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

All right. We have RingCentral back here today, Sonalee Parekh, CFO. It's funny. We talked last year, same room, same conference. There's been a lot of developments over the last 12 months. So I'd love to understand from your perspective, what are the key things that have happened over the last 12 months?

Yes, great. Well, firstly, thank you for having us back, and it's a pleasure to be here. I was just saying no one needs to convince me too much to spend this time of the year in New York City. It's so beautiful. So thank you. And yes, it has been a very busy year at RingCentral. So I'll cap off a few highlights, and then, you'll probably want me to go deeper in certain areas. But I think, firstly, what I would say is that it's been a year where we have delivered on our commitment to drive durable, profitable growth. Hopefully, you see us today as a significantly more profitable company than we were a year ago, about 700 basis points of operating margin improvement. We are also significantly more cash-generative. So if you look at how we are guiding for the full year on free cash flow, it's a nearly doubling of unlevered free cash flow. We have also done a lot of work on our capital structure, and our treasurer is sitting in the back row, Aziz Megji, and we have taken very, very big chunks out of our '25 maturities as well as '26. But I think most importantly, have really demonstrated a financial profile that can support the quantum of permanent capital that we now have on our balance sheet. And I think that, that has -- we were just joking on the last one-on-one meeting that nobody asked about the converts anymore, which I think is a really great thing. It has also been a year of prolific new product introductions. I can go through all of them. And hopefully, you're going to ask me a bit more about some of them, but one in particular, RingCX, which is our native AI-infused purpose-built contact center as a service business. It has just gone into GA a couple of weeks ago, seeing great traction and really excited to go out and get our go-to-market guys pushing that -- pushing adoption across the base. We are now close to being a $2.3 billion ARR company. We feel like we have never been stronger in terms of our financial profile and our product portfolio and are now very much a multiproduct company. So hopefully, that's enough for a year.

All right. So there is one that you missed. So Tarek joined as CEO. Now I know he was on the Board previously and you've worked with him in the past. But would love to understand what his priorities are, and we'll hit on some of the stuff you mentioned, but what have you seen early on from Tarek's impact?

Yes, absolutely. And of course, Tarek has joined us. And as you say, it was very much continuity from my perspective and that I've known him for many years. But also Vlad, our Founder and Chairman, is still very much part of RingCentral every single day. And something you've heard me say in the past, and actually, we talked about it last time I was in the seat, is how important innovation is to RingCentral, and it runs through our veins, it's part of our DNA, and investing in new products and investing for growth is exactly what Vlad and I are partnering on at the moment. And Tarek has set out some strategic priorities, which in many ways, are cementing what hopefully you saw from me when I arrived about 1.5 years ago, really driving that durable, profitable growth profile. And we believe there's a lot more we can do around certain golden verticals where we have been extremely successful and where we truly feel we have a right to win, some of those are in healthcare, health services, the 3 largest dental service providers in the United States are RingCentral customers, but also in retail, in the public sector, sectors where reaching your end customer by phone is extremely important and mission-critical. And we think that there's even more we can do in terms of segmenting that base and our new products and particularly RingCX, but also RingSense, which is our AI platform. We really believe we can target those SMB and mid-market customers who perhaps, doing a larger, more complex call center deployment would have been too onerous for them. And we listened to those customers, and they said we want a simple, easy-to-use solution that we can deploy in weeks, not months where we don't need a massive internal IT department to do the deployment. And again, it's really about going after that sweet spot of where we see very strong end-user demand. And that's where that segmentation and really focusing on where we've historically been so strong in that SMB and mid-market.

Well, I was going to hit on the product later, but you mentioned RingSense and RingCX, like what are the early traction or data points that you've seen? And how do we think about that opportunity as you think about your TAM longer term?

Yes. So great question. And I think -- I'll start off on RingCX and then add RingSense, and RingSense is early days. And as I said, it's our AI platform. And on RingCX, what I would say is that we have already proven and we have seen from our own customers that customers want to buy UC and CC from the same vendor. That is a very powerful value proposition to customers. One, because it allows the payback period to be significantly shorter. So in terms of total cost of ownership, that is an easy sell. But secondly, there are strong, strong efficiencies that customers can gain from that. And you can just imagine having both your front office and back office linked on the same platform, and that's something that we can offer. And I think we at RingCentral are actually the only truly integrated UC and CC platform. And again, it's just a very, very strong value proposition for the customer. And also for us, we -- if we lead with a CX contact center sale, there's often some very, very strong UC pull through on that. So we're looking forward to seeing our sellers gain more and more traction with that product. Without giving too much away, we have seen an extremely strong start in terms of interest from our base and actually new customers from RingCX. And last quarter, one of our largest deals, which is a multi-thousand-seat deal in the waste management industry where we competed against very big names in contact center. We won that because of the value proposition that we deliver to our customers. And again, it's a very proven sales motion for us. And we built close to $330 million CCaaS business in the 8 years, that's as large as many -- some of the largest SaaS companies out there. And although it's early days on RingCX, our own native product, we feel very, very optimistic about the growth it will drive. On RingSense, we're still trying to figure out the -- and I think not just us, but including the broader ecosystem in terms of how we're going to price it. We've been really clear on how we price RingCX, super disruptive pricing, $65 per agent per month. That's a significant discount to pretty much anyone across the board, very deliberate strategy. On RingSense, some part of the RingSense for phone platform will be embedded within our MVP product, which we sell as a bubble product today to customers. But we also believe that there will be demand, particularly from that SMB category that we were talking about mid-market for an AI or RingSense-only SKU. And we think that can also be additive to ARPUs. But again, in terms of the impact you'll see next year, I would expect to see more from RingCX than I would from RingSense in terms of the actual ARPU accretion as we figure out the business model, and again, us, and I think the broader ecosystem overall.

That's a great overview on that. Maybe taking a step back. I think everybody has been debating the macro here at the conference. We'd kind of love to understand what you've seen over the course of the year. And how would you maybe segment that between enterprise, mid-market, and SMB?

Yes, great question. You know what I mean, we are still discussing the macro ourselves as well. No one has that crystal ball. And depending on which research you read, it's either going to be a great year next year or it depends on what happens to rates, et cetera. So what we do is we plan for several eventualities, which you would expect a CFO to do. What we're seeing in front of us right now is a fairly stable macro. You have heard me say that the last couple of quarters, certainly, in Q3 and Q4 of 2022, we saw a worsening. That started to stabilize around Q2 -- Q3 of this year. And when I say stabilize, I mean things around deal cycle times, layers of approval, the size of initial deployments, we did see those drop, and then, drop further at the end of last year. We've seen the stabilization there. We are still seeing very strong end-user demand in the form of pipe. So we -- our marketing team does demand gen activities, and we have early pipe and late pipe and conversion of that pipe, that continues to be very, very strong. Good question on the segmentation because earlier on in this macro, which I guess started hitting Q2, Q3 of 2022, we saw the SMB business hold up surprisingly well. And actually, enterprise was slightly more impacted within our base. And I think that's partly because enterprises are -- they often have their own procurement department where they'll have a CFO that starts getting involved in the decision-making, and SMBs are not set up in that way. We did in Q3 see some weakness in our SMB business for the first time. Enterprise actually held up better. And I think reading, again, of -- some of the peers are saying and some of the analysts are already, I do believe that a weaker SMB backdrop we're seeing across the market. We are not seeing any worsening of that in the current quarter. The other macro theme that you've heard me call out, and I find with every quarter, it is actually becoming even more or ever more exaggerated is this back-end loading. I remember seeing it in Q4 of 2022, particularly that month of December in an exaggerated way, and that's continued all through this year. And look, we're still not through the quarter, but I would expect, and I highly suspect we'll see again that very, very strong back-end loading. When I say back-end loaded, I don't just mean the last month, I'm talking last 2 weeks or even the last week. And that is different from what we saw before. And one other point I'll make there is when you're at $2.3 billion ARR base, you have a certain proportion of the base that churns as well. However, churn happens fairly steadily within the quarter and then sometimes the bookings will just come in the last week or the last day, depending on how customers are buying. And Q4 tends to be a very enterprising quarter as well. And enterprises tend to be even more back-end loaded. So I suspect that's what we're going to see this time.

So higher level, just on the TAM, it's always -- it's funny we have a lot of debates and we're talking about converts and things like that. But if you think about the TAM in front of you guys and where the cloud penetration is, I feel like sometimes that's missed. So maybe kind of remind us where we are in terms of industry penetration and what kind of opportunity you still see in front of you on the UCaaS side?

Sure. Absolutely. So it is an enormous TAM. And sometimes people think about it in terms of number of seats out there. I think in some ways, that can be a little bit misleading in that some of those seats, and I think the number that's been used and we've used it and third-party data has definitely used it, just this 400 million seats out there. Some of those seats quite likely are obsolete, and we'll never end up converting. But even if you took that TAM and cut it in half, that is 200 million seats. If you look at the number of UCaaS seats out there today, I mean it's tiny minuscule penetration. So in other words, there is still a ton to go for. And we continue to be the leader in UCaaS in terms of revenue market share. And customers choose us because of our reliability, 5 9s -- 99.999% reliability, like what does that mean in real life? It means that your phone will be down less than 5 minutes per year, including scheduled maintenance. None of the competition can even come close. And that is 20-plus years of R&D that got us there. And, yes, this is for the ninth quarter. Actually, I think the last 2 quarters we were 99.9999% reliability. Also the deep integrations we have, think of almost any software. I was talking about golden verticals like healthcare. There are certain integrations that our UCaaS offering has with other software, other APIs. And again, no one comes close in terms of the number and depth of those integrations. That is why we continue to lead and win in UCaaS. And in terms of the opportunity or what might catalyze the opportunity, I think AI could be a very big enabler there. And I think AI is starting to drive discussions around perhaps some of those industries that were a little bit slow on cloud adoption in UCaaS. And I think they're afraid that they might actually miss a change in the technological landscape such that as they look forward, they might not be able to keep up with the advancements. And I think that, that could be a catalyst. Again, we're certainly seeing more and more conversations, and our sellers are telling us about that. So we think AI could be a game-changer here. We also, obviously, with our RingCX product, are looking at significantly different revenue and profit pool from what we had access to before. And I think what makes us slightly different there is we don't have a legacy base to protect there. We have a relationship with NICE inContact, where we sell, but we partner with them on their CCaaS technology and product, but we don't have within our RingCX base, a legacy revenue base to protect. So in other words, we can be very, very disruptive in using AI as a tool for encouraging adoption, and we can really lead with it in a very disruptive way. And we think that, that will put us at a huge advantage. And again, you've seen our prolific product announcements this year. We will continue to invest very heavily in innovation and particularly around the AI side of things, which Vlad, our Founder, calls the mother of all megatrends, which I actually think is an understatement because not only is it the mother of all megatrends, it's the speed at which it moves. And again, that's why I think we might see some of these laggards in terms of moving from PBX to the cloud, really decide to adopt this UCaaS technology.

So it's interesting. You also have a lot of channel partners, strategic partners from a go-to-market side. What role could they play in helping to facilitate this? And as you think about your reach and your touchpoints, like how should we be thinking about some of those strategic partnerships?

Yes. So great question. And you're right, we -- I think one of our critical success factors over the last couple of years has been our distribution and the breadth of it and the depth of it and those unique partnerships that are exclusive, and I think that's really important and needs to be emphasized. So we have 15,000 partners that sell RingCentral today. And therefore, we have 15,000 partners that will be selling RingCX and RingSense and RingSense for sales and RingSense for MPP, and so on and so on, and I think that is the power of having this not only very large ARR base but these deep and long-standing partnerships. It means that when we bring in new products, we can really go after that opportunity in a scaled way. So the partnerships that I would specifically call out, Avaya and Mitel are the exclusive ones. And Avaya is today the largest if you talk about TAM, the largest base of legacy PBX seats. And we, RingCentral, are the natural destination for those seats to move to. And again, I do strongly believe that AI can be an accelerant there. And you see that's where we're investing our R&D dollars as well. And then we also have fantastic partnerships with the global service providers or telcos and cable operators. And we've added Vodafone in the last couple of years and Charter in the last year. Vodafone is a great foray and entry point and foothold into the European market, one of the largest telecom providers across Europe, and also, on Charter, one of the big cable operators, and that partnership has far exceeded expectations and continues to deliver. So I think there's more we can do there. And you've heard Tarek talk about even going beyond the partners we have today. You saw a couple of quarters ago, we announced a partnership with AWS that's starting to generate significant and really attractive pipeline, which we're going to go out and convert, and AWS sellers can retire quota selling RingCentral. But there are ISVs and software companies that we can look to partner with. And again, those are opportunities that we will pursue as we look forward.

So you mentioned a lot of investment in AI. We've also seen significant margin leverage. So as we're thinking about the growth opportunities and the go-to-market and everything, how do you think about balancing growth versus profitability from your seat going forward?