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

Thanks, everyone, for joining us for our next session. My name is Sterling Auty. I'm the software Analyst here at JPMorgan. This is actually one of the 2 sessions that I've been most eager to host at the entire conference. So first, let me welcome the management team from RingCentral. We have Vlad Shmunis, who is CEO; Mitesh Dhruv, who's CFO. Guys, thank you for joining us. We really appreciate it.

Thanks for having us.

You got it. All right.

Thank you, Sterling.

Vlad, maybe to set the stage, can you give just a quick overview of the business, the markets that you compete in? And what's the size of the opportunity that you're going after?

Yes, sterling, of course. So what we do is we replace traditional on-prem PBX systems with a pure cloud-based solution. We are one of the pioneers in this field. We are also a leader. Many people will say an absolute leader in this emerging field. Market size, we're talking about 400 million to 500 million seat installed base, of which approximately 12 million so far have migrated to the cloud. So as you can see, overall penetration is still very, very small for cloud as a whole. Inside the cloud, we are holding the absolute leadership position at approximately 30% market share. If you were to translate into dollars, we are talking about a market size of -- in excess of $50 billion. And we -- at RingCentral, as you know, we are sort of, call it, say, a $1.5 billion run rate range. Vast majority of our revenues being recurrent SaaS revenues. So still very small greenfield -- still very much greenfield, small penetration. And just wanting to add, we started out by replacing legacy equipment from people like Cisco, people like Avaya. Now we partnered with Avaya, we partnered with Office [indiscernible]. We can talk more about that. But we have since very much expanded and led the new definition of UCaaS, which now includes structured messaging and collaboration for enterprises as well as, of course, video meetings and conferencing. To add to this, we are unique in this space in having tight integration with a leading cloud-based contact center for CCaaS. And as you know, just today, we announced this morning our extended partnership with another absolute leader in the respective segment. This would be NICE inContact. And now we have extended our -- what was a 5-year relationship for another very substantial period of time with renewed commitments from both companies to cooperate and tightly integrate our products and services current and in the future.

Listen, the timing couldn't have been better. I had all these questions I want to ask, but given the timing of the announcement, let's start off with that. You have partnered with them for over 5 years. They are the leader or one of the leaders in CCaaS. Why did you choose to extend and expand the partnership rather than focus on developing and rolling out? You have your own digital go-to-market solution, but why not do in this area what you did in video?

Look, we follow the customer. This area is a lot stickier, frankly, a harder lift. And we -- as you know, as we've discussed when we discussed our video strategy, look, customer wins. What we're hearing from customers is that for specific applications like digital-only deployments or outbound applications, we actually have in-house technology, and that's being well received. But for full-up enterprise-grade contact centers, NICE inContact is an absolute leader in the segment currently. And given their reliability, given their feature set, their acceptance in the market, we just feel that this combination between 2 leaders, UCaaS leader in ourselves and CCaaS leader with them, 1 plus 1 equals 5 here, yes. So customers are clearly speaking out in wanting to have a single unified solution from a single provider. So that would be us. We have proven market traction with over 1,000 enterprises already using our combined product, which is unique in the field. And it's a good thing. So we just wanted to make sure that the party doesn't stop, so did they. And some people have asked, as you know, okay, is -- was a contract about to run out, like why now? And the reason is, look, everything has accelerated, and people are wanting stability and security. We're signing multi, multiyear deals with our customers as are they, and people want a peace of mind. And today, we're able to provide a peace of mind.

Unmute myself, sorry, the pandemic [ so far ] -- my dogs were barking in the background. All right. Let's shift on. Clearly, the entire UCaaS opportunity is a massive TAM. We talked about that. And it's underpenetrated. But it begs the question around the competitive landscape. And there's this perception in some of my investor conversations that there's suddenly a higher level of competition. So can you help describe to us and help us understand, how has the competitive landscape evolved in recent years, especially given the attention the space has gotten through the pandemic?

Of course. Look, if there were no competitions, there would be no markets. It's hard to imagine $50-plus billion market that nobody is competing for, right? So we've always got competition. What we're seeing now, first and foremost, what all of us are seeing now is a renewed interest in the space. And it was always strong, and it was always going one way, meaning from on-prem to the cloud. No one ever goes back. But certainly, with the pandemic and work from home, it really made it very clear to many people that you do have to provide solutions, which are not office bound or location bound, and that's where cloud comes in. Now post pandemic, what we are seeing is return to office, but also continuation of work from anywhere, work habits, and RingCentral has really been an early pioneer and we continue carrying that flag, okay? Now as far as specific competitive landscape. So first and foremost, primary competition is not our -- is not other cloud providers, primary competition are still the incumbents. So Cisco is going by using resizing code, Cisco via auto Alcatel-Lucent, NEC, et cetera. Now that hasn't changed with 1 proviso that now 3 of the top 10 providers, on legacy, which is namely Avaya, Alcatel-Lucent Enterprise have now linked their future RingCentral, and we are in a pole position to deliver cloud services to their user bases as they go through their digital transformation projects or journeys. As far as Cisco is concerned, I have to say, they do not seem to have fully embraced the cloud on the PBX replacement side. WebEx calling will not replace a Cisco Box through the cloud, unlike RingCentral-based Avaya cloud or Office can very easily and consistently does replace a scaled-up Avaya implementation, but just by the way of example. And of course, as Cisco HCS is concerned, so this hybrid environment for various reasons, technical and otherwise, it's just not the way to go, okay? So in that sense, we're seeing tailwinds, okay? Now we had a number of, call it, traditional competitors. They all used to be much larger companies than we are -- they are -- than we were. They are now all smaller companies than we are now. So we're talking about 8x8, we're talking about Vonage, or Vonage for Business, Fuse. Look, they're all fine companies with good products but they don't seem to have the critical mass at this point and respectfully, but more of a rear-view window situation for us, okay? And then there is a perennial frenemy situation with Microsoft that we've been competing with and cooperating with really from day 1, and the company is over 20 years old, which is when they started it. And what we see from Microsoft at this point is, of course, on the one hand, strong acceptance of Teams. So congratulations on that -- on the messaging -- that's on the messaging side, mostly, some video. And we're also seeing the realization that their PBX offering or Microsoft phone, as part of Teams, is really not there yet. They recognize it. So recently, they opened up this new capability, they call it Direct Routing, whereby providing Slack ourselves can integrate into the Teams environment and thus essentially gain access to their 70 million seats that Microsoft claims to have on Teams. So we are taking advantage of this opportunity. We do have very interesting wins in specific -- in this space, specifically leveraging Teams integration. So I would say that, overall, that became a little bit easier for us. There is a relatively new player in the market, which is Zoom. And they do have an offering called Zoom Phone. And look, it's a final offering, but it's substantially behind our residential office. And based on the fact that we have been at it for 20 years, we have specifically said, this is a very key point I really want to stress, our approach from day 1 is new -- not a new-fangled thing here, okay? From day 1, we were saying that we are not here to tell customers how to run their business, we are here to enable customers to continue running their business and using the same or very similar workflows that they have had for decades, only delivering these capabilities through the cloud and leveraging greatest in mobility, in smartphones, in AI, all of these other enhancements, okay? But fundamentally, we're not telling people that how their calls were routed through traditional PBX and how is their interactions within internal teams and how is their interaction with external customers, this need to somehow change because of technology, okay? As this has been a differentiator for us and continues to be a winning -- real deposit once a day for us in the app. So RingCentral is best positioned to replace a scaled-up working, complicated Avaya or Cisco or any other PBX with a pure cloud-based solution. Everyone else you talk to will tell you who needs this complexity, you know world is going messaging, world is going video, this and that. And truth of the matter is, at least what our customers and our partners are telling us is it's not an or, it's an and. Yes, you need messaging, yes, you need video, and we have all of that, and it's all very good. But what you need is the power of and. You also need to deliver video through no operations asked, no shortcuts, PBX replacement. And by the way, that includes not only the feature set and Avaya, for example, as an example, has over 1,000 features, which we are, by far, the closest to actually checking all of those boxes. How do we know this? Because Avaya is a key partner now. We're working closer together. We're checking those boxes. Same applies to Office@Hand, same applies to Alcatel-Lucent Enterprise, okay? There simply is no one who can play -- make that claim, outside of RingCentral, and this is where we're doubling down. We are continuing to expand. And just one last thing is there is another view onto this, okay, another dimension, which are global carriers. So we call them GSPs, global service providers. And that's a very large community, about 700 major companies worldwide, who are also delivering unified communications services to their customers around the globe. Historically, most of those people have or majority have licensed BroadSoft-based products. Since then, Cisco acquired BroadSoft, that product got a little bit long into tools. And as you know, we have been showing a very good and accelerated momentum, especially specifically with that important community. So we started out with this little company called AT&T. Since then, we added British Telecom; TELUS, a Canadian company; and our, of course, most recent announcements, very exciting, Vodafone, whereby we won 9 out of -- I believe, 9 Vodafone Europe divisions, okay, and as well as our latest announcement with Verizon. So now we have something like 3 out of world's top carriers, basically leading with RingCentral across some, if not all of their segments. And as always, we are pretty optimistic that the train will not stop here. So overall, we think between a differentiated product and a very differentiated and really hard, if not impossible to replace, partner ecosystem, we feel we'll be able to at least maintain our market share. I do want to know, though, that while the market has been growing at 25% year-over-year, RingCentral has been always overperforming that. As we used to say, and we still are saying, cloud is winning, RingCentral is winning in the cloud. So our growth in the mid-30s, of course, speaks for itself. And again, given the size of the opportunity [ fairly early ] like this, we're just saying that there is more good news to come there.

So I think it's -- you're pretty clear in terms of the moats that you've established versus most of the competition. And I think most investors would agree relative to Microsoft that -- behind on the telephony side. But in terms of Zoom in particular, what do you think is that competitive moat that's sustainable into the future on the phone side?

Yes. Look, I mean, so there are 2 products -- as there are 2 modes. There is a product mode, there is a partnership mode. On the partnership side, I would say there's sort of not much to discuss. We are a partner-oriented company. Zoom is simply not. We -- as you know, we are involved in the legal dispute at this point, which I'm not going to go into the details. But suffice it to say that in our 22-year history, we have never sued a partner. We have never been sued by a partner. And unfortunately, it's not something that Zoom can claim at this point. Having said that, on the product side, this is the highlight that I already mentioned, their Zoom Phone product. Look, it will have a following. It's a very large market. And of course, they are a very strong brand at this point on the media side. So they will have people choose to use Zoom Phone, but it does not do what RingCentral also does. It does not address the need to actually replacing a scaled-up PBX. So if a company needs to empower their entire workforce with world's best unified communications as a service, that's not Zoom Phone, that's RingCentral. We differentiate very importantly on reliability. We offer Five9s reliability. I'm not sure that there is anyone else of size anyway, who can offer that and accelerate that. We are -- we talk about global footprint, and we are regulatory compliant in all of our 40-plus global office countries. Again, I will let them speak for themselves. And look, if you want world's -- how do we sell, then if you world's -- want world's best, most integrated, more secure, most trustworthy and more stable full unified communication solution, which is, we call it MVP, message, video, phone, but now plus contact center, that's RingCentral. So that's our product mode. Where we'll be -- will become very, very interesting is as our extended partner network and again, remember, we have thousands of resellers, we have uniquely 3 top traditional PBX manufacturers, standardizing on RingCentral cloud moving forward. And of course, we have the global service providers who are now clearly lining up behind RingCentral. So once all of these channels start delivering, we think that our growth should at least hold steady. We really do call -- it will actually meaningfully accelerate. And this is regardless of what Zoom does or doesn't do. It's regardless of what Microsoft does or doesn't do. It's simple the fact that we are 12 million seats into $400 million to $500 million opportunity, with RingCentral being contractually in a pole position with approximately $200 million of those between our core strategic quarters. That's -- given a quality product, it's going to be, if anything, serious -- we'll be a serious contender for years.

And I think that makes a ton of sense. But I definitely have some investors that ask about lower price points for options that are out there, like Zoom Phone, are you seeing this? And how is the overall ARPU actually trended?

Yes, maybe Mitesh can take it.

Sure. I'll take that, Sterling, thank you. I think the ARPU question is very interesting, right? And also, if you look back at the ARPU, investors is a bit of a conflation going on that investors compare the stand-alone pricing, call it on the phone price, some of the competitors, and they compare it with the entire bundle we sell. If you do a like-for-like comparison to messaging, video and phone and look at the bundles from all our competitors' websites, you'll actually see that the pricing for the platform is in the same ballpark as what we sell, which is $30 plus or minus per user per month. Now if you look at our trends on the ARPU, they have been stable for multiple years and no real change there, Sterling, right? So if you were to take a back of the envelope, our $1.5 billion ARR, we are between 3.5 million and 4 million seats today. That implies a $30 ARPU per user per month. You've been covering the company for -- since the IPO, it's the same ARPU for all these years. Now fact of life, I'll put a final point on this. With our larger customers, there is volume discounting. It's a sliding scale, but nothing new. We have developed a $0.5 billion enterprise business growing over 50%. So no change then despite that. And actually, I would argue it's an accretive phenomenon because our average revenue per account actually increases as we go up market. The lifetime value divided by CAC is higher, and we can attach a higher CCaaS seat to that. So actually, we are seeing exactly the opposite dimension there. And I mean you've known us for a long time, one mantra for us or the philosophy is absolutely profitable growth. We care about the revenue share of the market and the profit share of the market. Investors can get carried away with -- there's a unit game that can be played. But ultimately, it's the -- not the number of seats, but the value of the seats that really carries the day. And that's why we disclose the ARR for our seats. So no real change to the pricing. And now actually, just to wrap up, if you take that $30 pricing on the TAM of 450 million seats, Sterling, Vlad said, it's a $50 billion-plus market, the plus is a key point. One could argue if you do just simple math, it's over $100 billion, $150 billion market. But I think we just didn't want to get ahead of the scales here. And even if you were to assume whatever ARPU you choose to, it's still a much bigger market.

Yes, that makes a ton of sense. So that means as you look ahead, how should we think about the long-term growth opportunity for the business?

Yes. Absolutely. See, long term -- I mean, Sterling, you tell me, you've covered us for a long time here. And investors who underwrite RingCentral's story, they underwrite RingCentral for a couple of reasons. One is consistency or the Say:Do ratio. We always delivered or overachieved expectations. And this whole compounding phenomenon of 30% growth rate over time, it's a very steady drumbeat. So maybe I can just, as I said, Ryan Goodman's help here to show some slides to see, okay, what could be the long-term growth rate? If it's okay with you, Sterling?

Yes, absolutely, thanks.

Thank you. Thank you. Thank you, Sterling. So just to illustrate the math here. So we have been growing at 30% plus ARR over the last several years. So what does it take for a company like RingCentral to keep on growing at that steady pace over the next several years. So let's start with today, state of the union today. Today, we are between 3.5 million and 4 million seats. If you apply a CAGR until 2025 and about 4.5 years, math will suggest to grow at a 30% CAGR, we would need about 11 million seats. So the delta of 3.5 million to 11 million, call it 7.5 million seats. Now these seats can come from 2 flavors or 2 drivers. One is the market itself and then the newer motion we have with our partnerships. I mean we have been growing over 30% in all these years without the help of the partnerships. So let's start from the market itself. Now if you look at the market, Vlad was saying this earlier, even if you -- so even if you assume just a market growth rate of 25%, which is pre pandemic, okay? After the pandemic, the markets actually, the overall market itself has gone up. But even if you assume just the market growth rate, nothing heroic, nothing more, nothing less, that itself will give you about 6 more million seats for us. That would imply that we need about 1.5 million to 2 million seats only from the partnerships. Now that implied penetration is 0 -- less than 0.2% penetration per year from the partnerships to get 2 million seats over 4.5 years. Now this case study does not quite contemplate that the market growth is faster than what the chart shows. Our share has been more. And then if you layer on on the partnerships, the potential of the partnerships itself, Sterling, is $200 million. And we'll tell you, and we've not rehearsed this with Vlad here, but the -- we -- when Vlad and the entire management team undergo the partnerships, our investment thesis is multiples of this, multiples. And the opportunity is there. But we are just not going after this exclusive market of $200 million, which is Avaya, Alcatel, Atos, we are going after Cisco after, after Mitel, after NEC. So the opportunity, Sterling, is actually $400 million, and we need to clear incremental 7 million seats over 4.5 years. So that's why I feel that we feel very confident to deliver a 30% ARR CAGR as a base case over a long period of time, Sterling.

So I think that's impressive, and it looks like it's a drop in a bucket, but I think the pushback is going to be -- for the investor, it's like, what happens if ARPU degrades over time?

Yes. That's a fair one. Look, we -- as we just covered, we are not seeing it. But of course, there's a bogeyman in the closet. I've been in this block multiple times. So you cannot refute the bogeyman in the closet. But we actually get this question quite a bit, Sterling, so thank you for putting a finer point on this, but we didn't contemplate this exact scenario. So Ryan, if you just click 1 more. Even if you -- so yes, even if you were to assume ARPU degradation, call it 10%, 20%, the 11 million seats or the 7.5 million seats we need, Sterling, will go to 9 million. Okay, fine. Why don't you assume 9 million? The big picture does not change. I think sometimes we all get so carried away with this whole narrative and rhetoric that I think it's important to show investors what actually the true big picture is.

That makes a ton of sense. Thank you for sharing those slides. I think it really helps put it into context. The other item that I talk a lot about with investors of late is guidance. The guidance for June seems a bit more conservative than usual. Investors are kind of doing, they take your ARR from March, divide it by 4, compare it to your guide type of comparison. So can you help us just understand the situation, how to think about guidance here for June?

Of course. Right. The way to think about guidance for June, I'll be tongue in cheek a little bit, is the way you've thought about guidance over the last 7 years. No difference, no change in philosophy. If this whole ARR divided by 4, Sterling, if you go back, I guess, 2, 3, 4 years, every single quarter, divide ARR by 4 in the previous quarter and look at our guidance, every single quarter, you will see a similar philosophy the way we guide. It will always be lower than the ARR divided by 4 because we just believe in prudence and reasonable guidance and never get ahead of our skis. So this June quarter was no different. There is one dynamic, which is a great thing, which is helping ARR, and it will show up in revenue going forward, which is, call it, more visibility for us, which is our enterprise growth rate. The higher the enterprise growth rate, this time we had, let's say, over 60% growth rate, it puts in a way a rev/rec delay for us because of the linearity in the quarter for enterprise bookings, it's mostly back-end loaded. I mean, you've covered software for, what, 25 years, Sterling. Enterprise -- for whatever reason, enterprises buy in the last 15 days. And that's happening. So the quarter does not fully reflect the full potential of the deals we have booked, and that will be timing. And that's actually, in a way, provides us more visibility as we go forward. So nothing to read into the guidance, except that it's more of the same. And if you look at the pipe and the visibility where -- I would say, I'd argue that we are seeing a lot more visibility than before, especially given that the partnerships are ramping, Sterling.

That makes sense. Well, we'll definitely look forward to more under promise and over deliver as we move forward. Maybe just to finish up on, you talked about even as work from -- or, let's say, return to office begins that you're still seeing improvement in demand in the overall marketplace. Why is that? What's the driving force? Are companies just trying to prepare against the next pandemic? Or what's happening?

Yes. I'll let -- this question can only be answered and done justice by the CEO, Vlad?

I don't think the companies are preparing for the next pandemic. Just we hope that's not going to be the case. Look, Sterling as I mentioned, it's simply -- there is a moving train. It only moves in one dimension, and it's picking up momentum as it goes. Every success brings more success. Every company who embraces and proves ability to operate and, in many cases, even operate more efficiently, in a hybrid work environment and, by the way, we ourselves, 5,000-plus people, we are a good example of that ourselves. So every company that does that just proves the case again that you don't need to be on-prem, okay? And again, that is still tip of the spear for us is to replace on-prem equipment, both PBX systems, now video systems and, very importantly, our on-prem contact center systems, okay? And it's clearly the case that enterprises of pretty much any size can successfully run their communications infrastructure through the cloud, okay? And this is a fire that feeds this engine. There is simply no end in sight to this, not until the 400 million to 500 million seats are all converted, and they will all be converted. But these are long replacement cycles and long POCs and so forth. So it's going to -- it has been a journey. It will continue to be a journey. But I tell you, we are very serious about building a sustainable, profitable and fast-growing multi, multibillion-dollar business, which is multiple products all around the area of enterprise communications. And pandemic highlighted the opportunity, it did not create it. But yes, human nature being what it is, now that they've sort of maybe brought to the promised land, if you will, through this, not very nice way through the pandemic, but now people do see that future can be quite interesting. And again, RingCentral is just -- we're just fortunate to find ourselves in a key leadership position in this very important, basically unique opportunity of digital transformation. And of course, again, given our unique set of partnerships, we feel that there are many, many people now, thousands and thousands of people, if not 10,000 plus, who are incentivized to deploy RingCentral's, or RingCentral-based products through customer bases that have been -- they've been doing business with for years. So again, combined unique channel was a very strong, highly competitive product with a unique position of trust from our customers and our partners that we have earned over our 2 plus decades in business. And yes, this is why we're feeling pretty good about life these days.

It sounds good. That's a great way to finish it up. So Vlad, Mitesh, thank you so much for joining us today. We really appreciate it.

Sterling, one of these days, we should hear you play the guitar in the back. I've always seen that there. But one of these days, may be.

You won't be able to unhear it. That's the problem. All right, guys.

All right, thank you. Bye.

Take care. Bye.