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

Okay. All right. Good afternoon, everybody. We have RingCentral here this afternoon, Vladimir Shmunis, CEO; and Vaibhav Agarwal, CFO. Welcome back to the conference guys.

Thank you.

Awesome. Let's start with you. So how do you define the next chapter for RingCentral? And what are the 2 to 3 priorities that will matter most to making it successful.

Next chapter is to AI across the whole portfolio externally, internally to become just like an AI-native company. Obviously, the predate AI as we know this, but we were a satiated company, and we will tie that and I think we have a very good chance of doing this again, leveraging the best of AI. And again, that will be both customer-facing as well as major revamp of all internal operations to become substantially more efficient and to better serve the needs of the market.

Okay. All right. Good level set. So ARR from customers using at least 1 of your native paid AI products now represents 13% of ARR. I think it's doubled over the past year. I guess what's driving the adoption today? And what needs to happen for it to broaden meaningfully across your customer base? Maybe we start with you a and then we'll move to Vladimir and move to Vaibav.

Yes. Look, I mean we're happy with this progress, but there is a lot more to do. It's only 13%. It's not 30%, it's not 90%. Over time, we see touching the internal portfolio. doubling year-over-year is good. Hopefully, that will continue and maybe even accelerate. Look, there is a lot of demand. AI is absolutely becoming the new reality. For everyone, certainly for the vast majority of our customer base. It's how do you get to them? We have 600,000 companies, logos on the platform. So that's a lot. So to get through to all of them, it's the right time. So many times, we just get to talk of them around renewal times or the sorting PLG type motions as well. So we just think as a result of goodness to come. And I think we shared before, but about half of our new business, if you're looking at new logos, are taking AI. So ROA, okay? So I would say that, that would be the goalpost is to get from 13 to at least 50%, and then we'll go from there.

Is there any sort of anything to read across in terms of like the types of customers that you're landing in these earlier stages, like within the installed base or even from a new logo standpoint.

Yes. Look, so firstly, so far, our AI has been skewing more down market. There are some very notable exceptions. But majority, I think we announced 16,000 logos last quarter. I can tell you it's meaningfully more than that now. So most of them are smaller businesses -- what -- where it plays the best but tend supply to almost our entire base anyway is there like B2C businesses, which makes us a B2B2C, okay? So where Brink shine is when we're serving businesses, whose customers are consumers who are calling or testing. And we have massive amounts of traffic on our network. Some of the numbers we shared, $40 billion minutes. We're sitting on billions of and recordings. We're processing billions of test SMS messages. So these are -- that's the cost -- and as long as consumers are calling other service providers, business providers, we are in a very good position to get in the middle of those transactions and to apply AI before a human picks up, assist the human if there is a human transfer and then do pulse processing and generate insights after the call is done. Okay. So basically, back to your question is, so what makes this customer special is there's the one dealing with consumers. And there are the ones who need help putting an AI agent at every stage of this consumer provider interaction. And we're very strongly positioned there.

Okay. Great. I want to talk about air. I was at Enterprise Connect, I think, last year when you guys introduced that product, I got to see the demo. It was really compelling fast forward to today, more than 16,000 paying customers. So maybe talk to us about like once a customer adopts error, like what does expansion typically look like? Is it primarily greater usage, deployment across more parts of the organization, adoption of additional RingCentral products and by Vaibav, feel free to opine as well.

No, I'll start yes. Look, like I say, for now, it's been most SMB. So expansion is usage. Okay. And this is absolutely expansion, there's a lot more usage. So it's in the wake of an outcomes-based approach. But it also resulted in stickier customers. Stickier customers over time will take more products, okay with larger enterprises, sky is the limit because they can be deploying multiple agents. So we have various business models that we offer. But in the end, it is about outcomes, and there is just more outcomes to be had with larger enterprises.

And then by Bob, maybe just to expound here. You've highlighted stronger ARPU and net retention among customers that are adopting at least one AI product. How should we interpret those benefits today? And what additional proof points would demonstrate that AI is becoming material to RingCentral's overall growth?

No, that's a good question, and thanks for hosting us always good to see you. So look, that's a key metric for us, the RCAI adopting customers. And the reason for that is, as we are selling more bundled products, that metric shows paid AI adoption. It's showing product penetration, and it's kind of, frankly, showing quality of growth that Vlad talked about. So that metric is showing importantly that it's showing the monetization potential of AI, and it's showing that customers are more sticky because that cohort of customers have better ARPU than higher net retention rates. It's also demonstrating that customers are not just experimenting with AI. They are paying for these AI products. They are expanding the use on the platform. They are getting benefits of it, and they are staying longer. So as the adoption of AI products increases over time, it will start becoming an increasing driver of growth.

Understood. Saad, let's talk about customer engagement bundle. I think that's now 10,000 customers in a relatively short period of time. What unmet need was that addressing? And how do you see it roll alongside Rene, in CX and more of the traditional contact center offerings.

Yes. No, it was 1,000, like I say, a bit more than that now, we're late in the quarter. Yes. No, it's our fastest-growing product ever. It's actually has a lot of AI in it as well. And it sits between an it's efficiently part of the EX, we call it a bundle. But what it is, is it's a lightweight contact center for generally speaking, with some exceptions, but generally speaking, for smaller businesses. could don't have dedicated human contact center agents. So that's a rapidly emerging category, and it's actually fairly well protected sort of call it, from the AI threat because everyone are self included with the formal dedicated contact center, what you just want to have less agents. -- cars the and AI agents can do as do a job, maybe a better job, corporate, and this is why we're investing so much into agent who is -- but with the bundle, people who pick up the phone, they're not -- they have other jobs they can be dental technicians. They can be realtors, maybe junior realtors, right? Any work of life insurance agents. They have things to do and yet people are calling them, and they're growing their business number or texting their business. Somebody needs to pick up, not necessarily with that particular in person. Many times, the interaction can be handled by an AI agent and progressively more so. So that's kind of where it sits in the portfolio. So it's basically for our higher-end PBX customers who are not yet full enterprise, and that's just a sweet spot.

Okay. Viabav, let's switch back to you. The newer AI-led products are growing rep we've talked about it extensively. But subscription revenue growth is still holding in sort of the mid-single-digit range. What needs to happen for that product level momentum to begin moving the company-wide growth rate more meaningfully?

Yes. Look, first of all, we've gotten growth -- the growth rates at a stabilized at a sustainable level. If you look at the last 5 or 6 quarters, we've been in a similar range in terms of subscription revenue growth. So I think that's point number one. Number 2 is we have a durable core base that is a recurring revenue model with strong retention rates and higher ARPU. So that's the foundation. And our AI portfolio, like Vlad mentioned, is growing strong. It's growing rapidly, and it's showing customer traction. Having said that, it's growing off a small base relative to the overall company, which is at $2.8 billion in ARR. So look, as AI adoption grows across the base and as we acquire new logos, it will become a more meaningful portion of the overall ARR. And be an incremental layer for growth in the future.

Okay. Great. Vlad, a bigger picture 1 for you. As communications contact center and AI come together, customers have more choices across established platforms and AI native point solutions. What is owning the underlying voice network create a meaningful advantage or where does it create a meaningful advantage? And where does RingCentral still need to improve its differentiation in the market?

Look, so that's where the magic is. There is a network -- there is also traffic on that network, and there is data that's going -- flowing through this network. Some of it is transient, but especially with AI gets transcripted. So what's transient, how becomes fit and then the reporting like that. So it's really a combination of those. It is -- if you were to ask me in then what is your 1 differentiator is the fact that we can seamlessly combine AI agents with human agents with human representatives and we can make them work together as a cohesive team. And some of this team, again, is just a human and some of the team is new AI agents, which are obviously very rapidly evolving. So if you look at that, you have AI native purely agency companies. That's all great. They only have so much traffic, most of them. But tech-wise, they simply don't have -- they cannot light up human facing end points. And that's a very heavy lift. It took us a couple of decades, for example, okay? Anybody who drive, you're talking years, if not a hit. So that's it. That's the differentiator. And then you have people coming in from the human side, your contact center providers. And that's fine. They're kind of trying to do the same thing. Thing is, they don't have the breadth of the base. So what we're seeing is pretty competitive up there. In the enterprise, it's very, very competitive. And we have our head in ring too, but it's just -- we just find it easier to grow and to deliver value at scale in lower segments of the market with SMB, which is like 40% of U.S. economy is there. And you talk about growth being, say, still stuck in single single digits. That is true. But about 2/3 of our business is double digits and rule of 40 plus, which is exactly enterprise portion. And look, we're hoping that we can turn to send the pricing around the other than later. But the backbone of the business, we started out as an SMB company. That backbone is alive and well and healthy and double-digit growth, Rule 40 plus. So I also want to make sure that people don't get that.

Absolutely. Now you recently expanded the nice partnership and restructured the Avaya relationship as well. So how do those changes strengthen rings position in the enterprise market your point? And what would make these partnerships meaningful contributors to growth?

Yes. Look, so with Avaya, basically, we're transitioning this ACO base to our nature rink EF. So it's just a customer-friendly gesture. Look, we speak for Avi, a very different company now than it was when we started out by the I think -- so kind of going on 9 years. And look, we're still the site provider for UCaaS so as much as there is a need, it would be met through us. But they seem to be retrenching into the very high-end enterprise on-prem and welcome that. okay? With a nice context, it's different. We've been reselling in context part of -- it's been very, very successful. We've built a multi-hundred million dollar portfolio on that. And the latest announcement was is there now saying, "Hey, why can't we also offer this complete solution as well. And it's a solution. It's still clear industry leaders coming together with best-in-class UCaaS, which is us and best-in-class CAS, which is M. And having this combined solution out there, which is otherwise not available. So it's been early. And again, they are playing also higher in the enterprise, so very long sales cycles. But they are now enabled, and we continue to be enabled with them. So we'll see what.

Okay. Good. Vaibav, let's talk about margins and investment philosophy. RingCentral has been investing more than $250 million annually in R&D but you're also expanding margins. So how do you balance investment in the core platform with the opportunity across newer AI products? And where do you see the greatest potential returns today?