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

[Audio Gap] and you guys seen great profitability improvement and new products over the last few years. So kind of new RingCentral, new environment for UCaaS. We'd love to hear from you just kind of how you see the lay of the land in the market today. .

Yes. Look, market remains very large. Greenfield remains very large. We continue leading with cloud voice. It's competitive, but it's always been competitive. We continue growing, not at the same pace, but COVID years were quite strange in many respects. But big change on our side is we've moved from a single product company to a multiproduct portfolio. That's a big change. We've introduced our own cloud contact center before we were leading with an OEM product. And the big change this year is that now we have our own product called RingCX in the market. We're leading with that. It's been growing strong double digits sequentially. So we're pretty optimistic about that. We have an emerging AI portfolio, which was also not the case back when you launched. And we have -- we acquired the company a couple of years ago, basically acquired, not a company, technology from Hopin, which was one of the better known unicorns in the event space, hybrid and virtual events. And that's been doing well for us as well. So we are pretty optimistic. It's a large company, $2.5 billion ARR now, as we speak. And I think you already mentioned, a major, major pivot towards profitability. So we went from almost doubling profitability in that time frame. So we feel pretty good about that as well.

Excellent. When you think about the next 5 years for UCaaS and CCaaS and the space in general, like what are some of the trends that you think could become more important? Maybe is it weaving AI into your tools every day? Is it still like on-prem to cloud conversions driving more of this product development and customer utilization? Or like what do you think becomes more of part of your business from here?

Look, AI is the greatest disruptor. We feel that longer term, we'll be a clear beneficiary of that. AI is perfectly complementary to UC and UCaaS. AI only enhances conversations and communications. It never replaces them in person-to-person. If I want to call you, I'll call you. I don't want to talk to your bot. But if you have AI taking notes for you, that's a good thing. If you have AI scheduling calendar for you based on what we've discussed, that's a good thing. But it's not going to replace the fact that you and I need to be on the service. With CC and CCaaS, it's different. AI is going to be a big disruptor. It's going to be replacing some, not all, but some physical human agents will be clearly replaced by AI over time. And then all of the note taking and all of the analytics and things like translations, again, calendaring, et cetera, all of those still remain. We do not have a large contact center footprint to protect. We have some, but it's not nearly as meaningful as our UCaaS footprint, which is in the millions. This one is meaningfully less than that. So we don't have the innovative dilemma there. And we expect that our own contact center will play well. We've designed it for down market. We are seeing that it's actually hunting in the upmarket as well. We ourselves at our size, we're able to move all of our agents, that's 2,000 agents to be clear. We've moved all of them from inContact to our own tech in a matter of weeks, okay? And...

Pretty fast for a contact centre.

Yes. And look, we're kind of the middle of the road. And look, inContact is a fantastic product. Don't make any -- and we've had a very, very good relationship with them for a number of years. We still think that there is value in this relationship. They are 1 of the 2 clear leaders in CCaaS. We are a very clear leader in UCaaS. So 1 plus 1 is 2, equals 3 there. Having said that, we do not have owner economics on that product, and we don't control that road map, obviously. And also, it's an upmarket product. It's an enterprise product. And we've been successful in enterprise with it, but much less so down market. So with RingCX, we see it going all the way down to smaller SMBs as well as scaling up into thousands of seats. We are one of the few examples. We're not the only example of that. So we think that between what we have in-house and still the opportunity with nice inContact, we really do have probably the widest coverage in the industry.

I definitely want to come back to what that owner economic shift means for you guys. But I guess to start with Abhey and you joining RingCentral, congratulations on the new role. I'd just love to hear about, maybe a little bit about your background, how that relates to RingCentral and what kind of drew you to the role?

Absolutely. Thank you, Ryan. Thanks for having us and for the question. Yes, my background, I was not too long ago, was in your seat. I was a sell-side analyst for nearly 15 years, but started my career as an engineer on the product side and building the products. And after that, I joined Autodesk, I ran Investor Relations, sales finance. Then I was at Cisco, where I ran about 1/4 of Cisco's P&L. So it was the services business, the subscription revenue part of it, and I was the CFO for that business. And then I was at Amazon, responsible for all of Amazon's AWS infrastructure, the CapEx budget for that.

I mean it's definitely an aspiration from our side.

It was the last one, but -- and then when the opportunity at Ring came along, it was -- it's something not completely new to me. At Cisco, we competed in the same space. So I was very familiar with Ring, and I've been big fans as I've been watching the Ring team go here. And at the same time, when I was at Amazon, we have a partnership with Amazon -- with Ring, as you know it. And so I was very familiar with the space from that perspective. And really kind of was appreciative of what Vlad and team have built in terms of, as we said, about $2.5 billion of business in UCaaS plus customer care space -- contact center space, sorry. And then on top of that, the margin progress that we've had done in the past for generating nearly $0.5 billion of free cash flow on an annual basis. So there were a lot of goodness. And as we are moving from single product to multiproduct company, I've got a lot of experience in kind of working in multiproduct, multi-growth driver organizations. So a lot of the similarities that I see where we are today, where Autodesk was when I was in 2018 through 2021, there are a lot of similarities there in terms of we were looking for multiple growth drivers. That's what we are doing here. Developing multiple growth drivers and working on how we really kind of make the story a lot simpler, a lot kind of easier to digest. So we did a lot of that heavy lift when we were at Autodesk. And interestingly, [ Will ] and I were partners in crime there as well. So it's definitely a lot of those things resonated and I was kind of excited when this came along.

I know you're 7 days in on the job. So I'm not going to -- the conversation next year will be a little more granular, but at least for now, Ring has done a great job of increasing your profitability efficiency over the last few years. I talked about ownership economics on contact center. I mean, at a high level, is that one of the drivers from here as you scale out products, how you think you can start to change parts of the income statement for RingCentral?

I think just wait, wait on that. As you said, I mean, I'm on my day 8 of the job. So just -- we'll do an Analyst Day in first half of next year. And at that time, we'll give you a lot more color. And we'll essentially dig into some of these areas. But keep in mind, I mean, some of the journey that we've been on, on margin expansion, we are not done. And some of the growth drivers that we're working on, we are not done on those, but it's something to stay tuned.

No, I appreciate that perspective, and we'll definitely stay in touch for that Analyst Day. Vlad, I even got the question last night just because you brought up the partnership with NICE inContact, which has been great for both parties over the last few years. And it totally makes sense that there -- the upmarket contact center, they've been doing that for a long time. Can you just talk about like from your side, you guys own the customer relationship for your contact center customers. You do the highest levels of support for them. So those are really like more RingCentral service customers. And like at the lower end, that's where you'll start to look for like opportunities to sell through RingCX for like new contact center opportunities from here?

We will be -- okay. So first, to be clear, we own the customer relationships. These are our customers. Now customers, they make choices and they can stay with us or go elsewhere. But contractually, these are our contracts. Certainly, we expect customers to live up to their obligations. So we're living up to ours, okay? To be clear, RingCX, our own product, we've conceived more for SMB initially. So lighter weight products, less features, easier to deploy, disruptively priced, right? What we're seeing is that it is also hunting upmarket. Does it have all of the bells and whistles that inContact or Genesis does? It clearly does not. Does it have some advantages over both of those better known players as well as Five9? It clearly does. Again, new tech, easier to deploy, conceived and designed with AI in mind just because of the [ vintage ]. And the one area I want to be -- just clarify a little, we are leading with RingCX across the entire gamut at this point. Now if we see that it is just not a fit and there are some cases, then we still have the other product to offer. And we do that, and it's still a very good integration and differentiated one. But our future at this point is RingCX. And we love having the other integration available in our portfolio. We think there's still some goodness there. But certainly, tip of the spear is RingCX for us.

And I like that point because the product has come out so recently, it will be a lot easier for you to more quickly add AI features or add new use cases as they pop up across the customer base you have now and the code base you have now instead of having hundreds of millions of customers, hundreds, thousands of seats that you have to make a new feature deployment across. So it will be more focus to iterate on top of your CX.

Also on the tech. We -- look, everyone -- if you look around, everyone is talking about AI. So what makes us different? Well, what makes us different is our very large network, our very large customer base, the fact that we understand their use cases. We are custodians of the data, so we can do things that other people simply don't have access to. And closest to the integration that's available because we can have our AI engineers and our contact center engineers sitting in the same room together as they do. And if you have a brand-new startup, it's a little bit hard for them because they don't have this network or the user base. So again, I think that longer term, we are positioned very, very well. Shorter term, as we flagged, there could be -- it doesn't need to be, but there could be some headwinds as we're transitioning from selling solely the inContact integration to now leading with our own, that is a fact of life. But we're pretty sure that given the owner economics of it, given the extremely positive reception that RingCX has in the marketplace, we've announced 45% sequential growth Q2 to Q3. Q4 is looking well. We're not going to do mid-quarter updates here. But look, it's a product that -- let's put it this way, Q2, Q3, they were not an aberration. We've hit the nerve in the market, and we expect to be a very meaningful entrant and the player in the CCaaS market, especially with AI rolling in.

And historically, the installed UCCC based on-prem, they were sold together in like 80% to 90% deployments, right? So it makes sense that people would want to consolidate.

Yes, I think 80% to 90% is maybe a little bit too aggressive, but over 50%.

Fair enough.

60%.

I mean that's what we do on our side, right? But to give you numbers. But just on -- back to your UC business, we're pleased to see your largest UC win this year. We picked it up in our channel checks, and we've been talking about larger deal sizes for RingCentral on the UCaaS side. I think we've seen just like less willingness for customers to shift the UCaaS from on-prem to the cloud over the last year just due to expenses and due to the macro. Should that start to alleviate, do you think you could see customers more willing to make that digital transformation at this point besides the TCO sell, but also due to some of the AI features they want to get?

Look, AI makes it -- it's yet another arrow in the quiver, and it's a very big arrow. Look, on-prem, it's hard to innovate on-prem. Nobody really is, if you think about it. So all of the action is in the cloud. It will continue to be. I believe it will continue to be. And it's yet another reason for someone to say, yes, okay, fine, this old Cisco system or even Avaya system, for that matter, it's time to move on. Now will it -- look, this is a very, very sticky installations. And they take time. I'd like to go faster, obviously, but they take time, but it's one directional. Nobody ever goes from on-prem back to the cloud. That just cannot happen. So over time, look, this next year is going to be interesting. Also, you got to remember, there's just so much innovation in core AI and these models are developing and evolving so rapidly. And there is so much competition among the hyperscalers to get this in. So that means that there will be -- we think there will be pricing pressure on them. So AI tech, I mean it's wonderful, but it's not for free. So I don't think it's going to be free, but there will be price pressures there. And I think people like us will be net beneficiaries because we are the next link closer to the customer. Ultimate beneficiaries will be customers. They will in the end get more for less.

I say that a lot, like your customer service experience or just like your collaboration experience will actually start to get over the next few years.

Getting better. Absolutely.

One thing I think people miss is like AI is a great cherry on top as part of these like cloud transformations. But just with your normal telephony or normal UCaaS systems, I'm like they're like, oh, well, competitor XYZ do this. Well, I'm like, well, if you want to do this thing, like time of day call routing, advanced call queuing or like the certain specifications, you want to place your Cisco call manager deployment. Those vendors can't do that, but RingCentral can. So as you move into some of the larger deployments, can you just talk about some things that differentiate you guys to win some of those conversions at scale on the UCaaS side?

Well, we are the UCaaS leader, okay? We have the widest global footprint. Latest win is our PAN-India License, which is unique. Direct competitors do not have that.

I can't believe you got that.

Yes. Well, it's not -- yes, it wasn't an accident. I mean we took a long, long time, but now we have it, okay? So there is that. There is also our core value prop is reliability at scale. So we are 5 to 6 9s, not in the name, but in reality. And that's huge. Other people simply don't have that. We have a much deeper feature set. We have more integrations. We have for the lower end of the market, in particular, we have our service provider business that is very -- that's quite sizable and growing well and growing faster than the company as a whole. There is a long runway there. So we have a number of differentiated motions and capabilities. But again, it really starts with what we call TIP, right, Trust, Innovation, Partnerships and trust-wise, security and reliability, and we don't sell our customers' data, and we are very careful how we use even for our own needs for training and so forth. Innovation, look, we got 2,000 engineers. Lots of that was happening, and we went from a single product company to multiproduct portfolio and all that happen. And it was pretty much all organic, almost all of it except for the Events product. So there is that. And Partnerships are just we got this huge VAR network. We have a completely differentiated service provider network of resellers, starting with AT&T and Vodafone, British Telecom, a number of others. Cable providers are now lining up. We have Charter, which is doing very well. Cox, you can well imagine that we understand that there are other MSPs worldwide that might be good targets for us. And you combine that with the deep technology that we have to offer and the ability and willingness to integrate and customize -- that's a unique problem.

I like your point in AI where it's like I want to call you. I don't want to call the agent bot version of you, right? And if you want to call a business, like you want to make sure that phone line isn't down. So that makes a lot of sense in terms of the reliability standpoint. Just for like your sell-through into the Microsoft Teams ecosystem that's been [indiscernible] for you guys. I think that's also allowed you to expand into [indiscernible] deal sizes as well. Like I would love to hear just your commentary on that partnership and how it's been going.

Look, it's an integration. We have a very good Teams integration. Teams and Microsoft understands that -- I guess they understand that their phone, it's world-class, maybe the world's best messaging platform since their video is definitely coming up. Phone is fine for lightweight use. It's also fine. It's not fine for heavy use. It's not fine for contact centers. Forget high-end contact centers where RingCX plays. But we have lots and lots of very small contact centers. A few people here, a few people there, they're running on our phone product. They're running on RingEX. We still have queues. We still have reports. We still have very lightweight workforce management, but it's there. If you have 5, 10 person contact center, it's good enough, okay? And Teams doesn't have any of that. And also, by the way, they just raised prices on their phone. So that doesn't help, right? So the way it works, if it's a Teams customer, they will ask, we have a Teams integration. So it's a qualifier. We do, and it's a good integration. And some of them use us inside the Teams environment and some of them just use Teams for Teams, but just because we have this integration, there is a mixed use. So we can easily coexist with Teams, and we do. And as people are migrating from on-prem to the cloud, Teams is taking a big portion of that. But the phone part, some of it we get as well, even within Teams.

That's a good point. So you can upsell contact center on top of those direct around deployments and then they can get better service from you on the contact center side if they have any problems or they want to make any customization. So that value-add sell-through there. You mentioned the Microsoft Teams phone price increase. First one in a couple of years.

The first one ever.

First one ever, since '18. You call it, Zoom raised prices last year. We kind of lived through 2021, 2022, 10x stiff in the channel, and those have gotten more reasonable as well. Do you feel like we found better footing from a price stabilization standpoint on a per seat basis? And do you think AI could support better economics?

Hopefully. These are valued services and valuable services. Look, you have a bunch of people come out and everybody's first idea is, well, we're going to drop the price and everybody is going to go our way. It doesn't work that way. You get what you pay for, and there is fair pricing. We think we're priced -- we try to price fairly. But you got to remember what's -- people are asking your ARPU, where is it trending? It continues to have a 3 handle, okay? So that's good. $30 a month, but $30 a month, [indiscernible], okay? And you don't need to worry about that line not ringing. Like look at this that way. So -- and you look at our pricing, we also hear, well, look at Microsoft Phone is so much cheaper, even Zoom Phone is so much cheaper. Well, not so much because they only come in as part of the bundle. Look at the bundle cost. The same $30. It's not going anywhere. And for decades, traditional telco, TDMs they were in the same range. So I don't know why that magic point, but that's a point where we can grow, we can make money. We deliver customers a lot of money for those dollars. New products absolutely are pulling it up as well because guess what? RingCX, it's a $65, $75 product before you get into all of the AI component. And again, I think that long-term vectors are pretty much all positive, I would say.

Unfortunately, in New York, $30 is like one salad. So that makes even more sense. Just for your installed base, I think across software, we saw companies like downsize their employee footprint, especially at the start of 2023. But since -- do you feel like things are healthier from just what your customers are saying about their hiring plans? Or are you seeing just like seats a little better? Is there any changes there over the last couple of years?

What it is, is all of the aftershocks of COVID are subsiding. And I would say it's a reversion to normal. The patterns we're seeing now are more like 2019 patterns at this point. So where there is no discrete growth and then everybody, okay, we overbought and like now we need to drop and we need to downsell. So I think that it's kind of more business as usual, which we like.

Perfect. And then I always just want to get like one question for me in these fireside. So this one is for me, but I would love to see where your answer goes for this is like. I'm getting a lot of questions from investors on voice AI. And like they're like look at these start-ups are doing this. And I'm like, if you want higher reliability, like there's people that specialize in this, and it's very difficult to do at scale and multi-geo. I would just love to hear from you, like do you think that will actually be like something people ask for in a UCaaS setting? Or I can see it in the CCaaS setting more likely, but like I just don't know if customers are even ready for something like this today.

Wouldn't say voice AI, like..

Yes, like you call in, you get an interactive chat bot....

No, absolutely. Well, certainly, in the CC -- I don't know about CC space. CCaaS space. CCaaS space, they're asking for it all the time. And we have a number of partnerships or reseller relationships or a cross-seller relationship in place already. By the way, we've just announced a very strategic relationship with Verint. They're extremely well known for their workforce management, WFM. They're actually easily 1 of the 2 breakaway leaders there, maybe the breakaway leader for the high-end enterprise. They also have a very broad AI portfolio, okay, that we are expecting to leverage, okay, -- for -- but that's for the enterprise. For mid-market and below, there are a number of players there. We expect to be working with many of them, but we also expect to be developing our own -- not expect -- we are developing our own tech. And we expect -- already mentioned that human agents to some degree, will be replaced by AI bots and who provides those bots, we expect to be one of those providers, right? For UC space, which is more person to person, that's a super interesting question as well. If you look at our portfolio today, what's there on our website, we are already leading with introduction of some of those bots into our UC base, okay? Now it's very, very early. I can say that preliminary results are very, very positive based on usage, but we are kind of at a beta stage. But what we're seeing is -- so our #1 use case is not taking, okay? No taking is huge. You can actually concentrate on the conversation as opposed to having to write something and like actually to the person you're talking to. So that's a big thing. And then there's all of the calendaring and task management and generation, all of that. Look, there is a gamut of possibilities. It is a game changer. AI as a whole is a complete game changer. And we expect to participate and we expect to benefit. We have 2,000 engineers, and they need to do something. So a lot of them will be doing AI.

Well, I feel like for many of the UCaaS customers, that will be their first like interaction in their business setting with AI, right, maybe besides e-mail, but like they're not going to have the resources to implement AI across their own business themselves, but...

[indiscernible] customers.

Yes. But...

Our customers. Yes. it's hard for a customer to do. Look, firstly, you've got to remember, we have a wide base. At the high end of the base, yes, big banks, they can kind of do whatever they want to do. But even below that, people run their businesses. You're running a flower shop or you're running a dental practice or something, you're probably not developing AI.

You know, that's great.

Which is why we have a value to provide.

I think that was kind of like a couple of quarters ago in your earnings call, you said like we are now a multiproduct company. This is really important for RingCentral. And I think like just that bigger footprint to upsell a lot of these new capabilities makes a lot of sense as well. So...

That is an absolute like I really want to use as one takeaway. This is a takeaway. If you -- everybody can talk and scream AI and people doing more power. But this is just one of the components. You need to have core tech, okay? And by the way, that's changing rapidly as well and the OpenAI is innovating and [ topic ] is innovating and so forth. But what else do you need? You need to have a customer base, you need to have a network. You need to be able to deliver reliability, security, standards compliance, geographical footprint. There are very, very few people who can do that. These are just the people at scale where we're one of them.

Easier said than done, right?

It took us 25 years.

Well, glad RingCentral team. I want to say thanks so much for being here. But next time....

[indiscernible] What's up for next year? What happened with bookings? [indiscernible].

Ready for you. I mean you've seen on both sides now. But I just want to say thanks again. And if you have any questions, we can get them over the RingCentral team.

Thank you.

Thank.