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

Okay. Awesome. Hello, everyone, and thanks so much for attending the UBS Tech and AI Conference. My name is Taylor McGinnis, for any of those in audience that are unfamiliar. I cover the mid-cap application and SaaS area here at UBS. And so with this session, we have RingCentral. So we have RingCentral's CEO, Vlad. We have the new CFO, Abhey. And then we have Deputy CFO, Vaibhav. So thank you all for coming.

Great to be here.

Of course, this should be a good session. And just so everyone knows in the audience, to the extent that you want to ask a question, I'll make sure to save some room at the end. You should have a QR code in front of you. So you just hit that QR code and send it in. So with that, maybe let's dive right in.

So I think a good place to start is a lot of investors are really keen on demand trends and what you guys are seeing. So Vlad, just curious, what are you seeing in the environment? You guys have had subscription revenue growth that has been pretty stable, right? So how much of that is execution, right, versus something that you're seeing with your customers in particular?

Yes. No, it's been all right. Look, firstly, there's a market. Whatever execution you have is there is no market you're not going to grow. Market remains very large. It remains underpenetrated. And execution-wise, we remain to be leading in voice. Voice continues to be the preferred means of communications in spite of some rhetoric to the country. But in particular, any B2C communications is -- continues to be voice-based. You can think of major verticals. You can think of health care, financial services, retail, real estate, SLED, government, states, that stuff, that's all through voice. Whenever the regular people get to call their provider, they call their provider, there's a video of their provider, they text their provider, and we continue to be the leader in voice-only. Now with that backdrop, we have transitioned from a single-product company to a multiproduct company. In particular, we've added contact center that is a major growth vertical in its own right. We've added various AI components. But upfront, but very importantly, a little bit more mature for us is RingSense, our quality management solution, which is native in-house. And these are all growth drivers for us. So now, overlay on top of this the fact that the economy seems to have stabilized, maybe some early optimism. So we will -- we expect it will have a positive impact on our very wide base, both from small businesses to larger enterprises as people start expanding again. So we're very optimistic.

Perfect. And I was going to save this question until later. But just because you mentioned your guys' leadership on the voice side, I think there's a lot of conversation around contact centers and AI and a lot of momentum and interest around that. But I'd be curious what you guys are seeing on the UC and UCaaS side and what momentum and demand looks like there?

We continue winning. We are at the tail edge, it seems like, of post-COVID headwinds. During COVID, people have prebought. They have overbought, and then economy tanked. And with our retention patterns, for example, we don't lose that many logos but we have been seeing down sales. But now as people are rightsizing, we are hoping that this effect will be tempering off. And look, I mean, we are now, for the first time, able to sell multiple products into our very large base. It's many millions of seats out there that we have and to a very large and differentiated channel. And where, way before, we were able to sell UCaaS and CCaaS together, we were unique in that, but CCaaS was a white label for us. Now we're leading with our own tech, and that is obviously hugely margin-accretive. I mean, yes, there's going to be some turbulence and headwind as the channel gets reoriented towards our own native tech. Also, our pricing is quite a bit more aggressive, more disruptive. It's still very healthy and accretive on the margin side, but just revenue side, expect some headwinds there. But we think we will go also short term, and we're absolutely convinced it's the right thing to do is to lead with your own tech, for that matter. Eat your own dog food. So we've converted our 2,000 agents in-house from the OEM solution to our own native. That project has successfully completed the last couple of weeks. At last earnings, I think I announced that we are half or 2/3 there. We're now 100% there. That's -- we feel good about that. So if we can run our business without -- I think it's a large business, right? If we can run our business without any interruption and any change in productivity or any loss of productivity on our own platform, then that's a good reference case. We'll take this one to town.

Perfect. That was great context. And in terms of what all of this means for next year, I'd love to talk through the puts and takes for growth next year. And this is something that all of you can opine on. But when we think about growth going into next year, I think the guide for subscription revenue for 4Q implies something like 7% to 8% growth. So one, should that be the starting point, I guess, for how we think about next year? And then, two, I know you guys have made some comments about prioritizing RingCX, and that, potentially, being a source of headwind. So can you talk about, in the context of what you're seeing in demand and maybe some of these headwinds that we have to be mindful of, what that means for the growth trajectory?

Yes. So I'll take that, Taylor. So look, we are focused on closing out the quarter and the year strongly, and we are in the process of our annual planning cycle for next year. So we'll provide formal guidance or Abhey will provide formal guidance in February next year. In terms of RingCX, so Vlad provided the commentary. I think we are very pleased with the strong early traction that we are seeing. We announced a $1 billion TCV deal with a large retailer on our 3Q earnings. Vlad talked about moving almost 2,000-plus agents internally to RingCX. So that was a big positive for us. So as we are focusing our efforts on RingCX and focusing our GTM efforts towards RingCX, it's going to result in some substitution effect in the short term. However, we think that's the right strategy to go with. As with our own tech, with the proprietary technology, we are able to innovate faster and meet our customers' needs. And it's going to be margin-accretive in the longer run because we get owner economics.

Perfect. Yes. Maybe let's talk a little bit more into that. So I guess, now, are you prioritizing RingCX over RingCentral CC with NICE? Is there going to be a transition period where maybe you're migrating some of the customers onto that newer offering? What does that mean for your relationship with NICE? Maybe you guys could provide a little bit more color there?

Yes. So look, we follow the customer. Customer now has more choices. New customers, they also have -- those who have choices, we were still -- the contract is still alive and well. We're still able to resell NICE. And in certain cases, we do. But everybody understands that future is RingCX, which is our native. RingCX, we originally envisioned it as a more down-market product. It doesn't mean bad, by the way. It just means more logos, but smaller logos and easier to deploy, not as deeply feature set, more disruptive pricing. We are absolutely seeing points of strength there, and we're able to address use cases that we were not able to address with NICE for pricing reasons, for complexity of deployment reasons, yes? So -- but we're also seeing larger enterprises, ourselves included now, able to use CX, RingCX just as effectively, if not more so, certainly for cheaper than they were able to use NICE, or NICE has acquired through us. So again, net-net is follow the customer. We expect that their -- we flagged this already. We do expect some headwinds as the channel is being reoriented. Some of the customers in the existing base, as they come up for renewal, they may be evaluating their options. There are options, by the way, it's not just RingCX or NICE. There are other options out there. People are evaluating those. We continue to believe that a partnership still has value. And we believe that the combined solution is still the world's only undisputed UCaaS leader and a very strong CCaaS leader on a single invoice, 1 umbrella, 1 throat to choke. But it is a change. Any change, always, there are some puts and the takes. And again, I'll just get right back to what Vaibhav said, which is just bear with us, we'll guide when we guide and -- which is probably February of next year. And I really would like everyone -- to urge everyone to think longer term. Because longer term, we are the only entity out there, $2 billion-plus, 2.4 run rate as we speak now -- not run rate, better than that now, but yes, whatever the guidance for this year, and $0.25 billion in annual R&D spend, and with very strong UCaaS and rapidly emerging CCaaS and rapidly emerging AI under 1 portfolio. So that keeps us differentiated.

Perfect. And Abhey, I'm going to put you a little bit on the spot. But given you're new to the CFO role, would love to hear why RingCentral, and what you're prioritizing, in particular, from the business?

Thanks, Taylor. And yes, it's a couple of things I'd kind of highlight here is, RingCentral and its markets are not completely new to me. As you know, in my past, I've worked at Cisco, I worked at Amazon. And at Cisco, we competed in the same market. We still do. And with Amazon, we have a partnership with AWS. So I've been able to keep an eye if it's to know about the company in the space. What really attracted me here is all the things that Vlad just mentioned, right? We've built a really solid business in UCaaS. As you can see, $2.5 billion in revenue, with about $500 million of unlevered free cash flow. We've been on a good margin journey, gone from 12% to 21% in margins. There's a lot of goodness that we've delivered. And as we look at the next chapter, all the things that Vlad mentioned, we're moving from a -- to a multiproduct company with multiple growth drivers, multiple levers on -- areas to work on. And as I reflect on my experience, a lot of the things we did at Autodesk were pretty similar to where we are here right now. It's essentially -- we're developing multiple growth drivers back when I was there. A lot of the lessons learned from there are going to be highly applicable here. So now, to answer the last part of your question in terms of what I would be focused on is essentially the journey that we are on. How do we get it go further in that? How do we keep growing top line as well as on the margin journey? How do we keep delivering on that. And work on -- work on learning the business more and give you guys more color as we go along.

Perfect. And yes, maybe to elaborate on that a little bit further, could you guys have seen tremendous margin improvement at RingCentral? I think, 2 years ago, it was roughly 700 basis points of improvement. This past year, on track to do 200 basis points of improvement. So when you think about where there's still opportunities, right, and what the pace of that leverage could continue to look like over time? Any high-level thoughts that you could share with the audience?

Yes. So look, we are very pleased with what we've delivered over the last 2 years. Abhey mentioned going from 12% to 21% on operating margins. We've gone from -- free cash flow-wise, we've gone from 7.5% to almost 17%. So tremendous progress there. And we are delivering this while we are continuing to innovate. We've launched 3 new products. There have been numerous innovations along the way. So really happy with the progress there. Of course, there is more opportunity. And with our cost structure, there is room for operating margin expansion. And when you look across the areas of spend, there will be tailwinds on gross margin as RingCX ramps and we get the owner economics. So it's expected to be margin-accretive. On the sales and marketing front, we've done a lot of work. We brought it down by almost 600 basis points over the last 2 years. We are continuing on that journey. We are very mindful of optimizing for routes to market that are more profitable. We are working on sales rep productivity. And we are very mindful of the business that we are taking. So we expect to continue to drive improvements there. And then there continues to be leverage in the business. Areas of spend like G&A and R&D will continue to scale as the company scales. One other thing that we look at in terms of profitability is not just operating margin, but we also look at free cash flow per share. So operating margins drive free cash flows. At the same time, we've been very disciplined in terms of the grants that we've been giving out, which is resulting in meaningful reductions in SBC and dilution. So with free cash flows growing and dilution coming down, there's a meaningful improvement in free cash flow per share as well. So overall, long story short, more room for margin improvement, but at the same time, we do try to kind of balance margins with investing back into the business. So we'll continue to be kind of on that journey, and we'll continue to make strategic investments that are right for the business.

Yes. And Vaibhav, when you think about the difference between operating income expansion and operating cash flow expansion, any differences between the 2? Like these 2 that should trend roughly in line with each other? Is there maybe more opportunity on the working capital side? How do you think about the differences between them?

Yes, so over time, meaningfully reduce the gap between operating margin and free cash flows. And we expect free cash flows would trend more in line with operating margins in the years to come. There will always be some working capital differences. And in the SaaS model, you invest upfront and the revenues come over time. So there will be -- there will continue to be some working capital adjustments, but free cash flow should trend more closely with operating margins.

Perfect. Great. Now with a lot of that finance stuff out of the way, let's get to the fun stuff, which is, a, AI and what this conference is partially about. So when you think about RingCX and your guys' opportunity with AI, I think one thing investors are trying to figure out is there's a lot of SaaS companies that have all come out with their own flavor of agents, right, conversational AI, some things on the voice side. So what makes RingCentral special and what positions you guys well to really monetize this opportunity?

Yes. Our network presence, our brand, millions upon millions of seats that are active that we have deployed, our channel. You're exactly right, everybody has their own flavor of AI. None of them are native to Ring but Ring. So we have this still the world's largest EC base. We have rapidly growing -- UCaaS, I should say, rapidly growing CCaaS space. And we have an absolutely differentiated channel, certainly, by a number of partners, but very importantly, the service provider business, which is simply unique. The fact that we have AT&T and British Telecom and Vodafone and the host of other telcos, host of others reselling Ring, in certain cases, exclusively and increasingly more, not just our core RingCX product, but also the new RingCX and related, call it, the economy around it, such as RingSense, that is unique in the industry, okay? So where we intend to differentiate is on this integration, in overall ease of deployment and overall ease of ownership. And again, don't discount our development and innovation capability. We've got about 2,000 people in product and tech. We are distributed. And we have just, for example, opened up a new office in Bangalore, where we have multiple hundreds of engineers and readily hiring there. So if you know people, please send them our way. So we will be coming up with differentiated tech, especially given the fact that we have all of the data flowing through the network. So yes, you need to be very conservative with GDPR and customer access, customer data access. But with customer permission, certainly, we can provide with differentiated solutions, including in the AI space.

Where you're seeing the momentum with RingCX, is that mostly with new logos? Is it more with your existing customer base, and it's really a cross-sell motion? And then as a second part to that question, I'd love to hear what this is doing to deal sizes, right? So when you introduce RingCX, what happens to the size of that deal on average? And then, two, there's a lot of concern on, well, if you automate more, there could be a reduction in seats. So are you seeing any of that? And what's the puts and takes there?

Well, so you know, so the reduction in seats, we're the disruptor because we don't have that many CX seats. If you are one of the CX incumbents, that's a different story. But here, we're as happy to sell them a human seat as opposed to a bot or an agent. So that's an easy one. We don't have dilemmas there. Look, with CX, yes, I mean, a lot of it is from the base. I think I already mentioned, NICE InContact, which is a very nice kind enterprise product. But they're not known for SMBs. They are not known for ease of deployment. They're not known for self-service, all of that. So we're absolutely able to go deeper into our base, and we're seeing good traction there. But also, look, this business is heavily channel-oriented. And we've trained the channel to deliver a certain kind of deals with NICE InContact. Now this is getting back to this potential headwinds, which is about our potential, which is being conservative here. But we are seeing that some of the channels kind of reevaluating their options. We strongly believe that, over time, they will learn to love CX just as they have the NICE InContact combination. It's easier to deploy, it's better-priced, it's more modern, it's AI-first. Everything is just lighter-weight. And that's the way the world is going, we think, okay? But there will be a transition, okay? So again, we'll have to see what the future holds, super optimistic in the medium to longer term.

Perfect. And then you guys put out a target of $100 million of exit ARR from these new products by the end of 2025. So can you even provide any high-level color in terms of where you are on that journey? And how we, the investment community, can access -- assess your product growth there?

So we keep reiterating the target. Probably would not be doing that if we didn't feel good about it. Yes. Look, we're well on our way, but we still have -- it's still 2024. As we said, end of '25. So look, stay tuned. I'm going to reiterate this target again. I do believe that we're going to hit it. Obviously, we're doing everything in our power to exceed it or maybe pull it in a little. But we'll have to cross that bridge as we get there.

Perfect. And then maybe just in terms of what you guys are seeing on the large deal momentum side. I know this is, what, something that you guys have been talking about the last few quarters is seeing some of these bigger 10,000-plus, right, seat deals. So in terms of that momentum, any update that you can give us there? What does the pipeline look for that? And what that could mean for growth of enterprise and mid-market going forward?

So I cannot provide intra-quarter color, unfortunately.

Yes.

But look, we're seeing -- generally, we're seeing stabilization in the market. We are optimistic, along with the rest of the popular, say, things that the economy is actually going to do a turnaround, which should be super good for us. We continue seeing strong demand from all sides of the market, including larger enterprises. And again, stay tuned as this quarter ends. And by the way, you need to all realize, too, is -- I'm sure you do. In the enterprise space, in particular, it's very much back-end loaded. So many deals will close 12/31. Why people want to do that versus other activities, you need to ask them. So I can tell you that we continue seeing demand. We don't see much negative change in competitive. Microsoft raising prices is helpful. Obviously, there is stock and some activity on debundling. But again, also, Microsoft, it's not that bad because of direct routing. Because if you buy the dollars that APIs that they have, we can coexist with them quite well, and we do. And we have many enterprise customers who are saying, yes, I mean, I'm a team shop, but I still need to bring for my voice interactions. We've just announced, we're the first ones on the map to do this. We've just announced a pan-India license and a pan-India presence. And many people, ourselves included, have offices in India. So tell you what, if you have a location in India that you need to light up was voice, you know what to call, and this is on the place to call. So it's these types of innovations that keep us ahead of the game. And yes, again, like I said, hopefully more to come.

Yes. I know it's really interesting. So can you maybe talk about what you've done? I know you mentioned like a few things, but really to unlock some of the recent large activity that we've seen in terms of these big deals. So is it as simple as you've had this good relationship with Microsoft. You've talked about being able to work alongside of them. Maybe there's like the opening of new regions. But anything else that you would say that's really helped gain maybe some of this momentum that you're seeing?

Some of it is economy. Some of it is just long sales cycles. And look, I mean, COVID is only, what, 2 years old? So there is still some sort of aftershocks after that. But now as people are coming out and coming out of those contract renewals and starting to rebuild again, that's helpful as getting better established in the channel, renewed and much improved relationship with Avaya. They are driving business down our way. We are an exclusive UCaaS provider for them. And hopefully, it will be not just UCaaS moving forward. We'll see. So all of those add in carriers. Service providers are helpful. We're getting major wins, in particular, in Europe, for example, through Vodafone. So they help. We're getting a nice traction -- continue getting nice traction, including its enterprise through some of the domestic areas. AT&T is a very long-term relationship of ours. And we have made improvements. And I think we made some announcements last time about this relationship going forward. So it's -- everything got in. Everything gets in. And look, are we where we were, say, growth-wise at the peak of COVID? No, of course not, but no one is. But we think that outside of these short-term headwinds potential with Ring CC, RingCX dynamic, outside of that, I think that we maybe hit the bottom and are optimistic.

Perfect. And one of the partnerships that you didn't mention was the recent strategic relationship with Verint. So can you give us a little bit more color there and how big of an opportunity that could be?

Yes, it's huge. Because the one thing was NICE InContact, that was -- it's selling point is the fact that they had closely integrated WFM, workforce management, workforce optimization. This is heavy, heavy tech. The only person out there with maybe better technologies than InContact had is Verint. So we view this as critical for high-end enterprise. I can tell you that we are in the middle of implementing WFM on us. Again, we'd like to eat our own dog food. And we absolutely plan to take this to market, and this is going to be a great partnership.

Perfect. And maybe last question for you in the last minute here or so would just be on the international opportunity. You mentioned earlier, you guys have a lot of very strategic partners, right, outside of the U.S. So in terms of the momentum that you're seeing there, I know like the last 2 quarters, growth has been around 9% to 10%. But can you help us understand like what could be bigger growth drivers going forward and maybe have some of those partnerships play into that?

Yes. So those markets are generally behind U.S. They are yet more underpenetrated. It is expensive to do business there, and we found that out. And our solution to this is to absolutely go international and heavy international, but via partnerships with service providers, in particular, some wholesalers as well. And they have the workforces already. They're in region. Obviously, all of the regulatory stuff, that got figured out. And they are fundamentally not competitive with us. They don't have their own tech. They do have their brands, and they have their networks, and they need product to sell. And this is why this is a great partnership. So I'm a believer. And I already mentioned, even some of the larger wins are now coming in through those service provider relationships. So hopefully, more to come.

Perfect. Awesome. Well, that's all we have time for. Thanks for everyone listening in. And let's give everyone a round of applause. Perfect. Awesome.