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

Thanks, everybody, for joining today. I -- we have RingCentral here. We have Mitesh Dhruv, CFO. I am Meta Marshall. I cover the communications software names here at Morgan Stanley. I'm going to start with the disclosure, and then we'll jump into questions and start from there. So please note that this webcast is for Morgan Stanley clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Again, we're very happy to have Mitesh here toda RingCentral's CFO. We may have a guest appearance later, but we'll get started with questions. So yes, the theme of the conference is life after COVID. RingCentral was really founded to support the mobile employees 10 years -- 10-plus years ago, which is more critical now than ever with remote work in COVID. So what changes did you see to UCaaS to best accommodate like the hybrid environment we're likely headed to post COVID?

Yes. Sure, Meta, and thanks for having me. Life after COVID, it's a very cool conference title. I really hope we are in a life after COVID with this recent news. So I guess you had started this conference even before this vaccine announced. So Morgan Stanley must have a unique insight into the vaccines coming out. So -- but it's very timely, I must say. With that backdrop, look, RingCentral has been all about powering the mobile workforce with any mode, any device, anytime. And it started out as a -- purely as a voice platform, PBX platform, trying to transition companies on-premise to the cloud. Now over the years, I mean, that core underpinning has remained constant, right? The problem area is still the same. Companies are landlocked with legacy PBX solutions and they need a cloud solution like a RingCentral. What we've learned is that -- but it's not just about 1 mode. It's about multiple modalities. We offer a solution with messaging, video and phone together, Vlad's coined this term MVP, which is pretty cool. And it really has become a communication platform. We don't expect customers or employees to communicate a certain way. We are on video right now, but we could be on messaging later on. And there are multiple, multiple verticals that are voice driven. So voice also is critical, absolutely very critical, emergency responders, retail vertical, restaurants where the fine lines reliability is absolutely critical. And so the name of the game, at least what we've learned, is it's going to be, in the hybrid world, it's going to be about persistent communications, not a transactional meeting experience. And I feel that with the ecosystem we've developed, we feel pretty good about our position in this world to happen.

Got it. And where in your customer conversations, do you kind of determine whether there is some kind of temporary pull forward versus just a more permanent change in how they're looking at communication?

Yes. It is interesting. Yes, there has been so much chatter about the COVID hangover or a surge in demand, which could be temporary in nature. What we have seen is it's a one-way street. Customers who go to cloud communications don't go back, right? It's not a stop gap. It's always trying to upgrade your infrastructure to the cloud. And now more so, it's become a business continuity solution. So we saw our new logos surge to a record high level in Q3. And this was before in Q2 and Q1, we saw a similar trend. So in Q1, it was like, hey, yes, it's the flash in the pan, is it panic buying. But over time, we are seeing that the structural shift is surely here to stay.

Got it. That's helpful. And we now have Vlad, who has joined us, Vlad Shmunis, the CEO and founder of RingCentral. So maybe Vlad, jumping to you. RingCentral has been kind of a dominant force for a number of years now, you guys have grown 30% plus on a subscription growth basis for the last 10 years. With many new entrants coming into the space and trying to establish a UCaaS platform, how does RingCentral continue to maintain its leadership position, particularly as some of those larger vendors kind of make more noise?

Hi, Meta. Excellent question. So look, we are one of the pioneers of the space. We've been leading for a number of years. I think we've been pretty much winning the Magic Quadrant, Gartner's Magic Quadrant for, if I remember, 7 years in a row now. And we certainly believe we're extremely well positioned to continue our leadership. And I'd like to use the word dominance, but we'll let history judge that. Look, so what makes us stick is, first and foremost, we are follow-the-customer company. We, as some of you may know, we are bootstrap, we were a bootstrap. We started with 2 people. I was one of them, okay? And here, we are a Global 2000 company, over $1 billion in revenue, profitable and growing in excess of 30% year-over-year and even accelerating a little bit based on last quarter's results. So why is that? Again, follow the customer, listen to what they say and stick to our core brand values. What are our core brand values? If I were to say it in one word, it's trust, okay? Our customers simply trust our platform to be always available, always secure, to -- always compliant with local regulatory requirements. That's a big deal. There are many people out there who say, well, we have this country or that country. Well, what does it mean to have a country? Are you regulatory compliant? Are you collecting taxes? Are you paying taxes? Do you provide appropriate access to local government agencies? It's a heavy lift in our experience, okay? And of course, it has to work well, be intuitive, be always on. And we find ourselves that this is a differentiated position from the product platform perspective. Now on the product side, the second leg of the stool, is we do have a differentiated offer. We were founded even back then as a mobile-first company. Mobile-first means that we always assume that workforces around the globe are not going to be office bound, but they're going to be mobile. It does not mean work from home necessarily. Obviously, COVID made work from come a necessity and not a luxury, like it used to be for some prior. But work from anywhere is here to stay. With the vaccine, hopefully, it will pan out. It would be fantastic for the economy, for humanity, for RingCentral as well. It's the fact that people will continue to be working from locations of their choice. We have this motto, which we've basically IPO-ed the company on, on any mode, any device, anywhere. And that has never been more true than now, okay? We are differentiated with our products in that we deliver communications, not only from a variety of devices, but a variety of modes. We call it MVP, Message Video Phone. That is a differentiated offering. We seamlessly combine team messaging and collaboration with video meetings with RingCentral phone or cloud PBX. Now we don't stop there. We also have a cloud contact center offering. So it is really MVP plus C. When you put it all together, then it is -- we find that it's something that customers do like. And majority of our wins and our enterprise wins use more than 1 modality. Majority, many of them all use all 3, messaging, video and phone, okay? And about half of them use contact center as well. So that, if you will, is the second leg of the stool. Third leg is our unique distribution network. We are fortunate to find ourselves in a position of having preferential access to 180 million of installed PBXs. This is through our exclusive partnerships with Avaya, which is a global leader by volume in seat count, Atos and Alcatel-Lucent Enterprise. So between the 3 of them was Avaya at 100 million and Atos and ALE at 40 million each, that's 180 million. This is out of approximately 400 million of global installed base. So not that far off from 50% of installed base. This is a unique asset that we have, speaks to our follow-the-customer, to checking every box. You will hear from some of our competitors and would-be competitors that well, phone is not hard. Who needs all of the complexities? Why -- just use your cell phone to connect and maybe small, little [indiscernible]. Well, not so much. Truth of the matter is that world of business has been running on-prem, what is now legacy PBX equipment, but it's been in place for several decades. There are extremely complicated and involved -- workflows involved in how incoming calls are handled, in how calls are logged, analytics involved, integrations involved, devices supported involved and so forth. Again, RingCentral's philosophy from day 1 was to not tell our customers how to run their business. We've always been about satisfying demand. If a customer says, hey, this thing works a certain way on Avaya and they are used to it. Can you please do it? The answer is invariably yes. And this -- based on this, we were able to convert enough Avaya customers. And with our new presence in Europe, starting -- people started feeling our presence there. So where these story platforms with tens of millions in case of Avaya, 100 million users to where they chose to select RingCentral as their go forward partner. Because why? Cloud is winning, cloud will continue to win. RingCentral is leading in the cloud and simply put, they want to transition their on-prem user bases into a world-class cloud solution. So with our differentiated products, our differentiated trust based platform strategy and our unique set of strategic partnerships to which, by the way, we can also add the fact that we are the only UCaaS provider with proven, pure cloud, scaled up deployment with major global service providers. So we have AT&T for the U.S. We have British Telecom incumbent telco in the U.K. and we have TELUS, 1 of top 2 in Canada, okay? And through those partnerships, we have an additional go-to-market motion in addition to the strategics. You put it all together, you see our channel and our indirect partner-based sales growing in excess of 50%. Mitesh can share the absolute numbers, the actual numbers. But again, you put it all together, look, we are in a tough space. We expect those competition. We will hold our own. We fully believe that at our scale and given the amount of resources and investments that we continue apply to both go-to-market and very importantly, product side of things. We think we'll continue our leadership and continue delighting our customers with state-of-the-art technology.

Perfect. That's super helpful. You mentioned in there kind of your partnerships with Avaya, Atos and Alcatel. And you had built a very successful channel ahead of that beforehand. And so what is it in -- that those partners kind of give you in addition to your channel given that you were kind of successfully taking away business from those partners anyway?

Yes. No, no. Very good question. But there is a good answer, okay? So firstly, to be clear, our strategic partners, some of their customers are channel based or if you will, channel controlled, but some are not. They all have direct customers, and these are substantial populations, subpopulations in all of them. So clearly, we could not get to those outside of our own direct sales force. And it is -- look, we -- let me put it this way. If we are at the table, chances are pretty good we win. But if we are -- but we have to be at the table first. And we believe, and history has proven ourselves to be correct, that it is a lot easier to get to customers in partnership with the incumbent versus bare-knuckle competition. So that's part of the answer. Now when you look at the channel, yes, absolutely. We were successful in the channel, but it was a dog fight. We needed to fight all of the programs and incentives and MDF programs, if you will, that the incumbents would throw to try to protect their bases. And we just thought that they -- and so today that rather than fight it out, why not combine forces? Because we all know all on-prem will end up in the cloud in the foreseeable future. So what better way for an incumbent to ensure that they have a piece of that pie moving forward for indefinite that by tying themselves to the cloud leader because the alternative is, this customer is going to go elsewhere anyway. Maybe it goes to Ring, maybe it does not, but the incumbent will decide. So win-win. When we first introduced Avaya relationship, we talked about multiple winners, first winner -- and I'll just reiterate, first winner is the customer, most important winner is the customer. World-class, pure cloud, multi-tenant solution, global, affordable, that's everything that their on-prem legacy system did, but it's now mobile-friendly, it's now global, it's now secure. So saves them money, improves employee productivity, which is fundamentally how RingCentral value -- this is our value prop. Next winner is the channel partner. They now have world-class solutions to offer to the installed base without having to worry that they are offsetting the incumbents that they have a multi-decade relationship with, all right? Third winner is the incumbent. Because, again, now they have access to this world-class technology, which in a co-branded way is being offered to their customers. And last, but maybe not least is RingCentral because now we have a much easier go-to-market motion, also a much better understanding of actual customer needs and maybe all of these little peculiar use cases, which we continue thinking are very, very important. Certainly, incumbents have a much better idea of what they are. And so product improves, migration becomes easier, device support improves and obviously, for us, it's an easier GTM, which then results in faster growth and better profitability.

Got it. And it's still early days, but you noted on the earnings call on Monday, you'd already had an 8-figure win with Atos, you're starting to see some traction with ACO. What has been surprising kind of in early days of either how quickly people have been willing to adopt it or size the customer interested?