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

Hi, everybody. This is Nikolay Beliov. I'm one of the software research analyst at Bank of America. We are happy to have today with us RingCentral, Mitesh Dhruv, Chief Financial Officer; and Anand Eswaran, President of the company. And we are waiting for Vlad Shmunis, the CEO, to join us in any moment. Thank you, Mitesh, and Anand, for attending our conference. We appreciate it very much.

Pleasure is ours.

Just to kick off the conversation, clearly, COVID is the topic of the day. At a high level, what are you hearing from customers on their spending intentions and IT priorities with COVID? And what impact from COVID do you guys think are going to be durable changes we're going to see post COVID and how this is impacting your business model?

Absolutely. I can start with that and we'll tag team between Mitesh and I. One of the key things which has become apparent is the on-premise and the legacy systems, the limitations of that have been never exposed more. People had to, overnight, transition to working from home, working from other locations and the world of the on-premise, PBX is the on-premise communication systems, just was not good enough to do that. So one of the key things we see across the board, across customer segments, across business sizes, is business continuity and business communications getting to the top of the list as a key priority. And within that, we see that everybody is thinking about how communications gets into the cloud and how that becomes the #1 business continuity priority for them. Because we know that work-from-home and work-from-anywhere is here to stay based on all the announcements you've heard from the different companies. And so essentially, every company is going to need a modern enterprise communication strategy. And that's going to be -- we are humble to be in the category where we can actually make a difference. The long-term outlook for cloud communications is really strong, and we are actually thrilled to be in that space.

And Anand, how has COVID changed your product or maybe technology priorities for the next 12 to 24 months? Was there a wake-up call for you in any way in terms of both products or technology or go-to-market because of COVID?

Yes. No. If anything, we are actually investing more aggressively across our entire list of priorities. So as we look at the products, one of the key things we talked about when we launched RingCentral Video on April 2 is the concept of business communications needing all modes of communication. From message, we call it M. Video, we call it V, and the phone voice, we call it P. And having a tightly integrated product set and having a tightly integrated experience is what we have always believed is the key to sustaining business communication. So what we are doing is we are aggressively investing on MVP, even more than what we had planned because every company needs this as part of their core business continuity initiatives. As I look at the go-to-market initiatives, we are actually -- we've been on a journey of investment in line with the demand we see. And our focus continues to be vertical markets, making sure that we have differentiation in specific vertical markets. We are working on international expansion as a key lever to our investments, and we are doubling down on what you've seen from us in terms of partnerships. And so these are the 3 levers we continue to double down in addition to what is an additive at the earnings, which is our strength in mid-market and enterprise. So the last leg of that stool is enterprise. And so these are the 4 areas we continue to double down, continue to invest.

Okay. We'll double-click on all this during our conversation, but I just wanted to stay with the COVID line of thinking here. So RingCentral, traditionally, the message was RingCentral being an on-premise PBX replacement. Is there a shift in message now at -- looking at RingCentral as a work-from-home alternative? So something like VPN or VDI, virtual desktop, and a cheaper and an easier way to work from home rather than expensive VDI solutions and VPNs, et cetera, et cetera. Is there a shift in the business model in that sense, in your opinion?

Yes, I recognize that there is -- there was a piece of the narrative, which was PBX replacement. But honestly, for the past years, we have been on this journey to actually be a viable work from -- I don't even call it work from home. We call it work-from-anywhere solution because it's location-independent. That's why we were, I think, the first company or one of the first to talk about how all modes of communication needs to come together. It's not just voice, not just messaging, not just video, all modes of communication needs to come together in an integrated form. And we are one of the pioneers of that. As we look ahead, we absolutely feel we are in the middle of enabling companies to offer RingCentral's platform to help their employees stay productive and work from everywhere or anywhere. As a simple example, we are working -- we have in platform integrations in key verticals. As a simple example, we are integrated with Canvas in education, which easily allows teachers and educators to teach and get to a better place in the concept of distance learning and remote learning. And we are integrated to Canvas, which makes it really simply possible. So our focus on verticals enables that work-from-anywhere solution vertical by vertical, and that's a journey we are on. So we feel very good about where we are and our ability to actually be a business continuity work-from-anywhere resolution for every company.

Can you just double-click on this a little bit more like. So carefully visualize, okay, I'm a knowledge worker. I want to work from home. So I'm using RingCentral. And as part of RingCentral, I get like-to-like collaboration with [ LIB ], et cetera, et cetera. So I can I work from home using only RingCentral? What else do I need to access from home to be able to do my work? RingCentral only? Or RingCentral plus something else?

Yes. No, that's a good question. So as -- just let's look at the use case of how I work every day. For the most part, I'm communicating with my employees. On these calls, I'm communicating with my customers. And there, one of the starting points could be, in this instance, the starting point is a voice call. And so I use the RingCentral platform to dial in and place this call, and here we are having this conversation. It is as easy for me to switch from inside this voice call to the video solution which we have integrated as part of MVP. So for me to go from voice to video without dropping the call is seamless. It's a click of a button. For me, to while amount of voice call or a video call, use messaging, which is tightly integrated with voice and video, at the same time, to sustain a conversation is as easy. There are other simple things, which is where the power of our platform comes through. For example, in messaging, we may have a group where we are collaborating on a project. And it is one click of a button, which allows me to get that whole group, that entire group from that message, inside the message to a video call or a phone call and actually share a common platform for doing that. Or something as simple because we are all in this work-from-home environment, you may have just stepped out pretty -- for doing something. And you may have had to take your phone call or your video call on your mobile device. When you come back home, it is one click of a button, one switch which allows you to transition that mobile video call, mobile audio call on to your desktop and actually seamlessly continue the conversation without dropping and joining. So we've gone through every use case which employees will need to think through as they communicate and make them productive to work from home, every single-use case across messaging, across video, across phone. That's what we feel good about. That's the journey we're on.

Got it. That's super helpful color. How is the platform evolving with the launch of RCV, RingCentral Video? And strategically, what are the top 3 things, let's say, RCV, that allows you to do that you are not able to do before?

Yes. So one of the key things is, firstly, we launched RCV on April 2. So at the time of earnings, we actually shared that over 1,000 organizations were using RCV and the feedback was really good. As we look at what does RCV allow us to do? And just one more color, which is important to provide. Although we launched RCV on April 2, RCV was a core part of Office@Hand, which we launched with AT&T a few months back. And as a company, RingCentral, we've been using RCV for more than a year. So we launched on April 2, but it's actually been an extensive use in production for a few months before that. What we are excited about RCV is we've always had the concept of message, video, phone coming together. But with our own first-party integration with RCV, what it allows us to do is not just have a tight product integration, but also have a tight experience integration, between message, between video, between phone. And having a first-party product which we are building allows us to build a tighter experiential integration more than just the partnerships, the very good partnerships, we have that and we continue to have. So for me, it's not just about feature parity, it's about experience and how all of that comes together because we strongly believe that business communications sustained beyond a call, a video or a message. And that's literally at the heart of why we felt strongly enough to create our own video product. Does it make sense?

Yes. Yes. And can you give us some insight maybe into the product road map? Are you going to have a webinar-like product and try deeper features in RCV going forward?

Absolutely. Absolutely. I mean this is V1 of our product. So we are on a journey, and you will absolutely expect to see all the other features come through later in the year like virtual backgrounds, like webinars, all of those would actually come through later in the year. There are things which you have with RCV which we feel good about, things like the ability for someone to just click a link and join through the web without being forced into a download. We carefully thought through that as important because not everyone wants to have one more downloaded app in their desktops. So that's an experiential differentiation for us. People can click and join without downloading an app. And most of the features which you expect to see, webinars virtual backgrounds, all of that will come across as we go across the rest of the year.

What are the migration plans to get the installed base off of Zoom? And how long do you think this is going to take?

Yes. The philosophy with which we have approached this, Nikolay, is that all new customers are on the RCV platform. We default them to RCV. Unless there's specific reasons the customer chooses as not to go there immediately, and we've had great success with that. For the existing customers, there are no forced migrations. We're being very deliberate, and we're being very thoughtful about it because Zoom is still a partner. We have several years of our partnership left, and we are being thoughtful about approaching the customers. And when they see the value of the integrated experience and all the other differentiations we're building in, we are gradually transitioning them, but we are not going through a forced migration or an aggressive migration at this point at all.

Got it. Got it. While we're staying on this topic, there's a question from an investor. Why has Zoom taken off in adoption versus RingCentral?

So I think, in a little way, we may be looking at apples and oranges there. Because as we look at adoption of Zoom, it's primarily only video. And we just launched RingCentral Video on April 2. And so we feel good about -- for a product which is in V1 and for a product which is now 8 weeks old, we feel good about where we are on the journey of adoption for RingCentral Video. But most importantly, if I take a step back, I look at the adoption broadly across the platform, we feel pretty good about what we're doing for our customers because we are focused on the enterprise. We are not focused on consumers. And when I just look at the enterprise subset, our video minutes are growing almost 3x. Our app usage, app downloads, the unified app download is up 180% versus what the statistics where in February. Our voice minutes are up 150% versus what it was in February. So as I look across, and this is one of the key things we always maintain, is we see consistent and accelerated adoption and usage across all modes: message, video and phone. And we expect to see our video get to the right place as we go on this journey of RingCentral Video.

Nikolay -- no, I agree with all the points Anand made. It's fantastic. Look, it's great to see a work-from-home play like Zoom Video, take off so nicely. It validates the entire market of collaboration and communication. But also, you have to understand a little bit that a lot of this demand, which Zoom is seeing, is consumer-led, right? It's becoming a consumer play, which is not good or bad, it's just the nature of the beast here. We are absolutely, as you can tell, we have been very manically focused on enterprises and that's why we've not opened this up yet as a freemium product. So we have been -- we are taking a different approach in a way to focus on enterprise communications. Zoom has taken a different approach. No right or wrong answer. I think both strategies could win.

Got it. Anand, one more question for you before we switch to some financial questions with Mitesh. Vlad told me a year back that RingCentral platform is on par with on-premise PBX in terms of features, functionality, et cetera. Where are we today? And just to double click, what can the RingCentral do that on-premise PBX cannot do?

Yes. The first thing is, basically, it allows people to transition to working-from-anywhere. When you have an on-premise PBX, the first premise is you are basically connected to hardwired phones and you have a legacy platform, which doesn't work. So cloud enables and frees up people to actually be distributed and it allows us to serve a mobile and distributed workforce, which couldn't be truer anywhere else right now. The second thing, which I would call out, which is so important for what we do, is deep user analytics for the administrators to make sure that they know that communications is happening at the right way. We are proud of the fact that we have a solution where an admin can essentially manage the entire system from their mobile device, on quality of service, on reliability on all of that. The third thing I'd call is multimode. Essentially, what we have been able to do because of a cloud-based communication system is integrate message, video, phone, bring it together. And what that does, as I've talked through briefly, is it allows you to sustain business communications beyond the moment-in-time conversation. And that I think is the most important differentiator, MVP, all of it coming together. The fourth thing I'd call out is mobile-first. We live in a world where everything is mobile-first. I very seldom sit down with laptops and desktops, I'm usually on my iPad and iPhone. And so allowing people to have a mobile-first environment of how they work is very critical. And the last thing I'd call out is it's so important as you are in an enterprise -- when you work for a company or -- whether it's a small 10-person shop or a 50,000 -- 100,000-person company, the ability to do your work from within your communication service is very critical. And that's where our open platform, 3,500-plus integrations, 30,000-plus developers is so key because we are building in-app integrations for your workflow. We are connected with Teams. We are connected with Salesforce, in-app. And so the ability to process your business workflows from within the app and get your work done and work on -- and remain on that single pane of glass for the full day is, I think, hugely productive for every employee. So these are what I'd call out, which is -- I think it becomes almost business-critical and existential for companies to change their business communications to a cloud-based communication across MVP.

Got it. Got it. And I guess this is a question for both of you. Switching the gears to ACO or Avaya Cloud Office. What are you seeing from the product in the marketplace after the launch on March 31? And Mitesh, maybe, if you can give us some more color. What types of deal sizes are you seeing here? What has been the feedback from the channel and customers?

Yes. No, I'll take that. So I think the -- it's early days. But it's been very heartening to see the progress, right? So right now, Nikolay, Stage 1 is to focus on enablement and pipeline building, right? So the launch on March 31, we had close to 800 channel partners that were onboarded. During earnings in May, we gave a stat that it was up more than 2x. That doesn't mean anything, meaning it's just that the education is really, really taking off, which is Stage 1. The feedback is really positive. I think the deal sizes are large there. And I don't know if you caught that, but Avaya, in their earnings, announced a 7-figure deal internationally in the U.K. on their earnings call. So I think there will be more deals like this. The momentum is building up, especially given this whole work-from-home trend, this is perfect, the right place, right time. What we have done for the guidance, which is the second part of your question, is not really baking in much in terms of guide for the year. Again, even if it starts to ramp-up in Q4, the impact on revenue will be not material this year, which is what we have guided. But you'll see it in the ARR building up towards next year.

Got it. Got it. And Mitesh, just going back to the beginning of the conversation, just in terms of the COVID impact on your business. What did you see in your 1Q pipeline? And is there anything -- any impact effect that you could call out specific because of COVID? And in general, what trends you saw in the pipeline in Q1?

Yes. In Q1, the pipe is building really nicely. We are seeing an acceleration in demand. We did say on the earnings call, Nikolay, that April was the fastest April we've seen in multiple years. So that's, I think -- and we are -- there's no slowdown in that trend. On balance, as I did say on the earnings call, there are pockets of churn. Understandably so in the SMB, like retail, hospitality, whatnot, which is up 10%. But on balance, I think what we are seeing is amazing cohort of customers coming in, in the fray which are very strong, which will have a very high lifetime value over the years.

Got it. Got it. And Mitesh, can you please comment on how should we think about the AT&T ramp, the kind of the rejuvenation of the partnership here, and also Atos? When can we expecting contribution from Atos?

So let's start with Atos. Atos, we are -- again -- actually, I'll start with Atos. But the way to think of the staging, right, is AT&T came first. Then we had Avaya and then Atos. Or Atos is actually the right pronunciation is what the counterparts told me there, it's Atos, not Atos. All right. So in that vein, what we are expecting is AT&T ramping really nicely. Sequentially, it was up over 20% this quarter again, after another sequential increase of a 15% to 20% in Q4. So AT&T is nicely ramping. Avaya is now starting to build pipeline. And then -- and next year, we expect Atos to contribute meaningfully. I think the point being, you can see that the story has multiple legs, multiple tentacles. It's just not going to be a one-trick pony, where, okay, you've seen an acceleration or pull-in of demand from work-from-home, and that's it. I think we are going to be keeping on layering on multiple levers to the growth story to make sure that we have a very, very durable path for multiple, multiple years.

Mitesh, can we double-click on the enterprise business? $318 million, growing 59%. What are you seeing -- with COVID, I mean, is there acceleration in the sales cycles? Any changes in win rates and any kind of changes in why you're winning those large enterprise deals?

Yes. Yes. More of an Anand question, but I will just frame it so he doesn't get too bullish here. It's marginally, yes, because of this COVID trend. We are seeing some marginal acceleration in sales cycles, which is on balance a little bit higher or faster. It's like, I would not call out any meaningful trends that, oh, my God, the dam is broken or anything. It's steady as she goes, but influx of demand. And why we win is, again, as Anand said it very elegantly, so I don't know if I can put it better than he did, it's this whole combination of this integrated platform, right, Nikolay, messaging, voice and phone together, which is a strong proposition for CIOs because it's also a TCO angle, right, these days. People don't want to have multiple apps, spend multiple dollars on different products here. So it's really starting to resonate. And I think we'll see continued strength over the years to come.

Yes. Mitesh, the only thing I'd add is one of the key questions we have had every time from our customers as we go talk to them is, help us understand how you are using it. And as RingCentral, 5,500 employees, we have been on RingCentral's platform and nothing else for the last 15 months across message, video, phone. So the ability to show and demonstrate a powerful use case of productivity, we launched ACO and RingCentral video, 2 of the biggest launches in our company's history after the employees started working from home, maintain the productivity. And those stories go a long way. But key things we also call out is trust. I think giving a [ 5 9s ] SLA on the stack on the platform is really -- I want to say it's one of the few companies in the industry we can do that. And so that's important. The global footprint, where we have native dial tone in 40-plus countries, and that is one of the key reasons customers pick us. The open platform, Mitesh has touched on it as well, 3,500 plus integrations, 30,000-plus developers, the ability to integrate business workflows within the platform is really critical. And then, finally, thanks to all of these, we see the industry recognitions like Gartner, where we are considered the leader in the Magic Quadrant, a significant leader, of Frost & Sullivan or Forrester. And those things add up. And thanks to all of that, we are humbled that this is the first year we've made our way into the Global 2000 list as well. But all of those things come together to establish the credibility and that's helped. Win rates are consistent. The pipeline velocity is consistent. The new local acquisitions is going really good. And even more importantly, once customers are on our platform, we see a lot of them making good upsell decisions to amuse other parts of the portfolio because of the trust and the customer focus we bring in.

Got it. Mitesh, you have more than -- at this point, you have more than a $500 million mid-market fresh enterprise business. I think in the past, you've been talking about 15% to 20% seat penetration within -- on average, within any given account. That guide implies that you have a $2 billion revenue captive opportunity today even before Avaya and Atos and AT&T. I mean, is that the right way to think about it? And how is that potentially going to impact your sales and marketing and customer acquisition cost expenses going forward?

Yes. No, that's an excellent point, Nikolay. And you've been one of the first ones to write about this, so I applaud you for pointing it out way earlier than any other people did. So that shows your primary research in asking questions. So yes, with that, yes, there is a captive installed base, which if you look at the current penetration, it's about 15%, 20%. So even if you think that the implicit limit is, I'll call it, 80% in an enterprise. Yes, there's 3 to 4x runway here. And so yes, over time, I would think that we have a license to hunt there in most cases. And this is even above over and beyond adding a single new logo to our arsenal here. So yes, there is a huge ramp ahead, which we can capture. In terms of sales and marketing, yes, it's cheaper, right, to acquire because we've already landed that opportunity and the cost of acquisition for those customers is going to be lower than acquiring a brand-new logo. So over time, you can see more sales and marketing getting even more efficient over time as we capture this install base.

Mitesh, there's a question from investors. They would like to know more about the Avaya ramp. How is Avaya ramping? I guess the question means both in terms of the pipe build and also rev rec.

Sure. I mean, I did cover -- you asked the question earlier. Look, it's early days. It's building really nicely. We are very pleased with the pipeline building right now. It just got announced in end of March. So we did announce a 7-figure deal in the U.K. just like a month after the launch. So I think we are very pleased and very, very confident of the opportunity ahead.

Got it. Got it. The SMB business accelerated 20% despite the headwind from churn from COVID, up from 14% last Q1. What are the puts and takes here? What are you seeing, Mitesh, in your SMB business?

Yes. I mean there's -- we did see a stronger -- so typically mid -- SMB grows in the low to mid-teens, and which is where we typically say it at. This quarter, yes, we did see some accelerated demand in Q1. Probably because of COVID, people were trying to figure out and place their bets really quickly to get this -- to this work from home, point one. Point two, it was also an easier comp, to be very, very fair and intellectually honest, from last year. So those 2 trends are what held Q1. Going forward, we don't model SMB at 20%. We model it being low to mid-teens. And we take all the profit dollars into more mid-market and enterprise deployments, which is even higher lifetime value.

Got it. We're almost out of time. We have about 30 seconds. Any concluding remarks from either of you guys, before we wrap it up?

No. I'll just -- I just want to just thank you for taking the time and providing excellent research to RingCentral over all these years. And thank you for just being there for us. And yes, that's it.

Thanks. Thank you, both. Anand, it was great to meet you on this call today. And I hope everybody who's attending today is safe and healthy, and please stay safe and healthy. And with that, this concludes our presentation with RingCentral today. Thanks so much.

Thank you.

Thank you, Nikolay.