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

All right. Welcome back, everyone. So we're going to begin the second fireside chat of the session today with Praful Shah, RingCentral's Chief Strategy Officer, who has joined us to discuss the space and how RingCentral is approaching the market. Praful, thanks for joining us.

Thank you. Welcome, everybody.

Yes. So I think everyone knows what RingCentral does at this point across voice, video messaging, contact center, so I'll save you from kind of an introduction and get really right in the heart of it. Now -- and actually, for those that aren't aware, we're actually using RingCentral underneath for this conversation, good picture quality, too.

And maybe just to start off, Praful, RingCentral was early on in the transition for customers from on-premise to cloud. And earlier, we discussed the entire market going from about 40% of the cloud. It's 50% over the next few years, but voice is a market that is actually well beneath that kind of overall rate across SaaS. How far into [ the theme ] of the cloud transformation are we? How much has the pandemic accelerated this? And are customers looking to end of life for PBX earlier now move to cloud? Do you see an acceleration for that?

Yes. Thanks, and I appreciate you taking the time to invite us. Look, if you think about approximately where we are in this cloud transition from on-prem for the communication -- enterprise communication infrastructure, there are about 400 million seats worldwide. So this is one of those situations where it is not a hypothetical knowledge worker/kind of estimate. These are actually deployed seats, 400 million on-prem by legacy vendors, correct? So that is an existing thing. There's also, by different estimates, about 4 million to 5 million, around about 5 million to maybe a little bit million here or there estimate of what number of seats have moved to the cloud. And that is pretty early on a relative basis, as you can imagine -- I mean, what the numbers show. Now look, what happened, key drivers for going to the cloud were very different than other SaaS applications going to the cloud. In the enterprise communications, the driving factor started as people started adopting and changing the behavior with smartphones, they started communicating very differently in their personal life. The voice was one element of the channel. There was video. There was messaging. There was WhatsApp. There were applications integrated with other applications. Suddenly, the richness of that communication capabilities and the integration with apps suddenly made on-prem legacy systems, which are fixed-line voice only, completely archaic. So what happened was the early adopters of the companies, especially with knowledge workers and distributed and mobile workforce who already had that environment for them, started looking at solutions. And cloud was -- that is what the cloud solution was designed for. The cloud was designed for people to work with any device from anywhere in any form of communication. And because it's a cloud infrastructure, easy to integrate with other enterprise applications, very different from the on-prem. So we are very early. So that was what was driving the growth and the RingCentral's, especially what we are known for. Now what happened in the COVID, the awareness of that we need to -- the enterprises need to modify and change that communications infrastructure suddenly became more prominent. Think of it as some kind of an awareness event, correct, and bad awareness event, but an awareness event. And people have now realized in the enterprises, suddenly, there is like, wait a minute, my people need to be able to -- they had this need, but now it is really risen significantly. So that is what is going on. Now did it accelerate or not? I would say the awareness has increased. There has been independent -- some kind of independent buying going on in terms of what point solutions, panic buying of some point solutions here and there, if you may, in some cases. But I would say that when you talk about mid-size and larger corporations, they have to do a methodical analysis. The department and individuals may go and acquire a video solution or a team messaging thing from Slack or something like that. But when it comes to the corporate communication systems like the PBX, it is a corporate IT buying. It is not an individuals or individual departments cannot go and do. It's like your corporate e-mail system, correct? You can't just -- individuals cannot do that. So the thing is the buying process is a little bit more, how to say it, involved, security, scalability, reliability, analytics, integration with other apps. Suddenly, you become aware that you need to evaluate all of that thing, and it's an enterprise decision which needs to be made. So that is -- you don't suddenly accelerate that, and you can't certainly accelerate that kind of decision. You can bring it forward a little bit more, but it's not like overnight, you can make a decision and get 5 seats for your team messaging or 5 seats for video. That's not how the process works because you can then go in -- then you can figure out your decision. So that's what is going on overall. While it has helped, it is going to help because now the awareness is significant. It is a structurally significant event that now the awareness, it's not going back. People know that they have to go to the cloud now and be ready for any kind of a venture. And more importantly, for the productivity of the people, it's a fact of life. So you should -- the rate of adoption should increase compared to the earlier, and the awareness has increased. But I don't think there is that kind of centralized buying suddenly happens within a few weeks, but it is definitely awareness has increased significantly.

Got it. And so one major thing that investors and me like to talk about are the -- all the partnerships that you've signed up. And really, it's been about a year since you kicked off all 4 of them, where we have this major inflow of them and what we call the quadruple As, as being Avaya, Alcatel, AT&T and Atos. A lot of the investors here that we have upon with us are familiar with the announcements, but I did want to ask a few things around them. First, is there any way to rank or -- yes, to rank which of these partnerships will have the most near-term impact? And then additionally, how to think about the sizing impact for each, especially after Avaya seems like it's obviously the largest opportunity for you.

It's an interesting question. Think of it, correct? We have got just over -- we have got over 2 million seats. Each of these numbers for each of these partners is completely in orders of magnitudes different, correct? So trying to pick one of your child out of that one, it's so different because they're significantly larger in terms of installed base. But having said that, in a chronological order, if you look at what we have done, okay, AT&T was announced at the end of 2019, some time frame where we became the lead solution with AT&T in terms of Office@Hand by RingCentral at AT&T. So that -- and we will talk a little bit more about that later. Then the Avaya is obviously the largest in terms of the installed base, about 100 million. So -- and that the product is already out, 1 quarter out. So the pipeline and education and all of that thing is going on with the reseller channels and all. So I would say it's very early, but indications are good. In terms of Atos, it's very different. Atos Unify, base of Atos Unify is -- essentially comes from Siemens, which was an acquisition of Siemens. And if you look at Siemens has got a very strong German roots and other European countries, some -- just some European countries but very strong Germany. And so that's a very -- but also interestingly, they are Atos, the parent company, not Unify, Atos, the parent company is one of the largest system integrators doing digital transformation projects around the world, about $10 billion, $12 billion SI company, so they can talk about. And we hope to get aligned not only with Unify, but we are aligned with Atos, the SI company. So we feel very good about that. And Alcatel-Lucent enterprise is -- really comes from the base of Alcatel in France, significant installed base in France and surrounding countries, and so that's a complementary. Again, each of this installed base, 40 million for Alcatel-Lucent, 40 million for Atos Unify, 100 million, each of those are independent installed bases. So the beauty about that is there's no overlap between those -- the installed bases. I mean installed bases and install base, by definition, is different. And so we feel pretty good about each one of them. Now it's early. The Atos Unify project -- product should be coming out now and early next year should be Alcatel-Lucent's product. So you are in the very early phase of that, leveraging those partnerships. We feel good about it.

Yes, yes. I mean you have almost half the market heading your way based on that $400 million -- 400 million endpoint number out there versus the almost 180 million if you combine all 4. Is there any bar of success that the team has in mind at this point on the Avaya Cloud Office opportunity? And why would or wouldn't an Avaya customer or underlying reseller who's actually doing the work for Avaya want the RingCentral software on top of it as one bundled package?

Yes. Good question. Look, if you look at what is the relationship and why did we do these relationships, essentially, our understanding of the market over the years became pretty clear. We -- if -- when you go into those installed bases, they have endpoint devices. They have a lot of other multiple sites, they have installed legacy systems. And there's a lot of relationships with the reseller channels and the vendor over years and years. These are companies that have significant depth. For decades, they have been in that business. So it became pretty clear that leveraging -- you can, one, compute, which we were doing, effectively competing and replacing those on-prem systems, it might be even better if we can partner with those vendors and jointly sell and remove that friction, correct, because those vendors were not even -- are not like saying, "Oh, okay, if you want to go to the cloud, go away or go." They would basically alter their -- they would sell and market to them their newer on-prem solutions or whatever it is. So by leveraging and partnering and doing the right thing for the customer was if you can put that package together, which was good for the vendor, which was good for the reseller partner and is good for the customer, then you can basically had a win-win situation, and that's what we figured out. And basically, it took a long time, of course, to do all that thing so that you could put the model together. And especially, it was good for the customer, then the friction for the customer is significantly less because the endpoint devices are supported. You've got migration, seamless migration capability with the proprietary tools that the vendor would develop to transition the detailed database information and all kinds of configurations transparently into the cloud on to the RingCentral infrastructure, and that basically removes a significant friction. So to answer your question, if you put it all together, it is -- definitely, there's no reason an existing customer of a vendor on the on-prem system would not find it appealing. Now will it all happen today? No. There are different stages, different types of customers, different industries and different time when they've got the later -- last systems and different needs of their business, whether their knowledge workers, would they work faster to go -- a company that has more knowledge workers faster than if you had more manufacturing company is going to be different. But we see that eventually, look, there's a one-way street, correct? The water is flowing only one way, from on-prem to the cloud. There's no example of this infrastructure, somebody went to the cloud and basically reversed and went back to the on-prem systems, correct? It's not going to happen. So that is a question of time. It's not a question of if anymore.

Got it. Got it. I like your stream analogy there. And so obviously, a lot of partnerships are going on, and it's early days, as you said. But you might be running out of A-named partners. We're seeing virtually one new partner per quarter kind of cadence. Is there any way to think about kind of the partnership pipeline as we turn into 2021? Are you working on more?

Look, it is -- in the long run, everything is going to go to the cloud, I think. We, essentially, have got a significant amount of partnership and amount of work to do. It's not just signing these partners. We are extremely focused on execution and making our partners and our customers and our reseller channels and their reseller channels successful. So there's a significant amount of work to do. We are doing all that work, and we'll continue to do that. I mean what we may or may not do in the future is who knows, but we are very, very focused on the execution of these partnerships and making them successful. What happens in the future, I don't know.

Right, right. And so I did want to touch upon beyond kind of the partnerships on sort of the competitive front, we hear from Vlad on the earnings call the MVP strategy, the security of the solution, the reliability of it. This is great HD quality that we have going on right now. But when customers are actually deciding between RingCentral and 1 to 2 others, more specifically on the voice side of things, what are the major things that customers are baking off that enable RingCentral to actually win? Does country presence matter from a global scale, for example? Really, what I'm trying to ask is how defensible is your market position? And what are the key moats that enables RingCentral to win the deal as opposed to kind of those 1 to 2 others in the final bake-off?

Well. It's -- look, one of the -- let's put it, for any technology company, not just RingCentral, for sustained growth and leadership, there are 2 areas of building moats, correct? You need to build significant moats in 2 areas. One is technology, other is distribution, go to market, okay? We have been very, very focused on both sides. And the reason you need to -- basically, if you look at on the technology side, we have only -- we have not done a point solution. We have always sold it an integrated solution with in-messaging, video meetings and cloud PBX infrastructure, all -- like your smartphone has got multiple forms of communication capability from a single device. What we have built is a platform for smart -- think of equivalent of a smart communication or smartphone system, if you may, which includes all that capability at the back end to map the capabilities of the smartphones, correct? So we have focused not on trying to just do one thing well. We're always, from day 1, focused on building an integrated, unified infrastructure platform. That is a very fundamentally different approach than doing one thing and then trying to add other things. So that is very, very significantly different number in terms of the moat. On top of it, the global and all is, of course, you build on top of it, but the underlying foundation is the most critical piece. Then you do international. You do open the platform for integration with enterprise apps, other enterprise apps. We've got a few thousand of those, makes it very easy for enterprises to do a different way of deploying communications infrastructure very easily with us. Now that is on the technology -- we keep on enhancing. The technology never ends enhancement, and we'll keep on doing that. That moat has to keep on going, and we'll keep on building that moat. But a unified experience -- and we only pry -- every seat of RingCentral Office includes everything. We have never sold video separately from team messaging separately from cloud PBX separately. We have never done it. We have always sold as unified seat. You get all of it together. That's what we do all the time. So number one. Number two, on the moat side, on the distribution moat side, we just talked about all the distribution moats that we are creating, the 180 million seats with all these critical partners. AT&T, I didn't even add AT&T. Didn't you -- I mean...