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

Perfect. Hello, everyone, and I hope you're enjoying day 1 of the UBS Tech Conference. For those in the audience that don't know me, my name is Taylor McGinnis, and I head up the application SMID SaaS space here at UBS. And so before we dive into our session with RingCentral, I just want to let you all know that if you have a question, you should be able to ask within the app. And then I'll leave a few minutes at the end to answer any questions. So with that, today, we have Vlad, who's the CEO and Founder of RingCentral. And then we also have Vaibhav, who's CFO. So thank you guys both for being here today.

Thank you for having us.

Of course. Vlad, maybe a great place to start is over the last few years, RingCentral has embarked on a significant transformation. So you started in the unified communications space. You've been evolving the product to encompass customer experience in the contact center, more recently, artificial intelligence. So maybe you can just give the audience an update on where you are in that transition? Is 2026 going to be the breakout year for some of these emerging products. And pic initiatives you and the team are putting in place to chase after a lot of these broader growth opportunities?

Great. Wonderful question. For the record, we only got 27 minutes left. I have a very long answer. We probably have more questions. Yes. Look, RingCentral, we are one of the original SaaS companies. The company is over 25 years old. I'm the founder. So we started out by moving business communications from on-prem to the cloud, okay? We call it RingCentral 1.2. We were rather successful coming up from approximately 0 revenue to approximately $2.5 billion in revenue in that amount of time. RingCentral 2.0, as we view it, is when we went to become a multiproduct portfolio company. So that's when we stopped viewing ourselves as a single product or service provider and more as a platform with multiple apps and now engaging into customer engagement, aka, the contact center, video, video events, messaging. So that's RingCentral 2.0. And it contributed to our growth, and our success and really set us up for where we are now, which is RingCentral 3.0. 3.0 is one that's going to overshadow everything we've done prior. And this is where we are not just making it easier for people to communicate more devices, more locations, cheaper, more self-service. But we're fundamentally changing how they communicate. So now 3.0 is about embedding AI into human interaction. Some of it will be replacing humans. But a lot of it, and certainly, that's where the industry and where we are now is less about replacing maybe just yet and a lot more about enhancing. So we've introduced a not 1 or 2 but 3 products just recently, the 3 As we call them, AIR for AI receptionist, AVA for AI virtual assistant and ACE AI conversation expert. And between these 3, we cover every stage of an interaction. Before the call, AIR during the call, AVA and after the call ACE. And it's super early, but these products are growing in triple digits, not annually, but sequentially. So gives us every confidence that your question is '26 is going to be a breakout year. Yes, so will '27 over '28. There is a lot to cover here. We believe that we are extremely well positioned to be one of the main beneficiaries of this AI revolution.

Perfect. So let's dive in a little bit more on the 3 As that you mentioned. So AIR, AVA and ACE. Could you talk about -- it's early days, but in terms of where you're seeing the most customer interest, which of those 3 products. And then two, as you think about the evolution of adoption and monetization, what does that look like potentially in the coming years?

Sure. As far as share numbers are concerned, numbers of accounts, it's AIR. We are well over 5,000 accounts as of our last announcement. We're well over whatever we've announced back then now. We're signing up multiple hundreds of accounts per week. And it's just beginning, and the big guns haven't really spoken yet. One of the big guns, for example, is AT&T., that started shipping and they now have multiple hundreds of accounts, if not more than that. Most GSP, global service providers, which is a unique GTM, we have in addition to direct and regular channel. Most of them are picking up at least some of these. I can tell you that there is a lot of excitement about AIR in particular, because it is so easy to relate to, okay? It simply gets you to where -- it replaces and augment really more augments and replace its reception, human receptions, and it can answer a number of questions, directions, work hours, price list like that, anything you can scrape from your website or your knowledge base as a customer of ours. It can direct calls, it can set up appointments for you. People don't realize how many calls they are actually missing with the best of intentions, people simply don't like leaving voice mail anymore. So what does they do they hang up? So that means missed leads, missed cases. We have a -- one of our customers is a health care clinics. And serious stuff. People have a breakdown and they need to get through. And if there is no one to pick up that phone, it's not a good situation from media perspective, okay? And AIR sort to resolve that because simple questions can answer and less simple questions, it can actually get through or near to get through. And this one company, it's a small company, but they're saying $1.7 million in annual recurring business for them once they deployed AIR, and it allows them to expand and buy a new business. So hopefully, more of that. This is just one little example. So numbers-wise AIR. It's very, very early. And in all fairness, a lot of what AIR does is embedded in some of the higher tiers anyway. We have this wonderful customer, some of you may have heard of Detroit business. They love it, okay? They're using. They get lots of traffic, people who call business for whatever reason. And they get it to document and annotate calls, okay? ACE, it's really quality management and sales training, and it's skewing more upmarket, but popular with financial institutions. I have to say we rank, we use all 3 products ourselves as well. We've got several thousand-plus people in the company, about 2,000 strong contact center, call center of our own. We have AIR in front. We have ACE in the back training agents and AVA for anything in between. So there is definite traction. And again, we are very well positioned because with all of the talk, maybe it's fading now a little bit that, wow, voice is going away and who is using voice anymore and all I do is I'm on Teams or Zoom or something. Yes, maybe B2B and even that by far, not 100%. But B2C, it's all voice. Voice and some text, some SMS. And we're the leaders there. We have market share. We're doing some of the numbers to share what, 1 billion calls a month, that's 3 billion minutes a month, so over 30 million annually, 1 billion SMSs a year. Everything is growing at or even above our growth rate as a company. And the trends are only getting stronger. And with this [ Metrigy ], we're just uniquely positioned to deploy AI at every stage of a transaction of a workflow. not too many companies can claim that.

Yes. That was a great background on the competitive differentiation, and I'd love to dive into that a little bit deeper. So in terms of the competitors that RingCentral runs into frequently on the AI side, what does that look like? There's a number of players in the space. You have CRM players trying to offer some solutions in the space. There's contact players entering it, other -- you see competitors. So who do you see more most frequently? And how is RingCentral trying to position itself in this industry?

Look, CRMs are great. We use the CRM. They don't answer calls or text, that's the thing. So we didn't run into them that much, at least not yet. So again, a consumer calls a business, sales force is not going to pick up that call, we will. Now certainly, especially for larger enterprises, of course, there is going to be handover and of course, we'll work with agent force or whichever Agentic cloud will -- there are protocols for that and all of that. And we do that. But again, we are in the first position. To your question, who do we see? The start-ups, sometimes we see, but the thing is, they don't have the traffic. They don't have the presence. So anecdotally yeah. I mean, usual suspects, there is Microsoft and the copilot but that's very specific. There is no AIR equivalent anywhere. There is not a scaled-up competitor with an AIR like products that we know of. I mean we see Microsoft, we see some Cisco, we see some Zoom. It's a very large market, but we also all have basis to cater to a business to protect. And certainly, our customers are choosing our product predominantly. I have to say that a new motion for us has been PLG, product-led growth. So 50% of AIR deployments are actually our existing customers going online without our intervention and just signing up for a trial. And yes working great, and we're certainly going to promote it more and more. So again, early days, but strong will get stronger. Hopefully, we'll continue to be one of them.

Perfect. Vaibhav, over to you. So you've set a goal of achieving $100 million in ARR from these emerging products. So could you break down what that $100 million could potentially look like across these individual products? And then just any additional color in terms of the growth trends you're seeing by product as well too, I think, would be helpful for the audience.

Yes, of course. So of the $100 million, the biggest proportion right now or the biggest portion is RingCX, which Vlad talked about and followed by ACE and AIR. And just to remind people, the new products are very new. Like RingCX was introduced less than 2 years ago. And within 2 years, we have over 1,300 customers growing 150% year-over-year. So that's pretty impressive. AIR, we've added close to 6,000 accounts actually in the last reported number within a matter of a few months. And as Vlad indicated, it's continuing to grow. So I think the pace of innovation has been really impressive. I think we as a company, we are -- the genesis of RingCentral has been innovation, particularly around product. So very pleased with the results, and that's the breakdown. In terms of the trend, look, it's a little under 5% of overall ARR now based on the last guidance we had provided. So we went from 0 in '23 to $50 million in '24, and we've guided to over $100 million by the end of this year. So again, the numbers speak for themselves. It's a pretty impressive trajectory. And it's a little under 5% as of now. I think our next goal and Vlad had articulated that at our product is to be approximately 10% of our revenues in 2027.

Perfect. And then in terms of the remaining 95, 90% going into next year, it still sounds like a lot of the core business is in the RingEX business. So could you give a little bit of an update in terms of the performance of that business, the underlying demand trends that you're seeing what the catalyst of that business look like going forward? So is it really a function of improvement of demand environment? Are there any interesting initiatives that you guys have underway to spark further growth in that business? How should we think about the underlying drivers there?

Yes. Look, it is a model ship. It's a $2 billion business, that's growing. It has been growing more in line with the market, certainly not underperforming. Market has slowed down. There's no doubt because it's maturing. It's -- it went through its growth but, let's say. But there's still tons of opportunities there. There is still a lot and lots on-prem left. People don't realize how much on-prem is still left and there is a lot. People like Cisco, people like Avaya, they're still sitting content of millions of on-prem heat. So every heat migrate to the cloud over time. But it doesn't need to be every seat to move a needle on our 8 million. So there is that driver. Also, there is -- the way that we look at it is now more as the platform, more of the share of wallet. So to grow UCaaS -- you don't really grow you UCaaS. You grow your revenue as a company. You grow ARPU, you grow ARPA and the direction we are taking is not just concentrating on net new bear minimum seat but enhanced seats, seats with AIR, AVA, ACE with CX, and we're having huge touches, okay? So new customers are taking AIR a alot new customers are taking RingCX a lot. So it all really works together. It's much more symbiotic, I would say. One little example is we have recently introduced something called customer service bundle, okay? And this is going to this idea that when people, maybe historically would think of UC and CCS 2 distinct Ireland and with very little overlap. But there is this new area called customer engagement which is in between. It's for lightweight informal contact centers to where you have a 10, 20, 30 person business, and not really a dedicated coal room, but people in business still behaving like agents when customers close coming into them, okay? So by that count -- so there are a few features that are -- telltale signs use of [indiscernible] in particular. And the third of our calls are going through [indiscernible]. So by that count, if you count a number of individuals involved, it's over a million -- well over 1 million, call it nondedicated agent, okay? So we actually have a product now aiming and getting trade specifically for that community. That's going extremely well. Again, we just introduced it last month, but we're talking about explosive growth at this point. And again, it presents us with an opportunity for net new logos as well as for upselling into the base. So I hope we answered the question.

Perfect. We've talked a lot about the growth trajectory that you're seeing by product, but I'd love to touch on the growth trajectories that you're seeing by customer segment. So there's been a big focus down market. You've seen a nice reacceleration in the business back up to double-digit growth. I think there's some more challenging dynamics happening in the enterprise space. So could you just talk through what demand trends you're seeing amongst those 2 customer bases, how RingCentral is trying to position the company and how you think about those customer segments going forward.

Look, demand remains strong. Sure, SMB is now growing in double digits, and Enterprise is not. I have to say, though, that used to not always be the case. And hopefully, we'll get Enterprise back up there as well. With Enterprise, really what we're doing is we're fighting harder comps. We're still adding tons and tons of new business. We're adding lots of new logos. We're having very healthy upsell into the base. Our logo retention is as good as it's ever been. We are dealing with lapping COVID contracts at this point. And it may seem like ancient history, but it really is not. And we were signing long-term contracts during COVID at higher prices for more ships because people were just buying, buying, buying, buying. And it's now reverting back to normal. This trend -- or the situation will normalize next year. By the end of '26, we should be done with those COVID contracts. There is a new normal, which, by the way, is the same as the old normal was before COVID. So we just came back to that. And so it's going to be easier comps moving forward. And then we also had this situation with NICE inContact where we were reselling -- were and are reselling their technology under our brand. We built a sizable business on it. And they were going through some management changes on their side, new CEO, all of that. So there was a bit of uncertainty in the market. And frankly, our channel dried up there. So we kept the base, but new leads were drying up. The contracts have since been renewed the. I would say, very, very good relationship between the companies, again, at this point, a lot of opportunities together, but it takes a long time to refill their channel. So again, we're fighting a harder comp, which should if nothing else normalize next year or after next year and maybe even as the new pipe gets refilled. And then meanwhile, on the tailwind side, we have this new product, and we have RingCX, our own contact center maturing and becoming more powerful. So it's going to be hunting more and more upmarket as well as our AI portfolio and their ACE, in particular, used to be called RingSense, that's hunting upmarket with dedicated call centers, with dedicated sales teams, that's what is explaining. So we're pretty optimistic actually.

Yes. And on that latter point that you made, so you talked about there's been a little bit of a mix shift from the NICE partnership then to your newer CX offering. And I think that has had a little bit of an impact to ARPU because I think the RingCX offering is lower ARPU than what you see with the NICE partnership. So could you talk about how you see that evolving over time? And are we largely through the impact that, that might be having to growth? And how do you think about that going into next year and beyond?

So it's a true statement, but I have to say -- so firstly, even just apples-to-apples, yes, it's an impact on the top line growth. But the bottom line, I mean, we have owner economics on CX and not on inContact. So what falls down to the bottom line is same or better with CX. So let's not forget that. Moving forward, look, the CX is getting stronger, and the partnership has been renewed. So we feel we can cover the entire gamut now from very small contact centers. Very, very small ones we do with the customer engagement bundle, okay? Then a little bit more formulized, more formed, we have CX and that's going into multiple hundreds of seats. And we think we'll be 500 to 1,000 seats. We have some examples even above that even now, which we are one of them, by the way, okay? And a company called Genpact, which is one of the largest BPOs in the world is the CX customer now, they have like thousands, thousands, but those are still few and far between. But again, between CX moving up, CC, which is inContact based, again, being in the field and the multiyear extension of the contract, and AI coming in and helping all of it, and with AIR in particular, not currently, it's aiding receptionists. Moving forward, it will be aiding agents and eventually replacing agents. Again, we think we're pretty well positioned. We're putting our dollars where our mouth is, dollars to the tune of $0.25 billion a year is our R&D budget. Over half of it is already going to new products. Hopefully, we're here next year, same time, I hope it's going to be meaningfully more than $0.5 billion.

Perfect. And I'd love to shift gears to the free cash flow improvement in profitability, which has been a bright spot in the RingCentral story. So Vaibhav, maybe you could just talk about the runway that's still left there and the opportunities for continued leverage both on the free cash flow side and also on the EBIT margin side.

Absolutely. Yes. So we are very proud of the improvements or the expansion we've delivered in both free cash flow and operating margin. Look, it's been a story of discipline and we are very maniacal about revenue growth exceeding operating expenses growth. So that's been a large part of the driver of free cash flow expansion. I mean, over the last 3 years, we've gone from $100 million of free cash flow to over $525 million, which is where we guided this past quarter. So it's -- the improvements are coming from 2 or 3 places. There's operating leverage in the business. So we are growing as a company and at 80% gross margins, a lot of it is dropping to the bottom line. There continues to be discipline in terms of spending. So we are very disciplined in terms of our headcount hiring. We are doing a lot of vendor consolidation. We are offshoring to low-cost locations. And as Vlad alluded to earlier, there's increasing use of AI within the company. I think he coined the term ring on ring. So we are using AI extensively. It's early on, but it's being used across multiple departments from R&D to customer support to sales. So that's driving operating margins up and that's flowing through to free cash flows. The second point there is we've also done a lot of work around working capital improvement. So the quality of the conversion from operating margins to free cash flow has been improving. There used to be a bigger gap, I would say, 5 to 6 points gap 2, 3 years ago. We've now kind of shortened that, and we have a point or so of difference. So that's point #2. Point #3 is we are also looking at free cash flow in conjunction with reduction of SBC and share count over time. So the metric we look at overall is free cash flow per share and free cash flow per share expansion. So we are taking steps to improve free cash flow, reduce SBC, reduce share count, which is now at 2020 levels. So based on the last guidance, we are now at $5.70 of free cash flow per share, which both from a dollar standpoint as well as from a growth profile standpoint is best-in-class. And the business model that we have around -- the recurring model that we have with the diversified customer base across [ SP ] enterprise and the growing portfolio of AI products gives us confidence that we'll be able to sustain that in the future.

Perfect. And I'd love to talk a little bit about the investments in AI and then also how you're using AI internally. I think you've made comments in the past that the big focus of R&D today is going into your AI product. So one, can you talk about that, how that is being allocated internally? And then secondly, you mentioned using AI, right, as an area to save costs and improve efficiency. So maybe you can give some examples of the initiatives that are underway there.

Sure. So as far as R&D dollars, I guess, I'll take it in that order. Look, all of R&D is becoming more efficient across the board. Certainly, we're not unique in that, but I don't feel that we are particularly behind anyone either. We got about 2,000 engineers, and they are required by mandate to use AI or else look for another job. The vast majority of them are choosing to use AI, I can tell you that. There is some resistance because it's new, but culturally, kind of -- they all understand that, that's the future. So this resistance is not very -- they're not dug in, okay? And well, proof is in the pudding. We are able to innovate at a rate that we never have been, okay? We are introducing multiple new products per year, if not per quarter. Just the pace of innovation, the number of features being released is multiples of what it used to be. We're hearing some very crazy numbers internally, 70% improvement. I don't know. I want to be a little bit careful. What I can tell you is that we are not growing engineering headcount and yet pace of acceleration is improving and just look at our announcement, okay? And there will be more of that to come. As far as use it internally, it's really across the board. We use it -- certainly, like you said, ring on ring, AIR in front of our contact center, ACE behind our contact center, that's already the reality. Our agents are being assisted with AIR, being trained and quality managed with the help of ACE. Using our own products, we were able to move to our own WFO. Let's not forget, we've added that to the portfolio recently. And we did this in a number of weeks. Our prior experience with the prior vendor was a number of months. So that's a step function change. We use it in marketing. We use it in search engine optimization. We use it in sales literally across the board. And absolutely not about using it for earnings scripts and for Analyst Days because it makes sense, okay? So it's just a new tool. And if you use it right, only good news will come.

Perfect. So that makes Steven's job easier. So I'm sure he's excited about that, that use of AI. Maybe a last question for both of you. We're wrapping up 2025 headed into 2026. So Vlad, first for you, what are you hearing in terms of customer conversations? What are your customers' spending plans potentially looking like going into next year versus what we saw this year? And then Vaibhav for you, curious on capital allocation and how you're thinking about that strategy headed into 2027?

Yes. Look, obviously, there is still some uncertainty on the macro side. Nobody is immune. Our customers are not immune. We're not immune. And certainty it does not mean no business or less business [indiscernible]. Some of these technologies we're bringing in they are disruptive technology. AIR is disruptive. I don't want the economy to go bad, but if somebody is laying off people, then certainly, it's easier to replace receptionists with AIR and vice versa. In small business, the backbone of the economy, 40% of the U.S. economy is SMB and it's been proving itself over and over and over again, it will continue to do so. And again, we are -- this is really maybe one takeaway. When all said and done, we are one of the very, very few mission-critical apps out there. If you're in business, you have to have customers and if you have customers, you have to communicate with them. You have to provide means for them to communicate with you. As long as the business stays as a business, they need a solution like us. So that's what we're hearing. So maybe sometimes it grows a little faster, sometimes a little slower, but it's always growing and it always presents an opportunity to upsell.

And then from a capital allocation perspective, look, our goal is to optimize free cash flow per share by investing in the business, growing revenues, paying down debt and buying back stock. So the beauty of having $525 million of free cash flow is it opens up optionality. So the first use of cash always is putting it back in the business in innovation and growth. And case in point, Vlad talked about over half of our $0.25 billion going in innovation. So that's about 5 points of margin that we are investing back in the business. We are opportunistic about M&A, we acquired CommunityWFM because that was a product gap in our CX portfolio. So again, we look at M&A. We are also deleveraging and strengthening the balance sheet. So if you look at our leverage profile, we went from over 4x to under 2x over the last 3 years. We've addressed our near-term convert maturities, and we've also made a commitment to reduce our gross debt to $1 billion by 2026, which will put us very close to investment grade at that point. And then last but not the least, buybacks represents an attractive opportunity at the current stock price level. So we bought back $200 million worth of shares. We have $385 million left from a Board authorization standpoint, which we'll continue to execute on. So overall, big picture, the idea is continue to optimize the business for free cash flow, pay down debt, reduce share count, which is now, by the way, at 2020 levels with the goal of improving free cash flow per share and expanding that over time.

Perfect. Well, we'll leave that there. Thank you all for joining and let's give Vlad and Vaibhav a round of applause.

Thank you.

Thank you.

Perfect.