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

Thank you, Vlad from making it, first of all. I appreciate it.

Pleasures.

Always good to -- we had you last year. There was some scheduling conflict or whatever it is, but I believe this is my first time actually hosting you if I'm not mistaken. So glad we could work it all out. And thank you as well for your attention.

Why don't we start with this, Vlad. What does the company look like 5 years from now? Now granted that 5 years ago, you didn't see the things that happened, but what are your objectives for the company 5 years, if you could share that perspective.

Yes, you know like how David used to say just one baby, objective is to continue with that pace. We are a fairly sizable company at $2.4 billion. We're profitable to the tune of over $400 million. We see there's room to grow both top line and bottom line as we are decreasing SBC and generating, hopefully, better shareholder value and returns is the process, very large market. Voice is not dead. They've dealt the misconception. We're seeing it's not dead. We have over 7 million seats, continue to be in the lead as far as paying seats are concerned, have a very differentiated product portfolio, differentiated GTM with some of the world's largest service providers, global service providers, reselling RingCentral. Future, we think is bright. And of course, we have these new products that I'm sure we'll talk about a lot...

Absolutely. We're going to get into the new product stuff. So let's revisit the TAM, which has always been very compelling, 400 million legacy PBX opportunity that has always been out there, and you're only at 7 million paid seats. What is the realistic addressable market? How many of these seats ultimately do you think more to the cloud?

Yes. Look, there are different ways to look at this. So yes, 400 million to 500 million is the legacy base. But that was also a while ago. And there are puts and takes here. Certainly, some of the seats may not convert because that's certainly the bear case on us and the industry as a whole, is saying, well, who is even using Voice. The comeback to that is, well, some people are not using Voice or not as much Voice because of video because of messaging. But when you're calling up your dentist or your personal attorney, or your broker or your real estate agent, guess what, you're calling them. You're not videoing them, you are not writing them. Funny enough, this is what corresponds to our, what we call gold verticals, which are financial services, real estate, health care and public sector and education, okay? Just in those verticals, just in the U.S., there are 75 million people employed. We believe our addressable market realistically is the Western world, which is U.S., Canada, North America, call it, plus EU. So generally, you would multiply it by 2. So we come up with account of 150 million. We are in the lead at 7 million, if given everyone every possible piece of the doubt, maybe everyone together is at 25 million. Historically, we've been sort of 20%, 25% holder -- revenue shareholder or shareholders. We are still like in the teams for overall penetration. It does not take into account all of the new business formations. It does not take into account, say, Charter or Cox Communications, both of them are customers of ours doing those triple plays, the way you get broadband and media entertainment and communications altogether. So those are not even replacement seats. Many of them are going into new business formations. Final stat is we have a $1 billion SMB business, which is also growing and also profitable. And this is one of the areas which is particularly immune from both competitive measures or competitive threats because Microsoft is not particularly strong there, for example, but it's also immune from AI taking over, which is absolutely going to do is enterprise, but smaller businesses, they value personal service that how it differentiates themselves. So we have always called pockets of strength and resistance, many of them are doing very, very well, which is what gives us hope for the longer-term future.

Got it. Before I ask Matt to jump in here. Curious to get your take on the market structure, you said you have 20%, 25% share roughly of the revenues. How do you see this playing out? So you were the pioneer. I mean you started this company in 1998, 1999. I think you finished up at San Francisco State University many, many years ago, and we met many years ago and you had this thing that was so unique. And now you got at least 2 other companies that are caught on to this. So how do you think the market structure takes out? Do you still, at the end of the day, have this. We're the best functionality. We're not going to discount. We're not going to be a mass market. We're going to be the specialty -- I hate to say niche, I don't say niche, but specialty high end versus the mass market or do you envision yourself becoming the volume leader at some point. What are your thoughts?

We are the volume leader in pink for what people pay for. Look, so I mean to cause a little. I don't see RingCentral as a Ferrari. I mean I think it's a very good product, but it's not that specialty.

The Ferrari breaks down a lot, by the way. It breaks down a lot, I'm told, yes. It's not 99% reliable. It's...

It's not -- well, 99.999%...

you got five 9s.

Yes. But it's a nice product. Look, we are the leader in business Voice, okay? And we go across all segments from one seaters to current threshold at the upper end is 40,000 seats from one account. So that's a very wide span across a whole number of vertical industries. And even though we are mostly North America concentrated from historical perspective, but we do have quite a bit of exposure to international markets as well given the size of it. Look, we are fighting every account. We're winning many of those fights. We expect to continue to stay in this position. And we try to not lose on price, but we try to not lead with price either. So again, back to car analogies, I don't know, you know, but it's somewhere, BMW kind of maybe Mercedes like that. It's not the very bottom. Maybe it's not the most exclusive maybe. But it is pretty nice. It's hard to beat us on features. Certainly, hard to impossible to beat us on reliability. I will refer people to our IR deck. There are -- don't do it today, do it tomorrow because there are a few things...

Being updated.

Well, for example, we have just added a new GSP Zayo. So I don't know that that's not the side yet. But just our uptimes, we talk about five 9s. We've had a number of quarters of six 9s. If you look, there is a little site called Downdetector, it's a third-party service. Look at Downdetector and look at the percentage of outages reported against call it, the big 3, which is Microsoft, Zoom and ourselves. And 60% of outages are reported against Teams. 37% of outages are reported against Zoom, which leaves 3% of outages against Ring. So if I'm bringing it up in this forum, you can well imagine that there are 2,000 salespeople are using every opportunity to remind people of this reality. So if you are running a medical practice, for example, you probably don't want to miss that call. It has very nasty implications, including liability. And if you're running a real estate agency, you also don't want to lose that call because your competitor who may be a RingCentral customer will not use that call. That's our pitch. And that's what we realize.

It's a good one. I like that. By the way, I had to give away by BMW of 23 years old, not because it was not, it was working just fine. It was just I don't know it's so old, we should not be using, but it was just absolutely fine. So it's got the longest life.

I have been made for a long time. Don't even go over there.

On that note, that note...

It feels like RingCentral's product velocity has picked up a lot in the last 12 months. So if you could, could you stack rank for us kind of the most important drivers future growth. Where is RingCentral focusing from an investment perspective, how should investors gauge the success of RingCentral's emerging products that have come out over the last couple of months.

I think investors should gauge success with numbers because words are cheap, subject to change, but numbers are the numbers, and we have auditors who make sure that are certain numbers. Look, we've certainly solid start with the negative. Growth has slowed down. Part of it is because we're a $2.4 billion business, and it's hard to grow $2.4 billion business with the -- to handle because that would be $0.5 billion of recurrent revenue added every year. And that's hard. But we're adding about half of that, which is also hard, we were able to do that. But you asked about the new products. New products are growing in double or triple digits, but not year-over-year, quarter-over-quarter. They're small, we have 3 new products, 3 main new products, One is RingCX, which is our own contact center product, native contact center. Another one is what we call RingSense which is -- has, so the many phases to it, but the ones that I'll talk about now is revenue intelligence. We call it in RingSense for Sales. And that's a product that we have -- both of those products, we have many hundreds of customers already, so customers being companies. Both of them are if not doubling quarter-over-quarter then something not far from COVID, okay? And there is something called RingCentral Events which in fairness is something that we've acquired from a company called Hopin. They're one of the unicorns that harder times after COVID. We picked it up for a good price. And since then, we have returned it back to growth. And we've signed accounts like Harvard, probably there are a few graphs here. So next time you do your alumni get together maybe in RingCentral. Mackenzie HP, Spotify, just some of the needs, okay? So again, look, having said all of this, it is early. It is early. Those products are relatively small but we're well underway to get $100 million, it's a low about $100 million ARR by end of next year. The way we look at it and they look at it personally is each and every one of them. I don't know one of our directors should be in the room here, maybe Rob here. So yes, Rob here, you can stand up. He is our leading independent. Rob has had full judgment to invest in us in Series D, I believe. And look, we learned a lot about SaaS from Rob and his circle. And our new businesses we're trying to run as we would start up, okay? So everyone needs to be fundable in the song write, and we think that many of them are. So they already registered $100 million, so call it next year -- I'm not guiding for next year, but plus or minus $2.5 billion. That's already 4%. So that registers, but it's just the beginning. So you have where will growth be coming from the core. And from the core, it means just growing number of seats, improving retention, okay? There are many process internally were changing to improve gross retention to aid with net retention. Macro eventually turning around, and we'll absolutely help further with net retention because upsells will start going again and then the new products adding in. And it becomes a virtuous circle. We get more revenue from new products and also better retention, okay? And better cross-sell, better upsell, so everything becomes working. So I can tell you that turning from a single product company to a multiproduct portfolio company, it's still work in progress in fairness, very, very hard, the super heavy lift, but well worth it because everything becomes more valuable.

I like the way you framed it. It's a lot of forward-looking, if this happens, these compounds. And just as the last 3 years have been such a tough cycle for everybody that any hour started going down, new customer had started to go down. Everything was just compounding in a very negative spiral, right? Hopefully, the cycle out of this in the opposite direction, but it also means that you've got to have good products to benefit from the next economic cycle. Talk about AI, what are your visions for RingCentral AI. We had Eric from Zoom talk about his vision for how he's going to redo a lot of the core platforming of Zoom whether it's the companion AI, document and et cetera. So he envisions the grounds up rebuilding of that architecture. How do you look at AI? Is it different? Augmenting or redoing the whole stack? How are you approaching this?

More into evolutions,[indiscernible] evolution. I don't know about redoing the whole stack, but we are injecting AI into our entire stack. I don't see a need to sort of start from scratch and I don't know I don't want to speak for Eric. He knows what he's doing, I'm sure. In our case, look, we have this AI platform called RingSense, that we call RingSense, and we have RingSense for CX for the contact center, which is fundamentally quality management. So it's a [indiscernible]. It adds $30 to $65, which is already disruptive on the CX side. So you have your $95 suit price point, which is already super competitive and disruptive. But also we have a high percentage of our enterprise deals pick up this [indiscernible] package, okay? So we know it's working. We have RingSense for EX and that's a little bit of a different play, where...

Employee experience or EX. You said, EX?

EX, Employee experience. Right. So our product portfolio maybe is core products, the flagship, we call it in RingEX, we used to call it MVP, Message Video Phone. Staff hasn't won in a few years, so we went away from MVP. So now the portfolio is EX main products, 7-plus million seats, $2 billion of revenue. CX, which is the contact center product. We have something called RingCentral Contact Center CC, which is our legacy inContact integration which is still doing very well because it's very unique integration within 2 industry leaders. And then we have RingSense for Sales, one of the newer products. And then we have VGA in particular, we sense of events that we've talked about, okay? So there's a portfolio. So each and everyone, EX, CX, Events, everything we touch will either has or will have an AI component to it, whether it be in the form of quality management, summarization, transcriptions, translations, it's super helpful to have a very large network with a sticky customer base that you can actually deploy the stuff too because many people talk about all of this new tech but they're funding may be a little bit harder to generate a multimillion user base. And we are one of the companies that over time were able to deliver it.

So you're a believer, generative AI then.

100%.

I don't know any CEO that's not a believer of generative AI, but...

Or else, it will cancel me.

So generative AI conference flat.

But I'm not necessarily, yes, generative AI, but we can talk about model sizing. Are we talking large models? Are we talking smaller models vertical. That's a different story.

Yes. So are you able to -- not that I plan this thing, but are you prepared to discuss what kind of model you're building at RingCentral? Are you leveraging the frontier models? Are you doing things on your own? How are you going about this?

Look, you have to have -- you have to choose your fights. Are we going to offer AI as a service. There are other better funded people who are -- better placed people who are doing that. But are we planning and they're already leveraging everything that's out there. Look, we got 2,000 people in R&D. So you can do well -- 2,000 [indiscernible]. It's a large company, we're not small. We've got 2,000 salespeople and 2,000 R&D people. If I could cross train them, that would be a lot better. So we have a bunch of people and experts PAGs, looking at each and every tech that's coming out. But mostly, where we are differentiating is in verticalizing to our use case. It's not -- we're not that interested in the generative purpose AI, okay? Let other people fight that fight. But when people are asking the system, hey, which ones of our calls -- of my calls went well or less well. That's where we come in. And because we have this giant network, we are in a differentiated preferential position to leverage that data obviously, without getting into privacy, yes. But we can help people understand what went well, what did not. We can help people understand what types of questions there. Customers are asking and offer help all those ways. That's our application of AI.

Matt wants to know how you're going to cross-train your engineers to be salespeople and vice versa?

I'll share it.

That was my imagination.

I want to drill down...

I want to do that. To drill down into contact center a little bit, right? Contact center is a big market, but it's fragmented, it's competitive. You launched RingCX quite a time ago now. I just want to get a sense of what you're right to win is in that market in particular? Is it price? Is it feature set? Is it integration? Any color there?

Primary right to win is integration onto ourselves, okay? Because, again, we have this very large base. We have 400,000 accounts, 7 million paying seats on EX on the phone product. The likes of AT&T and British Telecom and Vodafone and Charter and Cox, and the long list. And now we just announced today yet another member of the class, which is a company called Zayo, which is one of the top providers in the U.S. I mean, more regional this than AT&T, but still a large name. So the fact that the product is so seamlessly integrated into our flagship and the fact that they have this entire channel that is wanting to sell it. And what we've announced so far is that both Charter and Cox have already agreed to resell it. So that's one. okay? On the product side, look, it's a new attack, yes. So -- but it's a new attack, but still build on the same, okay, proven BMW platform, call it. So people know it will work. Again, the five 9s reliability is a calling card for us. But the New York tech part, look, it's AI first, okay? It's much easier to deploy, either to manage and yield, disruptively priced. So all of that is why.

How does your relationship with NICE inContact evolved now with the RingCX launch, right? It sounds like there may be some overlap in terms of the customer base that you're going after. That's a $350 million ARR business for RingCentral alone. So maybe talk a little bit about what that opportunity looks like in the future.

Yes. Look, sure. Before we had our own contact center product, it just purely complementary. It's more nuance than that, but we were very clear that from day 1 that we see RingCX as more of an SMB product and also addressing simpler use cases, in particular, if you need complicated and sometimes people go completely much crazy with it. Route accrues, yes, you need an in context or you need a Genesys or five 9s, need one of those people that has been at it for 20 years. But there are many, many cases, especially, but not limited to just small businesses to where you don't need all of that complexity. And that's where RingCX comes in. So we're still seeing opportunities on both sides. From our perspective, our combination, our integration with inContact is unique -- remains to be unique in the industry. And hopefully, hopefully, it will have another number of years is [indiscernible], right? Having said all of that, obviously, wood behind the arrow on our side at this point is behind CX. We are investing heavily there and we see a good traction.

Maybe shifting gears a little bit. You made reference at the...

We don't say shifting gears, segue, double pick...

No, double pick, drilling down...

Yes. We don't. We have heard all these what we called the common place things.

Well, for the SMB business, you may reference for $1 billion in ARR at the onset of the conversation. Your enterprise business is also pacing a little bit faster than the overall growth profile of the business. So how do you think about kind of balancing the go-to-market focus between SMB and enterprise at this juncture?

Yes. Look, sales forces have always been segmented. It's a very different motion in the enterprise versus SMB and SB in particular, small business. Enterprise is sales driven as a result of channel involved. There is [indiscernible] that have involved. There are very different teams addressing this in different skill sets. The smaller you go, the more product-led growth, the more e-commerce just above that is an inbound call center where we have very large presence in Manila, in particular, not 2,000 people. So okay, but over 500 agents taking those calls. So it's not an easier [indiscernible]. The common platform -- the beauty of this approach is that product is largely the same. Now enterprises will absolutely require special integrations. They do have more complicated use cases. And we do develop for the enterprise stuff that small business wouldn't need. But anything and everything we do for small business does also go to the enterprise, like all of the usability, PLG improvements like that. And look, I view both of them as essentially independent BUs -- well, semi-independent because there is a common way of product -- common product underneath both of them. Both need to be profitable, both need to grow both need to hopefully start marching back to the role of 40 in their own right, and that's how we're running the business.

Vlad, I had a question for you. Have you deployed generative AI within your company? And if yes, what benefits are you seeing? But, disruptions, pretty share that, too.

Across many functions absolutely. And -- but I would say that at this point, a lot of this in the experimentation phase. Obviously, people are trying to play with code generation. It's not there yet. We're not yet able to provide cloud to generate code...

Who do you're using for code generation?

I don't know. Who do we use. Let me -- yes, yes, I don't know. A bunch of them, a bunch of them. I'm sure including the OpenAI itself, okay? But I do know that we talk about that a lot. Look, we're in the process of migrating from inContact to RingCX internally. So that brings AI in that way. We use AI for marketing. We use AI deliver node for product naming okay? We use AI to fashion our knowledge base. So we absolutely reaching our...

That's great. And what kind of impact is it having on the company? Are you getting return?

Look, it's hard to quantify. But it certainly saves you time, and it really depends on the proficiency of the user. And there are some people who say -- within the company, who says that their work has become substantially easier. They happen to be mostly in marketing at this point in time, some in analytics but that's going to change. But the thing you're hitting on a very important point, which I actually don't want to -- can't reciprocate on. As we are going through this experimentation phase, and from what I understand, we are kind about where people are in general. Everybody is playing with things. Still there is [indiscernible] hard to quantify, there was some literature on copilot kind of not tracking as well as maybe they thought. But as...

Copilot can never be as good as the pilot. I mean, it's just...

It was good. But as we are figuring things out for ourselves, our intent is absolutely to be passing on to our customers and channel partners. And this seems that there is an additional benefit that we'll be realizing from this over the years.

So you feel like you can -- when you turn it around and productize it for your customers, do you think you can charge more for AI.

So short answer is we are today to give you some examples. But some of it, maybe we don't charge more dollars for it, but we just have better retention. And that may be worse even more to us than...

Got it. Yes. Fair enough. Any questions? Yes. Feel free to -- Danny, go ahead just...

It seems like for at least the last several years, we've just heard more and more anecdotes of kind of lower-end phone coming into the market. That feels like it's not getting louder. But what is changing is that RingCentral is focusing on newer products like RingCX, you guys are increasingly having more proof points. So I guess when do those two kind of opposing forces offset? And when do we kind of see that in the numbers? Because for a long time, the business has been in this plus or minus $50 million of net new ARR per quarter, but you haven't had the multiproduct motion before. When do you kind of see those two overlap?

Yes. Look, there was -- this field was always competitive. The idea of let's do a cheaper phone service, it's not a new idea. And actually, we did not invent it either, but you also get what you pay for. Again, we lead with reliability with features with integrations with referenceability and simply playing on the CX factor of missing that important phone call, and we're burnout, okay? Now it doesn't mean that there will always be a segment of the market that we want to grow bottom [indiscernible]. That's okay. We can't do anything about it. We are not going to play in that game, okay? But our core business is steady growth. Again, it's slower than it used to be, but it's still the fastest in the industry, if you think about it. And hopefully, that will continue. New products as they grow, they will take more and more share. But for our new products to get to that level, you don't have that many companies that have crossed $2 billion, like, you have actually 0 companies, over $2 billion in revenue in CCaaS in pure CCaaS, like even Genesys, whatever, they're below that for their pure CCaaS product. So it's going to be some time. It's just the entire TAM is smaller for contact center than it is for the phone. Look, we're playing in both. And if your question is, okay, hey, when are you guys going to reaccelerate? Then it's a very good question. We're working hard on that. again, we're dealing with a large ship to turn. But I'm optimistic. And the reason for that is that the TAM is huge, continues to be huge. That's what guess started out with one of the earlier questions.

So the good news is, Vlad, to end on a positive note, every CEO that I've interviewed, I think we've had 5 before you, once reacceleration in the top line and which is what we want. We want reacceleration. So on that note, thank you once again for giving us your time and your perspective. Thank you to our clients as well for chiming in with your questions and perspectives. And we hope you have an amazing conference. You are better informed at the end of the 3.5 days, and you're ready to go at it and make some killer investment returns. Thank you.