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

Great. Good morning. Thank you all for being here. To all the investors, thank you for attending the 40th Growth Stock Conference here at William Blair. A huge milestone for us. So I'm excited about it. My name is Bhavan Suri. I'm the analyst at William Blair that covers RingCentral. And you can find all the appropriate disclosure on our website at www.williamblair.com. It's a huge pleasure to -- it's great pleasure to have a dear friend of mine, Mitesh, who's the CFO at RingCentral; and Anand, who is the President and COO at RingCentral join us on this call. Thank you, gents, for being here.

I guess just for folks who are maybe new to the story at a high level, can you just give a brief introduction to RingCentral, a little bit of the history and sort of the markets you serve and sort of what does the product do? I'd love to get that started. So you could kick it off with that.

Anand, do you want me to take it?

Yes. Why don't you start? The senior person on the call, so I'll [indiscernible].

Yes. Yes. We'll start with me, and then Anand, of course, will chime in. It's a simple product, solving a simple need, which is business communications in the cloud. We all need to work across all modes, messaging, video phone to be productive with employees, with customers. And so RingCentral is a platform that serves a need. This need arises because there are about 400 million on-premise PBX seats that are locked -- LAN-locked. What I mean by LAN-locked is it's basically tethered to a hard wire in your basement, which is not open. You cannot go mobile. You cannot be global. You cannot integrate with other applications. So in this new world of -- especially now where we have to work from anywhere, especially from home, you need to be able to be -- to have -- to be always on and untethered from your desktop. So that's what we provide.

Great. When you think about that market, and I know you said simple, but actually, the problem you solve, while the idea is simple, there's a lot of complexity in there. If you think about the market of 400 million seats, you're the leader in cloud PBX with, let's just take 2-ish plus million seats, double the #2 player -- more than double the #2 player. I guess how have you been able to carve that out? And what is the differentiator that allows you guys, while solving a simple problem, deliver the value given this actually quite complex underlying infrastructure?

Yes. No, that's a good one, Bhavan. Look, it all starts in a way with R&D and innovation. If you look at the dollars we put to work in innovation, it's -- it totally dwarfs the second guy down, as you're saying. This year alone, we'll be spending close to $150 million, $150 million in R&D and innovation. And that drives that product road map. That innovation road map drives everything going forward from that. And it again -- it's again a -- it's a complex problem, but it's difficult to be simple, right? So what we try to do is try to create a good or a great user experience with a unified platform across all modalities. Now there's this convergence going on where this UCaaS stack is going to be about the convergence of 2 or 3 modalities, call it messaging where Slack is leading; video where Zoom is leading. We have our phone where we started from. But I think the end game, the grand prize is going to be where all 3 modes or all 3 modalities work in tandem seamlessly anywhere at any time. And I think that's what the customers are asking for, and that's what at least we are striving to deliver.

Yes. And I -- what I would say, Mitesh pretty much said it. So there's a couple of things I would add, which is, one, is MVP, and we call it MVP. So we refer to MVP as Message Video Phone. The other thing is, increasingly, our contact center is a very, very [ great place to see. ] We were one of the first companies to understand that and start to actually sell contact center in the same way as integrating message video by phone. That's the -- that's one thing I'd call out. And the other thing I'd call out is a relentless focus on partners and partnerships. When you look at the channel program we have, it's best-in-class in the industry. When you look at the partnership we've established over the last couple of years, that's a journey we are on in-house. But bring it all together, that innovation we talked about, [ resyncing ] through Message Video Phone, bringing contact centers in places. It's doubling down on the channel and the partner program and then creating a key pillar of partnerships, bring it all together, that's the reason you see us have -- be the leaders in the UCaaS market.

Anand, that's helpful. And Mitesh, too. Anand, I guess, as a relatively new member of the team, when you look at what they've built and you look at what Vlad, Mitesh and the team have built, if you think about go-to-market, partner is a critical part of the strategy, but obviously, the direct sales motion is pretty critical, too. I'd love to understand how you think about the direct sales motion, what investments you might make, how you might change it as you see this convergence start to play out that Mitesh referred to.

Absolutely. So I referred to, not just the direct sales motion, if I look at the go-to-market. I -- look, have a simple acronym for it, I call it VIPE. The first one is V, which is the focus on verticals. We are focusing on 5 key verticals. When I think of verticals, I think of how do we make sure that we integrate that system in [indiscernible], how do we make sure we have the certification, and how do we make sure we have key IP for certain key things inside each vertical. Vertical is very important. International is I. We are focusing on international. Our partnership with Atos is one of the key -- one key lever, which will give us an international presence, especially up market. The third is partners and partnership. We doubled down on the channel. And you've seen AT&T. You've heard about Avaya. You've heard about Atos. So that's across service providers, legacy on-prem, companies or SIs expected to become the focus on partnering to continue. And the last is E, enterprise. This is where a lot of the focus on the [indiscernible] will come in. And enterprise will go across the first 3 [indiscernible]. How do we make sure that we focus our enterprise sales team on the key verticals? Enterprise will be a key part of our international expansion because SMB is already doing well. And enterprise will work hand-in-hand with partners. One of the key things which RingCentral has done is have a channel program, which is in complete harmony with our direct sales force, and you can expect that to continue as well. So the simple answer, VIPE.

Got you. Got you. You touched on it. So let's touch on Avaya Cloud Office. Obviously, a lot of excitement around this. I have to join offering with Avaya released for GA at the end of March. I guess maybe take a step back because there may be some folks who are maybe less familiar with it. Just what does the structure of the deal look like, the importance of the relationship and how the deal came about as you look to extend the leadership position that you have in the market?

Yes. Yes, I'll take it. There was a -- this whole 400 million seats. So I'll start with how the deal came about and then we'll touch on the structure, Bhavan, of the deal. So the way the deal came about is there's a -- one thesis is very clear, right, that all these 400 million seats that are locked in on-premise, customers want more flexibility, more agility to take it to the cloud. Now the issue is Avaya is a great brand, and customers want to stay with that brand. And then there's a natural tension between going to the cloud and staying with Avaya's brand. So this deal essentially came about to remove that point of friction where customers get best of both worlds. They get to stay with their Avaya brand, but they get the best-in-class technology platform from RingCentral. And so the way the deal is structured is that Avaya is now endorsing, in a way, RingCentral's product through their channel partners, through their direct sales force and reselling our product. Customers do get our product with the Avaya brand, and it comes with some special preferences where you can actually get to keep your enablements. You can get to keep your settings, whatnot, in a seamless manner to migrate from an Avaya instance to a RingCentral instance. And the promise land is you leave your office on a Friday evening, you come back on Monday, you have exactly your same setup. You have the same desk phone, but your underlying infrastructure is swapped out for a cloud infrastructure. And so people -- I mean, we are seeing a lot of traction there, and I think this journey is just getting started, Bhavan.

Yes. So let's talk about the traction, right? You launched on time despite COVID. So, I mean, congratulations. I mean that's an effort in of itself. But I assume the current environment has an impact on the timing of deals at [ Avaya ], right? I -- look, we all know, and you've mentioned that there has been traction, you have closed some deals. But I think when you think about what your expectations were pre-COVID and what they are post-COVID, it makes sense to think that maybe this is 2021 massive gain as opposed to 2020 massive gain. So I'd love to understand what early feedback you received and how do you think about what could have happened this year, maybe translating to what might happen next year.

Yes. Yes. No, let me take that. So you said it right, Bhavan. We launched on March 31. And as a company, we have transitioned to work from home in the second week of March. And we had 2 of the biggest launches of our company's history is in Avaya Cloud Office and RingCentral Video. So in a way, we not only -- we delivered the launch on feature, actually a little under time. We've obviously kept at the same time we had publicly announced it. So we are pretty proud about how that happened. And it's a testament because RingCentral as a company, has been on MVP, our own platform, for a long time. Every one of us. So that's that. But that said, now we are 8 weeks in. I'll stay with what we had shared just post-earnings on Avaya. We spent the first couple of months is all about getting the partners, Avaya's channel partners onboarded. We shared that at the time of earnings, 1,700 partners have already been onboarded. So you can expect -- you can extrapolate from there. We are working on helping them jointly build fight because the motion and the value prop of positioning the cloud-based solution is different from an on-prem PBX. So we are basically working on educating them, training them and getting them ready for the go-to-market motion. What I'd tell you is this. COVID-19 -- firstly, I hope everybody is safe and healthy on this call. It's unfortunate. But in the context of that, it did create a little -- it does create a little bit of a tailwind for our category, UCaaS, work from home. And given that, that's what we saw. The pipe building was extremely good. Avaya shared a large deal, a 7-figure deal, in their earnings call, which we had in the United Kingdom. And so all of you are aware to have a 7-figure deal, a large deal, it takes a little bit of time. This is not [indiscernible] deal. It's not an SMB deal. And to do that in 5 weeks is actually a sign of the health of the partnership, how we are coming together, the difference the product is making to the customers end of the day, especially in the work-from-home environment and the excitement of Avaya's channel partners because they have a true cloud solution. So just as we shared right after earnings, these things continue, and we hope to share more once we come back on the earnings calls.

Yes. Yes. The Avaya deal, when you think about it, it gets you, let's call it, privileged access, right, to let's say, 100 million seats, right? And we can discuss in size and we know there's different ways, but a lot of seats. In the wake of that deal, there's a low -- a competitive place sort of in the SMB space. They could deal with any scene for access to 80 million seats, right? This just suggests and shows you how big the market is in various segments. But I guess, both for you, Anand or Mitesh, do you see the potential for similar deals of this substantial size out there? Like, is this something we'll see you guys ink another one that's with a 50 million or 100 million one? And do you think there'll be other cloud providers sort of saying let's emulate RingCentral and get access. Smaller competitors, say, "Okay, we should do this with another large guy and maybe given better economics, who knows what that plays out?" But I guess the question is, are there more deals like this to be had? And are you seeing that?

Yes. No, it's a good question, Bhavan. We wouldn't make forward-looking comments about deals. But I'll go back to something I just said, which is partners and partnerships is the foundational pillar for growth for us. So integrate data is as [indiscernible]. How we structure partnerships is going to be the key growth factor for us going forward. So that's probably what I would say.

Mitesh, you want provide any forward-looking statements?

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

So let's touch on the other partnerships. AT&T has been a partner for RingCentral a long, long time, kind of ups and downs there. But obviously, you've -- we've seen you expand that partnership over the last year or so. Just maybe give us a brief history. And more importantly, how is it progressing? And what could that partnership mean for RingCentral?

Yes. So what I would say is, obviously, the partnership predated me, but I was a keen follower of RingCentral's partnerships, and AT&T was one of the keys there. Several years ago, they opted to consolidate with a different solution and moved the way from RingCentral. But pretty quickly, they realized the power of the RingCentral Office solution and the platform we have. So late 2018, AT&T and RingCentral came back together with a much deeper level of engagement and much more focus, not just one customer segment, but an intent to actually focus on more customer segments and more verticals. Long story short, I think we shared the story of Q1, which is we had the -- a strong quarter-on-quarter growth. I think we grew 20% quarter-on-quarter, which was, again, a symbol of the strength of the partnership. But even more importantly, for me, where 2 fundamental lead indicators, which tells us where we are going, which is, #1 was the percentage of sellers who participated. We had 30% more sellers who participated in Q1 from AT&T, which was [indiscernible]. And the second thing I would share is Q1 was where we had the lowest churn in 6 quarters in our relationship with AT&T as well. So both of those put together, more and more sellers participating, less churn as a trend and then reflected in the growth numbers we shared, we feel pretty good about our partnership with AT&T.

Yes. Yes. That's very helpful. You touched on the platform. You brought this up obviously a couple of times now. Along with ACO, obviously, you've got RingCentral Video. I guess let's touch on that video part. Like, what is the go-to-market strategy with the product? And then early traction of feedback would be great to get some sense of.

Absolutely. No. So if you look at video, I mean, for us, a couple of key foundational pillars, we are a business and an enterprise-focused company or a commercial-focused company. We work with SMBs and enterprise customers. For us, RingCentral Video is not about creating consumer motion. It is doubling down on our focus on the enterprise. Now what I'd tell you is we launched RCV, RingCentral Video, on April 2. So we are just about a couple of months. I'll stay with some of the feedback we shared right after earnings. At earnings, we shared that we have 1,000-plus customers. The feedback has been extremely positive. Most of the feedback is it feels like a week 3. It doesn't feel like week 1, which is great for us. The other thing I would remind everyone is even though we launched RingCentral Video publicly on April 2, we have been in production with AT&T for Office@Hand, which is AT&T and RingCentral's joint product, had RingCentral Video as the offering. So we've been in production with AT&T for a few months even before our launch, which allowed us to hone this very well. From a go-to-market standpoint, this is how we look at it. Any new customer is defaulted to RingCentral Video, unless there is a really strong reason we don't want -- the customer doesn't want to go there. And early indications are very good about it. The second thing is we have a large installed base. As Mitesh said, when he started off, we talked about messaging video phone, and Zoom has been a key partner and will be a key partner in the future. And so our existing installed base continues to remain on Zoom. And we are not force migrating anyone, but we have had customers raise their hands and say they would love to explore RingCentral Video. And we are letting it be a customer choice versus a forced migration on our existing installed base. And so great feedback, great traction, especially as we look at new customers coming onboard. Solid key features, which they love or things like, hopefully -- and any of you have had a chance from RingCentral Video, you can click a link and directly come into the meeting. You don't have to -- you won't be forced to download an application and then join the meeting. So a lot of good things there. That's the journey we are on.

Great. No, that's helpful. I think as we talk about the convergence, obviously, we've had a way -- we've talked a lot about the convergence. You guys have certainly delivered on convergence there. But do you think you ever offer a stand-alone video product at all? Or does that just not make sense given ultimately, it's part of a suite of things that all kind of works together to drive communication collaboration?

Yes. We never say never again, and we don't make forward-looking statements. So it's -- that's a heavy combination.

It actually is tracking very well. I'm just going to say that.

And so yes, so that's where it is. Our focus is on the customer. Our focus is on our business customers. Every motion intersects with that. And those customer demands and preferences is what results in the innovation choices we make and we take in.

If we think about that platform and innovation, you've also acquired things, right, Glip and others, Connect First, et cetera, including internal development of RCV. Just can you talk through how you -- the longer-term vision for the platform? You've touched on it, but sort of how do you think that vision is shaping investment priorities today?

No, that's a great question. You referred to Glip already. And it's been a steady -- it's been a -- it's I think one of the key things we are proud of at RingCentral is understanding customer choice and giving them what they want. And that is what has resulted in -- I think we were one of the first, if not the first, to actually talk about message video and phone coming together. There's only one other in the industry, which is Microsoft Teams. But we were one of the first, or if not the first, to actually go and do that. And so everything you see us do will be grounded on some of those factors, which is making sure that we not only have tight integration across all modes because business communication is about sustaining communication across all modes because of video or a phone call this point in time. When you bring video phone and messaging together, then collaborations scales across the life cycle of an individual. And so integrating -- we already are integrated, but bringing more experiential integration as a key way to make employees more productive is going to be one of the key places where we go invest innovation cycles on. Obviously, RingCentral Video is being one. You can expect us to -- this is a journey for us, but it's a journey we are very, very keenly invested in, which is important. We talked about the contact spend. I think one of the Aberdeen's research told me that when companies make a joint decision on UCaaS and CCaaS, employees are 30% more productive. There's more than a 30% reduction in, for example, customer calls, which come in because you're able to deal with it pretty effectively. We were early to understand that trend and invest in the contact center. So we have a key partnership for -- within contact. And we also are focused on our first-party products for outbound with this Connect First acquisition and the Dimelo acquisition we had, which is our digital -- engage digital. So between RingCentral and contact center, engage voice, engage digital all coming together, and then and deeply integrated with RingCentral Office, that's the second piece where we feel pretty strongly about where we are and how we work with customers, make them more productive across the entire life cycle, both of how we engage with customers, but also within the business. So that's -- and then the last thing I would talk about is integration and creating an open platform. We have 3,500 plus integrations. We have 35,000-plus developers on our open platform. And that makes a huge difference in having an ecosystem, which is constantly creating in-app integrations to make employees more productive. So that -- those are the places where we're investing. But at the end of the day, it all comes back to security, reliability and trust. We are -- if you look at the voice stack, I think we are probably one of the few, if not the only companies who offer a 5 9s SLA on voice. And as we all know, we can have a conversation with a slightly grainy video, but there's no conversation to be had with patchy audio. And so that is a key part of -- even our competitors offer a better SLA, something like 3 or 4 9s, not 5 9s above the stack, but nobody offers 5 9s SLA for voice. And so maintaining that focus, which we've been always grounded on, on reliability, on security, on trust, is essentially what it all comes down to on top of the innovations.

Yes. No. That's great. Let's touch on margins a little bit here. Look, you've grown incredibly well. And the growth rate has, in many cases, accelerating. You're at least sustained in the, easily, mid-30s, right? So a phenomenal growth. You've invested in sales, go-to-market and product, but you've also been able to drive margin expansion. I guess maybe this is more for Mitesh, but what enabled you to deliver these results? And how should we think about your balance between growth and profitability going forward?

Bhavan, it's -- for us, again, as I -- as we've talked about extensively, and you've -- kudos to you, you've been one of the early-on leaders on the sell side to write about these things for RingCentral and doing primary research. For us, it's always about, not just growth, but profitable growth. And this business structurally and inherently is a very accretive margin business. If you look at our subscription gross margins, it's in the low 80s. And then our sales and marketing efficiency with all these distribution engines, with all these partnerships, is getting more leverage and more scale. G&A, by definition, will get scale over time. And the only place we will keep on doubling down, which will drive further scale and growth, is R&D. So I think the rule of 40, at least we will -- we are not backing away from that. I think the rule of 40 is here to stay. And all the upside gross margins and leverage we will get from the growth, we'll be reinvesting it back in the business, but we will -- we have promised about 40 to 50 basis points of margin expansion. And just for sake of discipline, and we will stand behind that.

Mitesh, that's great. I guess as you think about the rule of 40 and balancing that, the assumption is with Avaya and some of the partnerships, that top line may potentially -- hopefully, it does, right? Let's not get overly excited, accelerate quite dramatically. And if you think about the flow of what that means down the bottom line, I'd love to get a little color on how that plays as it flows down the bottom line because the structured deal is a lot of prepayments there, and so let us understand sort of how that actually impacts free cash or operating margin, however you want to take it, but I'd love to understand that a little bit.

Sure. No, absolutely. It's a fantastic question, Bhavan. If you look at the -- it all comes down to unit economics of the deal, and everything starts flowing through from there, Bhavan. And I've never seen somebody having a sip of water and just the glass disappearing. So you should teach me next time how you do it, Bhavan, by the way. [indiscernible]. I'm just teasing you. But if -- the way the unit economics works for Avaya is it's actually more accretive than our direct business. And here is a simple reason why. We don't have to pay our salespeople upfront. And the churn rates are better because Avaya's channel partners are incented to keep the customers, and there's no marketing cost involved. So the upfront cost we save on sales, on marketing, that can be reinvested for growth. So ultimately, with Avaya margin starts going through, it will be accretive to our business model.

Yes. Yes. That makes a ton of sense. I guess when you look at the investment priorities in sales, and maybe this is for you, Anand and Mitesh. You talked about the VIPE approach, the vertical sales approach, I'd love to understand how you think about continuing to invest in that because obviously, it is a critical part. And as you do that, are you seeing a greater number of larger deals? Is this allowing greater part of the E, enterprise approach as you verticalize it? I'd love to have sense sort of like the investment piece that you want to make and keep making there and then what fruits are you seeing from those investments you've already made. Are they enterprise? Are they across the board? I'll let you jump in and provide color.

Absolutely. Good question. Let me just at least reflect on what we shared in Q1. Q1, large deals for us, where -- what -- I mean, that was the largest, large-deal Q1 we had ever had. And if I reflect on that, most of it are coming through as a result of some of the key vertical efforts. So for example, one of the key verticals for us is education. Cornell was a key win with 15,000-plus users there we talked about, and we are building momentum on the education vertical. Mutual of Omaha, I mean, FinServ is a key vertical for us. And we talked about Mutual of Omaha, a Fortune 500 company as a key win for us in the FinServ space. I -- health care is key. And I health -- I shared Aveanna Healthcare. I'm actually pretty excited about Aveanna Healthcare for more than just we -- Aveanna Healthcare was a large deal in Q4 for us where we sold RingCentral Office. But what happened with COVID was actually pretty remarkable. They had to get all of their contact center agents to work from home pretty much immediately almost overnight. And this is an area, which is like mission-critical for them, right? It's not just selling you insurance, it is saving lives. And so we've been able to work with them to transition their entire contact center population, agent population overnight -- not overnight, within 48 hours. It took 48 hours for us to transition them to work from and actually make them productive. And in the process, it ended up being one more large deal from the same customer because of the cross-sell in Q1. So Aveanna Healthcare is a great example of how we see the COVID tailwinds help us penetrate our customers and the installed base faster and quicker as well. So that's what you would expect to see or you should expect to see as we think about more focus on verticals, and in the process, getting some more specialization in the sales -- investments in the sales force as well.

And Mitesh, we're almost out of time, but let me turn it over to you, maybe a closing remark before we wrap up.

No. I will -- thank you, Bhavan. Thank you so much for taking the time to host us. I think, look, I think this is going to be a watershed moment in the history of UCaaS. There's this massive shift going on from the legacy business communications to the cloud. And COVID has just exposed more seams that this whole work from home, which is a subset of work from anywhere, just cannot be sustained. So UCaaS now becomes it's not a nice to have, it's a must have, almost guaranteeing business continuity and survival for most of the companies. 400 million seats will change hands. We are -- at least we feel that we will be driving change there, and we'll be getting a fair share with our distribution engines like Avaya, AT&T and Atos. And with this whole RingCentral MVP approach, Message Video Phone and convergence, as you call it, I think we are only at 2 million seats and I think our journey is just getting started, Bhavan. So looking forward for 15 more years of you covering RingCentral.

Guys, thank you so much. It's great to see you guys at least virtually. Hopefully, we'll see each other physically soon. I'm glad everyone's safe and well, and thanks for participating and being part of our conference. And like I said -- like you said, maybe another 15 years.

There you go. Thanks, Bhavan. Thank you, everybody.

Thanks, guys.