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

Welcome, everybody. This is Meta Marshall, I head the communication software practice here at Morgan Stanley. We're pleased to have RingCentral here today. We have Anand Eswaran, President and COO of RingCentral; as well as Mitesh Dhruv, CFO; and then we also have Ryan Goodman from IR, who's also listening in. I'm going to start with a brief disclosure, and then we'll jump into questions. So for important disclosures, please see the Morgan Stanley research disclosures website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

With that, let's jump into questions. Last year, we started talking about kind of an inflection in the market that you had seen around 5 years ago, where you realized it was time to move further upmarket with your base, with full UC, voice, video contact center. As we sit here a year later, those same customers have gone through a year where their workforces are more distributed than ever. Do we think we are now at another inflection point in willingness to kind of adopt cloud? And we also have Vlad Shmunis joining us, CEO of RingCentral. So welcome, everybody. But just maybe jumping back into the question of you saw an inflection 5 years ago. We've clearly gone through a tremendous year of disruption to just kind of how people work. Do we think we're at another inflection of moving towards the cloud?

Yes. Great question. Maybe -- Vlad, should I take -- let me take the first shot. So Meta, what I would say is yes. Inflection points are big words. So what I would say is this. We sort of were passionate about the fact that companies need multiple modes of communication to be productive. So we were first sort of in the industry with video, voice and messaging coming together way back when in 2015 before all the others. What I'll tell you is looking at the last 9 months into the pandemic, now hopefully, coming to the end of the pandemic, business communications is not just a nice to have. This is on the top 3 priorities for every company. And it's not just a line of business or an IT discussion. It's a CEO and [indiscernible]. That's the first thing we're seeing which sort of lends credence that it's a huge thing. The second thing is what the pandemic has done is shine the light on the fact that right now, the communications infrastructure cannot be on-premise. It has to be able to allow an employee to work from anywhere because we don't know what anywhere could be, could be in the hybrid mode of work, partly in the office, partly home, partly any other location. And so a cloud-based communications platform is not a nice to have anymore, it's a business essential. The third thing I would tell you is just looking at the data, just looking at the data which we have over the last months, we see -- I mean we shared in Q4 that we had a record level of $1 million large deals TCV events, including 2 over $10 million. That grew 50% quarter-over-quarter sequentially. But -- and so when I look at that, when I look at the velocity and the close rates, because customers need a cloud-based business communication solutions. When I see the new logo momentum broadly across all customer segments, when I see that every go-to-market channel is coming to the table with performance, whether it's the VARs, whether it's the service providers, whether it is the strategic partners, the partnerships we have with Avaya, Atos and soon to be released, Alcatel-Lucent enterprise. When I look at all of them coming together, I think that data validates that hypothesis that it is mission-critical, it's a Board-driven conversation, not just an IT-driven conversation, and every company needs to have a solution to enable their employees to work from anywhere.

Got it. So one vector you just talked about on kind of accelerating growth is just that the decision has been elevated. The other is clearly kind of the strategic partnerships that you've entered into with nearly half of the installed base of the UC. At a high level, just how have you seen those partnerships change kind of the discussion that's happening and just how customers are evaluating your solution versus competitors?

Yes. It's a great question. And our thesis of the partnerships was very simple. Number one, there is a huge capital investment companies have done in the solutions they have procured from Avaya, Alcatel-Lucent enterprise aren't unified, all of them. That matters. So if there is -- their behaviors are used to using those endpoints in a certain way. Number two, now that cloud-based communications is a reality, there's one more reality, which is people buy from people. And so the channel community and the people they've been buying from for a long time, those relationships are still very critical in the decision-making process. What we love about our relationship with Avaya or Atos or Alcatel-Lucent enterprise is we now enable all of these customers who have these solutions with the cloud-based solution, which takes them to a modern communications platform. So it solves the biggest problem they've had, while leveraging the existing capital CapEx investments they have made, while retaining the relationships with the sellers, they've always been buying from. So when you bring all 3 together, magic happens. Again, it's all going back to what the proof points are. So when I look at Avaya, it's been 3 quarters that our product is in market, as we shared after the Q4 earnings. Everything is in line with what we expected. Strengthen customer wins, strengthen large deals, strengthen seats expansion. And on top of that, we've been expanding the geographic coverage for Avaya solutions to be available in ACO; and then finally, strengthen channel participation. All trends going in the right direction. If I look at Atos, same thing. Q4 was our first full quarter with Atos, and we're very happy with the progress. We had an 8-figure deal with Atos in its first full quarter to deploy 30,000 seats across 20-plus countries. And we are excited with Atos to have 2 dimensions of this partnership. One is what is -- what you would expect, which is the unified channel, which is the VARs, which, resell it to their customers. But with Atos, we get a second dimension, which is their systems integrator business. So the ability to work with Atos and their SI side with the large enterprise customers is actually an icing on the cake. So again, in line with expectations on all fundamentals, I think fundamentally, our relationships give us access to this, what we've talked about of 180 million-plus seats off the 400 million-plus seats users who are on-prem. And this gets us the best of all worlds for these on-premise customers. Relationships, the ability to work like they did, but with a modern communications platform, which gets them to the cloud.

Great. Maybe a question for Vlad. A lot of what we've talked about here is identifying years back, kind of the transition that this market was going to make. And I can even remember 10 years ago, having the discussion of the world needs a mobile-first kind of communication solution. I guess just over time, kind of how much of this evolution went exactly the way you thought it was going to go versus the path of what products people wanted or what delivery mechanism or what channel they wanted to buy from is different than the expected?

As you well know by now, I am never wrong, and I can predict, you will see by the minute to indefinite. Kind of -- what you want me to say? I think the mega trends, we had right, yes? Mega trends, to remind, and I assume that there are some people who are not new to our story, but recapture for some who are. So just as a friendly reminder here, what is this company, what was it founded on and what did we IPO on? And the short answer is a few, very clear mega trends. What were those? Mobility, distributed workforces, wide proliferation of inexpensive reliable broadband. That's it. Three major legs to the stool. Those -- all of those mega trends proved out to be correct. Broadband got bigger and less expensive over time. Mobility became ever more pervasive, and globalization clearly to -- distribution clearly stayed in place and got supercharged now because of this unfortunate COVID situation to where not being mobile is not an option. Not -- being tethered to a phone line in an office is not an option. So all of those directionally played out as anticipated. Surprises along the way? Sure. Nobody could have predicted COVID. Certainly, we could not. Amount of complacency in the buying community and just momentum, maybe complacency is not the right -- don't care. But just people are used to what they're used to, okay? On the other hand, there were some pleasant surprises as well, okay? And the fact that, for example, what we didn't know is we didn't know just how disorganized and frankly, plain weak, the incumbents were. The fact that none of the big incumbents, starting with Cisco, but in fairness, extending to Avaya and everyone else, none of them had a platform of their own, they could call their own, that was for this century. Everybody was living in legacy on-prem hardware/software world. So that was one interesting surprise. Another positive surprise was receptivity of global carrier community to go with a pure cloud solution. And I'll tell you, BroadSoft was there, and they certainly gave us some run for the money. But in the end, the software model did not run out. It caved in, there was a sell-in, not sell-through. So overall, BroadSoft's revenues flattened out, and so they needed to be acquired. Cisco bought them. I have to say, very fortunately for us, and I think some of the other newer players, Cisco never invested in this, never took it to the cloud. So now our latest win with Vodafone business and that's on heels of British Telecom, very strong and strengthening relationship with AT&T, TELUS is -- continues to be strong for us, and now the 3 As, Avaya, Atos, Alcatel-Lucent, this is what gives us this absolutely unmatched GTM opportunity. As you already mentioned at that, over 200 million seats, in fairness this is counting Vodafone business. Outside of Vodafone business, 180 million seats. Still a very large number, out of 400 million to 500 million or so. Combine that with our very, very solid product, unique differentiation, Message Video Phone, all under 1 roof, all working well from being best-in-class. The other ones are doing well and improving. And unique differentiation on the integrated contact center side that is what in the end is -- has been carrying the day for us, and we believe will continue to carry the day for us. It's very, very early still. Let me remind everyone, very early. Our overall installed base, maybe, 10 million seats. We are about 30%, 3 million seats. You hear from some other players, million seats here, million seats there. But it's a drop in the bucket versus 400 million to 500 million that's up for grabs.

Got it. You're kind of about a year into the launch of the partnership or the product, ACO. Maybe in terms of channel, product, just ability to work with the company. Has anything kind of surprised you about kind of the partnership with Avaya?

Yes. Anand, do you want me to take it or...

Yes, why don't you start? Yes.

Sure. No. I think this is a -- so Avaya is a partnership which sets the blueprint for all the other ones, right, for us. And it's not an easy task to get 2 companies together working, ironing out all the channel differences, whatnot. But I will say, right, it's been fascinating to see how well the 2 companies work together. It's a tall order to get everything lined up the way we have. And we have always at RingCentral have this channel motion where we've been able to remove any friction, any wrinkles from the channel. And Avaya and all the 3 As, quite frankly, just bolt-on to that motion for us that we've been pretty successful at that. And I think these learnings you will see as Avaya ramps, you will see more proof points in Avaya itself. But I think those learnings are getting funneled back, as Vlad was saying, into the company for other partnerships. And I think there's definitely more to come as years progress in terms of the ramp of the partnership and the kinds of wins we'll be landing.

Got it. I mean one of the most attractive components of this partnership, all the partnerships that you have, is that customers can kind of take a phased approach to cloud transitions. You talked about making it easiest kind of for the customers. And so is there any surprise on kind of customers that have opted for phase transitions versus ones that have just said, rip out all the old stuff, put it in?

No. I mean, that's the beauty of a transition to the cloud, Meta, which is if you take a step back, the meta point is we feel good about the accelerating trajectory of eventually the entire 400 million plus on-premise users converting to the cloud. As we see, I think it's very hard to stereotype or even create too many patterns around which customer start small and goes big, or starts mid and goes big or goes all-in at the same time. It truly depends on where in their journey they are on one side from a tech platform standpoint and also where they are in their business success as well. Those 2 come together to basically see what customer decides how. But we -- essentially, customer choice is our first lens. So we work with them. There's a ton of customers where we go in, get a certain percentage of their customers on our cloud platform. And then we work with them on the migration path for the rest. And there are some, especially as I look at retail, who want to equip all of their stores for their retail employees with a communications, cloud communications platform. In that instance, we work with them to actually equip all of their stores and all of the retail employees with a solution first and then get to do the migrate. So different paths. We will -- customer choice is what dictates how we work with them, we enable all paths.

I got it. Another question, and I'm sure every investor ask you, is just how should we be measuring the success of these partnerships over the next couple of years? And just how to think about the path of penetration to kind of the installed base of some of these partners, vendors have or installed vendors have?

Yes, Meta, you're absolutely right. Every single investor asks me that question for sure. So thank you for again asking that question. The success is, it depends who you ask is success. If you were to ask this success to the person in the white t-shirt there, he would say, all 200 million seats is success. For me, I would just put some -- I would dimensionalize the opportunity for you a little bit more. If you look at how we have done until now, right, until 2020, we've been growing, call it, 30%-ish plus or minus. I don't think we've ever dipped into the minus, but on the sub revenue, 30%, call it, without the help of any partnerships. In 2020, we had some contribution from Avaya, Atos, but it's not material to the growth rates. 2021 is one step forward, where we'll have more ramp in the partnerships than we had before. And you may see that signaling in our guidance. We did start the guidance a little bit higher than last year. So it's just more of a signaling effect. But only Avaya will be fully ramped in 2021. Fully ramped meaning it will be ramped in earnest, but multiple years to come, but we'll have maybe half a year of benefit of Atos and nothing for Alcatel and nothing for Vodafone until 2022. So if you now look at the broadened up horizon. Now I'm answering the success question, the measurement of success here. If you broaden out the horizon for the next 4, 5 years starting '22 when everything is firing on its -- on all cylinders I guess or ramping, the potential is 200 million seats. So if you attach -- I mean I don't know what exactly they attached to use, but assume 1% attach rate each year for the next 4 years, that gives you 8 million seats. We have a base business, without any help, growing at 30%, let's use conservative numbers. Let's decelerate to 20%, just to be conservative. And let's slash ARPU a little bit just to be conservative. If you put all these things in the blender, you will get to 10 million, 12 million seats and a revenue base of $4 billion, $4.5 billion. Of course, we would choose to do -- we would try to do better than that but that's your relative base case. Now the slope of the curve could be interesting because as things keep on ramping in SaaS or layering on, it will layer on interestingly enough where you get at a larger base, you could see an acceleration in the future, right, which is what we saw last quarter. So I think that's the way we think about in the next 4 to 5 years, 3 to 4x seats we have and multibillion dollar company. And there's not a ton of more heroic effort besides execution that need to happen here because we will put in the groundwork in the next 3 years. So I know I cannot exactly give you a number that, here are the number of seats, but it leaves a framework on how internally we are thinking about it.

I'll let every other investor ask you then. All right. Another area -- maybe jumping ahead. Another area that's kind of been brought up a lot over the last year is just kind of the overall collaboration platform, taking it outside of just voice, video, but -- and you recently rolled out your Glip Pro product at the end of the year. Just what was the impetus for that? Was it just that's the way you saw the market heading that kind of caused you to introduce that product? And what pain point for customers were you really trying to address where you thought there was an entry point?

Okay. That's a great question.

Let me try that. Look, the pain point, multiple pain points. One that comes to mind is too many apps undeveloped and too many contracts, too many SLAs, not enough integration, too many address books for that matter. So all of that, single app needs to solve all of that. I have to say there is one other company that subscribes to this and that's Microsoft. And we were the ones who came out with this MVP moniker, Message Video Phone. But Teams does have all of those same modalities. And look, it's been very, very well-received. People like the fact that they can deal with a single vendor, single [ throw to joke ]. Now you extend this to the fact that we have an integrated contact center capability both in-house for lower end and omnichannel and very much top end with inContact, again, same thing, single SLA, single invoice, single POC, unified user experience. That's pretty powerful. That's what's really carrying the day for us. And as -- look, we're investing very, very heavily into products, into R&D. We're still outinvesting most competitors, even some that are now larger than us. And it will continue carrying the day. I mean that is a core belief is, in the end, these amazing partnerships that we have and the GTM, they're unmatched. There's no doubt about that. But they would be just empty promises, but for the product. But because we have product, which is very competitive and getting stronger and stronger in those modalities, which are not native to us like message and video. And we continue our leadership in phone and we continue improving in contact center, we think that's a pretty viable and well differentiated competitive position. So yes, we're very optimistic.

Got it. You touched on Microsoft. Clearly, the competitive environment has come up more and more either with Microsoft, with Zoom, kind of with any sort of names. Cisco even kind of reconfiguring their platform. How do you view the competitive environment? And then how do you view how much of that is going to be product? And then how much of that is just going to be availability within the channel, which you guys have helped to secure?

I think it's both. Again, look, nobody owns the customer, yes? It really helps -- Anand already said, people buy from people. In the end, that's why we went with all of these partnerships because of those long-standing relationships, both with traditional PBX manufacturers as well as with channel partners. Because remember, Avaya is heavily channel-driven, Atos is heavily channel-driven, yes? So all of that absolutely matters, and it gives us a bit of an advantage and a very necessary boost. But is it absolutely foolproof? It's not. But with the product being there and being very competitive and well differentiated, it'd be a pretty short song there, yes? So it has to be both. But you combine the 2 together, and we think it's not that easy to compete against, which is what we're seeing.

Got it. And then, Mitesh, maybe you touched on kind of pricing or what you would see with ASPs. Certainly, another investor concern that we kind of field is just concerns around ASPs or ARPUs within the space, just as more and more competitors enter the space. Just how have you been able to kind of keep ARPU steady and even grow them as you've layered in contact center? And just how do you see that kind of progressing in the space?

ARPUs are -- if you look at ARPU when you go to higher deals, there is an element of lower ARPUs where this crazier, harder than, call it, your SMB space. But we have been able to, I think, do 2 things in a way. Number one is, move people to a higher end SKU. So realizing the same ARPU -- I guess 3 things we've done. Realizing the same ARPU, but giving people a higher SKU. So it doesn't cost us much to deliver those cost of goods, but we've been able to hold our own ARPU there. Second, as you mentioned, made a contact center does drag the ARPUs up. So that helps the ARPU situation. And the third one, if you look at the average revenue per account, our ARPA or ARPU, we've been able to grow that meaningfully. So we've been able to get more seats in the bag. And it helps with our gross margin as well because our fixed service is peanut buttered across a larger base. So those 3 things are playing into the equation. And I think over time, there may be some margin pressure here -- or the ARPU pressure here or there, but we've been able to overcome that with all these.

Great. And then maybe just the last question before we exit. Just on the contact center market, you've gotten a lot of learnings, either from your partnership with inContact, from your partnership with Avaya even and just seeing kind of what those customer cases are. Just how important do you think kind of that integration of contact center will be eventually? And just where -- do you think we're just heading into an environment where everybody is going to want a little bit of contact center?

It's a great question. What I would say is what we see is companies are increasingly -- much like UCaaS, they need to equip their contact center agents to work remotely, work from anywhere depending on the circumstances. So in a way, the pandemic has shone a light even harsher on the need to modernize contact center platforms. The second thing I would share is recent research from Aragon research data published, which said companies which made these decisions jointly, their employees are almost 30% more productive. And we see that validated in companies trying to now make those decisions jointly. Contact center and UC now goes to -- we see it starting to go hand-in-hand. And again, looking back to data. Most recent quarter, Q4, over 60% of large deals for us included the contact center solutions. And so it's validated in customer buying behavior, it's validated in the numbers we have. And as I look -- again, going back to you, asked a question on compete, Meta, just a couple of questions back. This is a true differentiator for us with a very deeply integrated contact center solution across inbound voice, outbound voice and omnichannel, digital-first use cases, our partnership with inContact. We feel very good about how strongly differentiated we are when those things start to come together.

Perfect. Well, with that, we're out of time. Any other questions, investors can feed through myself or Ryan Goodman at RingCentral. I appreciate you guys being here today, and continue enjoying watching you guys on your great journey. So thanks so much.

Thank you very much. Always a pleasure.

Thank you.

Thank you. Always a pleasure.