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

So I'm Ryan MacWilliams, SMID-cap software analyst here at Wells Fargo here for the ninth Annual Wells Fargo TMT Conference. With me today from RingCentral is CFO, Vaibhav Agarwal. Vaibhav, thanks for being here.

Thank you. Thanks for inviting us here.

And the joke I was making is like I feel like we should just open the back doors, I mean we can do like Ocean View fireside.

View is fantastic. This is my first time at the Wells Fargo conference as CFO. The view is just amazing. The attendance is just great. Happy to be here.

This should have been a part of my pitch to come over. It's like, yes, bring the whole family. So anyway, I'm glad that we're able to do this. Look, we know each other for a long time, and we've been around different environments for UCaaS. And 2020, 2021 was an amazing time and a lot has changed from our product. And technology standpoint. But maybe just to start off, like for those maybe revisiting RingCentral or just trying to look at the story for the first time, can you just talk about this year for RingCentral and kind of what led up to the most recent earnings?

Yes, absolutely. I think 2025 so far has been a really good year for us on multiple different fronts. We, in our Q3 earnings came out at -- all the metrics came in from a revenue standpoint at the top end of the guidance. We had record operating margins. We continued with free cash flow expansion and more importantly, free cash flow per share expansion while reducing SBC debt and continuing to buy back stock. So from a financial standpoint, it was a great quarter, on track to finish the year kind of in line with where we guided. From a business standpoint, there's lots of excitement. I think the fundamentals remain strong. On the core UCaaS side, we are continuing to grow. We are the market leader with a steady 20% market share. We are operating at scale with over 0.5 million customers that we serve, 8 million digital lines and tens of billions of minutes of traffic that's flowing through the platform. The excitement continues. We recently concluded our Product Day. And Vlad, our Founder and CEO, laid out the vision for our Agentic voice AI product portfolio. So I'll highly encourage everybody to go through the presentation and the webcast on our website. But Vlad laid out the vision for the -- and the product portfolio, and that's very exciting for us. The proof is in the numbers. These products are already out in the market. We are monetizing them. We are on track to exceed $100 million in new products within a matter of 2 years, which is a great accomplishment for us. And then kind of as you go down our business -- our small business continues to do well. We have a very unique and differentiated GSP practice, which is growing in the double digits and has strong profitability higher than the corporate average. We raised our free cash flows to over $525 million. We reduced SBC, which is now closer to 10% of revenues. And then from a capital allocation standpoint, we've done a lot of work over the years. Our leverage ratios are -- on debt are now under 2x. We've committed to reducing our gross debt to $1 billion by the end of 2026, which will get us closer to being investment grade. We continue to buy back stock, reduce share count, which is now at 2020 levels. So both from a business standpoint as well as a financial standpoint, there's lots to be excited about, a lot to look forward to. And what gives us or gives me the confidence is 3 things. It's our recurring business model. It's our diversified and large customer base and our exciting suite of AI portfolio products.

I remember in an earnings call a few quarters ago, Vlad really drove on the point that RingCentral is a multiproduct company now and how that's important in a number of ways in terms of your go-to-market or even just to go back to your existing customers and try to upsell new things. As we think about like RingCentral in 2026, you have a really fast-growing AI portion. It seems like stability more on the UCaaS side. I guess like how do you think RingCentral starts to change? Or what do you think starts to become more of a theme for you guys next year?

Yes. It comes back to the AI product portfolio and the vision that Vlad laid out. Look, for us, voice continues to be mission-critical. When we look at, especially in our B2C verticals, voice continues to be a predominant mode of communication. Case in point, when you have to call your physician's office, you are calling, you're not videoing. You're calling a plumber, you're calling your credit union, you're calling your bank, you are calling them. You're not -- or texting them, you're not videoing them. So there are a lot of use cases and voice and text usage on our platform continues to grow. We have 30 billion minutes flowing through the platform, 10 billion calls. We have 1 billion SMS traffic flowing through the platform. So that puts us in a very, very unique and a differentiated position to apply AI. So a lot of people asked at the Product Day, how are you differentiated? So the way we are differentiated is we are simply top of the funnel. We feel the first call when a consumer calls on their provider, they happen to call or text their provider. And in many cases, that goes through our platform. So we are in the best position to apply AI from the get-go. And during the -- every life cycle of the conversation, whether it's before, during or after. And that's where our product portfolio and as Vlad coined the name 3 is AIR, AVA and ACE comes into play. It's applying AI at every phase of the consumer interaction. And again, a point of differentiation for us also is we are investing materially in innovation. The pace of innovation has been very rapid. The pace at which we've come out with these new products in 2025 has been super exciting. We have over 2,000 engineers. We have over 2,000 direct sales force. So overall, I feel we have the core competency in terms of people, engineering as well as GTM talent. We have the right product portfolio, and then we have the right processes in terms of our unique and differentiated go-to-market motions to take these products to the market.

Yes. And voice is mission-critical for many of your smaller customers. So they're not going to trust the new start-ups with something like voice when -- like the voice AI thing is fancy and people want to use it, but like we got to -- we get the call to book the appointments and do our normal course of business first. With that in mind, I think folks kind of always underestimate the resiliency of like the voice market. And I think you mentioned that like voice minutes are growing year-over-year. So that what you're seeing like you're still seeing phone calls on RingCentral platform do well or growing on a year-over-year basis because you hear so much about like how things like chat or voice AI is going to impact voice minutes.

Yes, voice -- to my earlier comment, voice continues to be mission-critical, especially in B2C communications. So I would say about half of our business comes from -- we coined this term called the golden verticals, and those are health care, financial services, retail, professional and consumer services. So these are industries, again, where voice continues to be the primary mode of communication. Some of the examples I gave out earlier -- and in addition to the volume of the usage, the usage is growing on the platform. And that just is the most richest and the purest form of data that's available and the most ripe on which you can put AI to drive more revenues for customers and to drive more efficiencies for our customers.

I love that. That's where I wanted to go next. I mean those are highly regulated use cases, and I think you definitely have strong barriers to entry there and long-term relationships with those customers. On the AIR products and some of the other new products you mentioned, I was surprised to hear that half of the new -- or half of the customers using those products are new logos. And that seems like almost counterintuitive to me because I expected it to be like, oh, you're a long-time RingCentral customer, makes it easy upsell. So what do you think is resonating with bringing new customers on to RingCentral with those products?

Yes, we are seeing strong demand for the products, including AIR and ACE. And the demand is coming on both sides. There is demand in our installed base, which we happen to have a large installed base, and it's coming from new customers as well. So when we make a new sale now, we offer the full suite of products to our customers. And what's really driving the demand is the ROI is very, very clear. Like take AIR as an example, what does AIR do? AIR is fielding the calls. When you are calling your physician's office, before a human gets involved, AIR is picking up the call. It's answering basic questions. It's getting you leads, it's setting up appointment. So it's doing those types of things. Now a human agent can only work a certain number of hours a day. It can only field as many calls during the day. AIR is working 24/7. And it's replacing a human agent, which could be $3,000 to $5,000 a month with a product that is in the tens of dollars a month. So the ROI from a financial standpoint is very clear. And then it's allowing customers to drive more revenues. So case in point, I think you attended our product Day, there was a customer on the panel, and she was running -- she is running a mental health clinic. The use case for AIR for them was there are thousands of calls coming into the system every day. With the human receptionist, they're just not able to field all the calls. With AIR now, there are fewer missed calls and what that is resulting in is higher patient intake. And as a result of that, with patient intakes going up, and I think there was a number of 60%, they are able to generate about $1.7 million of more revenue annually. So for that business, that's a big -- kind of big deal, generating that amount of revenue that can be reinvested back in the business. There was another example I think we had given out on earnings of a customer, again, in the health care space, wherein they are using AIR for appointment setting. So their CSAT score has now gone up substantially as a result of them being able to set appointments in a timely manner. So I think overall, to summarize, the ROI is very clear. It's resulting in more efficiencies for our customers. It's resulting in more top line dollars. So overall, the value proposition just works.

Absolutely. Yes. And your first example, like trying to staff like a light contact center for that use case would be really expensive and it would be difficult to schedule where you have a 24/7 agent, right, that can handle any amount of capacity. I was initially surprised because when I think about like setting up a voice AI agent, that seems more technologically complex, right, that like an SMB customer or a new customer to RingCentral might be capable of. But I was surprised when I was demoing AIR that you can just put in your company website and what you do and then it instantly populates like a voice IVA, but we may consider like IVR router, but instantly for the AI agent. So it seems like setup times can be pretty fast even for small businesses for the AI agent.

Yes. I think that's the beauty of the product. It's very easy to deploy, simple to use, and there is practically no intense implementation, if you will. Customers are able to do it by themselves. They don't need to either use our professional services or outside professional services. So that's the other kind of benefit of the product.

And I think that makes more sense to me than like trying to tie like an API into your knowledge base and like come out with like your own voice -- do-it-yourself voice agent than buying it from a vendor like RingCentral. Just for folks that might be newer to the story, can you just go -- you went over AIR great, just AVA and ACE in terms of new products?

Yes. So AVA stands for AI virtual assistant. So think of it as a Copilot. So AIR fields the initial call. If for whatever reason, AIR needs to transfer the call to a human, what AVA does is during the conversation, it takes notes, it takes action items. It can take certain actions on your behalf like scheduling meetings, et cetera, from a ring -- from a UCaaS standpoint. And from a contact center standpoint, in addition to that, you have functionalities such as agent assist and supervisor assist. So in simple words, it will help the agents and supervisors on a real-time basis. And we had another customer on the panel from Detroit Pistons, which is a customer of ours. And they talked about using AI note taking as a game changer during their strategy sessions. So you don't need a scribe, you don't need people to be taking notes and comparing notes. AI is doing that automatically for you, which is embedded in our AVA product. Now once the call -- once the human interaction finishes, the ACE product comes into play. So ACE stands for AI Conversational Expert. It's a conversational intelligence product. And the simple way that I describe it is in the prior kind of world before AI, if you were in a contact center and you were getting, let's say, 0.5 million calls as a supervisor, you could only kind of listen to a sample of 5% or 10% of the calls. Now with AI and with our ACE product, you can review 100% of the calls. And there was a customer example we gave wherein historically, the customer was listening to 300 calls, and now they're listening to like hundreds of thousands of calls. And it's giving you conversational intelligence, it's giving you sentiment analysis, it's giving you call scoring so that you get better insights and you kind of get better intelligence on how the calls went. And the beauty of all of these products is these products are all working in tandem with each other. So they're all kind of sharing information and the idea is to drive better outcomes as the models kind of mature over time.

And that's super additive if you're a contact center manager or if you're like the team that does the analysis on your inbound call volumes? Folks may know, but I worked in the contact center in college, and I got one call created a month, right? So of the 25 to 30 calls I did a day, and I always got 90 scores on the call, so I never pitched the survey at the end. So -- but now you can either pitch a survey at the end with AI or you can do the recaps on your own. So it makes sense that like now through accessing these voice or data streams, you can build a lot more products off there. So it seems like the development for RingCentral has increased a lot over the last 6 months or to a year. Like when you think about AI internally, we've been asking each company so far on the fireside. Is there a way you guys are utilizing internally either in R&D to build products faster or even in finance?

Yes, there is an increasing use of AI across the board within the company. And -- that's been partially a driver of our operating margin expansion as well. Yes, it's early on, but it's -- we are increasingly using AI across functions. So in R&D, it's used for code development and quality assurance. Within our sales organization, we are using ACE. So now 100% of our account executives and sellers are now trained on AI. So what that has resulted in is better efficiency, better productivity, and we are seeing 10% more quotas. So eventually, it will -- if quotas go up, what it means is you don't need to hire more sellers. You're doing more with less. Within our customer support organization, they are using all the products now. So they are on RingCX, they are on AIR, they're using AVA and ACE. And some of the metrics that we are looking at is 15% average handling times going down. So meaning the agents are able to answer customer questions faster. And with AIR, we are able to deflect about 20% of the calls. So AIR is -- there's 20% deflection rate from AIR. So overall, we are a large contact center organization ourselves. So we have about 2,000 agents, which we migrated on all of these products and WFM, which we recently acquired. So overall, it's driving more efficiencies, and we have not added customer support agents over the last year or so. So overall, these are all examples of how we are doing more with less and also how we are driving better customer outcomes by answering questions faster, being more accurate and training our agents and sales force.

And just tying into how these new products can fit into like your existing customer base and the growth that you've seen. So as you think about like the ARPUs across UCaaS and contact center, like those have slightly changed over the year. But at this point, as you think about like some higher-priced SKUs for some of the new products you mentioned, like how does like these help ARPU across your customer base?

Yes. So these are all products that are separately monetized. These are all separate SKUs and being separately monetized. So RingCX, as an example, sells for $65 a seat. But when you tack on ACE and AVA as an example, the ARPUs are going up to almost $100 a seat. AIR is a separately priced product. We charge about $40 a seat for the first 100 minutes and then it becomes usage-based after that. And ACE is being separately priced at $60 a user per month. So net-net point being that I think there'll be 3 impacts of new products. A, it gives us the ability to cross-sell into our customer base. So we are getting a bigger wallet share of the customer. Secondly, it helps us get an uplift on ARPUs. Now again, these products are in their early innings. But as these products scale, it will help grow ARPUs. And number three, when you become a multiproduct company and when you are selling multiple products into the base, the base becomes stickier and net retention gets better.

And as you think about like your GSP ecosystem, and that's been a big advantage for RingCentral in the past. How are they starting to adopt some of these new products? I know it's early, and I think many of the classic UCaaS channel partners are going to take some time to get their hands around AI, but some of the AT&T commentary around the new products is interesting. So how is that developing so far?

Yes. We are super excited about that. So look, we have a very unique and a differentiated go-to-market motion, which I believe is a competitive moat for us. We have over 2,000 direct sellers. We have over 15,000 channel partners, and we have 15 global carriers with the likes of AT&T, Charter, Cox, Vodafone and others. So when you put all of these together, these equate to kind of more than 100,000 kind of feet on the street, if you will. So there's a lot of advantages that we have in terms of the go-to-market reach. And the GSPs are particularly exciting because more than half of our GSPs are now enabled to sell new products. AT&T was the latest addition, which we announced at earnings. And the reason we are excited is just the reach. Like they have hundreds of thousands of customers in their base to which they can resell the product. So you can have all the good products in the world, but you need to have the reach to be able to sell them. So GSPs give us that unique advantage, and it will help us just expand and get the products in the hands of a lot of customers.

Yes. And they know how to deploy RingCentral for years. So it takes a long time to train the trainers, as I call it. But look, we have a CFO on stage, so I have to ask...

Financial question.

You know it was coming. Just how long it was going to be. So just on the free cash flow, you raised your outlook for the year, now 21% margin. I guess like what are some of the things that you feel better now at this point versus the start of the year?

Yes. I think one of the north star for me as a CFO is driving free cash flow per share expansion. I think I'm looking at that as the Uber metric for us and for external shareholders. And free cash flow per share has 3 components. So number one is the growth. So we talked about growth. And certainly, the new products, the new AI products, the usage and the adoption on the platform is driving the growth. So that's going to contribute to free cash flow. The second kind of component of that is operating margins. And we've done a tremendous amount of work over the last 3 years. We've doubled our operating margins. We've like 5x our free cash flow. And that has come as a result of a lot of discipline. Like we are maniacal about revenue growth outpacing expense growth or OpEx growth. And the way that's coming is we are very disciplined in terms of our hiring. We are hiring in offshore locations, low-cost locations. There's a lot of vendor consolidation. I talked about AI getting implemented within RingCentral. So all of those things are helping kind of expand operating margins. The quality of the free cash flow is also going up with working capital improvements. And then the last thing we also look at is, which is the third leg of the stool is SBC and share count. So we've done tons of work to rationalize our SBC expense, which is now at roughly 11% of revenues. Stock continues to be a key way we incentivize our employees. So we'll continue to use it, but we are very thoughtful in terms of the use of stock as a means of compensation. And then from a capital allocation standpoint, we've been paying down our debt. We've been buying back stock and now our stock count is back at the 2020 levels. So when you put the 3 components together of revenue growth, operating margin expansion and reducing share count, our free cash flow per share has been growing at 35%. We are producing $5.70 per share, which when I looked at it last, was best-in-class amongst our peers, both from an absolute dollar as well as a growth rate standpoint.

Excellent. And you beat me to my next question, but just for consistency or maybe if investors are newer to the story, I would love to hear if you could double-click on both your buyback and then how you feel about -- I mean you've done a tremendous amount of debt payback over the last couple of years, but how that is currently?

Yes. Look, from a capital allocation standpoint, the idea is to optimize the business for free cash flow, which is what we are doing. We raised our guidance to $525 million. Now from there, the first use of cash always is investing back in the business. Case in point, we talked about our R&D spend is over $0.25 billion, a majority of which -- over half of which is going into the new products with a greater proportion going to AI. So that's about 4, 5 points of margin that we are reinvesting back in the business versus taking it to the bottom line. We are also opportunistic about M&A. So we recently acquired CommunityWFM to accelerate our product portfolio with the product. So we are opportunistic with M&A. And from there, we look at debt paydown. So we've -- you're right, we've paid down a lot of debt. We brought our leverage down from 4x to now under 2x over the last 3 years. We have a convert coming to you in March, and we've addressed that proactively. And we further committed to bringing our gross debt down to $1 billion by the end of 2026, at which point, our leverage would be under 1.5x, very close to investment grade. We then also buy back stock. I believe, at the current valuation levels, buying back stock is an attractive use of cash. So we bought back $200 million of stock this year. We have about $385 million remaining on our authorization, which we'll continue to execute. And so the overall kind of Uber level point again comes back to improving free cash flow, paying down our debt, strengthening the balance sheet, putting money back in the business to continue to grow and reducing share count with buybacks. A combination of all of that will result in free cash flow per share growth.

Excellent. And just on the competitive landscape, I mean, we've seen people kind of come in and out of this market and focus from larger and smaller vendors, become more prevalent and less prevalent in the last couple of years. Anything to call out there? Any opportunities you think are to take share or maybe some stability overall in the market with a better macro?

Look, I think there's a couple of points. On the UCaaS side, we continue to hold our market share. We are the market leader with a steady 20% market share based on revenues. And these are reports not published by us, but published by Synergy and industry research analysts. So we continue to hold our own. We are continuing to grow. We are adding seats at a decent clip, and we continue to capture the on-prem to the cloud migration as well as the migration from subscale cloud players on the UCaaS side. I think on the contact center side, RingCX is playing particularly well. We've added over 1,000 customers in a matter of a couple of years or under a couple of years, and that's been pretty staggering. I think that's been the fastest addition, I think that Vlad talks about on a contact center solution. And then when it comes to AI, look, we are uniquely differentiated in Agentic voice AI. There was an interesting statistic that Gartner published wherein it said that 90% of Agentic AI fails because it's not associated with the platform. And the differentiation we have is that we've built a very large, reliable and a feature-rich platform over the course of our history with so many -- with over 0.5 million customers and 8 million digital lines. So we are at a different size and scale when it comes to -- you talked about start-ups, like we just have a scale advantage. I mean we have the network, we have the platform to be able to deliver solutions at scale. And therefore, you are seeing that manifest itself in the numbers. Like the -- we have now over 6,000 customers on AIR within a matter of a few months. We have 4,300 customers on ACE as an example. So just the scale, the depth and being able to invest $0.25 billion in innovation, having 2,000 engineers, 2,000 salespeople and having the large and differentiated go-to-market motions is all helping create that differentiation.

Yes. And you've built out a platform to handle some of the most complicated like Cisco call manager digital transformations that -- I think that's -- it's a good point made on Gartner, like people need a platform because no matter how good a voice AI agent is, like you're still going to want to have failover to a human agent, no matter what. So I think like that's kind of the missing piece that we forget about is like there's a lot of attention around voice AI agents, right? But like you still need to talk to a human when things go wrong.

So you need the foundation of the traffic, you need the foundation of customers, you need the roots as Vlad called it on the Product Day.

And so the one thing I thought about over the last couple of years is like people don't wake up every day like let's change from on-prem to the cloud, right? Mission-critical digital transformation can take a number of months, and it's just not something you want to do every year. There are some customers you talk to, it feels like they're like we're set on on-prem forever. But does AI start to change that calculus as you're sitting there, you're like, okay, we know we need transcription. We know we need to tie these things into our CRM. Like we need to get more insights from our voice calls that people are more coming around to like, okay, as I think about like where I could start my AI journey, like this might actually make more sense now to start shifting like a lot of these workloads to the cloud.

Yes, absolutely. I think the on-prem solutions just don't enable you to use AI. I mean they're rigid, they're inflexible. And I think for you as a customer to be able to use the power of AI, which is becoming a must to have rather than a good to have at this point, I think you've got to transition. So I think our expectation is that those migrations should continue and should continue at an accelerated pace.

And that's just what I want my work life, right? How many investor calls that I wish I note from. But for those in the room, it's time obviously to say thanks to RingCentral for being here. Really appreciate the time.

Thank you. Thanks for having me.