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

Welcome, everybody. We're delighted to have RingCentral here today. We have Vlad Shmunis, CEO; Mo Katibeh, COO; and Vaibhav Agarwal, I definitely screw that up, Interim CFO. I am Meta Marshall. I cover the communications space here at Morgan Stanley. For any research disclosures, go to morganstanley.com/researchdisclosures or check with your sales representative. Glad the joy of covering RingCentral for so many years is there's always a healthy debate on it, positive or otherwise. And so there's definitely a healthy amount of debate right now on RingCentral and what's happening in the UCaaS market, in general.

Just from your perspective, what do you think is being missed in the investor conversation just about the health of UCaaS and the health of RingCentral's position within UCaaS?

Well, it is great to be here. And this was actually the last conference right before COVID that I was going to attend and I was asked to not attend because I happened to have had some visitors from Asia the day prior, so I didn't check the box and mail two days later. So I think what's being missed now is maybe what's being missed all along even those days, which is, it's a large, robust market. I think people get large. They don't necessarily get robust. There always have been concerns about viability of voice as a channel. Here we are speaking in voice. Businesses need their identity in the voice space. I think that there is a confusion about endpoints and to receive demise of desktop phones which is not what we're seeing, our attach rate is increasing, not decreasing, while the growth is also increasing. So clearly, people are still buying. Having said that, our mobile usage is meaningfully outpacing. So as we say, mobile is a friend, not a foe. So people missed that. I think people much over, or I would say, overly concerned about the competitive environment. It's a great market. It's 450 million seats. It's $100-plus billion at an ARPU of $20. Ours is about 50% higher than that. And look, you -- like you say, you've covered that from day 1, and there always were concerns. Some of the players have changed. Some have not, Microsoft has not. Yes, there is a new competitor in Zoom. But here we are. We are realistically going to be a $2 billion business this year. And we've guided, as you know, in the mid-20s, without changing our guidance philosophy. So yes, I think that people are just listening to these rumors and concerns, which are not supported by reality. It's not what we're seeing. It's not what our channel partners are seeing. And most importantly, customers are buying.

I mean, I think part of the discussion ends up being of enterprise price points are obviously always going to be lower than kind of what we have traditionally seen in the SMB market. And just how do you walk through investors that the LTV that you're seeing from these enterprise customers still is representative of you doing business at those price points, and that it's not just indicative of kind of worries about commoditization of the sales?

Well, see -- and that's, frankly, what I personally find out a bit hard to understand, because we're pretty transparent about our numbers, so our seat count is pretty well known. Now it's grown with good synergy numbers. It's about 4 million, give or take. Our MRR is well known. Our IMRR is easy to compute. Just do some simple math, and you'll see that our ARPUs are indeed stable, obviously, are positively increasing as we're moving more upmarket. But even with that, ARPUs are fine. Again, enterprises, there was always pricing pressure from the enterprise, but they take a higher-level service, they are more prone to buy contact center. Today, we continue to be the only vendor out there that's able to offer both UCaaS and CCaaS, both leading in the MQ and that's a huge boon. Others are trying to catch up. That's a heavy lift, I can tell you that. So we just -- we see business as usual, if not better than usual.

Got it. I mean, you mentioned what the competitive -- it's always been a competitive space, but maybe the competitive landscape has changed. Just what are you seeing as differentiating today for RingCentral versus the competitive landscape versus maybe what you were competing with 5 years ago in that competitive landscape?

Look, the core principles haven't changed. Product-wise, it's still any device, any mode anywhere. Now obviously, we got a lot better at it. We are the only provider of size with true Five9 availability. So that's a few minutes of downtime per year, including maintenance windows. And if you look at public sites, like down detector or something, you just see that people are not so good, but they're not complaining about our outages. Not too many people can make that claim, pretty much no one else can. So number one, it is -- we view this as a mission-critical app. And we're serious about security. We're serious about reliability. We're serious about regulatory adherence. So those would be very core differentiators. On the product side, again, we talk of this TIP, that's trust innovation partnerships. So this is a trust part. Look, innovation, we're the only provider out there with well-integrated, fully functional message video phone, MVP, okay? Clearly, we're leading with the phone. Clearly, we are an undisputed leader in phone to this day and holding on just fine. But our video is coming up. I don't think this is news to most people here, we had this partnership with Zoom. Partnership is over. There was legal action, got resolved. So there was settlement and -- but we've moved 2/3 of the accounts already. So RingCentral Video is viable. In Enterprise, we certainly will use it exclusively. Our messaging platform is very powerful, very sticky. So again, on the innovation side, we do have a differentiated offering with a huge amount of momentum behind it. If you look at our R&D/innovation spend, versus our competitors, it's right up there. It's up there with Zoom. It's up there with Microsoft from what we can send about how much [indiscernible] up there. And we never said that we are going to monopolize this, it's very legal, but I don't think it's realistic, but remember, we are 20% share leader -- holder and leader. And we're holding on to that. It's a $100 billion market. This is outside the video. This is outside of messaging. Here, we are at $2 billion this year, we maintained our 20%. We maintained 10%, still 5, 10x growth, which is not hard to imagine given our track record. And last but not least, again, for maybe people newer to the story, it's the last letter in TIP, which is partnerships. And it's also just unique, right, between the strategic partners, Avaya, Atos, Alcatel or Enterprise, most recently, Mitel. So that's over 200 million seats in their combined installed basis most of the market. And our newly reinvigorated effort with GSPs, global service providers or carriers phone company, where we have a collection bar none AT&T, Verizon. Name one company that does business both with Verizon and AT&T, and here we are. And now Vodafone, British Telecom, Deutsche Telekom, just recently announced a couple of days ago, a deal with Frontier. So all of these are coming together and that's what allows us to maintain growth and operate at [indiscernible], but not like some of the other players, so the flattish growth, 10% to 11% growth, we're still -- at least historically, have a 3 handle, guiding to healthy mid-20s.

Yes. Perfect. Mo, I want to bring you into the conversation as kind of the newcomer of the bunch. I think investors were impressed with just kind of your progress and promotion of the story on the Q4 earnings call. Just why join now? What kind of -- do you think that you can bring from an operational perspective to RingCentral?

Very good. Good seeing everybody. It's lovely seeing human beings to start there. You can imagine over the last 5 years or so being at AT&T business, I've had a fairly comprehensive view of the broader telephony landscape, everything from VoIP, TDM, SIP trunking, UCaaS, CCaaS, et cetera. And one of the things that has just been so obvious to me, and there's a core part of why I wanted to join the RingCentral team, is just a staggering opportunity ahead of us. Frankly, if you even want to debate the size of the market, some of the factors that you've brought up, however you cut it with sitting at less than 10% penetration of the total, the opportunity is just immense. And businesses are going to take, frankly, many years into the future to migrate all of their seats into the cloud, which promises durable long-term growth opportunity for RingCentral. So first and foremost, it was that -- it's just recognizing at least for the next 10, 15 years, that this thing is going to keep cranking out at a material rate. The second one is the product. What Vlad and Kira, our Chief Innovation Officer, and the whole team has built over the last X number of years is bar none is incredible world-class market-defining product. And just to bring this in perspective, and I'll give you a little bit of color around the GSP dynamic. There are all of these partners that are sitting out there across the world. And they have these, call it, legacy phone seats that are part of their base, and they're trying to figure out what they're going to do with them, how are they going to migrate them to the next solution? Their customers are asking. They know that this is going to be something that they need to lean into over the next X number of years. And yet, their precious capital dollars really need to go into investing in mobile networks and the fiber networks, into capital-intensive businesses, and they need something world-class. And this was the core thesis behind why about 5 years ago, when Vlad and I first met, we cautiously chose to select RingCentral as our premium go-to-market offering. About a year or so later, we elected to sunset our own UCaaS product in favor of it because of the efficacy and the amount of dollars that's going into just on an ongoing basis ensure that it stays world-class and meets all the feature functionality that our customers need. And so just the efficacy of the product was the second key reason. And then -- I'm not saying this just because he's sitting next to me, but knowing Vlad in the team, it's -- the culture is really impressive, and there was an opportunity to work with a world-class set of humans as well, which was obviously important. You want to enjoy the people that you work with. And then relative to operationally what I'm bringing to the role, I think about our 3 priorities from my lens being our growth, our people and our future. And for this audience, we'll focus on our growth and our future. Our growth to me just means how are you going to go out and execute on 2022? Day in, day out, drive and deliver on the results that we've committed. And there's 5 factors that we're focused on. The first one is these partnerships that you've asked about and continuing to unlock them and drive growth through them. The second one is continuing to add to the partnerships and the channels, new providers, new motion with them. Last year, we ended the GSPs with 5 relationships at the end of 2020. And at the end of '21, we ended with 12. There's even more coming. And those mean, hey, look, you've got to go do the contracting, you've got to go do the product work, you've got to get the sales enablement in place, and they build on one another. Historically, we've only had 3 key partners, AT&T, TELUS and BT. Vlad mentioned a couple more that have come to market recently. So there's even more coming in the back half of this year. So more opportunity there. Our channel has been growing double digits year-over-year, just the number of companies that we're working with to bring the product to market, and we're not slowing down there either. The third one is around brand. So when you think about our win rates in the market, they are impressive. They are really, really strong. The opportunity for RingCentral is really around awareness of businesses knowing who we are and what we do. So we're launching our first major brand campaign, the first one ever in the history of the company. The thesis is quite robust. It is you spend X amount on brand, awareness goes from X to Y. Y is our current win rate throws off incremental revenue growth, and then also becomes another flywheel for us, both in '22 and going into '23, and frankly, drives growth across all our channels, whether it's e-commerce or direct sellers, the AAAs and our partnerships, et cetera. The fourth area is around investing in AI to continue driving improvements in our retention and churn rates. So let me start by saying last year, our churn rate was the lowest it has ever been in the history of the company. So we're starting from a great place. Some of the motion that led to that was, one, continuing to go upmarket. Enterprise is inherently stickier, brings down your churn. And then the other one was really now, as we're becoming a $2 billion business, understanding signatures from our customers that would indicate to us, hey, this is potentially someone who's going to down sell, potentially someone who's going to churn, potentially someone who's not going to recontract and then building internal motion around those customers. We have deciles. We've broken all of our customers up into 10 groups, and we know most likely to churn for least likely, we can make ROI-based decisions on how we invest to go help our customers utilize our products to continue driving down the churn rate. And then the fifth area is continued efficacy of our product, continuing to invest a staggering amount of money to ensure that our MVP solution is world class as well as our integrated UCaaS and CCaaS solution and how we bring that to market and differentiate it. So that's our growth. From our future, I'm a planner, and I'm a huge proponent of you've got to be making decisions like right now that are going to pay off 4, 5, 6, 7 quarters from now. So there's quite a bit of work happening behind the scenes on business cases, ROI-driven, what are some of the bets that we need to be making that will pay off in '23 and '24 and beyond to continue the growth that we've been talking about. And then the last comment I'll make on our future is, I said on earnings that I'm coming in, I'm looking at every single aspect of the business. And one of those aspects is every piece of the business and are we as efficient as we can be. And efficiency, I think, is an opportunity for us to lean into. How we're thinking about the guidance we've given on our operating margins? And is there potentially more we can do there, so more to come.

Got it. Well, I think you covered most of my questions in one answer. So we're good there. And then maybe Vlad, turning to you. One big shoes to fill with Mitesh. But just if you could give us a little bit of background on yourself and just your history with RingCentral? And what are your kind of objectives kind of stepping into the role at least on an interim basis?

Yes. Good seeing everyone. Thanks for the question, Meta. And this is my first conference, so I'll remember it in the years to come. So I think my reasons -- it's interesting, I joined the company 6 years ago, and my reasons for joining RingCentral were very similar to what Mo's are. At that time, the opportunity was very clear to me. Companies going to the cloud, a sub 5% penetration of the TAM was quite clear, our market leadership and our commitment to continue to do that was fairly clear. And just from a people perspective, as I have worked with Vlad, Mitesh and others over the years, it's just been an incredible group of leaders. The pace, the growth mindset is hard to replicate. And when I look back, we've come a long way. I joined the company when we were, call it, $300 million in revenue. And we just guided to $2 billion. So we've come such a long way, but when I look ahead, there's -- we are still in the early innings. So that's what kind of keeps me here. I think in terms of the objectives, Mo and I are very aligned in terms of the 4 or 5 priorities that he outlined. It's about delivering durable, profitable, compounding growth in the years to come. So making the right strategic investments in the business, looking at things from our ROI lens, making sure that we are making the long-term bets, not only for now but for the years to come so that we make this a long-term durable business just given the opportunity that's so large.

Got it. Maybe as Vlad mentioned, you guys -- you do give a lot of metrics. And so I think when investors sometimes push for more metrics and like they give a lot of metrics. But just in terms of what either in terms of breaking out partner separate from direct, disclosing the seat count, what are the metrics that you feel like would be helpful versus just not kind of helpful to the overall discussion you guys have?

Yes. So I'll take a pass. And Mo, you feel free to add. I think when we think about the metrics that we disclosed externally, the first point is how do we look at the business internally? And we've tried to mimic the metrics that we provide to how we manage the business. Now there's a question about seats and ARPU and other things have, it keeps coming up. We've been on call since this -- meeting since this morning, we don't manage the business on seats. We manage the business on annual recurring revenue, and we provide like 4 or 5 different cuts of it. We don't really internally look at ARPU as much. It's all about the dollars, the annual recurring revenue because seats can be free, there can be different flavors of it. So we've always tried to provide metrics which are in line with how we internally manage the business. So we've provided metrics around segmentation of customers because the go-to-market motion in a large enterprise is different than e-commerce and SMB. So we've provided to provide color around that. We've provided color around profitability metrics, around sales and marketing efficiencies, et cetera. So I think that's been the general thought process in terms of provide metrics which align with how we internally manage the business.

Got it. I mean, just in terms of profitability of the segments, I think, in the past, you guys have noted listen, enterprise customers churn at a lower rate, we are seeing degrees of upsell within those customer bases. Have you thought about anything additional that you can kind of disclose to help investors with that? Or upcoming -- not asking to release it today, but just as you refine what you're showing investors?

Do you want to take that?

I said it a moment ago, and I said it on our earnings, which is, we are looking at every single aspect of our business. We've created an incredible number of avenues for our customers to come to RingCentral and the cloud. And it's one of our things in our mind, which is, hey, what should be the metrics that we should be providing that we are consistent about? We provide them to the X number of quarters and years to continue driving confidence. That said, at the heart of it, I mean, we are a SaaS company, ARR and driving that growth, driving, expanding margins, durable, profitable growth is at the heart of what we want to do.

Got it. I mean, I think one of the areas that I spend a lot of time with investors on is your partnerships give you guys a unique ability to let customers take the pace of change that they want to. And some of the technology we acquired from Mitel also kind of helped with that. Just what are you seeing in terms of your customers in that more gradual move to the cloud? Are you seeing changes in that kind of over time?

Yes. So the way I'd answer that is first and foremost, this is why we very conscientiously chosen the avenues to our customers that we have. As an example, I spoke about the GSPs going from 5 relationships to 12 to more. And just yesterday, I was looking at the new GSPs that we're launching this year and outside of North America and the U.K., how many new business seats that are currently with those GSPs and partners would suddenly become opportunities for us to sell into because we've enabled them? And the answer is 50 million in a year, all right? As you think about the AAAs and Mitel, which you brought up a few moments ago, they bought during earnings, said, "Hey, Mitel, we've built a little bit more of that growth in the back half of this year, and I got a question this morning as to why. Well, the answer is because we're already selling with Mitel. We didn't go with a co-branded solution. So we're seeing wins in fourth quarter and first quarter, but if you look at Mitel, they are a collection of legacy companies that have come together. They have subtending platforms. Those platforms all have different end-user devices that are tied to them. And we're actively doing the product and certification work that allows us to unlock those slices of the TAM within Mitel that allows us to keep going in and selling into them. We have always said we want durable, profitable growth. We're very mindful of how much you have to spend your CAC in order to acquire and we've very consistently gone in to unlock more and more of that TAM every quarter to keep driving the growth rates that we've been putting up the last X number of years. It's a very conscious decision. This strategy has been working. And that's how we think about it.

Got it. And maybe spending a second on just profitability and free cash flow conversion. Clearly, you guys have shown operating leverage over the years. I think maybe investors with their new profitability mindset, have wanted to see a little bit more. Just how do you guys think about the growth profitability equation? And how that translates to free cash flow conversion?

Yes. So when we look at the business internally, there's leverage in the model. Inherently, as we are going more upmarket, our sales reps are getting more efficient, we are realizing higher RPOs which is a metric or a long-term value as our partner-led motions are kicking in, like Mo said, even they are inherently more efficient because we are leveraging the partners go-to-market ecosystem. And then there are just inherent efficiencies of scale that we are realizing in areas like G&A. G&A, for example, went down by about 2 points year-on-year. So the strategy for us has been that you -- we take the leverage in the model, reinvest it back into the business to drive the growth of the business because we are so early on, there's such a large opportunity ahead of us, it really comes down to a choice. Do I drop the margin dollars down to the bottom line or do we put it back into the business in strategic areas to drive the longer-term growth of the company? And we've taken a disciplined approach. We've grown historically north of 30% year-over-year, yet delivering a margin expansion of, call it, 50 basis points or so. So I mean, that's been the strategy. I think you will continue to see pretty much the same, which is there's the enormous leverage in the model and thoughtful investments in terms of driving durable growth for the years to come.

Got it. Vlad, I want to just end with any -- I know the question was asked kind of on the earnings call, but just any update as the Russia-Ukraine situation has evolved and just any potential impact to RingCentral?

Yes. Look -- first, thank you for asking that. Look, it's terrible, unthinkable unspeakable. We don't have any employees there. We don't have any revenue there. Given our long-term relationships with leading GSPs, AT&T, in particular, which Mo used to be responsible for from that side. We are securing our operations. So there will be no impact to our ability to maintain the service, our ability to innovate, and so forth. We do have contracts there in both countries. We are providing humanitarian aid, of course. And we're just paying that this nonsense ends. But for business, putting emotions aside, business is solid.

Got it. Well, I appreciate you guys being here today. I mean, I think it is a huge opportunity. We are in early days. And you're healthy. You have very healthy competitive positioning. And so look forward to everybody kind of digging into the story more. I appreciate you guys being here today.

Thank you.

Thank you.

Thank you.