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

Welcome. I want to thank everyone who's dialed in and going to get to hear one of the top SaaS companies in the market today. So this one is going to be worth your while. I'm real pleased we've got the CFO of the company, Mitesh Dhruv. We also have the Head of their Investor Relations organization, Ryan Goodman, with us. And we're going to go through a just fireside chat, just try to bring the opportunity, talk a little bit about the news the company made this morning. And then we'll open it up to Q&A for the buy side. So feel free to either email me a question or post your questions on the chat, and we'll ask Mitesh. We got him on the spot here. So with that, Mitesh, we do have some new listeners and viewers today. So for anyone who is relatively new to the story here, we just start at a very high level with just a brief introduction of yourself and the company.

Sure. No, thank you, Brian, for having us here. We are very privileged to be -- as part of this Oppenheimer platform and doing this chat with you. You've covered this company for a long time, and you and I go back even way before then. So next time, I just need to upgrade my wardrobe to wear a nice suit like you. But besides that, I'll try to do my best. So I'm Mitesh Dhruv, CFO at RingCentral. And for those of you who may not know what RingCentral is, it's a very simple story. We are a leader in cloud communications as a service. Basically, what that means in layperson's term is we help workforces and employees connect with other employees, their vendors and customers via any mode, any device anywhere. And that may seem like big words, but in this world of post COVID, people do want to work from home and anywhere. So we actually enable the entire communications suite, be it a messaging platform, be it a video platform, be it your core PBX, which is where we got started. The market opportunity is just ginormous. We had some announcement this morning, which we'll go into. You've got 400 million seats that are locked up in the on-premise world, and we are trailblazing the world to the cloud. So sort of that's the -- a quick thumbnails sketch of what we do.

Thanks, Mitesh. Well let's hop in. I alluded and you alluded to that the company made some news here this morning. If you look at the stock reaction, clearly it's getting a positive reaction, from the market on the news. So can you please just give us an update here on the Alcant-Lucent Enterprise (sic) [ Alcatel-Lucent Enterprise ] announcement that you made this morning?

Yes. No, thank you for that. So this morning, we had an announcement where we signed an exclusive partnership for UCaaS with Alcatel-Lucent Enterprise. It's a company headquartered in France. They have about 40 million seats that are on their on-premise ecosystem, and we have been very privileged to sign up an exclusive relationship with them as they look to their customers to provide them a path to the cloud. Now what's interesting about this is, this is going to be the third partnership we've signed. Not intentional, but they all start with A for some reason. I don't know why. So we'll have to move up in the alphabet soup over time. So we have a partnership with Avaya. We have a partnership with Atos. And now the most latest addition is Alcatel-Lucent. They all are a bit different in their own -- they bring their own flavors, but we are very excited to just lead the overall charge to the cloud migration for now counting up towards 180 million seats here which are now up for grabs for us.

Perfect. Mitesh, you set yourself up now. So I guess we're going to wait for the announcement for Apple partnership next. That will be the next one, I guess. But if I could ask just kind of one follow-up question. Anything you can share with this announcement as we think about the growth for next year after we're past the enablement area? And anything to think about in terms of the long-term growth opportunity with this partnership?

Yes. We've not given guidance -- formal guidance for 2021, as we know. We are in midyear right now, and we'll give 2021 guidance in the fourth quarter in February. But if you think about the landscape and what's happening, I think 2021 will be another good year, just like 2020. We have Avaya ramping up this year in Q4. We'll have Atos ramping up in the first half of next year, soon to be followed by ALE in the second half. So these partnerships will keep on ramping. We have AT&T in the background that will start to contribute even more meaningfully along with our baseline growth drivers. And on the product side, we are -- we just launched our own video product. We are working on the contact center side. So there are so many -- we have a lot of irons in the fire, which do set us up for a good 2021, we feel. And, I mean, you said it right. It's not about just one and done, right? It's not like a one-shot -- one-trick pony with RingCentral, as you've seen over the years. I think the way we think about RingCentral is a long, enduring growth story where -- which we have been demonstrating over time, where once you start ramping all these different growth drivers over time, it doesn't take a lot of heroic assumptions for the numbers to add up to be pretty big. If you look at the partnerships, Brian, right, we have a call option on 180 million seats exclusivity. Even if you just assume a low single-digit attach rate, about 2% to 3%, that itself, along with our baseline growth, could be multiples of seats from where we are today, where we're only 2 million seats right now. So I think RingCentral, I feel very good about an extended period of growth rate over time.

Sorry to jump right into kind of the real-time news. But I know a lot of investors have been on the story for a long time and were interested in those comments. But let's take it back to kind of the beginning and the high-level view here just to shape the opportunity at this point in the company's life cycle with the next couple questions. So tell us a little bit just about the business model and the go-to-market, who you're disrupting. And you mentioned there's this ginormous, I think, was your word, TAM. So anything that you could share about the penetration rate as it stands today?

Yes. Penetration rate, again it's very, very early innings, Brian. We are a little over 2 million seats right now. The overall cloud market is 400 million seats. These are tangible. Look, sometimes, you've seen -- you've done so many IPOs. It's not the obligatory TAM numbers people throw out. Oh my god, TAM is $100 billion, and our operating margins are going to be 25%. It's like perfect like that. No. These are tangible seats people are using. So we feel very good about the servable TAM. And amongst the -- in the 400 million seats, within that, we have exclusive relationships with 180 million of that. So I think this is -- this movie is just getting started here, I feel.

Mitesh, I think you've giving out our secrets here on the sell side -- with our TAMs and our triangles and ASPs that -- but no more secrets.

I'm -- exactly. How many -- you and I have done so many IPOs together when I used to be at Maryland. It used to be the obligatory throw like a BHAG TAM number. And you and I would be scratching our heads saying, oh, my god, this is just disaster. So hopefully, we don't feel that way at RingCentral -- about RingCentral because these are real tangible users we can migrate.

So let's talk about just a bit kind of the moat or the kind of -- we'll get into the moat and the barriers to entry. So Mitesh, tell us why you went at the end of the day. You've been competing for a long time against these much larger legacy systems providers in the market. You compete against them. You've got best-of-breed communications solution providers. But just looking at the growth rate and the scale of the company, you're clearly outperforming all of them. So how are you doing it? How are you differentiating and winning against -- in the market?

Yes. Look, winning -- thank you for all these kind words. We, I would say, are just very humbled with the way you framed it, is we are getting more than our fair share. And I think in this world, we think about every day waking up saying, how will we compete effectively and to lead the charge to cloud migration. And that's what is -- drives the entire company here, including like from the beginning, from the top and then it percolates down. So the whole culture is about winning and competing effectively and differentiating and creating a moat. So I can just -- I can give you two big [Audio Gap]

No. Thank you. So, I mean, look, it's a matter of time and it's a matter of money. It's -- we've been doing this for a very long time. We've invested hundreds of millions of dollars in R&D, and it's critical. When you're doing a communications solution, it's unique in that amongst all SaaS solutions, this one touches all employees in a company. So this is something where the Five9s of reliability is critical. And having a deep feature depth is critical. Especially when you're going upmarket like we've been and going into the larger enterprise customers, having that feature depth to meet all of their needs and be able to deploy without dictating how they use the platform but just empowering them to enhance what they're already doing and apply communications and integrate with other enterprise workflows, all of this takes a considerable amount of time. And then as to what Mitesh was just saying, having that open platform ecosystem, again, to get to those 40,000 developers and those 4,000-plus app integrations is not an overnight project. So I think all of these things are key differentiators. And we continue to invest in. To that point, I mean, on the product side itself, we did just launch RCV, our RingCentral Video solution, as Mitesh mentioned. So another example of how we continue to take the product leadership we have, improve on it, stitch together the different modalities, messaging and video and voice, and make a really differentiated solution to keep us moving.

Thank you, Ryan. Mitesh, I want to bring you back to a comment you made on an earnings call. As you know, that's what we do as sell-side analysts. When you make a comment, we never let you forget about it. But you did make a comment that you were starting to see improving customer lifetime values in the business. And you clearly made that comment in a public setting. So you wanted to make that comment. Can you maybe dive in a little deep -- dig a little deeper into that comment? Why is this happening now in the business' life cycle? And you do this -- the company distributes to all size businesses, and just wondering if that comment is applicable to the different segments of the business -- market size companies.

Right. Right. Just to -- but to finish up on the previous comment Ryan mentioned, like who needs a CFO when you've got such an eloquently spoken Head of IR? So maybe Ryan should be answering all these questions. But I will go with this one since you directed it to me. By the way, Ryan, fantastic job in answering the previous one. So on the lifetime value, look, the hidden crown jewel for RingCentral has been our mid-market enterprise adoption. It's about over $500 million business, growing over 50%. And that's -- really, Brian, you hit the nail on the head, these customers are generating a much higher LTV to CAC because we get them in, it's never a wall-to-wall deployment to begin with, and then we are able to upsell them more seats and more products and higher contract durations. So that's one. Number two is our awareness. Now that's also helping us drive higher lifetime values because our brand awareness -- the marketing dollars are showing return on investments. And the third one is the partnerships. That, again, adds to the lifetime value with Avaya, Atos and AT&T. And product itself, when Ryan mentioned RCV, it's getting to be much, much more stickier product with RCV. If you look at the financials, it's full and sticky. But on the financial side, it's going to be more accretive gross margin dollars for us because we don't have to pay the partnership toll we pay right now. So overall, net-net, all these vectors are pointing to a higher lifetime value as we move up the curve and get even more scale.

Great. Let me ask one more question and then we'll open it up, questions to the buy side. Again, they can make an email them in to me or post them on the chat. Just wanted to ask you about the go-to-market strategy and how important that is to the business, the go-to-market motion. And the reason I ask is because the business has actually taken a unique approach with the strategy by partnering together with channel partners, carrier partners and your strategic partners. So can you share with us what this provides for you and the business?

Right. No, we will. So I'll again have Ryan take it because Ryan answered the product question so nicely. So let him bookend the go-to-market question now. Ryan?

Thank you, Mitesh. So look, the go-to-market is important. I'd say at the core, the product is key. You have to have an industry-leading solution or nothing else really matters. But then once you have the solution, being able to bring it to the global market in a unique way is an important differentiator in itself. So we do have a few different strategies we take. First, we have the direct sales approach, which anywhere down to SMB with self-service and all the way up to direct and enterprise wins is a key part of the business. We have built an extensive channel network with channel partners, and we give that metric on each earnings call. The channel ARR growth was up about 60% in Q2. So that business is growing very nicely. And a key element in the distribution and -- or the go-to-market motion, reaching the upmarket are larger customers. We have carrier partners. We recently announced that we're a lead provider to AT&T as their UCaaS provider. We also have carrier relationships in U.K. and Canada. So very important to us in expanding the international niche in a way with favorable unit economics. And then as Mitesh has mentioned, we have 3 very important strategic partners with a little bit of a different flavor to each one of these. You have Avaya is the one we announced late last year with 100 million installed base in over 180 countries, where -- just a massive channel network and a legacy in these industries. So to be their exclusive UCaaS provider gives us a really differentiated advantage, we think, with an extremely large portion of the overall market. And then you have Atos, which we described recently. And again, a different flavor here, a little bit larger of a customer base in terms of customer profile. It's about a 40 million user base with more of a system integrator approach, where we can be integrated as part of a larger UCaaS-related projects. So that's a new go-to-market motion for us. And very strong in Europe, so -- and newer geographies. So a different installed base. And then, of course, this morning, we announced the Alcatel-Lucent Enterprise. Again, another major player in Europe, a different installed base there with 40 million. Again, a little bit different go-to-market motion than the others and a distinct user base. So putting these all together, we think that this is the mindset, is pair all of these together to bring our leading solution to as bigger portion of the global market as we can. And so far, it's been doing a nice job in that.

Thank you very much. Ryan, you're doing a great job. And Mitesh, you should be careful because if I recall, the CFO came from the sell-side analyst who's in that seat. So...

I know.

Let's go to the field and the questions. Mitesh and Ryan, a bunch of questions have come in here on Avaya. So I guess maybe I'll just read it. It's -- or this one. The partnership clearly is in its early days. But can you share with us some of the surprises either from the enablement period and the early adopters? Anything that you've seen, either positively or challenges, that may have rode so far with Avaya?

Yes. Avaya is off to a good start. And again, early days, but we have some good proof points in, I would say, 2 dimensions. One is the business itself. We saw good business in Q2, as expected. And we saw a -- we had a bluebird, 7-figure deal, which we did not contemplate. So in a way, to answer the question, that was a surprise. We were not expecting a 7-figure deal. So it shows you that -- how the momentum is building. And if you were to look at the future, the pipeline also is building very nicely and hence my comment about Avaya starting to ramp starting Q4 and then starts to meaningfully contribute in 2021.

So the next question is about COVID, kind of just the current environment. Mitesh, Ryan, it says, "You guys are on the ground here. The business is clearly a clear winner in the work-from-home trend." But they want to know internally within your company how the pandemic is just changing the collaborations, sales, go-to-market motions. And are you able to keep up with the product road map with everyone working at home these days?

It's -- one of the surprises, I was -- I'm just shocked that we were able to deliver our ACO road map or the ACO product launch during COVID. And that was -- forget inside company. That was a collaboration between 2 different companies on 2 different coasts, right? So we were -- still launched ACO on time. The beauty about the RingCentral platform is that we are able to close deals remotely using the RingCentral platform and some of the other products. We don't need a physical install. The remote installation totally works. And as it relates to the product pipeline, the collaboration, I don't know if you guys see it in your business, Brian, but the productivity, at least what we are seeing, is through the roof here. And I'm sure you see it in your business as well because you just go from one meeting to the other on, in our case, RCV meetings, and you just literally don't take a break and you're just working nonstop. So I'm seeing we are able to close the books effectively. We are able to punch through products effectively. It's going to be -- it's been amazing in a way where we we've seen a lot more collaboration and people being on standup calls every day. And I think -- yes, I think, well we feel very good about it.

Yes. I mean the proof point -- sorry, just to bring up a couple of points that came up on the earnings call a week ago. We did deliver a record number of million-dollar deals in a quarter. That was with COVID. And Mitesh, actually you offered up a new metric just for the quarter of sequential growth in bookings from new enterprise customers was up 50%. So a very good number. And just another proof point that larger deals continue to happen, are happening and continue to happen in this environment.

Ryan, can I ask just a follow-up question just on your own experience with this? If I think about like what you've done in the Investor Relations role, you're putting together earnings reports, you've launched a product here with RCV, you've had these material announcement calls. How has that been working with your team and doing that all remotely?

Actually, I'll echo with Mitesh here and the productivity of -- it sounds backwards, but working remote where you're locked into a very -- meeting to meeting to meeting and, for me, investor calls and sell-side calls, it's extremely efficient. And very focused where I feel like I sit down and you just go from the start of the day to the finish, you're just adding to this. The earnings process, we've now done 2 earnings processes going remote. They both have been seamless from planning through execution of the earnings day through doing all the follow-up calls with investors and with analysts. So yes, absolutely. I mean perhaps it's also because we've used these tools before COVID, and we continue to use them in the same way, where, honestly, if you're on the RingCentral platform, it doesn't particularly matter if I'm sitting in my office or at home here, if I'm sitting in an office or if I'm at an airport. As long as I have the platform, I can basically do almost this entire job on a PC or on a mobile phone.

Actually, just to put a final point on that, so no, that's an interesting point because what Ryan said, even the $1 million TCV deals that are getting closed, record number during COVID, plus, think about our 2 announcements. You actually alluded to that, with 2 major players, the extension of the partnership or expansion of the partnership with Atos, where we became exclusive, along with the Alcatel-Lucent announcement today. This was all done remotely on our platform and in 2 different continents with 2 different sets of people. I mean, if there is 1 key uber-proof point of productivity and the platform working, it's that.

Yes. Mitesh, a couple of questions came in here from the buy side. I'll just read it. They're interested in the long-term kind of growth drivers for the business. They want to know, how much of that is left that's still greenfield opportunities? How much is coming from displacement of the existing solutions out there? And then there's the third avenue, too. They're not mentioning it. But in terms of the existing customers, I don't believe they've all taken your entire product set and solution set that you're offering. Last one, if I can throw international out there. It looks like you're laying out a clear trail here for international. You announced your partnership with Atos. You're announcing here this morning about the partnership with Alcatel in France. So maybe if you could touch upon those different growth -- long-term growth factors for the business.

Brian, you said it all. So now as Charlie Munger would say, I have nothing more to add to what you already said. You said it all, man. It's exactly that. We are laying down a track for international. It's about scale and reach with these partnerships. We have a baseline business growing and we have new products in the mix and -- which will drive more cross-sell. And we are going to larger customers that will drive more upsell. So upsell, cross-sell of products and seats along with international and new partnerships, I think that's the secret sauce and that's going to be the recipe for the next couple of years.

Maybe if I could just ask you a follow-up just on the contact center opportunity. Maybe you can share with us how you think about those different layers within the contact center that -- or categories that you're taking share in. And clearly, you have the voice, you have engagement technologies. But how do you look at the contact center opportunity over a longer-term period?

Contact center is a very interesting play. We are able to grow contact center of itself. It's about 10% of our revenue, growing much higher than the corporate average, along with -- it does drive cross-sell to UCaaS in both ways: UCaaS driving contact center, contact center driving UCaaS. We did have some customer examples this earnings call. Maybe Ryan can chime on those ones. But overall, the punchline is customers do want a vendor that can provide a best-of-breed, integrated solution for both UCaaS and CCaaS, and RingCentral is able to offer those kind of solutions. I think, Ryan, do you want to just give a flavor of a couple of examples we had on the trifecta on the airlines and a couple of other ones which will bring to light this thesis?

Yes. No, it was a good one. So it was about a year ago we had announced an engaged digital customer, and this is in the transportation industry. So that was a pure just digital solution a year ago. And then a year later, this last quarter, now they had decided, particularly in the COVID environment, to accelerate spreading the RingCentral solution throughout the organization. So they increased over 2,000 UCaaS seats and also added some CCaaS seats. So this actually -- the trifecta that Mitesh has coined here is they're using the entire solution. They're using a digital contact center solution, a voice contact center solution and the core RingCentral Office UCaaS solution, all starting from just kind of a smaller early win about a year ago. So we see examples of this every quarter. This was a particularly nice one where they use all 3 portions of the solution. But very often, especially as you go upmarket, if you have a UCaaS win, there's often a need for some sort of contact center solution, and it's a national buying motion to get to the same provider for that. But then we've also seen plenty of examples where they've adopted us on the CCaaS side, and later in the cycle, they decide they're ready to transition their UC business over to UCaaS. And that relationship is there, and it's a natural motion to just come to us for that as well.

Thank you, Ryan. I think we'll finish up the last question just on verticals and the industry momentum. You've called it out for several quarters here, a lot of industries, health care, financial services, education, retail, public sector. The question I wanted just to ask you is, how should we think about the cadence of new vertical solutions entering the market here in the future?

It's going to be more of the same. You mentioned 3 or 4 key verticals which we are doubling down on. And over time, we will add public sector. We are -- we will add the federal government to this. And I think you can start seeing us opening up TAMs in verticals that are meaningfully large. So I think stay tuned. More to come there, Brian.

Thank you very much. And I want you to know Mitesh is being very humble here because with us are the 2 #1 ranked CFOs and IR personnels here in the industry. So he's being very humble. And RingCentral has been a topic for us this year and really for long years. It's what we are stuck with all these years. It's been a massive winner. And the good news is there's a lot of good news and a lot of good things ahead for the business as we hopefully fleshed out that. So thank you, Mitesh and Ryan, and hope everyone has a good day today. Thank you.

Thank you so much, Brian, for all the support over the years. And I do want to acknowledge that it's been a good ride. And so, Brian, thank you for the support.

Thank you.