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

Excellent to see the entire team here. Thank you so much for spending your time with us, and thank you for joining us as well.

So Vlad, you always get the same question from me at the start of this conference. I think we've been doing this for 4 years in a row, 2022, 2023, '24. 5 years -- 4 years, sorry. 10 years, yes. But I don't ask you the same question all the time. But this time, fourth year in a row, what does RingCentral look like 4 to 5 years from now?

Same answer. We're still around.

Yes. Okay.

We're still in the lead on business voice. Nobody gets to ask anymore if AI is going to kill us, AI is going to make us, remake us. And we're a large, healthy, growing, profitable company.

Expand, if you don't mind, on the AI piece. That is the debate right now, and you know where I stand on the debate. But I'd love to understand, as a founder, CEO of the company, why are you so deeply convicted that AI is not just not going to kill you, but it's going to -- I could paraphrase, it's going to rejuvenate the company. Why are we so confident that it will be the case?

I mean it is now. I mean we're seeing this firsthand. But I never saw any rationale for AI killing us. If anything, maybe for traditional contact center companies, well, your agents are going to go away because virtual agents are going to take over. That's maybe, but even that's probably a little premature. For us, look, we're making people connect. We're making people connect with their service providers to businesses. And humans are going to be involved. Now AI can make these interactions a lot more proficient, a lot more valuable, both for the consumer and the service provider. And we are the ones most upstream in those B2B2C interactions. So people call their businesses, people text their businesses. And we are the dominant provider in that. So what we're able to do is, we're able to add value before human picks up, sometimes instead of -- but interesting enough with our new products with AIR in particular, we're actually seeing more human-to-human connections for those accounts where we deployed and...

And why is that?

Why that? Because basically, people hate to leave voice mail. It's not the same.

When was the last time anybody left a voice mail.

Well, that's one good question. Here's another question. When was the last time that you picked up that you called someone, there was no one to talk to and you hung up rather than leaving voice mail. See that's the thing, is people just hang up, all right? And that's really bad for a business because it could be a lead, it could be a customer that needs an upsell or just has a question. It's just not good for business. And AI makes those connections better. It doesn't make them go away. It can answer simpler questions, direction, setup appointment, price list, workouts, things like that, it does fine. You don't need a human for that. But once it gets deeper, at least for the foreseeable future, you still need to talk to someone and AI can make that connection happen in a lot more seamless way than without it. Then okay, leave me a message, don't call out, we'll call you. So we're seeing that. And in the CX space, it's actually the same. It's -- and we use it ourselves, right? We have AI fielding our calls for the company. And our agents are more productive and they're able to answer more questions, move more product, if you will, but they're not going away.

Kira, let's move to you. What are your mandates, key mandates in the years ahead? How has your job changed in the company?

Well, in the last year, it changed significantly. Now having the CEO position, it's about creating profitable growth. It's making us do more with less, like basically, we're enabling our customers to do. And that comes to getting more products faster, innovating faster with the help of AI, by the way, and maintaining and improving our margins. And stabilizing and accelerating our top line. And so -- and I think the numbers are kind of speaking for themselves. And AI plays a critical role in that.

I think the target was $100 million in exit ARR for the new products in 2025. How significant is the AI component of it? And how confident do you feel there's somebody running products that feel free to chime in anybody.

So very comfortable in the target. We're optimistic we'll exceed it, but leave that announcement for another day. It would not be happening without AI. The largest product by volume there is RingCX, which is a contact center product, but it is an AI-first contact center. And rest of the portfolio is just pure AI, AIR, RingSense, AI agents like that. So -- and look, even -- and those are just the parts that we're monetizing. There is a lot of AI in the core products that we're not monetizing directly that is just leading to better user experience.

Got it. Vaibhav, you, the new CFO of the company. You've been with the company for a long time. So what is your agenda? And what is your -- the ask that the executive team has made of you? What's your mandate ahead?

Yes. Thank you. Thanks for the -- and this is my first Communacopia conference as a CFO.

Welcome.

So thrilled to be here and very excited about what lies ahead for RingCentral. Look, from my mandate standpoint, I talked about it on the earnings call. It's driving the long-term success of the business, creating a compounding durable business. And it comes down to 3 core principles in my mind. The first is, as Kira said, driving profitable growth. We have multiple growth drivers ahead of us in the business. We have a leadership position in UCaaS, and now we are building upon that with strong momentum in our CCaaS and AI-led products. Number two is continuing to drive expansion in operating margins, driving free cash flows higher and reducing stock-based compensation. And the third thing is being disciplined and balanced in our capital allocation approach so that we are returning -- we are driving returns for our shareholders. And with over $500 million in free cash flow, we have the ability to pay down debt. We are buying back stock and while investing in innovation. So at the end of it, long-term success to me would mean creating a compounding durable business that's returning cash to shareholders.

So Kira mentioned that -- and glad you too, that there's a prospect of potentially accelerating revenue growth rate. If that opportunity were to present to yourself, how do you still grow margins while still accelerating top line?

Yes, there's always a balance between -- in the SaaS model between near-term profitability and long-term growth. So we are trying to balance the 2. It's about profitable growth and optimizing for the long-term economics of the business. So my approach and frankly, our approach as a management team is to drive margins, drive free cash flow up with operating discipline in the business. What that does then is it provides financial degrees of freedom to invest back in the business. And case in point, Vlad's talked about investing $250 million of R&D investments with a significant and growing share going to AI-led products. So that's an example of how we are using the dollars to fuel the long-term growth of the business. Similarly, we are investing in our go-to-market partnerships with GSPs wherein we are seeing double-digit growth. So these are all examples of where we are optimizing, making smart investment decisions to optimize the long-term growth of the business.

Got it. Vlad, back to you. We have 3,000 customers for RingCentral AIR, that is AI Receptionist. What is the opportunity you're adding for? And why does RingCentral win in this opportunity for AIR?

Well, why we win, that kind of went a little bit already. Again, we're the ones fielding those calls. We're the ones upstream. It simply makes sense. Many people talk about AI, but actual touch points are maybe sometimes a little bit harder to understand, at least for me. With us, it's very obvious. AI answers your call, or field your text message. AI is there to assist during the call as you're talking to a human person and AI is there is to process a transcript after the call to tell you what went wrong, what went right, opportunities to improve like that, okay? So that's why it is. We also have a name and the reputation and a well-developed channel and a unique set of service provider relationships, which are all extremely helpful in deploying these innovations at scale, right? So having said that, look, we have 500,000 accounts. Only 3,000 as of our last disclosure are AIR-enabled. So for the base alone, I would say the target would be 500,000. It's an account-based product for now. It's not yet seat-based. But our latest announcement, we call it AIR Everywhere is to take it outside of the base and actually make the same agent receptionist work with any other phone system, all right, or phone solution provider, even your cell phone directly, okay? And we actually have carrier partners who are interested in specifically deploying it like that, like literally having AIR field your even personal phone calls. There sky is the limit. How many people that's the population of the world.

And what is the pricing since you're unbundling it and selling itself?

Too cheap. Too cheap.

Right now, the price for a stand-alone AIR or AIR everywhere is priced at $59 starting price. We're still -- it's still early, and that's the per account. You start with an account, you get 100 minutes [indiscernible] that.

It's a consumption model.

Well, it's -- like it's an account model, but then yes, you get that many...

You get an allocation.

You get an allocation, then you can buy more.

Okay. So $59.

[indiscernible] ChatGPT itself.

Okay. Got it.

You pay dollars, you get a certain number of units. And then you're over them, you buy more.

Got it. Got it. And who is providing the infrastructure? How are you building this? Is it running on AWS or Azure? What's the hyperscaler, who is helping you with this?

Yes. It runs on AWS. It's somewhat runs on GCP. That's the mix of infrastructure behind it and also a mix of large language models that sit behind it. So we're optimizing for best cost and best performance.

Got it. Let's talk about CX, Vlad, you talked about CX. It's in that $100 million pile of revenues that is the target for exiting 2025. We talked about contact center for some time, and you actually started off saying that contact center is one area where you might see some AI impact. But if you net out the AI impact against the white space that is available to you, what would be the reason somebody would switch out of our legacy solution and go with RingCentral?

Well, legacy solutions in the contact center are still on-prem, being legacy. So they would go to cloud. So their first decision is, hey, they want to stay on-prem or go cloud. Someone who has followed and really made the cloud, in particular, I don't need to sell the cloud to you. Cloud is the future. Nobody is buying on-prem. It's all going to the cloud for new business and renewals are in the cloud. Why CX? Today, the answer is because it works with CX because people know and trust our PBX voice, which, by the way, our PBX voice in itself is -- I don't think too many people understand this. It is used by smaller contact centers a lot outside of CX. It has kind of the basic ingredients. It has [indiscernible] some queues -- some analytics and reporting like that, right? But CX, in particular, so that's a true contact center dedicated contact center product. And we've always been on record saying, look, there is a large segment of the buying community that wants to buy PBX and Contact Center or EX and CX from the same vendor, one throat to choke, no finger pointing, closer integration, single invoice like that. So today is the primary reason. As people are getting more and more comfortable with CX being a viable stand-alone product, we hope we'll be seeing more stand-alone business as well. But still, our main value prop is still the integration. And by the way, for that same reason, our integration with NICE inContact has been very successful. And now with renewed relationship, we're pretty optimistic about what that can do because that plays well at the high end of the market. CX plays well at the low end. So between the 2 of them, they cover the whole gamut.

Is it a different product at the high end of the market with NICE?

Well, that's the same thing. That's the one, yes. RingCentral Contact Center power domain.

So there are 2 different SKUs, one with the...

[indiscernible] 2 different SKUs.

Yes. Got it.

Addressing different segments.

Yes. So what does the renewal of the partnership mean? I mean, is it -- what do you even have to renew it? Is it because the first agreement was a finite time horizon, you had to do it. It's not because NICE tried to do something on their own and failed and decided to renew it.

I [indiscernible] tried or not tried. But it's not our first renewal with them. The relationship, I think, is about 10 years old. It predates NICE itself because it was an encompass relationship. But there were some trepidations and maybe some confusion in the marketplace. Hey, you've got CX and they announced some deal with some other company. In the end, what we were saying all along, there are clear swim lanes. You got a smaller contact center or maybe some larger contact centers, but kind of more specific means CX is just fine for that. If you want the Rolls-Royce of the industry, every bell and whistle imaginable, every reference case imaginable, there is no better partner than NICE inContact, and we're the only ones with a seamless integration with them. So that product has always made sense. We've built a $300-plus million business on it. It was growing in double digits until it just stopped when all the streumers started floating around. We're hoping that it will restart.

So I know you mentioned your target is to reaccelerate, but it's not part of the guidance. But what are the things, Vlad, if you take a step back, if the business were to reaccelerate at some point next year, what are the things that will have contributed to it hypothetically? NICE being one.

Look, it's really a change from a single product company to a multiproduct portfolio. We are able -- with the new products, we're able to grab a larger piece of the wallet, okay? And we are also able to attract the type of a customer that before were hard for us to get to. Everywhere is a clear example of that. It's very, very new. We only have a few accounts just so I don't want to get too far ahead of my skies, but the product is specifically designed to work with other phone systems, okay, or other contact centers, whether they're on-prem or cloud or the cloud. So again, we have about $0.25 billion we're investing into R&D annually. And a very meaningful portion of it and growing, I think as Vaibhav said, he is already going towards CX and AI and they tell more into AI, okay? So we expect to be a major player.

$250 million in research and development, that's a lot of money. Is that purely AI or core, incremental?

The entire budget. Some of it is to just keep the core -- keep the lights on. And not keep the lights on is AI.

And let's talk about how you're using AI coding assistance o or coding LLMs to get leverage. I mean, what is it that is realistic of a scenario? I mean, can you really have code assistants do the job of an engineer? Or you look at me and say, Kash, come on, you're a software guy. I mean that's ridiculous, right? So where are you in that spectrum of unlocking productivity for your developers with AI? In the $250 million [indiscernible].

We're early In the journey, but really promising. On some of the projects, we're seeing 20% improvement in productivity. That's substantial.

That's number of codes -- lines of code generated per.

Yes, number of [indiscernible].

Use cases.

Number of use cases, lines of code that's being produced. We're seeing much faster on-ramp of new engineers, which is very important because new engineers start, they usually make a lot of mistakes. They takes time to onboard. Now that time is condensed from months to weeks with much better quality. In the area of even things like being able to translate figma designs to code. So basically a tool that generated where you model UI, we can do that now.

It's demo, right?

Yes, demoed, exactly. I think we talked about that. That's another example that's very meaningful. In an area of QA, definitely huge improvement. I think it's actually now an emerging category that is called QA automation [indiscernible] AI. We're actually seeing that across the board, and it's meaningful productivity. And it's not just in development, right, where the -- it's in marketing, it's in sales productivity, and actually throughout the company where AI tools are being deployed. Of course, on our own contact center where we use our own software. So our own CX is deployed -- ACX is deployed in our contact center. With all of AI modules, we're seeing, for example, up to today between 10% and 20% reduction in average call handling time because agents are assisted by AI tools that help them handle questions. And then supervisors are assisted with tools that allow them to evaluate agents and be able to make agents that are less effective, more effective. So all of those things are very [indiscernible] for us.

Got it. There's an existential debate about users' seats going away because of AI. When you look at your customer base, what are some of the patterns you're seeing? I mean, of course, you've got all kinds of job professions represented in your customer base. It's not just developers and customer support people. But what are you seeing in your customer base? And also secondly, are you using SaaS applications internally within the company? And how does AI affect the use of SaaS or augment or kill? What are your perspective? One is an outside perspective, one is more of an inside perspective?

Everything I described it arguments. And we see that within how we use AI tools, whether this is salespeople selling something in our call center salespeople calling customers. The sequences for BTRs are now laid out by AI, who to call, what to say, et cetera, but there's still a human being that actually interacts out there. So that's a typical flow right there where SaaS is augmented by AI and the same for products that we sell. With AIR, it's the front of the conversation. And it's frankly a better experience, a less -- probably a more affordable experience and with a better outcome, then that is then ultimately, there's a transfer to a human being. If that needs to happen. It's the same with everything I described before or it's human-assisted. And then the interesting thing about, I think, the heat, we don't have a huge CX install base. So we're sort of being very opportunistic. If you actually think about AI seats for the vendors, it's a better deal, right? Because it's a higher price. AI is expensive. So it's for the businesses, it's a good thing because instead of a human being, if it costs you $250 a month, it's still a good deal because agents cost more. And if it is AI assisted, it's still a good deal because an agent is more productive. In the meantime, we're making money either way, whether it's AI assisted or direct digitally handled.

Got it. One for you, Vaibhav. How do you price and package? What is your involvement as a CFO in pricing integrity? And how much room do you have as a CFO to extract more economics from the business?

I would say very involved, I think, at every stage. One of the key areas that we are looking at is: a, maintaining and improving our gross margins; and b, the effectiveness of our sales and marketing spend. So on both of those areas, I get pretty involved in terms of approving the pricing, looking at various different pricing models that are evolving. And then very involved with deal economics, making sure that we are getting -- we are utilizing the dollar, getting the best possible ROI. And we are in a situation where oftentimes we say no to deals, where certain deals don't meet our contribution thresholds. We are saying no to transactions and to deals.

Got it. Okay. So Vlad, one for you. So we're set for another year of solid margin leverage. How are you balancing the investments you talked about $250 million in research and development. That's -- does it ever come up that you need to balance the investment needed in the business versus driving more margin leverage, which is something the company has done really well. Does this priority change at all in 2026?

Look, like we said, it's about profitable growth. My core belief is that if you stay for innovation, you will have neither growth nor profits. So we're not going to do that. Is $250 million the right number. It happens to be the number we're at now. I'd like to spend more, but there is also [indiscernible] and there is AI and people are getting to be more proficient. So we think it's a healthy level. It's about 10%, call it, which is in the ballpark. I do believe that there are efficiencies to be had elsewhere, and we're working hard on those. We had 4x expansion in free cash flows over 4 years. I don't think that another 4x in 4 years is realistic, but I certainly don't think that 0 is the right answer either. So I believe that there will be continual leverage that we can extract. Stay tuned for the next guide. But we're at scale. We should be profitable. We should be returning dollars to shareholders one way or another, and that's the plan.

Anybody wants to jump in with the question or two? Just raise your hand, and I'll just -- maybe 2 more. We already talked about this. The future drivers of growth, if you were to stack rank, what's number one, most important, #2, #3 to help you reaccelerate?

Well, innovation, I mean, my core belief [indiscernible] product guy. So we have to deliver new quality product at scale. Frankly, the rest -- if we can do that, the rest will probably take care of itself. But if you were to start delineating, next one down, I think, would be the channel. Channel is large. So our GTM efficiency, starting with marketing efficiency, how we manage and organize our internal sales force, how we run the outside channel, relationships with service providers that they are reselling us. So I would say that's number two. And number three is just internal discipline. Very important, we continue on major reductions in SBC. SBC would very much urge people to look not at the top line SBC that are getting published, but at grants in year that we're doing now. So that will -- because that is where the whole thing is trending. And it's quite healthy. It's already meaningfully below our growth rate, what we are granting in a year. So that's going to continue. All of this together, to me translates into one number, which is [indiscernible]. And that's been a bit of a hockey stick for us and hopefully will continue, especially with buybacks [indiscernible].

Got it. Yes, go ahead.

Can you talk about just how you see AI agents progress over, let's say, the next couple of years? What are the areas that they can reflect more customer service calls? And which areas are basically very basically no [indiscernible] for AI agents?

I don't think there are any no-gos, but AI agents do well. They are as good as the data that you feed them. So if a company, say, our customer is able to articulate and well define the question set that their customers are asking, then AI is quite capable of understanding user intent and providing the right answer out of that universe, okay? But it's a heavy lift because many of these questions that customers are asking are one-offs, and that's where humans are still have a role to play.

Unless there are -- unless there are any other questions, why don't we wrap it up just a couple of minutes earlier because I ran out of my questions. You guys did a great job giving good concise answers and not stonewalling. And so I appreciate the directness and the openness of the conversation here. To our clients, it's just day 1. We got 3 more days of software, technology, Internet. So hang around. I hope you learn a lot and go back with great actionable investment insights. Thank you so much. And thank you again, Vlad, Kira and Vaibhav for coming.

Thank you.

Thank you.

Thanks for having us.