remote workers in lower-cost regions, lower T&E expenses, so that we can fund more engineering initiatives and more sales capacity and more marketing capacity. I think I'm not unique in saying that is definitely something we are looking at, and it's something that we are looking at institutionalizing coming out of the pandemic.

Your next question comes from the line of Meta Marshall from Morgan Stanley.

Great, thanks. I wanted to dive into some of these new customer deals that were greater than $100,000, and you noted that, 53 deals, but only 34 of them were new logos. Just getting a sense of clearly the means you're upselling your customers quite a bit. Is that tacking on more seats? Is that selling contact center secondary? Is that pulling through UCaaS? Just a little bit of commentary on some of these new deals that come from existing logos.

So I'll start with some general characteristics, and then I'll let Dave pick up if he wants to add anything. So I hate to be so obvious, but it's a little bit of all the above. So definitely, we add on more seats, and definitely, we cross-sell. If we land a customer with UC, we cross-sell our contact center; every once in a while, we'll land a contact center customer and cross-sell UC. I think one of the biggest things is as we move into mid-market and enterprise we do find is we'll frequently land one region, one buying center, one division, and they're the first group that moves to the cloud. The rest of the organization catches on. We sort of get an overall corporate buying decision that gets made. Looking through the deals this quarter, and over the last few quarters, I'm constantly surprised when we land the European division of a US division of a multinational, and then they want to roll it out to Asia; they want to roll it out to the rest of their global operations. Every one of these six-figure deals you see is cross-boundary, cross-geographic, cross-products in the end. Dave, anything you want to add?

I think when you see, like Hallford, where we already had 4,000 plus seats in there in UCaaS perspective, we are able to have that open discussion with the buyer and then able to cross-sell a whole product category with contact center. There we added 450 seats; that's a great opportunity because we get to tell the story of the integrated product, and we have a strong relationship with the customer. So that's an area that is quite fruitful.

Your next question comes from the line of Mike Latimore from Northland Capital Market.

Great, thanks very much. I guess, Dave, on the 8x8 platform, it sounds like your number one differentiator being the full UC/CC stack. Just want to make sure that's right. And then second, can you give sort of a concrete couple examples of if the customer uses the full stack, what benefits do they get versus buying another platform that's sort of an integrated approach, let's say?

Yes, so it goes back a long time that customers have wanted those products combined and legacy solutions have combined those. There's the ability to have high reliability, and uptime from a single vendor and not create complexity and chance for duplication across multiple vendors. There are opportunities to reduce total cost of ownership. But additionally, there are things when you're talking about an IT buyer, being able to have integration out of the box and not having to integrate the two products, as well as being able to maintain integrations into corporate workflows. Additionally, we see feature capabilities, not only from manageability from an administrator, but also the ability to share presence or analytics across the product suite for adoption usage and a measurement of high levels of call quality and loss scoring across both products. So, I would say buckets sizes into several areas. In 8x8 buyer demand that's existed previously, legacy, and they're looking for that in cloud.

Got it. And just quick on the gross margin on the other product line, negative 25%, is there an opportunity to improve on that over time?

Heck, yes. We've improved it pretty radically over the last year, and we should continue to improve it. It may not be every quarter; it depends on certain things that happen, particularly around sometimes we have new phone sales, and sometimes you get larger enterprise phone sales. But yes, we definitely have room to improve gross margins on the other revenue line.

Your next question comes from the line of Catharine Trebnick from Colliers Securities.

Thank you for taking my question. Congratulations, Dave. Nice to see you there and a great quarter. I wanted to ask about the channel. What we're seeing this quarter is some consolidation of master agents and bars and SI firms. I'm wondering what's your take on if that persists? Where do you see your strength at 8x8? And then also, in addition, can you give us an update on Scan Source? Where that partnership is and how it's progressing? Thank you.

Yes, I'll take the first part of the consolidation in the channel. I think that's helpful overall; we like to work with large partners. We have a reputation in the market for being easy to work with, flexible, and supportive of the partner community. That will continue to support us going forward, as well as we can't afford getting known for having the differentiated combination of UCaaS and CCaaS to leverage with the channel going forward.

Then specifically on Scan Source, I never talk about a single partner without their permission. So it'd be a little bit inappropriate, but on the US bar program in general, it continues to roll out; it's something we're reviewing continuously to see what the next steps forward are. But it continues to roll out and not much else to say.

Your next question comes from the line of George Sutton from Craig Hallum.

Thanks. Dave, I may be the only one that goes back to your WebEx days as well. It's nice to work with you for a third time. I did want to double click on the UK channel success. Now my question may be inappropriate based on Sam's last answer, but the Virgin program along with the cloud-fueled program, I'm just wondering if you can give us a little bit better sense of why that has been so successful.

Thanks, George. I'm going to let Sam answer that; he was running our European operations previously.

Yes, so I wouldn't give you a specific on Virgin. But I'll certainly talk about the UK market. Look, the company entered the UK market in 2013, first through an acquisition, and doubled down again in 2016. We've been there for eight years. The team always tells us we're the number one cloud player in the UK market. It's a lot of what Dave said earlier about our success in the US. We are known; we are reliable, and we are easy to do business with. We figured out how to do the bar wholesale billing in the UK and all those intricacies of the business model there over time. I think it's a real competitive advantage for us because we've got years of head start compared to everyone else there. The bar you mentioned in particular saw what our capabilities were and selected us for their next phase of growth there.

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

Thanks for taking the question. Just one clarification on the cost side, Tim, I think you talked about expenses being up sequentially 1%. I just wanted if you can clarify that. And then more for Dave, just on the competitive side, what are you seeing in the market? Is your success that you're going head-to-head with similar competitors that you were before or are you getting invited to more deals? Generally, in these deals, especially in the larger ones, how many competitors are you seeing that you have to beat in order to win the deals? Thanks.

All right, I'll take the first one while Dave gets the second part. I think what I said was we would be up single digits year-over-year growth for OpEx in the fourth quarter. So single-digit year-over-year growth in the fourth quarter for OpEx.

The competitive landscape is largely similar as you might expect; the buyers are the same. It's about meeting those needs. There is a little more back to the contact center side on the competitive and buyer side needs, and that's the only difference.

Have you seen in terms of the sales cycle, I think there was a little bit of a disruption when we went to a lot of remote work earlier in the year. I think improved it more if people got more comfortable with buying and installing the product without face-to-face.

Well, so the last part is absolutely right. The multiple meeting face-to-face meetings required have now turned into remote video conferences using our own product and remote video demos using our own product. So definitely that's the case. I think the biggest change that has happened in my mind is that IT departments are used to this now. We did have panic buying and I think we've talked about that over the last couple of conference calls. Now it's a little less panic buying; it's more course of business. They know what they're doing; they know how to remotely deploy; they know how to remotely enable their users. I think it's great because the cloud has really shown through during this pandemic. No one's ever going to think about buying an on-prem system again for all the reasons this pandemic has shown.

Speakers, there are no further questions. I would like to turn it back to the management for closing remarks.

Thank you so much. And obviously, there's a replay available on our website. Until next time, thank you.

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