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

Sorry for the delay, everybody. Thank you for joining us. With us, we have Vaibhav Agarwal from RingCentral and Sonalee Parekh, who is recently minted CFO. So a bit of an upside surprise already to start the day. That's what we love to see from our companies. And so first, congrats on the new role, and it's great to see you here. So appreciate you joining us.

Thank you. Can I just say I am a Jefferies alumna?

There you go. Jefferies create talented people that do great things. So good to talk to another Jefferies alum, and we appreciate having both of you with us.

I wanted to maybe start off just to rip the Band-Aid because we're getting questions from investors all the time about the different crosscurrents that you're seeing, right? You seem -- it seems to be a strong economy, but you have people concerned about maybe a slowdown and what happens. And really, we're all trying to figure it out. So I'll open with that question, maybe. What are you seeing and hearing from your customers that you're having conversations with on a daily basis about whether it's interest levels, demand trends? Let's start there.

Sure. I'll take a crack at it, and Vaibhav may want to add. And I would start off by saying we, as a leadership team, are also grappling with what the world looks like today. And as we know, it's dynamic and changing literally every single day. So what I would say is that from our perspective, and you can see from our Q1 results in print, end demand and customer demand was very strong. And we also in our conference call stated that our pipeline going into Q2 is very, very strong and is actually up 50% sequentially. Now that being said, what I would add is that given how dynamic the world is, we are definitely on the forefront looking for any changes in behavior there. None that we've observed yet. And Vaibhav can talk a little bit about deal cycles, et cetera. But what I would say is that demand continues to be very robust for our products. And I would say that there's a huge trajectory of growth out there for us just on pure fundamentals because it's a very underpenetrated market. And when you think about what customers turn to RingCentral for, it's the digitization of their PBX lines. And that trend, I don't expect to see slowing. It's not something we've seen slow. If anything, I would say, macro concerns or macro pressures would just accelerate buying decisions in that area. I would also say that I feel we are very well positioned should a macro -- a worsening macro picture evolve. We are a SaaS business at scale, $2 billion revenue run rate. Our margins would be the envy of many players out there and also at a point where we are expanding profitability and free cash flow. So again, I think we're in a very, very strong position should the macro change, and it's something that we will be monitoring closely. The only other thing I would add is, of course, FX is a factor. It -- there was a small impact in our Q1 numbers. And we have factored the strengthening dollar into our guide, and we feel very comfortable to where we've guided at when we last spoke to you.

Great. And Vaibhav, maybe just on the customer conversation side, just anything as far as what you're seeing in terms of interest levels, deal cycle lengths. I think that would be kind of a helpful way to round out Sonalee's comments as well.

Absolutely. And thank you for hosting us. This is my first time at Jefferies. So on the customer cycle or the demand cycle side, we are continuing to see a robust demand. I think with the return to office, there is a demand for the product. Our pipeline, as Sonalee said, continues to remain strong. In terms of our sales cycles, I mean they are at our -- consistent with what we've seen in terms of our historical trends. So nothing really to call out at this point. But like any other management team, we are super focused. We are monitoring the macro environment very closely. Look, we, as a company, we are not immune to the macro, right? I mean should the broader environment continue to deteriorate, it could have an impact, but we will continue to monitor. But nothing really to call out at this point.

Great. Very helpful. And maybe pivoting away from that, Sonalee, you mentioned the 1Q numbers. And I think that there is a lot to unpack there. The growth continues to remain really healthy. Just when I think about what's been driving the recent results, what are the maybe one or 2 things that you think are worth calling out that give you confidence in that outlook that you've already given for the year and kind of the growth outlook that you just talked about?

Yes. So I'll take that. So Q1 was a really, really strong quarter for us. I mean we came in at the -- above the high end of the guidance that we had given out, both from a top line as well as from a bottom line perspective. So in terms of the drivers for the top line, 2 or 3 things to call out. Number one, enterprise continue to remain strong. So -- and the upmarket business for us is now almost $1.2 billion, growing kind of north of 40%. So we are continuing to see strong demand there, continuing to see a healthy clip in terms of million-dollar TCV wins, including the F1K, G2K customers. So that's point number one. Point number two, as we are going more upmarket, contact center continues to be a clear differentiator for us. So having an integrated UCaaS and CCaaS solution is a clear differentiator. Number three, in terms of partnerships, the partnerships continue to ramp, continue to layer on incremental contributions for us. We did give out a metric specifically in terms of the seats, 0.5 million seats that we've done. And the fact that when you look at it on an economic basis, on a lifetime value of a customer, we've kind of broken even relative to the investments we've made. So happy with the progress we are making on our partners. In terms of operating margins, we did print 120 basis points higher operating margin expansion. So that was again a deliberate effort on our part, wherein, look, we are committed to top line growth but with an increased emphasis to operating margins and free cash flow expansion. And that was driven by 2 or 3 things. One is the inherent profitability in the business. The business is inherently profitable with high recurring margins. Number two, the unit economics are strong, particularly as we are going upmarket and through our partner-led motions. And three, we were very deliberate in terms of our spending. We are looking at all areas of our business, including head count and discretionary spend and applying a very disciplined approach to where the next dollar goes out of the business. So I think when you put all of those pieces together, that's where -- that were the key drivers for the Q1 results.

Great. Very helpful. And just one follow-up on 1Q and then maybe we'll move on to some big-picture types of questions. But RingCentral Office net adds were strong on an absolute basis. I think they were a little bit lower on a year-over-year basis. And I know that metric bounces around, but it's a question we get from investors. Just how should we think about maybe what drove that? Was it seasonality? And maybe just how should we think about that on a go-forward basis?

Yes. So ARR grew 35% year-on-year, which is Office ARR, which is still pretty healthy. And from our perspective, when you look at kind of the second derivative that, as you said, bounces around a bit. And the third derivative of that, which is the growth rates, year-on-year kind of bounce around because of things like a tough compare and when the deals land in the quarter. So as an example, in Q1 of last year, we had some mega-deals closed that provided a tough compare for the quarter. So overall, the megatrends that we talked about on the investor calls continue to be -- will be near-term as well as longer-term growth drivers for us. And I would like to point you guys to the guidance we gave out, which is continuing to demonstrate strong top line growth as well as an increased emphasis on operating margin expansion.

Great. Now I'm going to ask Sonalee. I want to ask you a question that -- since I didn't originally anticipate you joining, but I'd love to know since you're the newest member to join the team. What excited you about joining RingCentral, right? Like what made you want to join this team? I know the company has had a lot of success, but maybe what are the one or 2 things that really stood out to you as you were making your choice?

Sure. That's a great question. And I could probably speak the entire 15 minutes on this. But -- so I got to know Vlad actually over a period of time, probably over a 6- to 9-month period. And I have to say there's something about working for a founder-led company that's always really excited me and a chance to join a company like RingCentral that is already so firmly established, but yet also such high growth and at this point in the cycle where they're actually at scale or we're actually at scale and expanding margins. It was this kind of very unique situation. And then, of course, the product, the IP. And I know that that's one of the reasons that our margins are what they are. It's such a unique offering, and it's also an offering that customers love. So I knew I wanted to work for a leading team with a leading product that was at a stage in their growth profile where they were really starting to scale. And the team itself, I got to meet Vaibhav and other members of the senior management team. And it just felt like a place where people were -- the organization was flat. Decisions could be made quickly. And it was the kind of executive position that I have dreamed of. So it's been great so far. I'm a couple of days in, but it's just something that I'm incredibly excited about.

Great. And then, Vaibhav, you mentioned the partnerships in that new disclosure around the 500,000 seats. I think expectations were a little bit all over the place. Can you maybe just help us understand how the company thinks about that versus its expectations at this stage, particularly with layering on several partners over the last couple of years and just how we should contextualize that number?

Absolutely. So the way we internally think about the partners is that these are kind of long-term partnerships. These are multiyear kind of contractual arrangements that we have with our partners. So these are not -- we don't look at them as a 1- or a 2-year thing. These are multiyear partnerships that will continue to provide us with an opportunity to have durable profitable growth for several years. So when you kind of look at it in that context, we are -- of course, we want a lot more, but we are happy with the progress that we've made. And one of the points I made in the script and the earnings and a little bit earlier is that when you look at the number of seats relative to the investments that we've made, we've broken E1, and there's a long way to go. The partners are still underpenetrated. These partners give us an opportunity or give us an exclusive access to almost 200 million seats. So we are barely skimming the surface, and there's a very long runway ahead of us. We are -- when you look at our partnerships with Avaya and Atos, they are continuing to layer on growth. We are adding seats. We are adding new accounts. We are adding million-dollar TCV wins every quarter. So we are happy with the progress there. When you look at our newest partnership with Mitel, which we struck back in November of 2021, it's still early on, but it has a good early start. We've seen a couple of million-dollar TCV wins, and it's expected to contribute in the second half of the year. So in terms of its contributions and layering-on effect, over multiple periods of time is how we look at them internally, and therefore, we are happy with the progress we've made.

Great. And I know one of the important things about these partnerships is -- and I think even I underappreciated it, there's a big technical lift to it, right, to build the backward compatibility, to build the connectors. Even just moving phone numbers over, I've heard, is just a real sticking point for companies when they're modernizing. So just, I guess, can you help me or help us understand where we are in terms of doing that technical work or that R&D side that can make these partnerships start to take off where it's easier to address their whole entire install bases?

Yes. So there's generally a ramp cycle of, call it -- it could be anywhere from 6 to 12 months for a partnership. And we've learned over a period of time, I mean, as we've done multiple partnerships now. So our partnerships with Avaya and Atos are kind of fully ramped wherein we had a co-branded product. The product has been launched. And the incremental effort now is in terms of if we are going into a new country in Europe, as an example, we have to meet the data privacy requirements or the EU privacy requirements. So the heavy lift is kind of behind us. We have to do incremental work to meet the in-country requirements. When you look at our newest partnership with Mitel, one of the key differentiators in Mitel is that there is no co-branding of the product. It's RingCentral MVP. So the route to market is a lot faster. So there is not nearly the same level of lift as we had to do in the other partnerships. The one thing we have to do in the case of Mitel for it to scale is device compatibility, which is if a Mitel customer has a phone on their desk, RingCentral needs to work with it. That's a lighter lift, and we've made a lot of good progress on that. In fact, I think at the end of Q1, the majority of the work there had been completed. So it will be a much faster route to market, and we'll be able to offer the solution to our customers a lot faster.

And then this is a toss-up. But I think that Microsoft is brought up a lot. Teams has become very prevalent. But I don't think that everybody necessarily understands the relationship and dynamics where Microsoft and Ring can coexist in the world. And so I thought it would maybe would just be helpful. I know it was a focus on the most recent earnings call as well, but just unpack how Ring and Microsoft can be used together to add value for your customers.

Absolutely. So Microsoft is a growth driver for us. In this past earnings, I think we provided a lot of incremental color both qualitatively as well as in terms of some quantitative metrics. And the way to think about Microsoft is as follows. As an Office 365 user, you can have an E1 license, an E3 license or an E5 license. Now majority of the E1 or the E3 customers, they don't have any form of telephony. It's mostly a collaboration-based tool with some video on it. And Teams generally comes into play in the upmarket enterprise segment, wherein employees need a telephony service. So the customers have a few choices. They can go with a Microsoft calling plan, which is limited in its features or functionality; or they have an option to choose a direct routing capability, which is where RingCentral can come in and plug in like we plug in our MVP product alongside a Microsoft Team customer to supplement the gap that exists on the telephony side. So that's how we come in. And we provide a highly reliable Five9 service with privacy with advanced features, which is what most of our enterprise customers require. So that's how we coexist. That's how it becomes an incremental growth driver for RingCentral. And we had provided a quantitative metric stating that the Microsoft direct routing business for us grew at 500% year-on-year.

That's certainly very impressive, and it's great to see that. And thanks for clarifying that because I think that's a question we get a lot. And it's complicated, right? Telephony is very complicated. You said something that I think is a good follow-up, which -- the availability and uptime of Ring. And I was wondering if you can just help us understand how that differentiates you from maybe some of the other providers in the market and why that ultimately matters to your customers.

Yes. So Teams is generally prevalent in the upmarket enterprise space. And enterprise customers want the best-in-class, a highly reliable and a secure telephony service, right? You -- as an enterprise customer, you don't want a telephone like a cloud PBX solution that doesn't work, there are frequent outages and whatnot. So that's where really our differentiation comes in is in providing the advanced features. I think our features and functionality relative to a cloud PBX product are pretty well known. I mean we've proved that over a period of time that when we go head-to-head with our competitors in the cloud PBX space that we outpace all of them in terms of features and functionality. So it's really the advanced features in terms of call forwarding, the global reach in terms of an in-country presence and being available in several countries. Like Microsoft doesn't operate in South America or their calling plan doesn't work in South America. So that's where a RingCentral comes in. It's the Five9's availability, it's the data privacy aspect of it are some of the clear differentiators. And on top of that, it also provides us with an avenue and our customers an avenue for a contact center-integrated offering as well.

So you mentioned contact center. I hosted NICE here earlier, which is a key partner for RingCentral. Just I'm curious what the value proposition is for having UCaaS and CCaaS at the same time. And are you seeing that customers tend to make that decision at the same time? And maybe why?

Yes. So contact center, again, is a key growth driver for us and particularly in the upmarket segment. And what we are seeing is that the buying decisions that CIOs and the line of businesses are making is around consolidating around one vendor. People want to consolidate. They don't want to deal with multiple vendors. They want to consolidate with a singular vendor. And that's where we come in. We are the only pure-play provider that provides a Magic Quadrant-leading UCaaS with a Magic Quadrant-leading CCaaS solution, which is NICE's inContact solution in the back end. So that's where -- it's a culmination of the buying decisions. It's a combination of us having an integrated product. And we have deep integrations with NICE inContact, wherein from a customer standpoint, it's pure -- it's very seamless. They don't even see NICE inContact being in there. It's an integrated UC and a CC product. So it's those things that are helping us kind of differentiate ourselves and for customers choosing RingCentral for their combined UCaaS and CCaaS needs.

Very helpful. And I want to maybe switch gears and ask a financial question. I know at the top of it, you both addressed the importance of margins in. And Vaibhav, if I go back to 1Q, the company raised margin guidance by more than, I think, has in any of the years that I've at least covered it. So there's a clear focus on profitable growth. And I'm curious, for years, you guys have told us about the unit economics. And it seems like it's coming home to roost, and you're benefiting from it. And maybe just how should we think about that focus? Is it a stickier focus? Is this just letting upside flow to the bottom line? Or is it a change that we should think about?

Yes. So the way to think about it is in 2 or 3 different dimensions. Dimension one is that there is sustainability in the margin profile. The business is inherently profitable. The recurring margins of the business are very high. They are almost close to 50%. We choose to invest in strategic initiatives and go after the massive TAM that we have. And that's why the bottom line is not 50%. It's a lower number. So that's point number one. Point number two is the unit economics of the business are getting inherently better, especially as we are going more upmarket. As we are utilizing our partner-led motions, the unit economics will continue to get better, which will help profitability. And then when you layer on our increased emphasis on margins and our increased disciplined approach in where the next dollar of investment is going to be made, when you put those 3 or 4 things together, the flywheel effect in terms of increasing operating margins in the years to come will continue.

Great. And I think we have time for one more question. So Sonalee, this one's for you. I know you said you've only been there for a few days, but I'd love to know maybe what are your one or 2 top priorities in, let's call it, your first 6 months that you're looking forward to thinking about.

Yes. Sure. Thanks for the question. And yes, it is just a couple of days. And I actually haven't even spent a full day in the office in Belmont yet. That will be tomorrow. But a couple of priorities. One is to spend time with the leaders of our business and the leaders that spend time with our customers. So -- and they happen to be spread out quite a bit geographically. So I will do a little bit of a listening tour because I think understanding the customers and what they want from us is super important. I also think, from my perspective, Vaibhav hit the nail on the head in terms of this operational leverage that we're hitting in the business model and ensuring that we really maximize that. And we have committed to be a Rule-of-40 company, and that can come in various shapes and sizes. And make no mistake, we are a growth company. But I think that there's more we can do around operational discipline. And I think I will be spending quite a bit of time looking at things like head count, hiring, SBCs, sales force efficiency, things like that, because we will want to squeeze all the juice out of that lemon and ensure that the business stays as strong as it is, and not only that, that we deliver a lot of value for our shareholders.

Great. Well, we'll leave it there. And it's great to have both of you with us today. So thank you so much for the time, and look forward to working with you more closely.

All right. Thank you for hosting us.

Thank you for having us.