RingCentral, Inc. (RNG) Earnings Call Transcript & Summary

Welcome. All right. So we are very pleased to have RingCentral with us today. They need no introduction. Vlad, Founder, CEO, all of the above, built a great company. We have Mitesh, CFO, who many of you might know from going back maybe to the days with cash, right? So been around...

Yes. Didn't pick up on music as much, but yes.

Yes, yes. I mean you got to work on your snow videos, but you can do that later.

So all right. Your reported results Monday night, another really good quarter, another year of 30% plus growth. So I think one thing that we've been trying to ask everyone, especially for the ones that have just reported, it's just also to get a sense. Obviously, you beat expectations, but just to get a sense of kind of how the shape of the year played out in terms of IT spending, right? Did it -- how is the -- what's the variability by region at all that may have surprised you, either to the upside or to the downside? Did you notice any difference from -- maybe since you guys go through all business sizes, right, from SMB to enterprises, have you noticed any changes over the course of the last whether it's 3 months or the last year in terms of how strength in those sectors might have felt?

Yes. No. So great to be here. Thank you. Look, I'll let Mitesh get into more details, but at a high level, we're not seeing any slowdown in IT spend. Obviously, our numbers are holding up nicely. We're able to maintain 30-plus percent growth on what is now a $1 billion revenue run rate, so that feels good. We are, as many people probably realized, largely concentrated in North America, so -- but we do have exposure elsewhere, and in particular, we have a fairly sizable U.K. operation. And look, it's been strong across the board. Mitesh, you can maybe add some color to this.

No. I think it was -- it's shaped up a little bit better than what we thought, actually, originally, especially in the fourth quarter. So if you just recap the year, Heather, I mean it's exciting times to be in the UCaaS space here. We did punch through the $1 billion run rate, grew 34%. And the way we've been doing this is we are executing on our key core drivers, call it mid-market enterprise channel. We are layering on new drivers, AT&T, Avaya, Atos. And we're trying to do all this more efficiently. And all these 3 things are working together, so we are seeing a lot of flywheel effect in this space.

So since you mentioned the partnerships, AT&T, Avaya, Atos, we're going to spend a lot of time on Avaya, I'm sure. But just to kind of give people a sense of when you formulated your outlook for this year and you think about the layering on of incremental revenue from those types of partnerships, which one do you think is -- for this year, the most significant? How would you rank order them?

Right. So this year, look, the core drivers, which can be at play, which is, I think we will see more strength in mid-market enterprise going forward. We will see more strength in channel. But to answer your question on new levers, which is, call it, AT&T, Avaya and Atos, timing-wise, that's the sequence. Even impact-wise, that's going to be the sequence because AT&T, we have a relationship with them. And numbers are small, but AT&T did have a headwind for us last year by a couple of points of growth. It was a drag, but with new bookings taken over, that headwinds will start to wane. So it's going to be relative tailwinds for us. Avaya, that's the most talked about sort of partnership. Look, I think it's going to be -- over time, it's going to be phenomenal because there's a lot of pent-up demand. But for this year, we just want to take it one step at a time.

Right. So again, I got a lot of questions on Avaya, and I know people in the room have a lot of questions on Avaya as well. But if we just take a step back and look at the unified communications market and UCaaS adoption, what -- it's been kind of a slow and steady pace of adoption. Are we finally nearing the point where an inflection's going to start to occur? And if so if you think that way, then what's going to drive it?

Yes. Look, it's a giant market. It's a giant market. We're talking $400 million plus, maybe plus, plus out there that we believe are, by and large, all going to go to the cloud, okay? It's not going to be overnight. It has not been overnight, it will not be overnight. But we have much better acceptance across all sectors. And obviously, with Avaya, which is the largest incumbent out there, with Avaya basically now embracing the cloud and embracing RingCentral part UCaaS, I mean the debate is over [indiscernible]. Now can I sit here and tell you, okay, 2020 is going to be the year that more seats are going to -- more new seats are going to go cloud versus not, look, I mean there are -- if you can hear me? Okay. There are researchers out there who are much better at it than we are, we're just seeing what we're seeing. We're seeing larger accounts. We had 40,000-seat win last year. We had a 45,000-seat win last year. I think we've announced for the year, we had over 800, 100 7-digit TCV wins, which is remarkable, we think, certainly, where we're nobody followed us a long time. A few years ago, nobody know how, 1 a year or 2 a year, right? So the train is definitely moving, and we will get there. We will get there.

Those 40,000-seat deals that you mentioned you landed last year, if you go back a year or 2 ago, what would have been the reason that they might cited to not go with RingCentral? What have they kind of gotten passed and embraced about UCaaS versus maybe how those conversations might have fallen a couple years ago?

Definitely. Seriously, it's so gradual, yes. I mean a few years back, when you started covering us a few years ago, our largest win was sub-1,000, and people were going, well, is UCaaS as a whole and Ring in particular, but are you going to break through this 1,000 barrier and then 5,000 and 10,000 and so forth? And yes, as of now, that a 40,000-seat opportunity comes about, if -- all you have to show is 500 seats before. So it's been steady as she goes. I'll give you another maybe more technical reason is geographical expansion. So the advantage of UCaaS, it's not peculiar or just a range, we just happened to be the largest and kind of best established. But the amazing opportunity here is to provide through the global service in business communications. It's never been done before historically. None of the incumbents, whether it's your AT&T, BT, Orange, none of those companies are able to provide truly worldwide coverage. And we have. And when we go and we get these mega wins, I can tell you that international plays a lot. We are able to cover an enterprises footprint across the globe. That removes all kinds of friction and provides a unified and superior experience for the employees, for the customers worldwide and save them money. What's not to like?

The RFP process in those 40,000-seat deals, who else would typically -- and maybe if you even -- you don't have to talk about just those 2, but kind of the ones that you're in that are kind of 5,000 or 10,000 and above, what is -- who else is involved in those RFPs, typically?

Well, there are those pesky competitors from time to time, unfortunately, yes. Look, there is always the incumbent. Incumbent is by and large, is Cisco, Avaya, to be honest. And now Avaya, of course, is trained on our side. And then you have your usual suspects. 8x8 is still out there. Sometimes, you may have maybe a local regional competitor, maybe a pre-IPO company. But as you know, we tend to hold our own selves that we've been winning in Gartner for several years running now. So yes, our biggest issue is not -- I don't want to sound too smart here, but if we're at the table, chances are pretty good we'll win. Our biggest issue is getting to the table. And with these partnerships, you mentioned Avaya, AT&T as of now, we should have more advantage.

How did the Avaya partnership come about? Can you walk us through the back story to the extent you can share at about how you guys got together?

Well, look, I mean this is a small industry, right? Everybody knows each other anyways. It just made sense. So I tell you, we were just at Avaya ENGAGE conference. I know many people in this room have visited as well. And we talked to a bunch of channel partners, and Avaya is very much channel heavy, which is a good thing. And really the feedback was not why but why so late? What took you guys long? So it just made sense. I mean people want to stay with a known brand, which is Avaya, and also want to have world-class technology, best-in-class, which is Ring. So it just made sense to get together.

You mentioned the Avaya ENGAGE conference last week. What were your biggest takeaways?

Universal acceptance, a lot of interest. Almost -- I don't want to overheat this room in particular but certainly no resistance. I mean people are embracing this partnership. Concerns are not -- there are no strategic concerns, in backward sense. And I know many people here do their own research, you obviously -- Goldman Sachs does as well. So when exactly will it be out? When are my sales force -- when is my sales force going to be trained? How many seminars will you guys do? It's at that level. Which assets you support? And yes, the market is definitely ready for this product.

So one of the things we've heard from partners that will help accelerate the process, and I think you mentioned, Mitesh, on the call, the migration tools are going to be available, I think, at the same time the product launches, right? So we're going to have the migration tools. We've got to go through the training for the partners. I guess one, I'd love to know kind of how long you think that training process is for them to get comfortable reaching out to customers to kind of start the migrations. And I guess the -- well, why don't we start with that? And then I'll do the second part of the question.

Yes. So look, we took some experience. And what makes us unique at Ring is we do have an established culture of partnering. And that, to our knowledge, is pretty unique in the industry. Again, the fact that we have these multiple wins, we haven't even talked about British Telecom, TELUS. So the fact that we're able to deal with these major service providers and now with Avaya now our first SI, so again, it's just a moving train. Look, to your exact question, it takes multiple adverts to get people comfortable, okay? But we do have programs in place. So at a high level, we expect to have touched, say, Avaya's direct workforce as well as all of their major resellers. They will all be touched by launch. But...

By the time it launches.

By the time it launches, exactly. By the time it launches. But again, it will be multiple touches, multiple programs. And look, in the end, they have -- the whole idea here is to, what we call, train the trainer. We are not utilizing our direct sales force to convert the base. We expect for Avaya and their channel partners to do that. Our job is to train them. I'll tell you, the more success they see in the field, the more comfortable they will feel. And I see it a little bit as a snowball in the making. Eventually, they will be stand-alone or self-sufficient. And we'll just be there to support them.

How important is it that people will be able to take their existing equipment that they have and leverage it as they make the migration?

Yes. Vitally important. It's one of the biggest barriers to adoption is existing infrastructure. And the fact that we'll be able to now support Avaya's end points, which nobody else will, that's a big differentiator.

How -- and how quickly -- you and I have talked about this, but how quickly does that happen? So if someone turns -- if they get turned on, on a Friday night, how long does it take for them to be -- for the switchover to occur?

There are 2 angles or aspects to this. One is just supporting the end points themselves, which is your desk phones, right, which needs to be powered through. The other dimension, which is equally as important, is your migration scripts. So think of the entire user base in a company, that needs to be ported over. That's one. Part 2 is your settings needs to be ported over at the entire company level, your IVR tree. Where do you go to press 1 to go sales, 2 to support. That settings need to be ported over. And third, the user's personal settings, voice mail settings. How does Heather say hello, whatnot, right? Those also need to be ported over. So end points is one. Migration scripts is another one. So now both these need to work in parallel, and that's what creates this frictionless experience or will create a frictionless experience for customers to migrate over to ACO, which is what no other cloud provider can offer with Avaya. That's the differentiation.

Okay. The other question that comes up a lot is just the age of the installed -- age of Avaya's installed base, not your installed base. And is there kind of a rule of thumb that help people think about kind of the useful life of their PBX assets? Is it 20 years? Is it 10 years? I mean can you share with us anything you've learned about that?

Yes. Really, really good question. Look, it's all over the place, right? So you can talk about life of depreciation, but they tend to last for longer than, say, 5 years. We use usually rule of thumb. We think it's fairly conservative, but call it 10 years. So by that math, you have from Avaya alone 10 million seats a year come up. But I tell you, there are system cells that we're replacing that are 20 years old? So there are all these outliers. So another way to look at it, which is maybe potentially even more interesting, it's not sort of useful life of the equipment because it's good equipment. Right now, it works well. It's changing -- changes in the way that businesses operate, global nature of things because an on-premise legacy system is limited to a particular allocation, by definition. So certainly does not cover your distributed footprint, much less international. So that's a big problem we're solving. And then mobility. 50% of our 7-digit TCV wins, so this is our highest, and cited our mobile-first approach as the key reason why they chose RingCentral. Legacy equipment does not begin to cover that. So once businesses sort of start getting into this digital transformation mode, and frankly, it's 21st century, legacy needs to go out. And Avaya has felt that and obviously [ physically ] achieving that now as well.

So we also get asked a lot about the partnerships and the relationships you have with vendors like NICE and Zoom. Can you share with us kind of NICE -- I got asked about NICE a couple times yesterday. Just what's the current state of that relationship? And has anything changed as a result of the recent announcements you've made from a partnership perspective?

No. Nothing really has changed. Look, our foot forward has been always to follow the customer to provide best-of-breed solution in whatever segment. We'll know that as far as voice is concerned, that is the core that RingCentral was built on. We are second to none there. In the contact center space, we have a multiyear relationship with inContact, which is -- which precedes their acquisition by NICE. It's a real good relationship. We have close integration. It's riding on our network. We provide the SLA behind it. Obviously, customers are voting with their dollars. So they like this integration.

And Zoom is the other one that comes up, and they're always very complementary of Ring. But just wondering if you go down the path and they're selling their Zoom Phone, which again, it'd probably be helpful to explain to people, there are differences in the go-to-market and just the offering itself. But as you see them kind of moving beyond or innovating on the product, do you have to start thinking about maybe where you could go or start building out your own video solutions over time?

Look, again, all we have to do, to our way of thinking, is provide our users and our prospects with world-class technology across voice, media, messaging, contact center and the open platform. So that's kind of what -- how we view companies meant or to be. Zoom is obviously a valued partner. Again, I said, people vote with our dollars. So do we. I mean we continue choosing to offer Zoom to our customer base. They obviously like the combination, and we intend to continue that. Now just like with inContact, we do have a contact center product even with this one that are somewhat competitive too in context, but there is quite a bit of differentiation and everything lives happily together. I would not rule out of the question that we would have something similar in the video domain. This is -- we're not going to pre-announce it. But again, we will stay with our best-of-breed. And breed does not mean within Ring. It does not mean outside of Ring. It's whatever it takes to deliver the best quality experience.

Right. Right. And maybe just -- I'm not sure if you get asked this often as well, but just kind of the differentiation between Zoom Phone and RingCentral.

RingCentral is a lot better.

We knew that.

As Charlie Munger would say, I have nothing else to add.

There you go. That's like a mic drop. Okay. Let it go.