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

Okay. Thank you for joining us today. We're excited to have you back in person. Welcome to JPMorgan's 50th TMC Conference. My name is Noah Herman. I'm currently a software research analyst here at the firm. With me today is RingCentral's CEO, Vlad; new CFO, Sonalee; and also COO, Mo. Thank you so much for joining us here today. We really appreciate it. So before I begin, just wanted to remind everyone that towards the end of the session, we'll have a little portion of a Q&A. And if you have any questions, just feel free to raise your hand and someone with a microphone will come and help assist with your questions. So before we really get started here, can each of you maybe just introduce yourselves and just describe RingCentral, what you do and the customers that you serve?

Okay. Well, thanks for having us. I'm Vlad Shmunis, Founder, Chairman, CEO. What does RingCentral do is we take business communications to the cloud. For those of you unfamiliar with the story, we are one of the pioneers in this space. I founded the company in 1999 as a pure start-up bootstrap. Here we are. We've IPO-ed in 2013. At this point, we are a $2 billion pure-play SaaS business, $2 billion run rate, to be clear. We are operating at a rule of 40, so growth plus operating margin exceed 40. We are disrupting a gigantic TAM of upwards of $100 billion, which consists of on-prem telephony seats, PBX seats moving to the cloud, many of them utilizing our global RingCentral platform. We are also differentiating by being the only solution out there that combines a high-end UCaaS solution or PBX replacement in the cloud with a high-end cloud center solution. And this is through our partnership with NICE inContact. It's a differentiated offering now. And contact center cloud, contact center is now well over 10% of our business. So as far as GTM, also quite a bit of a differentiated story, whereby in addition to having a strong direct sales force, has combined with one of the largest distributor networks. Mo will address that in a second. We're also fortunate enough to count 4 major traditional PBX manufacturers as having standardized on RingCentral or RingCentral derivative technology for the go-forward cloud-based multitenant solutions. So these 4 would be Atos -- sorry, Avaya, Atos, Alcatel-Lucent Enterprise, and most recently, Mitel. Between the 4 of them, they account for well over 200 million seats of installed base out of the approximately 450 million in total, so a bit over half of the installed base. Additionally, we count 4 out of world's 10 largest GSPs, or global service providers, amongst our distribution partners. And these include AT&T -- Mo will give you a little bit of his background there -- British Telecom, Deutsche Telekom, Vodafone, Verizon and some other names we have not yet announced. So that's RingCentral in a nutshell.

Yes. Great overview. And I don't know if you want to introduce yourselves as well.

So, hi. I'm Sonalee Parekh, and I am the newly appointed CFO of RingCentral. You are hearing from me second day in the job. So please go easy on your questions. I'm super excited to be here and to be working as part of this team. I see a huge opportunity to really be part of a leading product, a leading team and really at a time where we have scale and we're starting to show very, very strong and expanding profitability and free cash flow. I feel like it's such a unique situation. And as Vlad said, pure SaaS company, operating at scale, expanding margins. There are very, very few opportunities out there like it. And in terms of our customers, I'm starting to get to know them, but what I will say is that I know we are in the business of delighting our customers. The demand environment is incredibly strong. I'm sure you'll touch on that in your questions. But customers love us and stay with us, and it's because of the quality, reliability and performance that we offer them. And I'm really excited to take on this role and really take RingCentral to the next phase of growth. And I see a huge trajectory ahead of us. And again, really happy to take your questions in the Q&A.

Very good. And I'm Mo Katibeh, the President and COO. I'm responsible for our marketing, sales, customer success, customer care, product engineering, human resources and corporate strategy functions. And I'll keep it light, so we can get into the questions. All right.

Terrific. So just really picking back off the most recent quarter, both revenue, ARR and EPS, both came in ahead of consensus. It seemed like a really strong quarter. What really drove that? What are you seeing in terms of the pipeline down the road as well for your customers?

Very good. So as you articulated, very strong revenue growth, ARR growth as well as profitability and free cash flow expansion. And so all of the things that Vlad articulated in terms of our differentiated go-to-market, our partnerships, our channel, our GSPs as well as our direct and e-commerce platforms is what drove that growth. And then in terms of the pipeline, we had quite a good pipeline quarter. Our in-quarter pipeline generation was up almost 50% quarter-over-quarter, with record increases coming from our channel and VAR partners, which is something that I truly appreciate because we know the channel and VAR will steer their leads to where they believe they're going to win and drive revenue and profitability for themselves while meeting the needs of their customers.

Great. And kind of following up on some of the go-to-market and partnerships, a key source of differentiation for RingCentral has been in sales and marketing. And for those unfamiliar, can you kind of explain the go-to-market decisioning and who some of those key partners are that you're going to market with?

Absolutely. So broadly, I think of them in terms of 3 categories. As Vlad articulated, we're very fortunate to count 4 of the largest legacy PBX seat owners on the planet. About 450 million PBX seats were sold historically. And we count Avaya, Atos, Alcatel-Lucent Enterprise and Mitel that represent about a little bit more than half of all the seats that were sold as part of our partnerships. And the unit economics on those partnerships is pretty extraordinary. It's accretive to our LTV CAC. We're able to take advantage of their marketing, their highly distributed sales force, their historical customer relationships in order to provide a seamless path for those customers to move to the cloud. The second category is what we call our global service providers, carriers. People call them different things. As Vlad articulated, 4 of the largest top 10 are distributing our product. In aggregate, at the end of last year, we had announced 12 relationships. We haven't announced all of them so far this year, but we're expecting to end the year at about 18 relationships. And those partnerships end up being a tailwind for us into the future. Why? Well, once we announce them, we have to go actually integrate our product in their network, their billing systems, their ordering systems, et cetera. We enable their sellers and then we go off to the races. So 12 contracted at the end of last year, 3 producing meaningful revenue, about 18 contracted at the end of this year, about 9 producing meaningful revenue, and then that number will continue to ramp into '23, '24 and beyond. And then the third and final category is the traditional channel VAR. This is an area where we spent many years building sustainable relationships with the most -- from the largest to the smallest partners that are out there. Right now, we're well into the, call it, 5-digit numbers of channel and VAR partners that we have, strong moats that have been built there in terms of the technology that allows them to sell, to bill, to be compensated, simple ordering, provisioning of those customers, that's why they love us. And that group of partners continues to ramp well year-over-year as well.

Great. And just speaking on partnerships, we did have a question coming from the audience, in particular, for your partnership with Avaya. Would you be able to describe what that partnership entails, the nature of that contract pricing or contract duration? Or just any clarity would be helpful.

Absolutely. So Avaya is our longest standing of the legacy PBX partnerships. It's about 2 plus -- about 2 years into that relationship with quite a few years left on that contract as well. And the nature of it is that they are selling a co-branded RingCentral solution called Avaya Cloud Office. It's one of the pure-play cloud offerings that they have. They have a fairly significant number of folks that are compensated, commissioned, ongoing and selling that product in the marketplace. And it spans all segments. So from their legacy small business all the way to their legacy enterprise, on-prem businesses, actively working to go sell into their base as well as potentially new logos as well.

And with that, has the relationship at all changed in terms of the recent announcements Avaya has made in partnering with Microsoft Azure for CCaaS?

Well, I'm not here to talk about other people's announcements, obviously. What I will say is during our earnings, we articulated that our -- the growth that we're seeing from Avaya has continued to increase, about 30% increase quarter-over-quarter in terms of new seats and new revenue that's booked. So it's continuing to scale up into the right. And then obviously, they can also do things with other players, but UCaaS in terms of their legacy -- as the largest legacy seat holder on earth around PBX, they are committed to RingCentral.

Yes. Sure, I would like to add to that. It actually is early. And again, we cannot speak to -- for them or for Microsoft. But at a face value, it seems it may be accretive to our relationship and to RingCentral directly. Avaya is the world's largest holder of on-prem cloud contact center seats, not cloud CC seats. And understanding of the Microsoft deal is that now Teams customers will have an easier integration to Avaya's contact center seats. As Mo stated, the telephony seats, UCaaS seats, it's old RingCentral. And I don't know if you -- if we're probably going to talk more about Teams or not today, but Teams is very strong in messaging. People like their video well enough, at least for internal use. But their telephony is not nearly as strong. And this is why, for example, our Microsoft Teams practice has grown by 500% year-over-year. So potentially wise announcements there, may be helpful as well.

And maybe just for those that aren't as familiar, can you kind of just, at a high level, discuss how you're at the same time competing with Microsoft, you're also partnering with Microsoft in a lot of instances. So just for people that maybe are a little unaware.

Well, I would think that this applies probably to most companies at this conference. Mo maybe can provide a little bit more details as far as our Teams integration.

Yes. Absolutely. Thinking about the macro for a moment, Microsoft is continuing to do really well. They've announced somewhere in the vicinity of 270 million monthly active users on Teams, but a very key point is that the majority of those Teams users are on what Microsoft calls E1 or E3 licenses. There's E1, E3, E5. E1 and E3 does not come with any sort of bundled telephony service included. As Vlad articulated, video and messaging is included, but not telephony. Well, why does that matter? Well, a lot of us that are in this room were what you might call knowledge workers. Knowledge workers generally will use video for internal peer-to-peer conversations, but there are still many, many industries, many companies that represent hundreds of millions of seats that need telephony as a core part of their business identity. Why? Well, because of the consumer to business interactions that they're a part of. So health care, patients calling into hospitals or their doctors; insurance companies, claims being made; financial services; retail locations; trucking; logistics, et cetera, et cetera, et cetera, many industries that need telephony as a core part of their business identity. So those E1 and E3 customers, one, have no telephony, so they have to go buy it from somewhere. And even with E5 licenses, they get internal company calling, but not calling plans to make calls outside of their company or receive calls from outside the company. This has created a truly extraordinary opportunity for companies like RingCentral to go sell into alongside Microsoft Teams. And as Vlad articulated, why we're seeing very, very meaningful growth, one of the highest growth engines that we have in the company when we go sell into that base and demonstrate our Five9's reliability, our geographic reach, which is significant as well as feature functionality that customers need that is truly differentiated than what is available from buying from Teams today.

Great. And sort of pivoting to maybe sort of the market opportunity or the penetration story, I think you mentioned before there's around 400 million legacy on-premise business telephony users globally. What would you say is the realistic penetration number for RingCentral to reach over time? How would you kind of frame that opportunity?

Well, what I would articulate to you is, currently, we're a $2 billion run rate business, call that 4 million to 5 million seats that are out there. For us, as Sonalee articulated, the next phase of growth is to grow from $2 billion to $5 billion, $5 billion to $10 billion and then scale beyond. The way we think about this is, is it impractical to believe that we can easily double the number of seats that we have over the course of the next handful of years, just illustratively, call it, the next 4 to 5 years? And the answer is when you look at our growth rate, when you look at the way we're continuing to scale, when you think about our pipe, when you think about this barely scratched TAM, yes, that is very achievable. It is in sight. That is the goal that we have set for ourselves. We're going to utilize these partnerships that we have, this differentiated channel. The GSPs are direct motion, and we're going to go continue to move seats. And as we articulated, Teams, frankly, has been a great thing for us, and it is allowing us to go after another vector of growth in the marketplace as well. Vlad, anything you'd like to add?

No. I think it's great. Yes.

I think we'll take a moment to -- yes. We have a question over here.

So kind of related to the question that was asked. I've been wondering, you made tremendous success within the SMB space. I've been wondering how much can you maybe carryforward that success to large enterprise customers, and a lot of those distributor partners that you mentioned have a very big enterprise base. And Avaya, for instance, I know they are doing their own sort of subscription programs with their enterprise customers. I'm just wondering how much opportunities that you have to tap into that space. And I have a follow-up.

So just macro level real quickly. Currently, we said we were $1.9 billion ARR exiting the first quarter, so approaching $2 billion, as we've said. You kind of break that apart, the mid and enterprise is already, call it, a $1.2 billion business for us, which then SMB becomes the other, call it, $700 million-ish. So absolutely, the beginnings of the company was on the SMB side, but we have meaningfully expanded into mid-market and enterprise over the course of the last, say, 6 to 7 years, check. And then to the second half of your question, yes, we continue to see, frankly, opportunity in every single segment in front of us. As you think about our recent disclosures on ARPU, our ARPU has maintained a 3 handle, well over $30. It's been stable quarter-over-quarter year-over-year. By the way, not just for the base, but for new acquisition as well as renewals, right? So as we look forward, acquisition and renewals is the best indicator of the continued stability of ARPU in the market. And that's really a testament to 2 things. One is that we're continuing to win across all of the segments and taking advantage of the ARPU characteristics segment by segment; and two, for both renewals and upmarket upselling into SKUs with more capabilities like incredibly strong analytics suite that allows our business customers to understand patterns inside the business that allows them to become more efficient and effective over time such as, in a hybrid world, how productive and utilize are their knowledge workers, and for midsized businesses, things like analytics around calling and -- customer patterns into their business by day of week, time of day, which allows them to manage their staffing and become more efficient as well. Very good.

And then, I guess, one more follow-up, which is kind of also plays into your partner and distributor network. How much kind of repurpose work is there to do like with devices like making Avaya and Mitel devices compatible with your RingCentral solutions? It seems like they are not there yet, and then there's also probably clouding technology to fully immerse into RingCentral to be able to kind of cater to those additional sub-acquisitions and cross-sell, upsell that you've been mentioning. So just kind of wondering how much of this start-up cost is there to fully merge into your partner network and then how much is there on an ongoing basis.

A good question. So I'll use Mitel illustratively to bring this to life for you. Mitel, the deal was consummated in the fourth quarter of last year. So at the end of the first quarter, we're about 4 months in. Very pleased with the progress that we're making. They're selling RingCentral brand, pure RingCentral, so not any sort of co-branded solution. We found that, that has actually allowed us to significantly improve the velocity of sales relative to our own expectations of where we're going to be. So check. And to your point, that's even before we've fully enabled all of the historic Mitel end points to work with RingCentral. You can imagine that our approach there is to look at the ones that are -- have the highest usage and propensity in the market today, call it, the 80-20 rule. You start with the ones that are more likely to be bought now or are prevalent in the marketplace. We enable those, and then you kind of work down a long tail over time. So the bulk of the Mitel end points we expect to be enabled before the end of the year. And then frankly, it's, in the grand scheme of things, a very reasonable R&D cost, if you will, as part of our aggregate annual R&D spend to enable those devices. The only other comment that I'd make is we have been -- like you just did, we've been asked about the upfront investments that we've made in the partnerships. And as part of our Q1 results, we articulated that we have already sold enough seats to more than pay for the initial investments that we made in our first 3 strategic partnerships, Mitel is brand new, on an LTV based -- long-term valuation basis. So yes, broken even, and it's all upside from here.

Quick question on technology road map and strategy. As far as I understand, most of your MVP core tech is in-house owned IP. But as contact center becomes more strategic over time, can you better describe the buy, build, partner decision with NICE? And then relatedly, as I don't know if shift left is the right term here, but as customer identity -- building a total view of customer identity and journey becomes more important to the contact center business, will automation like AI and ML getting back to the core tech of the question happen more within Ring or within NICE, and you'll be partnered for that AI/ML? And then I had a quick follow-up.

Okay. Very good question. So first and foremost, we actually have our own contact center solution that we have built in-house. We're generally using that for mid-market and smaller customers. And then we're using our partnership with NICE, call it, for the larger set of customers, one. That's a great relationship. There are many years left on -- as part of the contract tied to that relationship, and we're very happy with how it's going. And the, call it, very unique integrations that we have made into that platform that fundamentally differentiated versus the stand-alone variants that you could otherwise buy. We get the question, well, why would people buy this from you versus going through some potential other routes to market? And the answer is feature functionality. In our earnings, we talked about Ryder, the very large Fortune 500 logistics company. And one example of why they bought both the UCaaS and CCaaS solution from us was the employee experience and analytics visibility that they got from using the 2 together. Super simple example. Sonalee as a customer. She calls into the call center, goes through the IVR, which, by the way, is also the RingCentral IVR. She comes to me as a call rep. I realize, hey, Sonalee actually wants to go pick up a truck in Boston. I need to transfer her to the attendant at that depot. She can pull up the integrated company directory that exists inside of the UCaaS product seamlessly integrated into her single pane of glass. She sees that I'm available. I've got a green indicator. And with a single click, she could transfer that call to me, sitting in the Boston depot. Why is this amazing? It makes every single employee customer-facing. And by the way, it's significantly better unit economics because, as you probably are aware, the ARPU on UCaaS is lower than the ARPU on CCaaS. So then you can strategically choose who's using what solution, stitch them together. And then to your other question around AI and analytics, yes, I mean, one of the things I love about this space is setting aside the TAM that we've talked about, CCaaS is kind of its own, call it, $25 billion TAM that's incremental, and we're actively playing there. And then AI and analytics is another $25 billion-ish TAM sitting on top of that, that drives meaningful customer outcomes in terms of the productivity and utilization of their workforce, using the tools to steer them in the right direction. We're playing in all these spaces. And then longer term, not here to preannounce anything, but we're always looking for the correct opportunity.

All right. Understood. And then a quick maybe easier follow-up is just the ex-North America opportunity. We've seen other related communications peers also start in SMB land, but yet have larger international revenues earlier in their life phase. Has that just not been a focus for you all? If you can just explain why that international presence is relatively smaller and where you may see that trending in the medium term.

I'll give you the go-forward answer, and then I'll look to Vlad to talk about historical. As you articulate, our international revenues are about 10% of our total revenue, which, by the way, I'm very excited about. So as you think about our R&D road map, at the top of that for this year is EU, and going and unlocking more opportunities on that continent, which then allows us to go become a more meaningful player. I articulated during Q1 earnings, we actually launched our first wholesale RingCentral program in Europe in the first quarter to take advantage of the TAM and the SAM that's available there. So yes, definitely a growth -- another growth opportunity for us.

And look, for history with matters. So we try to be ROI-driven in our decision-making. Simple fact of life is that U.S. is a little bit further along its digital transformation path. It's easier. It's cheaper to sell here. You get better ARPUs, better ROI. And we've been and continue to be optimizing for that. Now you can say, okay, well, maybe flushing the baby out with the bathwater, what about the future, foothold, et cetera? Again, there, our strategy has been differentiated. The word we said that rather than building our own brand internationally like we have here, which is a very expensive proposition, and we're still a midsized company, why not go through partnerships? And this is why British Telecom, Vodafone, Deutsche Telekom come into play along the likes of Avaya, maybe 1/3 of their business is in Europe; Mitel, maybe about half of their business is in Europe; Atos, Alcatel, all of their businesses is in Europe. So it's just a little bit early in most of those relationships, but we feel that we have certainly some the seeds to have a very meaningful international business in the foreseeable future.

Any other questions? I guess just following up on that, are you starting to see large customers who maybe have traditionally been slower moving to the cloud starting to transition to the cloud? And what are you really seeing within the enterprise? And are you seeing certain sectors migrate faster than others at this point?

Really good question. And I'm glad and I appreciate that you recognize that, frankly, different industries move at different velocities as part of their digital transformation and cloud journey. One, we're starting to see quite good traction with is health care. And as part of our -- a couple of customer examples that I'd give you, one, that actually intersects with the team's conversation we were having as well is a large health care company that provides staffing and augments other health care professionals. So this company was using Microsoft Teams and came and selected RingCentral to work alongside and into Teams as well. And the reason why, it's feature functionality. So what this business does is they provide after our nurses, emergency calling after 5 p.m., et cetera, and they were using a spreadsheet to actually manage their call flows and call routing. So Vlad might be working Monday after 5. Sonalee is working Tuesday. I'm working on Wednesday. And so on the spreadsheet, a call would come in and they'd be routed to the right person manually. We were able to fully automate this process for them based on time of day, day of week, automatic routing of a customer calls in back to consumer-to-business telephony needs. Customer calls in, they're automatically routed to Sonalee on Tuesdays, to Mo on Wednesdays, to Vlad on Monday. And by the way, when Vlad gets sick, the administrator can simply go in and update the call flows for that evening to me because I've taken over the shift. Extraordinary example of the power of the feature functionality that you just don't get from other solutions like Teams today. So yes, health care is a great example of where we're seeing strong traction and accelerating growth.

Got it. Last question for me, and then maybe I'll just turn to the audience one last time. But just with all the macro headwinds occurring right now, how is inflation impacting the business possibly the conflict with Russia, Ukraine, Europe? Just any comments there would be helpful.

We've been -- you can imagine as a management team, we've been reading or listening to everyone else's earnings as well, trying to understand what everyone else is seeing. We've been quite fortunate, as we articulated, very strong first quarter, very strong demand in terms of pipe gen that was built in-quarter, which then obviously has positive implications on future quarters. At the same time, we're mindful that we don't know what we don't know. And so we've guided what we believe is appropriately for the rest of the year to take into account some of the things that others are seeing. But so far, knock on wood, life has been good.

Got it. Any questions from anyone before we wrap up? Okay. I think that's it. Thank you guys so much for joining us today.

Thank you.

Thank you.

Really appreciate it. Thanks.