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

Great. Hello, everyone. Thank you for joining the RingCentral session. Hope everyone's conference is off to a great start so far. And thank you on behalf of the entire tech team for any support in the II voting season. It's hugely appreciated as always. I'm Dan Bartus from the enterprise software team here at BofA. I cover the communications software space closely. And I have to say, RingCentral is certainly one of the hottest stocks amongst investors these days. So we're very lucky to have Mitesh Dhruv here, CFO for RingCentral. Mitesh, welcome. Thank you very much for joining.

Dan, thank you for having me. It's going to be fun. Hottest stock, I don't know these days with the market and how the stock market has reacted. But definitely a stock to worth -- worth watching, and see what we have in store for you guys. That's definitely sure.

Yes. Definitely a lot to talk about. So maybe Mitesh, we can start with some of the basics. For listeners that may not be as familiar with RingCentral, can you kind of just lay out what is RingCentral's specialty in the communication software market? And how is your technology perhaps even more relevant today as we look at a post-pandemic era?

Yes, sure. Absolutely. I mean as a nutshell -- in a nutshell, what we do is we make employees more productive by making them communicate more efficiently and more effectively. The way we do that is pretty simple. We have a business communications platform, where we are able to have employees connect from any mode, any device anywhere. And taking it a click below, tech speak, this would be we provide 3 different modalities on our platform: messaging, video and phone, MVP as we call it, on our business communication stack. Now this becomes very interesting, right, after the post-pandemic world because the workforce is going to be from anywhere, from any mode, from any device. And so the promise land we saw when we IPO-ed the company, or even before, is now finally sort of coming to fruition in the form of a massive catalyst with this pandemic. And why is this -- all this relevant? Because the TAM is massive. You've got 400 million tangible, what we call, PBX users that are connected to landlines, enclosed boxes, which cannot do the anywhere, any mode, any device, and it's all siloed. So now if you look at the backdrop, you've got 400 million seats there. If you take the entire cloud UCaaS market, there are 12 million seats that have been migrated to the cloud. So you can just see, with this kind of a technology in a platform, the potential runway ahead for us.

Yes. That's great. It's great start. So obviously, a huge TAM. You guys are the market leader right now with roughly 3 million seats. But how do investors think about how the competitive landscape has maybe changed over the years? And I'm curious who you view today as your primary competition?

Yes, sure. Today, we have over 3.5 million seats. So it's a bit of a new disclosure, but we've said this last week, I think. So it's over 3.5 million seats. But your point is interesting. So if you look at the competition, as you asked, right, this market is one of the largest untapped market that's going to the cloud. It's a very attractive market. So there will be competition, and it's a good thing for the industry. And if you harken back 3 or 4 years, if you were to ask me this question, "Hey, Mitesh, what's your competition?" And it's similar today than before, but with some changes. So what are they? So if you'd asked me this question, "Hey, who's your competition 3 or 4 years ago?" I would have said, "It's Avaya, it's Cisco, it's 8x8 and it's Microsoft." So okay, let's fast-forward the clock today in the casting characters of the competitors. Avaya, let's start with that. We were competing before. But with our recent partnership a couple of years ago, now we are -- they are a friend, not a foe. We are attacking the 100 million seats they have together. Cisco, it's been a bit of a -- not much has happened. They have sort of fallen by the wayside. They are trying to repackage some stuff, their old stuff. So nothing much there. Their whole hosted suite is -- didn't turn out to be very viable. And so that's Cisco, not much share there. 8x8, we've -- if you look at the numbers, the technology, we have just far surpassed them. So it doesn't come up in discussions anymore. Microsoft is Microsoft. They were still there. They're still here. And -- but now, we have an angle which we didn't have before with Microsoft, which is we can coexist with them with our PBX, which we call Direct Routing. So if somebody needs to be on Teams, Microsoft Teams, and they still want a world-class PBX, there's a way to make it happen today in a symbiotic fashion, which was not possible today. Now the only new entrant to the market now, besides the 4 players, is sort of Zoom, which is coming up with a Zoom phone. And we've always read the disclosures. They've got 1 million, 1.5 million seats. Recently, it doesn't quite change the overall trajectory of the market or of RingCentral. We've added a similar number of seats with higher value captured. So overall, if you look at it, right, it's a 2-, 3-horse race to capture this 400 million seats. And so the competitive market, I would say, is, in a way, stable to slightly more positive for the industry if you were to look at the way it's shaped up in the last couple of years.

Yes. I'd have to say I agree with a lot of that assessment as well, too. So I want to try to drill down quickly on the tech differentiation because that's a lot of the debate that I hear is maybe pre-pandemic voice was a big differentiator. And clearly, you guys were in a leadership position of voice. Post-pandemic, the value chain looks like it might be reshuffling a little bit with these components here. So can you speak to tech differentiation? Where have you guys been differentiating in recent years? And where do you think things go from here?

Yes. In the tech, it's an interesting way to phrase the question about the value chain and where -- what's valuable, what's not. It's certainly a debate, which I hear as well. Now if you look at the competitive moat on the product side, we do what we call MVP, messaging, video, phone. Let's start with the phone piece, which is our crown jewel in a way. And a lot of people misunderstand that, or conflate the fact that if you have an incumbency in messaging or video, that does not automatically guarantee a seat at the table on the phone side. These are 2 very different sales, right? If you look at a video sale, there could be a line of business user, okay, just swipe his credit card, his or her credit card, and get a license for a WebEx or Zoom or Microsoft Teams. So it could be a very disparate, siloed experience. You don't need anything else. When it comes to your PBX, it's like your central email system. It's like your central nervous system. You cannot have disparate PBXs here, you have to have a central identity. The buyer is the CIO, and it goes through the CIO. So it's a centralized purchase across the globe. You cannot have multiple solutions or multiple PBXs, it becomes a very disjointed experience. So when we talk to CIOs, what does matter to them? The first thing, which always, always comes up, [ sack of sand ] is reliability. And what we offer is if you can just call out the chart, which is an interesting chart we've created, where we have what we call 99.999% reliability. So on the left side is what RingCentral offers, a 99.999% reliability. What that means then is, on an annual basis, we offer our customers a peace of mind that our systems will go down 5 minutes in the entire year or less than 30 seconds a month. If you then go back -- if you can just step through it, then it's 99.999%, 99.99% and 99.9%. Most of our competitors offer 99.9%. Some don't even offer an SLA agreement on reliability. 99.9% means 9 hours of downtime. And the difference between 99.9% and 99.999% is 100x. So this is a key calling card we use for our CIOs because this is -- for any enterprise, you do need a reliable solution, and not many people -- other competitors can offer that. So that's the point #1. You can call it on the slide now. It just gives you a good overview or basically of how things work. So that's one. The second one is security. You can call the slide down guys, if you want, Ryan and team. So second is reliability. Reliability -- sorry, security is a key investment area for us. We've invested a lot of money in that we have a new Chief Security Officer. We've acquired a couple of companies for end-to-end transcription. So it's a key focus area for us where not every other competitor can claim a similar accomplishment in the area of security, where it's a pristine record in security. And when you have recent partnerships like Verizon, Vodafone, endorsing the RingCentral security, you've got to assume that all these big carriers, they go through a very, very rigorous scrutiny when they choose RingCentral. So security becomes very, very key. And once we pass that muster with our carrier partners, then automatically, enterprises -- CIOs of enterprises, it gives them peace of mind. That's number two. And third one, which is a secret sauce, is integrations and APIs. Business communications is getting embedded in custom workflows, other software applications. And to be able to have this ecosystem built out with our integrations, we have got over 5,000 integrations built out. And not -- if you look at other competitors, you will see it's like in the dozens versus 5,000. So that's the third part. So that sort of wraps up the PBX part, why enterprises choose us for the PBX part. Reliability, security, API integrations. Now let's look at the V part, the video part. Video part, we've been catching up, and it's been a couple of years of blood, sweat and tears. But we have sort of almost caught up now with a couple of features here and there, which are remaining. And this was sort of validated by Deutsche Telekom a week ago, where Deutsche Telekom chose RingCentral as the stand-alone video product for their customers. We also have Atos selling RingCentral video stand-alone for its customers. So now we are in the market with a world-class PBX and a video solution, which is going to be doing really well. So that's the overall technology moat on the MVP front. There's also another -- or problem angle, which you've brought up, Dan, in the past, which is not contact center. So we can talk about more contact center side as well if you like.

Yes. I definitely want to dig into that. And you mentioned partnerships like DT as well. I want to touch on some of those, too. But maybe just frame this with 2 more questions, because a lot of investors are asking about modeling this. Everyone is looking at the same kind of 400 million seats. It looks like the market is really ready to take off. You referenced that both you and Zoom are adding users at a more rapid clip now. So if we're at 12 million seats, how should investors think about the cadence penetration into the market from here? I know it's a tough question, but I'm curious how you're helping inform me.

I mean, ultimately, I would say the penetration is only going to go one way, right, which is cloud. So it becomes a matter of time when this whole market gets penetrated. Maybe what I can do is share a slide, which I've shared in the past, to show -- to demonstrate what it takes for a company like RingCentral to grow at a certain clip, which investors have been underwriting. So if you take a view for investors, what do people tend to underwrite for RingCentral? It's 2 things. It's consistency of execution and it's the fact that we've always delivered a 30% plus or minus CAGR over the last multiple years, even though the company has gone from 200 million in IPO to 1.5 billion. So that's what investors underwrite. So if you can just take a moment to see, "Okay, what does it take going forward for RingCentral to maintain its CAGR?" So if you can just call up the slide on the screen share? Awesome. Thank you. So here's what -- here's the snapshot today, Dan. And this chart is meant to illustrate what it takes for us to grow at a 30% clip over the next 4 or 5 years. So today, we are between 3.5 million and 4 million seats today. Now if you just do a simple math on CAGR, if you just click one more, it takes about 11 million seats to achieve this 30% CAGR by 2025, just simple CAGR math at 30%. Now the delta of, call it, 7 million, 7.5 million seats, which we need to fill in, will need to come from 2 factions, one is the market itself, which has been giving us amazing growth until now. And we also -- as you mentioned, Dan, we also have these partnerships, which is relatively a new phenomenon. And it's the tailwinds from those partnerships are ahead of us. So if you start with the market itself, what we assume here that we just assume a 25% growth rate of the market, that Ring grows at the market growth rate. We've been, of course, growing well north of that without any of our partnerships, but for this purpose, we only assume 25% market growth rate, which is what other competitors are growing at. If you look at 25%, that would give us an incremental 6 million seats on top of this 3.5 million seats. So now the remaining 1.5 million to 2 million seats need to come from the partnerships. And if you look at the math, over time, the CAGR math, I mean the penetration per year is less than 0.25%. For this chart, we've used 0.5% because just to keep the numbers round, but it's less than 0.25%, to keep maintaining the 30% growth rate. I will tell you that when we underwrote these partnerships, the bogey in our minds is much, much higher. To your point, the penetration potential and where we think this could contribute is much, much higher. So it's pretty unassuming. Now when you layer this on vis-a-vis what the market potential is, if you click one more, it is just staggering, right, where you brought this exclusive opportunity we have with 200 million seats straight shot. These 200 million seats with Avaya, Alcatel and Atos can only sell RingCentral. So we only need to clear 11 million of the 200 million, but they're also actually going after the entire market, which I started out with, with the 400 million seats. So when you put this in perspective, right, no matter how you look at the penetration, it's just a massive runway ahead of us to get 11 million seats in the next 4, 4.5 years from a base of 400 million seats.

It looks to me like there might be room for more than one winner, and that's what I've been telling people as well, massive market opportunity. But obviously, the other key variable in modeling, Mitesh, is the ARPU. What happens with that as you've made larger deals? What happens to that as maybe the market gets a little bit more competitive? So can you talk about ARPU? I don't know if you can kind of speak to your assumption on that path to 11 million seats in 2025. Or just more broadly, what keeps ARPU stable, like you've seen over the last 5 or so years?

Right. No, that's a good one, Dan. There is a bit of a, in a way, misnomer, right, on this whole competitive pricing that, hey, this market is going to see some price pressure and ARPU compression. I mean if you look at our ARPU trends till date since the last -- we give you enough data to actually define the ARPU now, would be at our ARR of roughly $1.5 billion revenue and seat math of between 3.5 million and 4 million, you can see the ARPU is plus or minus $30 per user per month. That has not changed in a long time because you've got to understand that the customers who are switching to a cloud solution like RingCentral are paying $30, $35 just for a dial tone. They don't even get what we are offering in a cloud solution. So the ARPU went -- if you -- and if you plot the curve of ARPU with the math I just told you of ARR divided by seats, you can plot the ARPU. We are one of the few companies in this space that actually give out the ARR, we give out the seats. So it's very transparent. Now what happens is with our larger customers, we -- there is, of course, volume discounting. So -- but it's nothing new. But it's actually a sliding scale, and it's very accretive for us. And our ARPA, average account -- average revenue per account, is expanding. So from a lifetime value to a CAC perspective, it's actually really accretive for us. We've always been about this profitable growth, right? So it's easy to get caught up in the seat math that, hey, this competitor has these many seats and 1.5 million, 2 million seats, no. It's -- for us, it's about the revenue share, right? It's a revenue share and profit share. That's what we really care about. And that's where we've been able to keep things stable. So if you keep -- if you bring -- if you compare now -- that's sort of part 1. Part 2, if you compare apples-to-apples, stand-alone pricing versus what we charge to -- for our platform versus competitors, and if you stitch together what competitors charge for the entire bundle, which is video plus phone plus messaging, you will see that the ARPU is very similar for most of the competitors in this space. So it's a bit of an apples and oranges comparison and people say, "Hey, you're selling at $30, somebody else is selling at $15." No. But $15 only is a PBX product, you also have to bundle in or layer in the video product for that. So that's where the clarification needs to happen. Now if you bring back the slide one more time, I just want to make another point where even if somebody were to assume an ARPU compression, to your point, right, because you guys are writing an investment thesis, and if you were to assume ARPU compression, it doesn't quite change the picture as much. So can you just bring up the slide back up, Ryan or whoever is controlling this? Yes. Okay. And just click one more. So if you now were to assume, even assume an ARPU compression, Dan, which doesn't quite change, it means that we need to add 2 more million seats, which is the gray bar on the third column. These 2 million seats can come from us, RingCentral, forming its share or from having a slightly higher penetration from the partners. So in a way, I mean even though we're seeing ARPU stable and we do expect ARPU to be stable, there is this whole case of what if ARPU compresses? It still doesn't quite change the investment thesis.

That's super helpful. And what I've been telling people, too, is that as you guys sell more contact center, sell more CCaaS, all this math will actually look better potentially on ARPU, or at least contribute to holding ARPU where it is, at the very least. So maybe transitioning to CCaaS a little bit. You recently announced the expansion and extension of the partnership with NICE's technology there. Can you just give us an update on that announcement around that partnership? And where are you seeing the strategy going from here?

Yes. I mean one of the -- you actually touched up on a key point where, yes, contact center will lend itself to a higher ARPU over time, which is what we have seen. And the base -- we've always seen the CCaaS part as an extension for UCaaS. And with the pandemic, this is going to more focus where customers want to make [ strategic ] decisions for UCaaS and CCaaS together. And because customers in the previous [ iteration ] of UC and CC, they're used to buying UC and CC together from Avaya, from Cisco, to now in the new world, they also want to have one single [indiscernible] to [indiscernible]. And in Q1, we saw that over 60% of the [ million dollar ] deal [ contact center ] because customers do single footprint, single vendor and then both solutions. So we saw ramped demand, and we thought it would be [ quite ] something to re-up or double down on our partnership within contact for a multiyear journey and to give us long-term visibility for our customers who are making long-term decisions based -- today based on the contact center and UCaaS together. And the interesting part of this partnership is that we actually get access to a broader portfolio solution set, which we didn't have before. So this gives us more arrows in the quiver to cross-sell to our customers. So that's how this sort of all came together.

And by the way, I should say, anyone listening, feel free to send some questions through the system. We have about 5 minutes left, so I'll try to get to any questions that are out there. But Mitesh, kind of following on the partnerships. Obviously, that's a huge part of your story. And you touched on it with the TAM, how it helps you get a leg up over competition to capture a lot of those seats. Maybe you can just talk about the significance of the technology partnerships and the service provider partnerships? How are they different in terms of how they help your go-to-market? How significant are these very different kinds of partnerships? Maybe you can kind of speak to both sides there?

Yes. I mean, look, we talked about moats here, right? So there are moats coming in, in 2 flavors. Moats come in the product flavor and they come in, in a GTM flavor. From the GTM side, these partnerships, these are fences we've erected. If you start from the bottom, which is strategic partners, where we have 3, this is all just listed alphabetically. So we've got Alcatel-Lucent, Atos and Avaya. And these are exclusive relationships for us to get to 200 million seats. And the only UCaaS solution they can sell is RingCentral. And we've done some pretty cool stuff to ease the migration of the customers to RingCentral's solution for these strategic partners. They need to come up a layer, which are global service providers, you've got new relationship with AT&T, Verizon, Vodafone, British Telecom, Deutsche Telekom and TELUS. I mean there's team emerging, right? All these GSPs, or global service providers, and strategic partners are choosing RingCentral. And these are very, very heavily contested deals, right? These are like amazing things to have RingCentral in its portfolio. And I will tell you that every UCaaS provider or vendor competes for these deals because it's very, very marquee names. So this is the opportunity where it gives us leverage on the go-to-market side. We don't have to invest in our go-to-market footprint, and we leverage boots on the ground from these other partners where it provides a broad distribution reach for RingCentral over time. So that's sort of the play here.

So right as I announced taking the questions, obviously, if you rolled in on CCaaS. So I'll try to combine them all together into one question. Maybe this will be the last one here. But first, Mitesh, what are your thoughts on partnering in the CCaaS technology versus owning that full stack over time? And right now, it's an advantage you had over Zoom that they don't have a contact center, but there's a lot of rumblings in the market that Zoom imply that they'll be entering the contact center space by the end of the year. So also thoughts -- any thoughts on Zoom getting into contact center?

Yes. Look, I mean, it doesn't quite change any of our road map or our trajectory, right? It's not a zero-sum game, right? Zoom already resells a bunch of solutions today, right? They have 99.999%. They resell [ Talk Tests ]. They sell a bunch of other ones. We have integrated with inContact. The fact of the matter is, just by buying the solution does not mean guaranteed integration. It takes a long time. We've been on a journey with inContact for 4 to 5 years. And that's when we developed this deep level of [indiscernible] where a customer's point of view is a very seamless solution. It's almost 1 solution from 2 magic quadrant leaders. So these things take time. And whether Zoom enters the market or does not enter the market, it doesn't quite change any of our road map, does not change any of our trajectory. It's just that that's where the market sort of moves. So it's sort of no change to us on the way we will execute.

Well, great, Mitesh. Perfect timing. We're just out of time. So very helpful session. Really appreciate the time, and great to see you, as always.

Yes. And apologies if my Wi-Fi was a bit choppy because I've got 2 -- I guess, it's interesting. I've got 6 devices running today at full swing. And my -- started switching my Wi-Fi to make calls better. So I need to [indiscernible] with it later on.

I've got the same thing going on, so we'll keep working on it. But thanks, Mitesh.

Okay.

Take care.

Thank you. Bye, guys.

Yes.