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

Great. We can jump in can join as they do. So I'm Kurt Simon, I'm a Vice Chairman on the investment banking side at Goldmans. And it's my pleasure to interview our folks here and I've known you for I don't know, 15 or 20 years. So thrilled with your new opportunity, but and Vlad thanks for being here and Sonalee you as well -- it's good to have you guys. And maybe Vlad, we'll start with you. Obviously, founder now -- kind of entering a new role here is Exec Chairman, Walk us through a little bit about thoughts on timing and really that new role, some of your key objectives and how you're going to define that role going forward.

Yes. No, great. Again, thanks for having us. And yes, look, so the new role. So first, there is still a role. It's a full-time role, it's not a CEO anymore but it is the full time Exec Chair. And the idea is to let me concentrate more on innovation, which is all of strategic direction of the company, technology-wise, product delivery, innovation at large and especially now that we're entering this new phase of another major innovation cycle forming, which is AI. So the company was founded on proliferation of reliable and reasonably price broadband plus mobility. Which led to distributed workforces led enable globalization and it served us well really well for over 20 years. And thus, we built this 2.2% and growing business on it. There is a new wave coming, which is AI and a large level model. And it's going to revolutionized things and we're going to be one of the beneficiaries as well as one of the contributors to that wave, just like we have been with the original 2 waves, and that were ended up really contributing to SaaS. We were one of the very pure play SaaS players. So same thing here. So this is where I'm going to be spending my time. And Tarek was -- I was very fortunate to have met him about a year ago so Sonalee that worked together before at HPE. That has been on our Board for about a year. But our Board members -- since there are Board members and Tarek has been very active and closely involved with day-to-day operations of the company. He was a member of key committees and a very prominent and vocal member, I should say, of both comp committee and the Audit Committee, which is the most important one in the company as well as various [indiscernible] committees that will perform on as needed basis. So this was a great opportunity to learn about each other, get comfortable with each other. At least from my side, I got comfortable.

We'll get to that -- we'll see what you have to say...

And we just felt that skill sets were incredibly complementary, okay? Look, as far as why now, -- why not now? But look, the company is large. The company is -- I don't want to say at scale because we're still growing, and we're hoping to continue our growth and to continue it for a long time, even of this pretty large number of $2.2 billion. But look, I mean, we're hearing our 10-year anniversary as a public company will be ringing the bell at New York Stock Exchange, I think next Wednesday, September 13. And so a little bit of a date like that. But really, most importantly, it was about industry getting to a certain place not the industry but technology to where I could be concentrating on this new wave of innovation while at the same time finding someone like Tarek, who just fit in very, very uniquely.

Yes, it makes liberating a sense of you to focus on, yes. And I've had a pleasure of knowing Tarek for a long time. But -- and I think we all agree CEO successions, maybe the most important function of a Board. But give us a sense for your -- and you obviously do him because he's on the board, but just what you thought -- what actually he brought the he thought made him the ideal CEO here and your successor.

Right. Well, again, I want to stress, yes, successor as CEO, but not successor as and the company anymore -- from that perspective. But look, we touched on some of these. So how do you say it? I'm a start-up guy. I think I'm a relatively successful startup guy, people starting with 0 and bringing to the $2.2 billion level -- I'm not unique, but it's not a huge club. But the thing is bringing is the largest company where we work by chat. And Tarek is coming in from a number of businesses in HPE prior to the Sprint. I'm sure he will go into his own the ground. But these are businesses in the tens of billions of dollars, where I just have never operated at that scale, and we really haven't had people senior enough in the company who have been in the situate at companies that were not is a single-digit [ lens ] like we are, but in the terms of the lens, which in then is what our aspiration is. And look, for those if you're familiar with our history, yes, we have had people from larger companies, no one in that level. No one at the C level, no one responsible for driving operational efficiencies and strategy and that technical vision as embodied through call it inspired acquisitions, we just haven't had anybody like Tarek -- so like I say, no pressure guy. But it just seems that we're at a level in the place in our evolution where we need a really seasoned [ really smart ] operator. And his interest is not maybe the car to get market is super hard -- so here we are. So that's why Tarek and look, the time that he's been on the Board for a year everyone -- I can tell you, it was a very short conversation is when it became -- now the Tarek is open to consider joining as the CEO. It was pretty unanimously [indiscernible].

So congratulations. You said this is day 10.

It is, Kurt. Thank you.

So let's get from your perspective because it's a great opportunity, but -- and obviously, being on the Board probably helps a little bit in the transition of the company. But walk us through a little bit on your thought process And looking forward here, next 12 or 18 months, what some of your key priorities are?

Well, thank you. Thank you for having us, Kurt. It's really a pleasure to be here. And -- and I'd like to start by saying I was deeply honored when Vlad considered me to be the second CEO of RingCentral ever. And it's an incredible success that RingCentral has demonstrated over the past 20 years, right? In a few days, we'll be in New York celebrating the tenth year of the listing of RingCentral, and that speaks wonders. And also, for those of you who follow the SaaS industry. There are very few companies who break through the $100 million ARR mark, fewer who break through the $500 million ARR mark and only a handful who are over the $1 billion. And we are north of $2 billion. And so when I looked at this opportunity, I said it's amazing #1 and also on the same level of consideration was my relationship with Vlad. He said, "I am a start-up guy. That's what he said. I am not a start-up guy. That is what I will say. And I've been operating in a much larger companies as he has observed and we felt 2 things: a, we're very complementary to one another; b, I think we also get along, and that's very, very important because we have different backgrounds, very different backgrounds, but we have very similar values. And that's at the heart of the relationship that needs to exist between a Exec Chairman and CEO. So having said that and recognizing the success of RingCentral my priority is to take RingCentral to the next level by driving growth. And to do so, we've got to focus on innovation, and that will be where Vlad will be in the driving seat, and I will be his close partner and then also as that innovation comes to fruition with new products, some of which you have seen such as RingCX and RingSense that we announced back in August, take that innovation and gear up the entire operation of the company to drive higher levels of sales with sophisticated marketing and also having a very different relationship with our customers post-sale. That's where I will apply most of my energy is in making sure that the operation execution capability is taken to the next level to scale the business beyond the people that where we are at. And we'll do so by really focusing on our core market for RingCentral has always been the mid-market. We've been incredibly successful there, with a high-quality product. And then from there, we will branch off into more specific verticals with very differentiated solutions. And the reason why we positioned the story that way is because the market has changed with the advent of Microsoft teams and larger players. We've got to be clear about our source of strength, which is the mid-market and also where Microsoft is not compete with them directly, but more so complement them. And in fact, we do have a very successful offer called Rings For Teams. And that way, we can actually play across the entire [ food ] chain. So product innovation at the heart of the priority to drive growth, coupled with real rigorous operational management of the company to drive growth in the core and selected verticals is what I would like you to take away.

Right, 10 days into a first impression is, how different the CFO role from your CEO role.

I have to tell you, CFO is completely overrated.

Not only with you next on this one.

It's much more exciting to be a CEO than a CFO, no I love it.

But it's got to be -- I mean, I assume it's got to be different, when people say it's a lonely job because obviously, the buck stops of you, but have you noticed a difference in terms of roles, responsibilities, et cetera?

Yes, there is undoubtedly a difference, and I was a CEO before. And what I love about that is the relationship I had to have with my CFO was absolutely critical, right? My job is to take some calculated risk and my CFO's job is to keep me on the safe side of the risk equation. But at the same time, you said it rightly. It is lonely when you're the CEO at the top, and I'm delighted that I have a partner. And I'm delighted that I have the company [indiscernible] partners. I have 2 partners -- and so which makes the conversation very rich. And we are, I think, the 3 of us, I would say we have 1 thing in common. Is that we love to discuss and debate stuff and so I think we do that passionately. And I do believe that there is a merit to that because it's when you are passionate around problem solving, then you find lots of interesting and creative solutions.

Sonalee, maybe a question for you. You've known him as long as anyone. Like what do you think actually still bring the table going to make Ring a great success and him be a great CEO here?

Yes. So how long do you have -- the list is long.

It was 21 minutes.

Yes. So look, I think Tarek brings an incredible strategic lens to almost anything he does. And I've seen that in practice. And you can also go back and look at his track record. I think having that strategic lens on top of unbelievable operational rigor and discipline. Some of you may or may not know this, but certainly, when he was at HPE, when I worked with Tarek, he was our CFO, but strategy also reported up into him. And he also ran the day-to-day business operationally and it was an extremely complex business. And it's amazing to see somebody who has that kind of operational rigor and problem-solving ability to take a very complex situation and bring it down into very simple terms and then make decisions accordingly and act quickly and act boldly. And I think we will really benefit from that. The other great thing about Tarek is -- he's great at collaboration. And I think for the next phase of Ring, as we think about driving sustainable, healthy growth, profitable growth and efficient growth. He will draw on all parts of the organization in order to achieve that. And as you said, we've already had some really interesting debates internally. But I'm excited about driving growth with Tarek, but then also improving the efficiency of this huge $2.2 billion business that we've created. I think taking all of that into account, it's going to be a really exciting time to be at RingCentral.

No doubt. Let's talk about growth. TAM, 400 million plus legacy [indiscernible] filter.

Very much. So yes.

What do you think about how quickly that TAM can -- those legacies can convert here.

Legacy seats are there for the taking, and we've been very successful at doing so and converting those seats to the cloud form so it's done under Vlad and the partnerships that were executed there with Avaya and Mitel and other players. I think that is still there. I think those partnerships are being rebooted right now. Obviously, in the case of Avaya that it just came out of bankruptcy. So we are having Avaya 2.0 partnership, so to speak. But there are also lots of different things that we need to think about because the cloud form and everything we do in UCaaS and CCaaS can be positioned beyond the traditional players, right? So there is a -- the next level of partnerships that we can turbocharge with a lot of different companies in the software space, large SaaS companies, the usual [ soft specs ] you can think about. And we will do so. I think this will give us the ability to grow profitably and efficiently to Sonalee's point earlier on and I look forward to it. There is in that 400 million seats to really think about the potential to tap is there's a lot. But there's substitution of those 400 million seats with this new model as well. And so we'll have to be very clear about how do we affect that migration of those seats or have opportunities within those customers when we led those old forms in the cupboard die because it's a sunk cost, and we have to think about that as well. And so there is a ton of opportunity to access those customers, whether you migrate that [ old phone the new phone ] or sell new products to those customers is really where the attention will be, but there is a lot of potential here. And this is why I joined RingCentral. I mean I think if you make a personal debt as a CEO is because you see some opportunity for growth, and you want to realize the potential that what gives me a buzz of excitement every morning, and I look forward to that.

Competitive dynamics. Give us a sense for what's helped there competitively and some of the sustainable competitive advantage you guys have.

So it's lively out there. I think if you think about us and I think what the -- what you look at when you look at our share price Kurt, and you think about what it actually is implying is -- I think it's a little bit too extreme in the way of thinking about RingCentral and growth prospects. I mean essentially, for many other years that operate in our space, the world is saying or the share prices are saying Microsoft is going to eat you all. And I don't believe this is the case. And rarely ever, you have a very categorical statement in industry that is manifesting itself in a very black and white fashion. There's always the reality is more nuanced. I think we have our core space, and we're very strong there. We do see people wanting to enter our space, but it's not that easy. Part of the reality is the quality of our product, quality matters. I mean we've been operating at 5.9% of availability. Microsoft itself is at 3.9% of availability, right? That for customers who really think about our solution as being critical to their business -- mission-critical to their business, it counts a lot. And then also, you could see other players that are coming in that are trying to get from the bottom end of the spectrum into our space, it's hard for them because they don't have the scale, right? And so I feel pretty good about competing. I love to compete personally. It doesn't scare me at all. As long as we are really differentiated and we continue to innovate which we will, I think we have a great way to outcompete the pack.

But, you mentioned the AI front. I think just about every meeting we've had in this conference is AI has been a big topic. You mentioned how well-positioned you are, it could be a big winner here. You want to talk a little bit about what you're doing in AI and how it's going to fundamentally transform the opportunity here going forward?

Yes. Well, what we're not doing in that -- in AI, we'll start with that. We're not developing our own model. We feel that there are much larger players that are taking care of that. What we are doing is we're tuning those models given the data that we have and given the patterns that we see with our user base. And we are infusing AI into our entire product portfolio. We had an Industry Analyst Day 3, 4 weeks ago, where we presented that vision. I think you'll be hearing more about it. But fundamentally, and without a white board behind me. But fundamentally, you can think of intelligence. Now permeating the entire stack. So name that we have is RingSense. Okay? And what is RingSense is really quality management and conversation intelligence, that applied -- that we are applying to all aspects of communications. So what is the aspect [indiscernible] all modalities, okay. Our phone traffic, which is obviously a trunk of the [indiscernible] that we are that we are growing here, we are fundamentally still mostly PBX to the cloud at this point. So if you think of phone conversations with customers permission because always customers that we need to be to remember that. But those conversations that are legally recorded can now be legally analyzed for the customers' benefit. What does analyze mean? It's anything from emotion detection to aggregation across sort of topic selection summaries, highlights, over time, task generation, calendaring, all of this. So when we have a phone conversation, usually, there are outcomes. And what do people do today, is they try to remember, they just things down whatever, you never need to truly paperless now, it can be truly paperless. You can generate all of these insights using tuned up AI models. And by the way, it's not just tuning them. It's also closing them so that there is no exposure to improper use of data. So that's the core value of the company as well. Okay? And you can now have all of these generated insights now available to customers, to managers within those companies, et cetera. Now what I said now apply the same thing to messaging, okay, apply the same thing to video, to webinars, to events, very importantly to the contact center. So what about the contact center. People talk about IVAs in the intelligent voice assistance or chatbot, okay? But that's just 1 application, yes. There are very clear applications where artificial intelligence is not replacing the agent. And yes, it will replace some agents, of course. But there are also these cases where it's not replacing the agent, but augmenting the agent.

Yes, better, more efficient, more...

Better more efficient. So a directive to the agent man machine interaction, if you will, that's now customer-focused. And look, there are many companies in this space. And sometimes, we hear well, [indiscernible] okay? And the simple answer, [indiscernible], right? And if there's one takeaway for the room that suggests is [indiscernible] is in the end, we are the largest pure-play PBX in the world still to date. You hear all kinds of numbers and people are blowing all types of smoke. But if you're looking at paid seats where people are actually valuing the products, okay, not give see it's not, okay, I'm -- like I have this other suite and okay, here is the phone see that nobody ever turns on. [indiscernible] don't see -- we don't have any seats that are not joined on. When we say since the last number we've disclosed was 5 million seats I can tell you it's now meaningfully higher than that. I haven't publicly stated what the number is. But they're all paying customers. They are all -- well majority of them are using customers and loyal customers. Our retention rates are still world class. Even with all of the trepidations of COVID and down cycle in business and so forth, not our business, the business in general. So that's our right to win, yes, is we make these technologies available into our user base. We have our brand values, which are well differentiated. A lot of it has to do with trust which is reliability, which is security, which is working well with the partnership community. Okay? So we talk about trust, innovation and partnerships, partnerships dip, okay? And there is only 1 RingCentral, okay? So when people buy RingCentral, they assume it will stay up. And now as we are expanding into these adjacencies like the contact center, like more video like AI as part of the portfolio, but also -- well, as both adding to existing products as well as stand-alone applications, like RingSense for sales, for example, which is a stand-alone app. We expect the same brand values to apply there. And we think it will hunt again because in the end, people want to sleep well at night. They need to know that ones that are buying the tool in the end [indiscernible], right. So when they're buying a tool, if it will work, it will not let them down. And that you know, you get what you pay for. And we think we're pretty well unique in that positioning. And like Tarek said, look, stock market does what it does. And we think that it's overshot a little bit at this particular point in time. But look, when we were was 20 where it was now, it also probably overshot at that time. So maybe somewhere in intimates is where things the...

And I think about when you founded the company and the cloud opportunity versus today in the AI opportunity, how would you dimensionalize those 2 opportunities? Is this a much bigger opportunity today.

I look again first no, it's super early, right? There are all kinds of regulatory.

The cloud was early when you...

Cloud was not early cloud does not exist, right. We didn't know the word cloud, we did not know the word SaaS. We didn't need to do software on a laptop or a computer anymore, but we could do it on a server sitting somewhere, okay? And the one who is the early candidate for the server location was my own garage, which is my wife got a few things to say loud. Okay. But Look, it's as early in AI. Now look, there is more realization now and people already got burned, including some of those very strong and used to be successful companies who were incumbent in the business phone space who did not catch on to this wave of the cloud. And the same people are a lot more careful now say no, no, no, AI is we're going to do something about it. But I tell you, there is a difference between saying you're doing something about it or you will do something about it and actually doing something about it. And if you look at the space we're in, look, there are smaller companies that always lead the stack. But from scale the players, it's not a very long list. I'm not saying we're completely unique. But for somebody that our scale to fully embrace AI like this, and we don't forget we have what 2,000 engineers. We can apply a reasonable number of them towards this new technology. It's just not a luxury that most companies have exactly. So I view it just -- I answered it [indiscernible] here, but I view it a little bit like you have a new startup, which cause profitable, it happens to have a budget of $2.2 billion per year. And now we'll see what we can do with that, we did this change. But to the first question, which is why it's something I feel like I can play with a... which is why we did the change. But to the first question, which is why is something I feel like I can play with maybe...

Anything you want to add to that?

Yes. I think what Vlad has illustrated very clearly is there is this view that unfortunately, we're a bit of victim of that our business is going away because machines are going to replace men in every call center and every phone conversation. It's not true. I don't -- we don't believe it's true. I think that statement is way too categorical. And I think as he has demonstrated, there's tons of opportunity to infuse AI in everything we do to make our offer be much more about enhancing customer productivity as opposed to be a means to reduce cost. And that's where the value is. It's a different level of value for the customer. And by applying the science and the know-how of 2,000 engineers, we can make our customers more successful in their own right. And what I love about my opportunity here is to drive a very different level of customer engagement, and that starts by having a very, very strong focus and understanding about customer segmentation. And this is something that is really very important to me, I have applied deep marketing customer segmentation concepts to -- in many situations. And when you do that with a level of science, particularly in the mid-market where you have such a variety in companies who may have 20 employees to 100 employees to 2,500, 5,000 employees, you have to apply a real rigorous customer segmentation to guide their innovation, to make customers more successful and more productive and make money in process. I mean the opportunity for us is tremendous if we're able to innovate the way I described it and take that innovation, push it through our operation to drive sustainable level of healthy growth and then in doing so, of course, getting to a point where we can drive further operating leverage with some of the -- on extracting efficiencies in the process, right? So these are the opportunities ahead of us is real and very big, and we look forward to demonstrating that to you...

You mentioned partnerships in NICE inContact has been a great success. Talk a little bit about what's made that so successful. And importantly, how you think about your stand-alone products versus those products? Are they competitive? -- complementary?

Largely complementary, some over that, but largely complementary. NICE inContact partnership-wide working continues to work so well is that you have 2 industry leaders. Now and still to the day, uniquely available tied together with a close integration, not completely seamless, but pretty close. Very importantly, single throat to choke, which is our throat, so it's our paper. It's our customer service, our deployment, our PSAT, professional services -- PSA as you said. And it just doesn't exist elsewhere, okay? But where there is an opportunity is in understanding that NICE inContact the really an enterprise provider. They address very large contact centers that is legacy that are coming in from workflow management, which is sort of almost by definition in enterprise product, okay? There is a very large world out there that mid-market and below, call it SMB. And with NICE inContact we've had some success, but a little bit of a square peg in a round hole, a little bit too bulky too expensive too hard to deploy and just does too much. You don't always meet all of this complexity. And this is where RingCX comes in. It's -- first is 100% our native technology. It is leveraging those 2 acquisitions we've done right before COVID that were both successful companies in their own right. Now we've integrated. So 1 was an omnichannel company. The other 1 was a voice-only company, we've integrated. So 1 was a digital channel company. Now we have an omnichannel product, which is main [indiscernible] here. And look, it's super early, but in those smaller deployments, where we're taking tens of agents and not hundreds of agents, is the show of the right size. Super early, but very good traction so far and stay tuned.

Maybe 1 last question. We talked about sustainable growth but also profitability, right? And as CFO, suddenly, how do you think about the trade-off between growth and profitability on a go-forward basis?

So I'm going to quote my new boss. We can have both growth and continued profitability. So look, we've come a long way. I think since I joined when I arrived, our operating margins were about 12%. This year, we've guided to at least 18.5% and exiting even higher than that. I think as we look forward, don't expect the same quantum of improvement over that period. But look, there is inherent operating leverage in the model that's really beginning to shine through. Tarek, I know will bring a lot of discipline around efficient growth and customer acquisition costs. So some of the actions that we've taken in '23 will continue to bear fruit in 2024. So there's more goodness to come there, just possibly not at the same rate.

Well, thank you. Congratulations on your new role, and you all, and thank you for being here today.

Thank you for having us -- thank you very much. All right. And wait for closing bell, everyone.

Yes, it's televised.