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

All right. Welcome back, everyone. Thank you for joining us. My name is Sterling Auty, Software Technology Analyst here at JPMorgan. Very happy to have with us the management team from RingCentral for our next presentation. We have Vlad Shmunis, who is CEO; we have Mitesh Dhruv, who is CFO; and the latest member of the management team, Anand Eswaran, who is President and COO. Guys, thanks for joining us.

Maybe just to get kicked off here. RingCentral is viewed by many investors as one of the companies that's definitely seeing a tailwind because of what's happening with COVID-19. What did you guys experience in your business, both in March and through the month of April?

Thank you, Sterling. And I just wanted to say, hope everybody is doing safe and healthy in these times, and we're glad to be here to have this conversation. So great question. I would say Q1 finished with very strong logo momentum. In fact, I'd say that more than 60% of the large deals, the million-dollar-plus TCV deals closed actually in the second half of March. We also had many instances of accelerated upsell. So we talked to you about Aveanna Healthcare in December as a large customer win with RingCentral Office. We actually had one more large win with Aveanna Healthcare in March. In this instance, it was taking their contact center agents, 300 of them, in literally less than a week activated and productive so that they could work from home as well. So many examples of that. Now this new customer momentum, new logo momentum has continued since the second half of March. As I look at April, our new logo acquisitions almost grew 40% year-on-year in April, which is one of the best Aprils we have ever had. If I look into verticals, we've had some churn in SMB on some specific verticals like retail, hospitality, travel, but they've been balanced by some of the accelerated adoption we are having in other verticals like education and health care. So it's -- on balance, it evens out to slightly better. And basically, the final thing I would add in terms of color is pipeline velocity, conversion rates, sales cycles' times, are holding fairly steady to actually doing slightly better than we've had before. So overall, with the context of COVID-19 in this backdrop, new deal momentum underpins what we see as a secular shift to a new paradigm in the work-from-home world.

So based on what you talked about in terms of the pipeline and some of the sales metrics, one of the questions that I get is, how much of the opportunity that you closed in March and April is actually a pull forward in demand? And could that actually make for tougher compares and headwinds for growth as you get into the back half of the year?

Sterling, I'll take that. I have to add some value. So I'll take that. No, I don't know. So look, 1 month or 2 months don't make a trend, but it's a little different than Netflix seeing a pull forward where people are binge watching videos, right? It's different. For us, I don't think it's a pull forward, it's a secular shift, as Anand mentioned. And we saw March and April follow the same pattern. So to the extent we all feel this COVID-19 and this whole new work-from-home paradigm is going to shift. I think we'll all look back at this event and say this 2020 moment, although a little bit sad for humanity, is going to be a watershed moment for UCaaS. And I certainly feel that RingCentral will be a beneficiary of that trend.

Yes, I think that makes sense. Now that the attendees have kind of fully ramped, I want to take the opportunity to remind the audience that I will take questions from the audience by just using the Q&A button. If you hit that and enter your questions there, I'll actually incorporate it into our session. Now Anand, you mentioned that there is some churn in the SMB, or maybe Mitesh, if you look to quantify, how much of the SMB business do you think is at risk? Or how much does it represent? And how are you thinking about how you factored it into your outlook?

Yes. No, it's a good one, Sterling. So those verticals are about 10% of our SMB installed base. And yes, we are seeing some elevated churn. What we've taken is, look, you don't know what you don't know, and you've known the management team for a bit here. So we have taken a more conservative posture assuming things don't really get better. The churn does look elevated, and we've assumed lower close rates in new business to factor in the outlook. Just to make sure that we totally derisk it, if the macro turns out better, we will absolutely see upside in the back half.

And are you guys seeing an increase in -- or a change in the mix in terms of your customers that are looking to you for UCaaS versus CCaaS versus all of the above?

Yes. No, it's a great question. And as you know, Sterling, contact center is a really important element of our growth strategy. And in fact, it's growing faster than the total business. So if I reflect on Q1, the number of large deals, the million-dollar-plus TCV, CCaaS deals we had were almost 2x up year-over-year. So -- and this goes back to the same thing, which is companies are facing the reality that even your contact center agents need to be productive and be enabled to work from home, work from anywhere. And so that is what is leading to companies making a quicker decision on contact center to deploy CCaaS and activate their employees as quickly as possible. The example I shared, Aveanna, is a poster child of that probably, but that's what we see. CCaaS is important and our relationship with our customers for UCaaS is enabling us to actually help them on their CCaaS journey quick.

Yes. That makes a ton of sense. Mitesh, one of the questions from the audience that I've gotten is on all of our companies is, as -- trying to gauge both Q1 and Q2, how many of your customers are looking for payment deferrals or looking for flexible payment options? And maybe kind of weave into that, what's the typical kind of payment structure that you have with your customers relative to the contract duration that you have?

Sure. So we have customers in 2 flavors. Majority -- or I would say, I think 50-50. 50% of our customers pay on credit card on a monthly basis. So it's sort of auto debit in a way and the other 50% are on invoicing terms, traditional enterprise software invoicing. For those, the payment terms are net 60 days. And what we're seeing is on -- in buckets of some of those customers, we are seeing some payment deferrals. They are using the product, but they're asking for some reprieve on payments, and we are helping them through this process. So overall, what we've done is, we've baked in some reserves for 2020 in terms of that some of these deferrals may not turn out into revenue, we may have to forgive some revenue for these customers, and we've dialed that into the outlook as well.

And for those customers that you are giving some flexibility to, what do you get in return?

What do we get in return? We try to get a contract extension in return. That's the first line of defense. So that's what we try to get to. Or part two is we'll just say, okay, we will forgive your payment for 30, 60 days, and you can just catch up our payments after 60 days. So those are the 2 -- it's a two-pronged approach.

Got it. Vlad, you've really kind of increased the activity with partners over this last 18 months, bringing -- getting back on board with AT&T, the Avaya partnership and now Atos. Can you talk to us in terms of strategically, where do you see kind of the go-to-market motion moving to with the mix of direct versus channel versus partners such as those?

Yes. I'll give you a higher level answer, and maybe Anand can provide you a little bit more details. But at the high level, we're very much partner-centric, I think, as you know. We do have a well-developed direct motion as well. But certainly, strategically, we feel that our partnership with Avaya is unique. Our -- again, they have 20% to 25% of world's installed base of PBX seats, which we expect to go to the cloud, especially now in the COVID environment, it's very clear that on-prem systems are no longer up to the task. So that will be an accelerator. You mentioned AT&T, Atos. So those are extremely strategic. I can tell you that we're taking it seriously. We are -- we were able to ship Avaya Cloud Office on time in the middle of this unprecedented crisis. It's early, but it's going well. We keep applying resources. It has management attention here at the highest level, and we expect this to continue. And perhaps Anand can add maybe a little bit more specifics.

Yes. Thank you. I came from Microsoft, and Sterling, this is -- Microsoft was a partner first company. And one of the things which excited me to RingCentral is our channel and partner-led focus because I do believe that sustainable success happens on the back of that. So with that, Vlad gave some macro color, let me give some details. If I look at the channel business, Q1 continued the very strong momentum we had. We added more than 500 new partners. What is even more important is the participation of those partners and engagement, almost 30% increase in partners who went through training and retraining. As you can imagine, in this world, partners are diverting more of their existing resources into the UCaaS world. That led to that huge spike and more partners getting trained. So that momentum continues. It's not or it's a case of the end. Now let me talk about and share some details on the strategic partnerships. Let me start with AT&T. AT&T Office@Hand, by the way, it uses RingCentral Video, which is great. If I look at Q1: one, it continued the very strong sequential quarter-on-quarter growth, which was very important; number two, sales participation. Seemed like 30% was the magic number for us in Q1. We saw a 30% increase in seller participation from an AT&T standpoint; and the last thing I'd probably share about AT&T is, we saw the lowest churn in 6 quarters with AT&T. So that is going well. Upsell is going well. Acquisition is going well. So we are pretty excited about what that means for the next -- for the rest of the year. Avaya, same thing. Vlad talked about launching ACO by RingCentral on March 31. I think we spent the last 5 weeks on 2 very specific things, onboarding Avaya's partner channel. We've onboarded more than 1,700 new partners, and that's starting to pick up and create momentum. The initial feedback from these partners is very strong, very enthusiastic. And the second is building pipe jointly. We are very excited about what trends we saw in April on both building of the pipe and the pipe velocity we see. And you heard from Jim Chirico on our first large deal, million-dollar deal with the government of U.K., [indiscernible] which is a great example of a million-dollar deal, which usually has larger sales cycles closing as quickly as 4 to 5 weeks. So we are pretty excited about trends we see in April with Avaya. As Mitesh has talked about, we expect to see the true benefit accrue towards the end of the year. The last thing on strategic partnerships I will touch on is Atos, and this is where it's a very different kind of partnership. It's a global systems integrator, and we're working with big brands, large customers in our joint go-to-market motion. Again, sales cycles, obviously, are much longer for these kinds of deals. And so we expect to see this translate towards the end of the year and next year. But again, early trends on joint go-to market, joint playbooks and pipe build, we are pretty excited about.

How are you managing the channel conflict? So if we take those examples, I think about Atos, while it's a global system integrator, I think about the strength that it has in Europe, Avaya, obviously, a global company as well. How do you manage kind of the opportunities that might be out there? Because obviously, almost all of them that these companies are going to focus on are going to be on-prem to cloud transition. It's not like it's going to be brand-new companies.

That is very correct. And this is where I'm actually privileged to be a part of RingCentral because I will tell you that the Channel Harmony program we have, that's what we call it, the brand name for it, is actually best in class. It is even better than some of the channel and partner-centric companies I've come from, where we basically level the playing field. So whether you're Atos or some other partner or a direct sales force, we do have a direct sales force, the structure and construct of our partner program is such that there will never be any conflict. It's transparent from a deal registration standpoint. We are very clear on the rules of engagement we have established. So we are transparent with partners as to who we work with for what deal based on the rules of engagement and the deal registration process. So that is very clean and very clear. And so net of it all, that's actually just one thing which is a shining benchmark in the industry, it is the way we have constructed our Channel Harmony and the mechanics of rules of engagement. There will never be any conflict.

So one of the questions we got for the audience is, help them understand what the implementation time frame really looks like? And specifically, what they're looking for is, walk them through when a contract's sign, how long does it take to get installed? And when does revenue start to hit the income statement?

Yes. And I'll answer the first part of the question and ask Mitesh to comment on the second part of the question. The first part of the question is very simple. It depends on the type of customer. There are certain customers, depending on how ready they are. We sign the contract. Our process of onboarding is instantaneous. And so for us to get a customer onboarded takes anywhere from a day to a week, depending on the specific type of customer. And this is also true across all product lines, not just UCaaS but also CCaaS. I reflect back on Aveanna Healthcare, that seems to be my favorite customer now of the day. But Aveanna Healthcare, we onboarded CCaaS customers, all of them, all 300 of them. They signed the contracts, all 300 of them had activated and became productive within one business week. That's how quickly we were able to do it. That's what we're excited about. The simplicity and the consistency and the speed with which customers are activated, turned on and productive instantly. So that's what I'd say. Mitesh, over to you on the second part.

Yes. So I think the -- not I think, rev rec starts, Sterling, when we activate the customers the way Anand is saying. So when the user is provisioned, rev rec starts, no different than any enterprise software. One of the myths and misnomers about RingCentral I get a lot from investors is, hey, you need to activate the desktop phone for the implementation to be complete. This couldn't be like further from the truth, actually. What's happening in this world is, desktop phone is an afterthought. People are not at their office desks. So people are using the apps in a more meaningful and profound way and across all modalities, right, messaging video and phone. And this is where the stickiness is coming in. So implementation on the app, as Anand said, is almost instantaneous. And then that's when people -- our customers start using the full platform. And when they go back to work, they may or may not want a desktop phone, especially given this whole new paradigm. I don't know how many people will actually go and want a desktop phone, where you can be as productive with sort of headsets and iPads and desktops, and that's where we actually derisk the guidance on the phones, as you know, because I just don't know how people are going to react to the new world of work here.

You're welcome to keep my desktop phone permanently, that's for sure. Anand, with your time here, in terms of being in this seat, you've already made some changes in terms of personnel. I think investors are curious, are you done? Are you happy with the structure that you have? Or what other changes might they expect?

No, that's a great question. First, let me reflect on the most recent executive hire, we brought Phil Sorgen in as the Chief Revenue Officer, which was a role vacant for -- it wasn't a change as much as filling a vacant role for the last 3 quarters. I'm excited about our segment leaders. They are an execution machine, and it's reflected in our performance. Let me tell you why I'm excited about Phil coming in there because Phil has run every leg of the revenue pillar at significant scale. He was the President of Microsoft Canada. He ran U.S. SMB. He ran U.S. Enterprise. He was the Global Channel Chief for Microsoft, probably -- not probably, one of the largest channel business -- channel-led business in the, probably, in the entire industry. So that's what excites us about Phil. We continue the channel partner mindset and basically connect the dots across the customer life cycle. That's the most critical thing we are excited about. It's a great team. No changes as such planned, and we take it as it goes, but we're excited about the execution team we have in our business and our company.

Vlad, when you look across the technologies that you've got, you just recently rolled out RingCentral Video. So you own the UCaaS, you move from -- you're still partnering with Zoom, but you have your own video offering. I think it's raising the number of questions I get from investors around, okay, what does it mean for CCaaS? Because -- and I also didn't mention, obviously, with -- you've got messaging, you've got video, you've got UCaaS. So what happens moving forward from CCaaS in relation to your partnership?

Yes. No, look, very fair question. So as far as CCaaS is concerned, we do know that customers want it all together, at least, some customers do, okay? Now we talk about MVP, Message Video Phone, it is a differentiated position for us, as you know. And now with RingCentral Video, we full -- [ on all the suite ] components of MVP. We are not really yet talking about MVPC, okay? But suffice to say that we see interest from the community in adding another letter, joining MVP into a 4-letter word now, if you will. And look, to be honest, would we like to have this technology in house? Yes, we would. Would we want to be out with anything but a world-class product that checks all of the boxes, no, we would not. That's not our brand value. We were in development on RCV for over 3 years with a very, very sizable team, okay, multiple hundreds of people. And hopefully, or perhaps next time we do this, we do this over RCV, so everybody can see. But it's been holding up very well. It's been, what, a little bit over a month since we introduced, and so far so good, good customer feedback, good reception, et cetera, et cetera. We are not, at this point, in a position to claim the same for our own contact center. We do have developments underway, but they're not at that level. So I think that in the foreseeable future, it's going to be partnerships for us. But as you all know, we do have a differentiated integration within contact and I would not be surprised if there are others to follow.

That makes a lot of sense. So just -- we touched upon video, let's dive in there. So with the rollout of RCV, or maybe I should phrase it this way, help investors understand what the strategy is with the rollout?

Look, the strategy is always to provide best-in-class customer experience across anything that we touch. That is sort of core brand value behind RingCentral, and it's been holding up for us, let's say, over the years. So with RCV, we do believe we have quite a competitive product at this point. We have not yet rolled it out as standalone. Some people are asking, and we're not saying no to that. That would be based on customer demand. But for now, we are uniquely positioned in having a strong messaging, strong video and strong telephony phones and keep out of MVP. We are uniquely positioned in that regard. And like I said, early reception has been very good and certainly a lot of work still left to be done. But we're well prepared to continue innovating and further differentiating, and expect to see more from us in this area.

So when a customer comes through, either through Avaya Cloud Office or RingCentral Office, are they given a choice of video options or by default, they get RCV?

By and large, it's the latter, not 100% because there are some features we're still missing. For example, webinar feature is still missing from RCV, that's coming. There are a few other, but I would say, more minor. And look, again, we follow the customer. If a customer wants our legacy, traditional, whatever word you want to use, RingCentral Meetings product, which is partner based, then that's perfectly available as well. We still have multiple years left on that partnership. And like I say, we'll follow the customer and provide them what's best for their case.

And Mitesh, is there any difference from a financial standpoint in terms of top line revenue? Or how should we also think about, as we move forward, what the margin impact from having RingCentral Video might do for the company?

No top line, obviously, no difference because we sell this bundled product. Long term, yes, of course, it's going to be margin accretive because we don't have to pay Zoom, but it's going to be longer-term because we are going to be phasing out for the installed base over time from Zoom to RCV. And it's not an imminent hurry, right? I mean we just -- Zoom is a great partner, and we're just having a two-pronged approach. Obviously, new customers will come on RCV. So to that extent, we will save some margin dollars. But overall, I think this dual-pronged strategy is working really well for us.

All right. A couple of questions from the audience. One is here on video, which they want to -- investors want to understand, if they're currently a RingCentral Meetings customer, so they've got the Zoom partner product, are they being shown at this point the opportunity to move over to RCV? Or what should they expect moving forward?

Yes, I can take that. So the answer is simple, as Vlad initially said, for new customers, default is RingCentral Video. For existing customers, we are letting them choose. We are all about customer choice. If there is a good reason and the customers see the value with RingCentral Video, we will give them the opportunity to get to RingCentral Video. There are no intentions of forcefully migrating anyone at this point on time. So we're letting that be customer choice-led.

All right. The next question from the audience is back on the Avaya partnership. There's been lots of discussion around the 100 million seat number that's thrown around by Avaya in terms of the opportunity. Now that ACO is out there, any sense of how valid the size of the opportunity might be? In other words, what type of kind of ping back are they seeing? And how big is the magnitude of the customers that are coming back and interacting with Avaya and/or you around ACO? I'm not saying what the exact sales pipeline, but just do you have a sense, is that 100 million? Or what portion thereof is a legitimate addressable market for the partnership?

Yes. No, so what I would say is this, right, I'd go back to how I framed the partnership with Avaya, which is, it's now 5 weeks since we launched ACO on the 31st of March. So the broad discussions have been, get their channel partners enabled, get them activated and let's go build pipe together. Now what we see as far as April trends go is slightly better than even what we thought coming in. So I think the traction, the enthusiasm of both the on-premise Avaya customer base to have a path to the cloud in such a seamless manner and the enthusiasm of the partners to have the solutions for taking their customers to is very, very noticeable. That's what we are seeing in the joint pipeline build. As I said, having a million-dollar deal close in as little as 5 weeks is actually pretty cool. It defies the norms of what sales cycles million-dollar deals go through. So that's a trend I would basically say. I would not go any further than that because it's just a month in. We're building pipe. I would stop at that and say, trends make us very optimistic about how the traction will be going forward, and what percent of the Avaya customer base we can capture going forward.

Is there a sweet spot within the Avaya customer base in terms of the company demographics, meaning, is an -- organizations of a certain size and above or below that is really the, let's say, the low-hanging fruit to go after? And is there portions of the base that Avaya kind of keeps for themselves?

Yes. No, it's a good question. So firstly, in terms of, is there a sweet spot? I think the time it is going to take to activate, onboard and get a customer going or user going is obviously simpler in the SMB market. As we look at the larger deals, we are also still positively looking at the trends of the enterprise customer traction as well within the Avaya base. The sweet spot, the simplest sweet spot is the North American geographies because that's where we have had presence and Avaya is probably strongest at. Across verticals, it seems to be consistent across all verticals. I don't see a single vertical tip the other. Consistent traction across verticals, decently consistent traction across customer segments, a better uptick in North America, but we are seeing the international pipeline build as well. So that's how I would frame this. As we go across the next few months, we'll probably have more patterns which will allow us to tailor our playbooks and our joint go-to-market strategies more tuned to that, but that's the patterns we'll probably share in due course and time.

Vlad, in terms of adding letters, and we talked about MVP, MVPC. Another question from the audience is, we had Vonage present earlier and obviously talking about some of their API business, so more of the, I guess, CPaaS, communication-platform-as-a-service. Is that something that's of interest to you? How do you view the developer community? And if it is, is it something more than just taking RingCentral Video and making it available through embedded APIs? Could you see RingCentral wanting to offer a broader platform?

Right. So developer community is key. We do have a developer community. We've been analyzing tens of thousands of developers, thousands of apps in the app gallery. So we very much have that motion developed already. And of course, there is more coming down the pike. Look, it's a very different model, transactional versus recurrent revenue. And obviously, it really had their outstanding quarter and more power, and congrats on that. We honestly feel we are in a different business. We are catering to our enterprise customers as a mission-critical app, okay, or mission-critical service. And developer community for us is of vital importance because we, again, want to provide this best-in-class experience. There is no way ourselves or anyone else can develop it all themselves. So we want to enable ISVs to provide value-added services, applications, what have you, into our customer base. But the core relationship with the customer, we like the predictable recurring revenue model with a land and expand motion that we have developed over years. So I would say that at this point, we would stick to the, call it, Salesforce.com model as opposed to [indiscernible] model.

That makes a ton of sense. Mitesh, in light of COVID-19, does anything change in terms of your approach to investment and how you balance kind of the operating leverage and the margin versus the push for growth?

It's always been a balance for us, right, Sterling. And what we're seeing here is, as somebody said, never waste a good crisis, right? So we are trying to see where we can save in discretionary items, which are non-product oriented, non-revenue generating and redeploying those investments into more product, into making this whole MVP vision even more tight for our customers, more GTM for Anand's organization for verticals and international. And we are taking some of that money from these discretionary buckets, for example. We are all working from home here, so there are natural savings, as you can imagine, but over time, we want to take this opportunity to accelerate our future enduring growth rate without sacrificing the rule of 40 we have promised.

That makes a ton of sense. And then what have you seen in terms of the productivity as you've shifted to this kind of work-from-home environment? And does it change maybe the approach that you had post-COVID? Could you see permanently keeping some in the current structure?

Yes. I'll say with productivity, Sterling, the only breaks I take is to shave my beard these days. But after -- beyond that, Anand can address a broader productivity question.

Yes, Mitesh said it right. Actually, Vlad referred to it briefly, Sterling, which was right on. In the middle of this lockdown and work from home, we launched the 2 most defining products of our company's history, RingCentral Video on April 2, and Avaya Cloud Office on March 31. Without missing a beat on feature, we were actually ready ahead of the scheduled dates. And so short answer is this, we feel lucky that we are in the business of actually creating the technology to enable work from home. So that is important. It allowed us to seamlessly shift to work from home. It's going to change -- definitely change some of the way we think about it. It's going to change how we think about talent, the locations we think about talent in because we now know that a geographically distributed workforce actually works. It's going to also have us double-click on location strategies so that we don't have too much concentration in any one location, and we don't. But it also allows us to basically help our customers not just provide technology because that's just a substrate, that's the fabric. But the cultural mind shift companies need to have to work from home better is actually going to be the key. So we are privileged, we are in the space and we feel very good about how we can help our customers transition to that place as well. So pretty excited about that.

Totally understand. And with that, Anand, Vlad, Mitesh, thank you so much for joining us today. We really appreciate it.

Thank you.

Thank you, Sterling.

Thank you. Stay safe, everyone.