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

Anyway, guys, thank you all for coming to the RingCentral presentation. If you don't know me, I'm Mike Funk, one of the SMID-cap software analysts here at Bank of America. Really pleased to have our speakers here today. I'm sure most of you all know Vlad, one of the early pioneers, really visionaries in the space. So a real pleasure to have you here. Also Vaibhav, the Deputy CFO at RingCentral. So once again, thank you both for coming.

Thank you.

Thank you for having us.

Yes, of course. If you don't mind, I would kick right off with the questions. So RingCentral is marketing itself today as a voice-first multiproduct AI company. And I want to better understand what that means exactly and how it affects your go-to-market strategy.

Yes. So for those of you new to the story, we are one of the original players and a leader to this day in business communications via the cloud. We're born as a cloud company. I'm the original founder. We started with a nice round number of 0. We are now $2.5 billion revenue business, growing in mid-single digits with an excess of $0.5 billion of free cash flow annually. So that just summarizes the last 25 years of that. So how did we get there is, we're leading in business voice. Business voice also happens to include business text, a bit of business fax to this day, some video meetings, et cetera, but it is voice-led in our case. So we've been defining and leading in this market for literally quarter century. And then this thing happened called AI. We were early with AI. We started acquiring in that space either pre or early into COVID. So this gives us good 5 years or so at this point. And we have recently changed into a multiproduct portfolio company. So we have added a contact center product for the SMB market. It's called RingCX. And we have added a number of products in the AI space, all of them monetizable and currently being monetized. And they cover all aspects of a customer provider interaction pre, during and after a call, okay? So we have -- in the pre-call space, we have a brand-new product called RingCentral AIR stands for AI Receptionist. Strictly speaking, it's in controlled availability still to this day, but it's soon going to go general availability. And it actually -- it replaces a human receptionist, which is actually unique for anyone in this space to have this capability deeply integrated with the base product, okay, with the core product. For -- we have something called AI Assistant for -- during call, okay? So think of it as a copilot and RingSense for after call. And we have it available for both RingEX, which is our employee interaction platform, which is also our original product, just renamed; and RingCX, which is our new contact center product. So we've been busy. We had numerous new product introductions last year, first time in our quarter century history. And all of our products are either AI-led, AI first or just pure AI like AIR.

Now it's a great segue then as well. You mentioned earlier, I think, 25 years and being one of the first really in the UCaaS space. I've been covering communications for a similar amount of time. And so I wanted to touch on TAM and how you think about expanding your TAM through whether it's adding RingCX or AI products like you mentioned earlier and to frame it, I've always thought about the enterprise communications market of being roughly kind of a $100 billion plus or minus market, right? And the product set may have shifted over time within that TAM, but the size of the market remained relatively the same. So if that framework is correct, how do you think about expanding your own addressable market? Or is it more that you're trying to add more products to maintain more stable spending with customers over time where the market remains relatively the same, but you're just trying to maintain market position. So maybe help address that view the market may have.

Yes. Look, I mean we started out by moving PBX seats to the cloud and that's a $200 billion opportunity, which is still underpenetrated even under all this time. We are -- we have a 20% share, which is the leading share and holding our position in cloud telephony, cloud business telephony, okay? But we're at $2.5 billion. This is as far as paying seats are concerned. This is independent research from Synergy, okay? Then you have a well-known place. You have Microsoft, you have Zoom. They actually have smaller bases as far as number of seats are concerned, which are specific to [ company ] seats. But you add all of us together, we are about 20 million seats maybe altogether, and that was a long tail, okay? So there still is a lot of room even in the regional market. But it is a slow -- relatively slower process, still moving from on-prem to the cloud, but slower than one would like. So having said that now, so now we are expanding into other TAMs. So there is a contact center TAM. It's generally thought of it being somewhat smaller than UCaaS or than UC, I should say. But it is faster moving currently. It's also a slowing market, especially because of AI with AI coming in and replacing or having or threatening to replace human agents with AI agents, okay? So that's kind of this middle category for us. It's still a strong tailwind for us because we are gaining share. We're holding our share in UCaaS. We're gaining share in CCaaS. And the great new opportunities with AI and agentic flows. And when consumers contact their providers, they mostly do it via voice, and this shows no signs of abating. You still tend to call or maybe text your doctor's office or your financial adviser or what have you.

It's still the primary means of communication.

It's still the primary means of communication by far, which is a bit different from enterprise where obviously, video and meetings are taking more. So there is still a very, very large opportunity there, okay? And when people place this call or text, who is answering the phone? Well, we are answering the phone. So this puts us in a very unique position to deliver agentic workflows into this giant TAM, and this TAM is measured in tens of billions according to Gartner and others. But it's very, very early, right? So we said that our new products, which include all of our AI portfolio plus our RingCX, we said that it's going to be at $100 million run rate ARR by end of this year. We're well on our way to do that. I guess, Salesforce just announced that they're at $100 million. Well, there are a few turns larger than we are. So it just shows just how early it is for everyone. But again, our position is differentiated. We are the ones answering the phone. We're the ones fielding this text. We're the ones with this global network behind us and understanding what actually happens on our network, on this network when customers actually utilize it.

A disruptor as well in the industry?

Well, we're an absolute disruptor. We will be absolutely disrupting the contact center industry, us and many others, and it is disrupting itself. I mean all of the providers, Genesys, inContact or NICE, they're all talking the same thing. But where we're differentiated is we have the PBX angle that they do not, okay? And that's a giant market. And in the CC space, we are -- we're actually the #4 provider by revenue if you include our NICE, inContact relationship. And our new product is filling this very important niche of smaller contact centers. And by the way, as AI takes more hold, one would think that more and more contact centers will be deploying less humans, which again plays into our strengths.

And I want to get your thoughts on that in a minute, but just sticking with contact center AI in general. I mean the thesis that technology catalyzes change, meaning that AI could actually be making contact center operators think more about switching providers, right, as they think about AI and the potential. And we've heard from some of the larger CCaaS companies you mentioned that AI has impacted their own sales cycle, indicating it's causing some pause in decision-making about resigning or renewing contracts. So are you seeing that in your own business where you're seeing churn increase or more funnel opportunities for your own business or people looking to switch to a RingCX because of AI?

Yes. Look, we don't have that many contact center seats to protect. So you can absolutely see how a pure-play contact center, especially in upper segments, will be feeling this uncertainty. Do I need to sign up for more seats when I can as well replace with AI. I can tell you it's a sizable company in our own right, and we have well over 1,000 agents, humans supporting our platform. We're not growing that workforce anymore. We're not shrinking it yet, but we're not growing. So we're kind of in the same camp. You can see the other side of it. But vast majority of our business is person-to-person communications. And what AI does, it actually gets more calls to be connected, not less calls, more calls, okay? Because rather than just leaving voice mail, which many people don't even want to leave voicemail anymore. So just hang up. Instead, it will engage you and either answer your question. I'm describing our AIR product now. And it will engage you either answer your question directly or it then direct you to the right person without having to go to voicemail because the receptionist wasn't there to pick it up. So we're actually seeing exactly the opposite. We're seeing stronger traffic patterns. We're seeing better retention, better share of wallet. I think that was part of your question.

Yes, it was.

So as we are going from a pure-play telephony into multiproduct, which absolutely includes and now is being led by AI, we see both new opportunities, so larger TAM or TAMs, plural, as well as better share of wallet from the base.

And you mentioned earlier, AI disrupting the human contact center agent, and you primarily serve the mid-market with RingCX, not targeting large enterprises, right? So are the SMBs more willing to go all in on AI and replace the human agents in the larger enterprises? And I guess, how does it impact your revenue opportunity longer term if they are willing to just completely disrupt or displace the human agents.

We don't see that. We've heard this rhetoric. We currently don't see that. I mean we'll see what the future brings. I can tell you that many small businesses I talk to like personally, they're saying that it's actually the opposite because this is how to differentiate is the human angle. They're actually saying, no, no, we want people to talk to people, but can it be AI assisted. So we're not getting much pushback, actually, a great amount of take for our new AIR product because we're not positioning it we'll replace your agents. We're positioning it, hey, your receptionist is a human person, that's like one-off. And if he or she is basically on the phone with someone else, what are you going to do? So we'll pick up the phone, but then AI will figure out the connectivity part. So with larger enterprises, again, which we are an example of, actually, there is more savings to be had and the agents are a bit more impersonal, too. But look, it's not just support agents, it's sales agents as well. So everyone can be augmented and made more productive with AI. And the AI is defining itself every quarter or so...

Of course.

So what makes us, we believe, in a very interesting position is the fact that we have this very sizable, very differentiated network. We have our brand. And Google and Amazon and OpenAI, they keep iterating on the base engine, on the foundational model, which is getting exponentially better. But as far as deployment in actual use cases, and actually putting it in front of the end consumer, we're not absolutely unique. There are other large networks out there, but we're one of them.

But you're a trusted partner as well, and they already know RingCentral...

We know -- yes. I mean we are known as a voice leader over the last quarter century.

So I wanted to shift gears a bit because I've always viewed your partnerships as a differentiator. Obviously, large global partners that you established over time. And I was sitting down with AT&T 2 weeks ago with John Stankey actually. He told me one thing I thought was really interesting that they were leaning back into SMB. After years of deprioritizing that market, maybe not paying attention to it, they've decided that leaning in and growing that part of the market is really important to them. And maybe think about RingCentral when he said it because you have a partnership with AT&T. And I guess specifically, are you seeing any impact in your business through that partnership and AT&T's decision to lean back in? And then maybe more broadly, how important are your partners today in your customer acquisition growth additions? Where is the opportunity?

Yes. We speak of TIP or Trust Innovation Partnerships, so P is for partnerships, absolutely uniquely important. We have over 16,000 of channel partners and that's individual organizations. So that's like 100,000 plus feet on the street. But where we have an absolutely differentiated presence is with global service providers, of which AT&T is one-off and happens to be our longest-running relationship. And it is completely symbiotic because what John is saying is exactly right. They happen to be AT&T, but many, if not most service providers, they're tending to smaller businesses. They all would love to get their share of the enterprise. There are just fewer accounts to be had. Small business is a backbone. It's the backbone of this economy, 40% plus according to consensus. It is certainly backbone of every Western economy I can think of. I strongly suspect that if it gets outside the Western economies, it's even more pronounced. So -- and they need all of this technology and all of this innovation that service providers themselves are not delivering. They're delivering networks, they're delivering connectivity. They have their brand names, but not core tech, not high tech. That's where we come in. And we have about, what, a dozen or so. I would urge people to go to our investor site and we actually list them, but it's AT&T and British Telecom and Vodafone and TELUS from Canada. And we used to have 2 out of large -- of MSPs in the U.S., which is Charter and Cox. I say used to because now they're merging, so -- which is good for us because now there will be a larger footprint and more uniform motion for us. And that's millions and millions and millions of seats that they already have. Like each of them already has that many of those were running on BroadSoft of old. Cisco acquired BroadSoft. That product, firstly was not cloud, was not really -- was not and is not being innovated on.

Very legacy, end-of-life technology, right?

Well, that's what we see. That's what we're seeing. And I don't know, Cisco, whatever I don't want to speak for them. But we find that we get our fair share or maybe more in that market. And we are the only other provider with like a repeatable motion there. We keep signing up new providers and delivering new technologies. And what is very, very interesting, and it was obvious to us initially is that all of them are either signed up or signing up for basically our entire new product portfolio, okay? So I think that that's going to be -- look, it's early. I don't want to sort of overheat expectations here, but we're pretty enthusiastic about it.

Okay. You sound very positive about it. I want to talk about the competitive environment for a moment. When I first started covering you, one thing I highlighted was I felt that your more complete product portfolio was also a strength. I think it still is. But since that time, you've seen Zoom launched own contact center offering as well. NICE is now offering voice, maybe a slim down, scaled down version of that. So a real convergence, I think, of offerings and maybe not similar products, but competing for the same customers in a way. So what are you seeing with competitive intensity? And how does RingCentral continue to differentiate itself versus those competitors over time? Is it going to be the market focus, the size of customer? Is it going to be price, product portfolio, partnerships? How do you think strategically about that within that construct?

Yes. I'll give you a multifaceted answer, yes. One is, you've heard me speak over years, and I believe this. Look, numbers don't lie. Again, go to our investor site, look at our market share, right? And you can see that everyone is holding their market share about steady, with the long tail being a net loser, okay? And we're holding our 20% and Zoom is about half of that. And Microsoft for paying seats is super hard to get. So guesses are guesses, but they are somewhat below. And there is Cisco. Cisco actually has been picking up a bit lately, but we don't expect this to continue because they're just converting their own on-prem base into their own Web of calling. We very rarely see them in head-to-head competition. So in the UCaaS space, I think it's pretty well settled what it is. But net loser, like I say, are smaller companies. I think they'll find it harder and harder to compete. Unfortunately, we're not one of those. In CCaaS, you say Zoom launched their own. Zoom actually launched theirs before we did ours. And from what we can tell, we're growing a bit faster. I think they've announced 1,000 accounts a couple of years into their life cycle. We did that within a year, okay? We think we're extremely well positioned in smaller contact center space with our native product, just more natural to us. I mean it is still coming in more -- on the video side of things at least historically. And in the upper end of the market, you mentioned NICE. We happen to have a long-term relationship with them as well. We've built a very successful joint product, which we sell on our paper called RingCentral Contact Center, but it's powered by NICE, but it's closely integrated with RingEX, and it's a unique proposition in the market, best-in-class UCaaS plus best-in-class or one of the 2 best-in-class CCaaS closely tied together. You mentioned they have their own UCaaS. They don't. They've partnered with a very small company. I don't know. You'll have to -- we never see them. I can tell you that with the change of management on NICE side, there was a change of CEOs, relationship has been substantially improved. And we're optimistic that this product will continue staying in the market because it's unique. People who want an enterprise-grade PBX in the cloud, combined with enterprise-grade contact center also in the cloud, just like they used to buy from Avaya and Cisco now through the cloud, there's only one thing like that in the universe, and that's this product RingCentral Contact Center. So it's a $300-plus million business. We had a hiccup in the relationship. It's being patched up now.

Okay. I want to stay on NICE for 1 minute, may have 1 or 2 more after that. You mentioned the change in management. We've also had a change in growth, at least in the cloud piece of their business. It had been projected more high teens, and now it's been maybe falling a little short of that in the interim for various reasons. Has that impacted your revenue growth as well, just given that partnership and the voice component that you were contributing? And are there maybe ways to offset that headwind if it has, in fact, been weighing on growth?

It absolutely has been weighing on our growth and on their growth, and our way was to do more CX. And we were successful. And again, you're saying double digits. I mean CX is double digits, too, but it's quarter-over-quarter. So and we'll continue that motion. But it was also very clear to us from day 1 that it is more of an SMB product. We never said to fully replicate what NICE has or what Genesys has because they're accelerated, they have a head start and it's super hard. And we just saw this opportunity in the down market while keeping the NICE relationship intact. And I think that there is a CEO change and kind of philosophy change maybe a bit. But also they're seeing the numbers. Like we're seeing numbers, they're seeing these numbers. And these seats that we used to get, they're not going to NICE. They're not going anywhere. They're just sitting on-prem because there is nowhere to go. So I strongly believe it's mutually beneficial to continue the relationship because they know where I stand on this. And it feels like there is reciprocity at this point.

And to your point, you felt the management change maybe renewed or improved that relationship, so greater opportunity in the future.

I mean who didn't know. I mean new guy is a new guy, but he seems to be much more business oriented, I would say, less emotion.

Sure. That's good to hear. I want to state the idea about product portfolio and strategy and competitiveness and your thoughts and if you can meet all of your goals organically or maybe if there's opportunity or even necessity to do something inorganic, right? You mentioned certain smaller long-tail companies and portfolios and technologies out there. So what is your thought on that?

There's no necessity. We're a large, healthy company. We are able to meet all of our obligations. We're on record saying that we'll be bringing our gross debt down to under $1 billion in the end of next year, see how things play out, but we will at least meet that, let's say that. And we're spending $0.25 billion in R&D and that's a lot of money. And with that, we're able to innovate rapidly. So having said that, always opportunistically looking, always opportunistically open. Some assets are priced more reasonably than others. And we're not trying to bottom scrape, but we also don't want to buy something at 40x revenues, which is what some of these other assets are trading at. So I think we're in kind of okay goldilocks spot maybe. We have done acquisitions and they've been largely successful. All of them have been tech and acqui-hire type acquisitions.

So likely not buying a subscriber base, which can be message we've seen from others that can be challenging with the churn. I think I have time for one more question and really important to investors, I think [indiscernible] yourself as well being the founder and large shareholder. You mentioned that you're delevering, you've addressed a lot of the expense in the base. You're already investing pretty strongly in R&D. So how do you think about kind of prioritizing returning capital to shareholders or making the value in your stock more evident maybe for investors that don't see it today at the very attractive free cash flow yield.

We just -- I don't know what else to do, but to keep on executing.

And would you institute a material dividend or large share repurchase, anything to kind of return capital to shareholders, maybe to refocus investors on the value?

Yes. Look, all of this is under consideration. Your bank and every other bank is suggesting things...

Everyone has ideas.

Everyone has ideas, but I can settle their all the differences I guess. Look, we got this debt. We need to pay down. Do we pay it down to 0? We're already 2 turns, 2x. I'd like to bring it down to 1x. We'll see what happens. 2x is investment grade, 1x is A++, whatever. Let us get there. We are buying back shares. We were able to bring our share count down last year...

[indiscernible] a year ago as well.

Okay. So that's -- we think is very healthy. That is a form of returning capital. Dividends is an absolutely a very interesting question. I would absolutely not rule it out. And -- but we just -- I would like -- I know that we and I have made a commitment to bring gross debt down to below $1 billion, and I'd like to do that.

Quick yes, no question. So pretty stable business model, growing top line, strong margins, strong free cash flow could probably handle more leverage as a private company. Would being private ever make sense given what the valuation is even if it's cheaper. Is that something you would consider through an MBO or an LBO?

Sure. Okay.

Great. That was it. Thank you, guys. That was all the time.

Thank you.

Vlad, thank you.