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

Great. Well, welcome to the 19th Annual Needham Technology and Media Conference. I'm Ryan Koontz. I cover the Comtech sector here at Needham, which is comprised of cloud communications and broadband networking. Really happy to be -- really pleased to be welcoming RingCentral here with us today, who is a leading provider of AI-driven cloud business communications, contact center, video and hybrid event solutions. I'm joined by CFO, Sonalee Parekh. Welcome, Sonalee.

Thank you so much. It is a pleasure to be here.

Great. So I'll assume most of you are familiar with recent results, which we're making them part our discussion. But let's start with the really exciting news, which is your big win in the quarter. I think you turned a lot of heads. Tell us about kind of some of the key reasons, tell us about that deal and tell us some of the ways that you won this biggest deal in the company history.

Yes. So thank you. Great question to lead with. And it turned my head. I can tell you when the salesperson first came to me. So yes, 40,000-seat deal. So making history. .

Yes. Pretty awesome.

Pretty awesome. And particularly, in the current environment, we were very delighted. But most importantly, the customer chose us and it was in a team's environment. So I think another thing that's really important to note is that we absolutely, not only can succeed but win in a team's environment. And I think that has been, in some ways, the crux of some of the bear case on this sector. And we've got a couple of big wins now under our belt. So this one which we're particularly proud of, it's a Fortune 500 retailer, $20 billion-plus revenues, highly distributed, global. And importantly, they chose us because of the features and functionality and differentiation that we offer. And some of the things that you've heard us talk about in the past are exactly what they pointed to in terms of why they wanted to work with Ring. And we help them solve some of their pain points that the competition, quite frankly, couldn't touch. One of them being reliability, five 9s, 99.999. Actually, in the last couple of quarters, it's been six 9s, which -- what does that mean in the real world, it's less than 5 minutes of downtime per year, including scheduled maintenance. So always on, basically.

Turns out, voice is hard?

Yes. Voice is really hard. And we've been around for 25 years. We're coming up to our 25-year anniversary, 10 years as a public company, which we celebrated last year. But there's a lot of R&D that's going into that solution, and that's why it is what it is today. But they really wanted vertical-specific integrations as well, which, as you know, and again, you've heard us talk about this, we have thousands of integrations, but specifically in certain verticals and like this was a win in one of our golden verticals. So retail. And particularly a distributed environment, picture stores all over the United States, but also, globally. And one of the interesting tidbits in terms of why we won, this customer also has a pharmacy within their retail footprint, within the stores and pharmacy still use fax. And guess what, we have a great fax integration. And their HR team needed SMS integrations. Guess what, we have the best SMS integrations. Another personal favorite of mine was, they wanted different hold music depending on the department and the store and where the store is located. And that's something that we offered. And again, it was a pain point. It was something they really needed. And so I think taking everything into consideration, they chose us. And again, they had come from a Skype environment, which obviously is a Microsoft environment.

You beat Microsoft head to head and as an incumbent.

Correct. Correct. And I think that's a very, very big point. And the other thing is we do feel very strongly that we have a right to win in certain verticals where there's this mission criticality of phone. And in this situation, the customer has actually maintained the team's ecosystem for video and for messaging. But phone, they absolutely wanted to go with us. And again, landmark deal, record deal, 40,000 seats. You heard me on the call, talk about 8-digit contribution to top line.

Amazing. So bunch of other deals out there like this? You get close -- I'm kidding you, but I mean -- are there still a lot of enterprises out there that are looking for full -- looking to replace phone systems?

Yes. So a lot of the world is still sitting on-prem in legacy systems. It is a bit sticky because if it ain't broke, don't fix it. But anybody who's looking to modernize, anybody who's looking to become more efficient. Anyone who's looking to automate and like who in this room is not looking to automate?

[ Workforce ].

I'm looking to automate. Absolutely. So I think it's a question of when, not if. But yes, we think there's a lot more to go for. And remember, we also have this partnership with Avaya, which holds the largest base of on-prem seats in the market today. That is exclusive. So if those seats are moving to the cloud, it's through RingCentral. If Avaya is moving those seats over. So I can't talk on a forward basis, naturally, and none of you would want me to. But if you look at the cadence of wins over the last couple of quarters, we also had some big wins in Q4. Thousands of seats. We had a very, very large insurance broker, which we talked about. We talked about a waste management company, the quarter before that. So yes, these sort of [ veils ] are -- there's been a nice regular cadence. And I always like to have at least one a quarter. And definitely that my enterprise sales guy know about it. And the other thing is -- and this is interesting as a CFO. I get pulled into these larger deals often, and it's a really fun part of the job because it's always a privilege speaking to a customer, but it's like it has to be about what the customer wants. It has to be about solving the customer's pain point. And it's really great to hear them talk about the value we bring. And so yes, I'm being pulled into more and more.

That's exciting. So enterprise sounding better, really stabilized here. I mean, last couple of quarters, I think you've been too long in the low teens?

Yes. Yes. So thank you. And you'll probably talk about financials and guidance a little bit later, but a few investors on the callbacks were asking like what gave you the confidence to raise guidance. And I think you hit the nail on the head. It's this stabilization in the enterprise business. And that's ARR growth of 13% plus for the fourth consecutive quarter. The nice thing about being a recurring revenue business is the visibility is fairly good. Now you're probably going to ask me about macro as well. Everything I say is based on the macro that we're seeing today in front of us. It does not incorporate any improvement. It doesn't incorporate any deterioration. On the enterprise side, I do feel that we have momentum when we look at the pipe, it's very, very healthy. And our new customer acquisition has been incredibly strong. And you've heard me talk about this in the last couple of calls, and I think we've even talked about it in callbacks is what has been a bit more challenged is that upsell motion.

Right. I think [indiscernible].

Yes. And kind of that land and expand. So say you're a customer and you buy RingCentral for a department. But then you think, oh, I'd like to roll this out across more departments. That was our classic sales motion. And I think in the current macro, when customers have been optimizing for head count and seat count and we're doing the same, by the way, when renewals come my way. That has had an impact. So what did we do? How did we address that? And we saw this -- this has been over a year now that we've seen this phenomenon. And we felt really strongly even when we were doing the efficiency actions that we took at the end of '22 and in '23 to drive that margin improvement, which I hope you asked me about. No pressure. We felt it was really important to keep investing in R&D, product and technology. It is -- innovation is the lifeblood of this company. Vlad is a P&T guy through and through. You know him well. And the important thing is we now have more products to sell into this fairly sticky, extremely large installed base, right, like close to $2.4 billion ARR, over 400,000 customers. What more can we sell into them? What more cool stuff? And when you think about enterprise, in particular, where the upsell has been more challenging, that is how we are addressing that. So we have this 13% stable -- or 13% plus stabilized growth in enterprise and now more interesting products to sell into them.

Exciting. On the SMB front, little more challenging there, would you say?

Yes, yes, yes. And I mean, you saw it in the numbers. We are clearly not alone, and I would say we more than held our own. In terms of end user demand and pipe and actually customer acquisition, we're seeing like new customer acquisition. We're actually seeing quite a bit of strength in SMB, but it's growing below enterprise because I think SMBs in general, have been more impacted by the macro and also this whole inflation has been a lot more persistent than people had expected, rates staying higher for longer. Look, we all read the same paper as an economist reports. I think that's impacted the SMB business, but our win rates, very, very consistent. Who we're going -- our [ path ] is very, very consistent. Who we're going up against very, very consistent. The reason that our customers are choosing us. And our background really is SMB, like we now have this amazing $1.02 billion enterprise business, but our roots, I just said our roots are in innovation, but our routes are also in SMB. And we have proof points that we have a true right to win there. And I think it's because we are so mission critical to those customers and what we offer. That has not changed. So we're going to double down our efforts to try and accelerate things there. I think we've done a great job doing that in enterprise. And now a lot of focus and a lot of Vlad's focus and my focus will be on SMB. But again, looking across the piece, as I see enterprise software, companies report, and you probably look at them more than me running all of TMT. But I think we did -- we were almost an outlier and being fairly stable.

Yes, for sure. Competitively in the enterprise, there's a big difference in SMB as well? I assume enterprise is just a couple of competitors there, really, right? It's Microsoft and maybe Zoom to some degree?

Yes. That's a very fair statement. So who we're seeing out there competitively has not changed in any meaningful way. Again, the win rates stable, actually both in enterprise and in SMB. People sometimes ask, oh, is it a more disciplined environment today in terms of how you work with the channel and you know this notion of spiffs in the industry and the category. It's been fairly stable there, but I never get too comfortable because there's always the possibility that somebody breaks rank and then you do have to respond in a certain way. But I would say, overall, the competitive landscape has not changed meaningfully. Maybe on the UCaaS side, there's one competitor that seems to be investing less in R&D and UCaaS right now. And that is a deliberate strategy by them. And I don't want to rubbish the competition like we all work hard and -- but I think it's a deliberate strategy, and we're seeing that in terms of our win rates. And another win you didn't ask me about, but I spent a lot of time living in the U.K., and we won Rotherham Council in the U.K., and that was a win against one of our competitors. That's more deeply rooted in the U.K., and I think that's hopefully a sign of things to come.

Great. Now the U.K. has been a relative market. Let's shift to the new product front. You've got RingCX, RingSense for sales, RingCentral Events. How do you think about that growth? And what kind of time frame do you start to see some material contributions from that cohort?

Yes. Okay. Material contribution. Let me see. When your $2.4 billion ARR material, it's -- that's harder. I'm not sure I'm going to be able to answer that one. But what I can tell you is, look, we felt very confident to reiterate the $100 million ARR by 2025. And customers and salespeople are saying they love the RingCX product. We gave you some customer numbers to update you, and we will -- we're trying to figure out the right cadence in terms of updating you on new products because we want to give you updates when it's meaningful. But in terms of customer numbers, if you think about what I said, and Vlad said at earnings, we're now at above more than 200 customers for RingCX. The last time we had updated you, we were at about 160 customers. We're now well above 200 customers naturally, because we're in the middle of May. But if you look at Q1 on Q4, it was a nearly doubling. And what I can tell you is that customers love the value proposition of RingCX. Customers love the disruptive price point. So it's $65 per seat per month. That is significantly, significantly below the competition. It is a slightly different use case. It's for more simple to use, simple to deploy, quick to deploy, low professional services lift, things like that. So we have our other contact center business, which is for the kind of more complex use cases, distinct swim lanes there. And you may ask me about that partnership. But look, what we're seeing is very, very good traction. And there are strong reasons for customers to want to work with us, and they love that UC/CC combined proposition. And we saw that with our nice partnership with RCCC, and RingCX is no different.

So it's kind of a contact center-lite?

Contact center lite, yes. And it can be a -- but contact center lite, but it doesn't necessarily have to be a small company. And what I'm going to say here is that like we've won some large companies, enterprise style companies. But sometimes their contact center needs in particular areas or divisions can be actually quite small. And the ratio is often 10:1. So if you're 5,000 employees, you're up a 500-person contact center. But sometimes it can be as small as 50. Our sweet spot with RingCX is in that smaller seat category. And again, you're probably not in -- it wouldn't be suitable if you wanted 10 languages in 140 countries. That would not work. But you asked an important question about growth. You asked about contribution, then you asked about growth. And those are 2 different questions, right? So when is it really going to contribute? It's a baby today? You'll see the $100 million or at least $100 million by next year. And then that will continue to accelerate. But the growth itself off of this small base is significantly above our corporate growth, our overall growth and significantly, significantly above even what RCCC, which the last we updated you, we told you it was a $350 million plus business. So this is high-growth stuff, RingCX and RingSense and RingCentral Events. It's just that it's off a lower base.

Yes. Great upsell, though. Great upsell...

Great upsell. And that's exactly right. And that was kind of the point I was making earlier about even when we were doing those efficiency measures, we felt it was really important to maintain the R&D spend, the product and technology spend. And like even the marketing and because some of these products, you're marketing to a different customer base...

Different buyer...

Different buyer, so different persona and different demand gen motion. And so these are all things that one require time but also investment.

Got it. How about RingSense?

RingSense customers -- so we announced 600 customers at the end of Q1, today it would be higher as well. That more than doubled from Q4, seeing strong demand. And -- the use case is amazing. Like it truly does elevate what the salesperson can actually achieve when they're doing their work. The worst thing as a salesperson, I think, is making a sales call being all excited and then having to like go and do all this admin stuff of like typing things in and -- this is live automated live transcription. It's also giving you feedback on key words that the customer is saying like true insights. And I think what salesperson doesn't love to know more about their customer? What salesperson doesn't love to know where they should be doubling down with that customer? And then also, it frees them up -- instead of doing all the admin side of things, they can go and pick up the phone to the next customer.

It's a productivity gain.

It's a productivity gain. And we are seeing very, very good feedback. The price point is accretive to our overall ARPU. And our salespeople are excited about it as well. They use it themselves like we eat our own dog food, it's really important. And we're a large company. So it's like it ends up being significant, getting the feedback from the salespeople. And we were using a competing product. And so we were really able to -- yes. And the feedback was, we were clearly much better. And like make no mistake, salespeople are very capable of complaining when they don't like things, and that was not the case with RingSense. And the other thing is like with RingSense -- RingSense AI, that's the first product like RingSense for sales. We're then going to have new motions in RingSense, verticalized RingSense, like we see a big opportunity here.

I can ask you on the vertical side there, are there particular verticals you're seeing some low-hanging fruit from RingSense, essentially here [ with traction ]...

Yes. Yes. So definitely, and you've heard us speak more, hopefully, in the last kind of quarter or 2. Probably 2 quarters about these golden verticals, where we have a proven right to win, where we are very mission-critical to the customer and our customer reaching their end customer. And health care is one you've heard us talk about and we won a big trauma center, not this quarter, but I think it was last quarter. And again, if you're a trauma center, you want that reliability. And we're doing more and more focused marketing around those golden verticals, and it's been great. And like the most amazing thing as a CFO.