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

Hello, everyone. Thanks so much for attending this session with RingCentral. We have Sonalee, who's the CFO. Thanks a for coming Sonalee.

I'm delighted to be here. Thanks for having me, Taylor.

Yes, of course. So yes. So Tarek, unfortunately, was a bit under the weather. So it's amazing. We have totally he's got rockstar instead, but we hope Tarek's feeling better. But I'm certainly maybe a good place to start because Tarek's come in, there's been some changes within the organization. I'm sure there's a period of transition.

Maybe you can talk through to the group, the areas of focus? Or should we expect any changes in the near term? I guess, how are you approaching this new phase?

Yes, absolutely. So A couple of points I would make there. One is that Vlad Shmunis is our Founder and Executive Chairman now, one of the biggest changes is that he is fully, fully focused right now on innovation, new products, R&D, tinkering with toys and releasing really exciting cool new products. And I always say that one of the reasons I joined RingCentral in the first place was this very, very strong innovation DNA that's part of the company. And we also have this incredibly strong installed base of customers, $2.3 billion of ARR. And wouldn't it be great if we had even more products to sell into that base. And that's exactly what we're doing right now is we are very, very focused on innovation. And you may remember, at the end of last year, we took some efficiency measures including around our workforce and difficult decisions that were made, but part of that decision-making was also where will we invest the efficiency dollars from some of those actions. And we all, as a management team, felt very strongly that it was important to continue investing through the cycle in products and innovation. And hence, in the last two quarters, you've seen hopefully some prolific announcements from us in terms of new products. And one that we are incredibly excited about is RingCX. So it's our own native and maybe you're going to ask me about it. But our own native AI-infused contact center aimed at really where we believe our customers saw a need for a more simple easy to deploy amazing contact center solution, and we're already seeing great traction with that. So I would say innovation, number one, delivering. Hopefully, you've seen us executing on what we committed to delivering on both growth and also increased profitability. That's something that I have been driving for the last 1.5 years. And I hope you've seen some very significant improvements in our operating margin and in our free cash flow. And I always say I pray at the Ultera free cash flow per share growth. And that's something that I will be very, very focused on as we look forward into 2024.

Perfect. I was going to ask you a RingCX question. So I might just ask those questions now. So that just recently became generally available, right? So could you maybe talk a little bit more about the opportunity there? How you're thinking about that adoption ramp? You mentioned customer feedback has been really good. So could that be a material driver of growth as of 2024? Or how are you thinking about that materializing?

Yes, absolutely. And we, and I think even if you look at third-party data, you can see that the contact center market is continuing to grow very, very strongly. I think some of the third-party data is showing certainly double-digit, but mid-double-digit growth. And as you know, we already have a strong presence in contact center through our partnership with NICE in contact. So it's an area where we feel like we have a right to win, and not only that, we prove it our right to win because over 60% of our $1 million-plus TCV deals have both UC and CC. We also know from experience, this isn't just surveys that customers want to buy UC and CC from the same vendor. And our RTCC, which is our partnership with Knife & Contact was very, very good for upper middle market and enterprise. It's sort of the more complex higher-feature use case. But what we found from our customers is that many of them who are SMBs and don't necessarily have their own large IT departments to deploy a contact center solution or don't have their own professional services staff. They wanted a solution that was much more plug and play that can be up and running in a matter of a week as opposed to many weeks or months and that was at a price point that was more digestible to these customers as well. And we did announce our pricing on RingCX. We had a big launch event. And I would encourage anyone who's here or dialed in to watch the event because it was amazing and very well attended, thousands of customers attended it. But they definitely felt that there was a need for this more simple solution. And we are already even pre-general availability and I called it out last -- in our last quarterly earnings, we're already seeing very, very strong traction from those customers. And not only in the SMB and mid-market, but we did also land a very, very large Fortune 500 company in the waste management sector, which we're really proud of. And that was pre-going GA. So can it be a significant revenue driver? We do believe it can be, can it -- will it have impact in 2024, we believe it will. I know we haven't guided yet to 2024, and my head of IR is sitting over there, so no time if I see anything. But certainly, it's one of the things that I'm including in the plan as we look forward. But here's a little caveat there is we are $2.3 billion of ARR today. So as you become a much larger company, moving the dial becomes that much more challenging. So yes, it will have an impact. Yes, it will be incremental. It will also be higher ARPU. Again, we disclosed the pricing of $65 per agent per month, and it should be margin accretive as well.

Got it. So that's really helpful. And then on this market, so you have a lot of players from different areas within software that are going after this opportunity. We have the cloud infrastructure players, the CRM players, other contact center players that are all trying to think, offer similar functionality to Ring. So can you talk about what makes RingCentral well positioned to grab that opportunity? How important is being the owner of the voice channel for that. Maybe you can elaborate.

Yes. So that's exactly what I was going to say. So you answered it on I think we are in a really unique and privileged and like leading position because of the huge voice base that we have and phone base that we have. And out of our $2.3 billion of ARR, you've heard me say contact center or CCaaS today is probably the last time we disclosed, which was a quarter ago was about $330 million. So the rest is really the remaining MVP business, and a bit of a global service providers in there, too. But it is the largest base in terms of revenue market share. And we also, with our RingCX product, we're infusing AI in everything -- every part of the experience. So that's before the agents call during the call and after the call. And it's not just the agents that will benefit from the AI. We're infusing in that, the agents, their supervisors. There's all sorts of features and functionalities that we've added into our product, which again, we feel like it will be very additive to the overall customer experience. And companies and customers, they are -- part of the value proposition today is the overall customer experience. People are realizing that. Our customers are telling us that and anything that you can do to elevate that for your customer, they're often willing to pay for it. And we did announce our pricing model. It is very disruptive, deliberately so. And again, we're seeing really nice adoption across various segments. But we do think that the sweet spot is likely to be the SMB mid-market that are looking for that simple use case. And given that strong base we already have to be able to go out and sell into that base, who maybe RingCentral Contact Center RTCC, was not the right product for them, but this will be. And then all the additional functionality, like for example, this we're on a call right now and you were using RingCX, the tone of my voice, your -- the questions that you asked and the intention and your voice, the number of times that you ask a certain question or the number of times a certain keyword comes up, that would flash in front of the agent and say, she sounds really excited about RingCX. Gear the call towards that. And it's that kind of thing that can be really change outcomes for our customers. And I do find and I'm lucky in being able to assist in some of the customer calls and events and I was actually involved in closing two of the largest deals last quarter. So I told our CRO that I should be on the commission. I'm not. But hearing from customers what they value and just knowing how our product and we don't come with it a legacy large base of CCaaS where we're afraid of cannibalizing. I think some of the peer set that you mentioned, they might be -- they might drag their heels on certain parts of adopting new features because it could cannibalize their current revenue stream. We don't come with any of that legacy, but we come with billions of minutes on our network that our customers will want to drive insights from. So I think that's the opportunity.

Makes total sense. And I want to touch on something that you said because you mentioned, especially with the contact center offerings, those being more geared towards smaller potential companies that maybe you haven't targeted in the past. So I know last earnings call, you guys made a comment that in terms of focus areas, one is tailoring more to the SMB and mid-market and another one was expanding on partnerships. Now when I first heard that, I said, "Wait, I always thought they catered more towards maybe SMBs." They do have like a big mid-market presence. They've done all of these partnerships with Avaya, Atos and others. So can you talk about -- like can you describe to the audience what's new behind your strategy and how to think about how that differs?

Yes, absolutely. And it's a really good question. So firstly, what I would say is that yes, we absolutely -- the sweet spot and the foundation of RingCentral was and very much continues to be a large proportion of our overall customer base is SMB and what we call mid-market. We then later added enterprise and enterprise has been and continues to be a strong growth driver overall. So we're not saying that we're not focusing on enterprise anymore. But what we are saying is that the new products that we're introducing and particularly RingCX which, again, we hope and expect will be additive to our growth profile and a new driver and really turn us into a true multi-product company. We feel like that is very much targeting that mid-market and SMB market for all the reasons I described earlier. The other thing that I would say in terms of SMB and mid-market is we see an opportunity to be able to segment that part of the market in a more granular fashion than we have. And that includes how we our CMO targets certain verticals. And we see an opportunity to go a lot deeper in terms of a verticalization strategy among that customer cohort or those customer segments. And we've talked about golden verticals, but areas and verticals where we feel like we have a right to win, and we've proven to have very, very strong traction, partly due to our extremely deep integrations in these golden sectors. And those are retail, healthcare, professional services, financial services and public sector. And again, I think with these new products, there's an opportunity to go very deep in that segmentation and really take it to the next level. And that also allows you to be smarter with your marketing dollars. And it's something that we started in 2023, as part of our efficiency drive is part of driving margin improvement. And one of the things I found so fascinating was we actually cut back on our demand gen spend significantly, and you see it in the numbers, right? And we actually ended up with stronger, better pipeline and better leads converting from [indiscernible] pipe, spending less money because we were being much more targeted on how we were spending those dollars. And I used to call it the Jackson Public method when you just throw things everywhere, and this is much more focused. And we feel like we can go further as we look into 2024 on that strategy.

Yes. Digging into that piece a little bit more. When you think about the SMB and mid-market segment versus the enterprise piece, is there something specific to that group that you say, "Hey, this is why the CX opportunity is better." I know when we've had conversations with enterprises, it sounds like there's an opportunity for enterprises to do some of the genes, right, and maybe not rely on a vendor. And so maybe that's the opportunity that you're talking about? And then the second part of the question is when you talked about the vertical approach, is there certain capabilities that RingCentral has mentioned maybe some regulated industries that give you guys the confidence and comfort that if you put dollars there that you'll see the fruits of that?

Yes. So really good questions. So the first one on AI, and I know it's such a buzzword, and again, like how many times did we say it in this conversation, AI. So yes, I think in answer to your question, yes. SMB and SOHO, small office, home office, they aren't going to be able to invest in their own LLM, we're not even investing in our own LLM. We're leveraging very large players. We're leveraging open AI, for example. We're leveraging that LLM to drive better outcomes for our RingSense platform. And actually, we won't limit ourselves to open AI. We want to be actually quite agnostic in terms of which LLM we use. And you have to be cognizant of where your customers are likely to want to invest and where they're going to drive maximum ROI. And one of the things you've heard us say before, and this isn't specific to AI, but customers that buy UC and CC from the same vendor, the payback period is much shorter. It's well under a year. It's around 6 months. So in terms of actually underwriting that investment decision. If you're a CFO or if you're a CIO or a proprietor of a smaller business, it's quite easy to make that decision as opposed to like if you're investing in a huge new AI project, if you're a small business, I think you're unlikely because you wouldn't -- that wouldn't bear fruit for a really long time. So you would be unlikely to do that. where do I think RingCentral has an advantage. One is that we already have that customer base. And they are turning to us and saying, how can we derive more insights from the things that we already have today. And we -- once you already have the relationship, it's much easier to then do an upsell. And speaking of upsell, that's an area that I've talked about being challenged in the last couple of quarters. We believe that's a large macro component there. But also, we have been, for the most part, a single product company up to now, we've sold message, video and phone, leading with phones. And now we are a truly multi-product company, and we're hoping that the upsell into these SMB customers will help net retention as we look forward. I think when you look at the overall market landscape, it's still early days on AI. I don't want to sit here and profess that I have all the answers, but we do believe we're in a position where starting actually as of last quarter, like it's been additive to us and it will be additive to us in 2024 in terms of our revenue and margins.

And then you mentioned or I think, alluded to earlier, growing efficiently. So what I thought was interesting on last earnings call, I think you mentioned operating leverage as being the last of the key priorities. So was that at all intentional? Like is -- was there any part of that saying, "Hey, we see a huge opportunity here. We might favor growth over operating leverage in the near term." And then the second piece to that, as you think about going after this AI opportunity and shifting gears a little bit more towards SMB, are there any changes that need to be made on the go-to-market motion or any incremental costs associated with that?

Yes. So to answer your first question, we are very focused, and I hope I'm being consistent here on durable profitable growth. And hopefully, you see that when we put out commitments and guidance, we meet or beat it. And I think when Vlad actually became our exec chair, he said, this is my 40th quarter and my 40th quarter of beating the results -- the expectations we set with Wall Street. Going forward, has that meaningfully changed or changed in any way? No. It's interesting that you say I said it last the operating leverage. I think the reason I did that, and it was -- it was fairly deliberate is that when I arrived 1.5 years ago, I said that we were certainly -- like for a $2 billion SaaS company, we weren't profitable enough. And it struck me and it was part of the reason I joined is like I saw a big opportunity to improve operating margin and free cash flow. And actually, our largest investor said, he remembers the first time he met me that I said that. Fast forward to today, Hopefully, you've seen significant margin improvement. So when I arrived, our operating margin was 10%-ish plus. This year, we have guided to 19% and exiting Q4 at 20%. So Taylor, if you ask me, am I going to see another 10 percentage increase in the next 1.5 years? Like the answer is no. Because part of it is the operating leverage in the model, but part of it is also actions that we took that we won't necessarily repeat this year, because actions that you take in a certain macro environment are different from actions that you take when you are launching new products and going into adjacencies and trying to capture share in areas perhaps that you haven't before, like that does require a degree of investment. We're going through our planning process literally as we speak. We do an annual operating plan like we have for the last several years. And one of the decisions that we make, and we look at the levers is how much do we want to invest to drive growth as opposed to particularly with some of the more legacy products. How much can be more on maintenance mode and therefore, drive more operating leverage and benefit to bottom line. And I think as I look forward and as we look forward, being a multiproduct company, we will be more inclined to want to invest to capture that opportunity because the worst thing that could possibly happen is you invest all this R&D in great new products, you launch them, and then you don't actually -- you starve the baby. I don't want to starve any babies. So I think when you think about 2024, and again, I'm not providing any guidance, we will invest more of that -- those efficiency dollars in driving further growth and the other thing I would say is that when you look at new products, you're not necessarily -- and this is your go-to-market question, you're not necessarily selling into the same persona. And what we found is AI purchases, for example, are not necessarily done by the head of procurement. It's more a line of business. And then when you think about how you drive pipeline for that, it's slightly different. So there are nuances on the go-to-market side. The other thing I would say is in terms of how we've organized our sellers. We do feel like we need to drive further efficiency in our sales and marketing and paying less people in the overall sales process. That's not just in the new products, that's across the piece. So bringing down that customer acquisition cost, again, that was something that I focused on in the last year, but there is more to go for there. And that's something that even though we're investing in the new product growth, I need that customer acquisition cost to come down. And that's something that I feel like we do have scope to improve. We can become a bit more efficient. We've come a long way, but we need to go even further.

Yes. And adding on to that, because I would agree that the improvement that you guys have seen on the operating leverage side has been very impressive this year. And the way your stock is trading, at least when you look in out years, it almost -- it's almost like people don't believe, right, that these levels are sticky. So going off of what you just said, it sounds like there are some areas on the sales efficiency side where you continue to make improvement or then you maybe could make the argument that these levels are a little bit stickier. We're also messaging that, hey, we -- if things open up in the market, and there's these opportunities, we want to make sure that we capitalize on them. So what -- I guess, how should we think about balancing those two, right? And the levels that we've seen so far, how durable those could be? I get that don't assume the same level of improvement, but in terms of the durability...

The durability, I would say, and again, without wishing to guide specifically the improvements you've seen in the overall margin structure, I am very confident on the durability of that. But as we look forward, again, we have these several products that we've launched in the last 2 quarters, the RingCX, RingSense, Ring Center for sales, we'll have other personas of RingSense for other parts of the RingSense for procurement, for example, like that's giving an example, but there will be additions to RingSense. That is our AI platform, and we intend to infuse AI in everything we create going forward. But there's also potential new products beyond that. We did the RingCentral forward team embedded at 2.0. That's really important because that's going to be a driver of growth. There's going to be more products that we're going to be investing in. Like we're not going to stop now. And I think one of the things that great software companies do is once they master like I believe certainly on unified communications, like we are the market leader, Gartner Matric Quadrant, again, very, very top right. We have the #1 market share in terms of revenue market share by a significant and wide margin. But we don't stop there. And part of it becoming a multiproduct company is a much stickier and as you see with great software companies that are household names. They expand into new products and then their customer base actually become stickier. And we didn't talk about net retention, but that's an area that I'm really focused on. I touched on the upsell, but we should, and we need to and we will be focused on improving that metric. I feel like it was very impacted by the macro, but you quite rightly say, markets are cyclical, like everyone in this room and dialed it knows that, and the market has been challenging. It's not getting more challenging, which is good. But eventually, it's actually going to come back. And I want to make sure that we have the investment dollars and the capacity to be able to invest there and we're not seeing signs of the macro recovering in any meaningful way, but we're not seeing to get worse. And I want to make sure that I retain and we retain flexibility there. And part of driving the free cash flow which we have, and again, hopefully, you've seen in the way that I guided for this year, close to $300 million of free cash flow. You-- and again, I'm not wishing to give guidance, but a high level, like that cash flow number can also go a lot higher. And another thing I would just mention there is SBC is something that has held us back a bit and we over-index there. And when you're growing 30%, you can use SBC as a tool. But then as you become a $2.3 billion company with operating leverage, you can change more of that comp into cash. That's what companies do when what we -- a lever that we have at our disposal. So hopefully, when investors look at us and you quite rightly point out that the reaction on beating our numbers as last quarter and the share price reaction afterwards implies that there's a lack of confidence in the medium or long term. But what I will be focused on is driving one growth, durable growth, to delivering on free cash flow and free cash flow growth and then importantly, free cash flow per share growth because SBC, we fully recognize that we need over-indexed and that trend needs to come down. And hopefully, you will see -- when we guide in February, you'll see positive momentum there.

Perfect. And I want to -- just because the macro is so topical and you mentioned it earlier, I want to make sure that we touch on that. So, you had some software companies that have SMB exposure that I think highlighted incremental weakness this last earnings season, you're talking more seeing stability. I know for you guys, I think your growth in your smallest customer base decelerated a little bit more. And then I think your NRR maybe ticked down a little bit below 100%. So in terms of what you're seeing on that front, like was there any incremental change there? And then when we look at NRR, could this be more at the bottom, where do we stand in terms of seat optimizations. I'm sure you're going to have these other demand tailwinds that will start to offset some of that, but we'd love to get your thoughts there.

Yes. So you're right, we talked about stable macro overall. And when I talk about macro, I'm thinking about things like sales cycles deal approval, initial deployments, linearity because linearity, you've heard me say this on previous calls, it became much more back-end loaded. And in an exaggerated way almost even in the last 2 weeks or even final few days, which does impact, right? Because when you do your plan, firstly, churn happens linearly, but then your bookings can be quite back-end loaded. So that can impact things like ARR. But in terms of the demand environment and in terms of what we see going forward, a stable macro is what we continue to see. I don't want to try and tell the future. But within that, we had seen a very resilient SMB base. And last quarter, you're right, we saw -- and now I'm reading -- I actually just read a research note this morning where somebody was talking about NRR, particularly in an SMB cohort. And yes, we did see some I would say, a bit of decel relative to what we were expecting in SMB. That's not a trend that we're seeing continue to play out. We're not seeing any big dichotomy and again, I know what you've been reading because I'm seeing the same. We're actually seeing fairly resilient SMB. And then net retention, like is at the bottom. Yes. If you hear me say I'm really focused on improving net retention, then we don't guide on retention. We disclose it, it's around 100, but that is not good enough. And that is somewhere that -- something that -- again, a metric that we're investing in improving and part of it is upsell with new products, and part of it is also on the customer success side, which is really important. And we're actually bringing in some super cool technology tools on the customer success side, which we think will be additive in terms of improving churn and down sell.

Perfect. Well, we're out of time. Thank you, everyone, in the audience for joining in Sonalee. Thank you so much for your time. This was great.

Thanks, Taylor.

Awesome. Thanks, everyone.

Thanks.