RingCentral, Inc. (RNG) Earnings Call Transcript
May 20, 2024
Earnings Call Speaker Segments
All right. Maybe we'll go ahead and dive right in. Thanks, everyone, for joining. I'm Sanjay Rao with JPM on the West Coast from the investment banking side. And we're super excited to have Vlad and Sonalee here today, coming off a really strong quarter, so always great timing on that regard.
Maybe with that, we'll just dive right in and open it up and also kick off with some of the recent product announcements and initiatives. So you guys have announced RingCX, RingSense, RingCentral events over the past 12 months. There's a ton of innovation going on in the portfolio. Can you maybe talk a little bit about these new angles to your platform and some of the things that you're seeing with customers and hearing from them, especially with your march up market and the momentum that we're hearing about?
Yes, definitely. So first of all thanks for having us, and hopefully mics work. Okay. Look, there's a bunch of things going on, okay? So one is -- just trying to think what order to present this. One is we are turning into a multiproduct company. We've been around for quite a century, RingCentral have incorporated in 1999. And we've been pretty successful as a single product specialist in moving UC to the cloud. So UC to UCaaS. And we started with a nice round number of $0 in revenue and we are what that was this year.
Close to $2.4 billion.
Close to $2.4 billion. So we feel relatively good about that, but that's all in rearview. So moving forward, this question is, how do we continue this march. And what's clear is that while there is still an amazing opportunity left in the, call it, digital transformation of business communications. So UC to UCaaS, and it's maybe 20% penetrated, if that and they're just in our gold verticals, but there are other opportunities that are adjacent that we need to go after. And they include CX, so contact center. They include [ video ], and very importantly, they include all of the innovation that is now possible through AI. So it's a megatrend of AI. So when I say several things going on, with diversifying the portfolio, we are infusing AI across our entire portfolio. And we are now beginning to pivot from a horizontal strategy to a more verticalized strategy. So we're talking about our gold verticals and where we are seeing our abstraction and the 40,000 seat win, for example, we've announced just last quarter is in one of those verticals, which is retail, okay? So we're busy, and it seems to be paying off.
When you are talking to customers, especially as you're marching upmarket and some of those large seat deployments, where are they on the AI journey? Are they still earlier or midway through it? Any feedback
I mean, how can it be midway through something that didn't exist 2 years ago. Yes. No, look, it's super early. I think people are trying to find their footing. There are all of these major applications and implications that's coming about because of this brand-new technology. It's very hard to create a megatrend. We have always been of the opinion that it's better for us to leverage in the right megatrends. And we founded the company on what was then megatrends of broadband, mobility, mobility of workforces, mobility of devices, smartphones and that lasted the last couple of decades, but this is the next one, and it's a little bigger. The advantage we have amongst, not all competition because there are obviously some other people very much as the [ scam ], but against vast majority of competition is we have a very large network. We're moving billions and tens of billions of minutes of B2B traffic. So we have learnings and exposure and attention of the customer base that are hard to replicate. And when you apply AI and these innovations, as well as our multiproduct strategy matures and you are able to cross-sell into the base, which in the end is becoming a major asset for us. That's where the magic happens.
That's helpful. It sounds like -- so CX, RingSense, your core UCaaS plus AI. That's a pretty fulsome platform with a lot of cross synergy as you expand forward and drive up market if I got that right, Vlad.
Don't forget video. And in particular, we're seeing very good traction with RingCentral Events using [indiscernible] events. And look, it was a high flyer, COVID [ baby ] fairly in fairness, but they used to be valued at $8 billion. We paid a little bit less than that. But interestingly enough, for the first time in many quarters, which predated us, we are now seeing a reacceleration in that business. And I think it grew 25% quarter-over-quarter, which is significant for business that's...
In logos.
In logos.
That's great. Could you double-click on your contact center strategy? So you have the existing partnership with NICE, and there's been some change there over the past week, which would be helpful to get some of your commentary on, and then you have your own contact center solutions. So how do those two play in market together? And what's your long-term strategy around that part of your business?
Yes. Well, the change with NICE it's been announced, but so far, no change. I think Barak is saying that he will stick around through transition, [ what have you ]. So yes, we don't expect any change. It's a long-term relationship. Strictly speaking, it predates NICE itself because they started out with in content before the acquisition. And look, we have lots and lots of customers that are enjoying UC and CC together. And more and more, we're actually seeing enterprises actually the all sizes really wants all of their business communications together under one umbrella, which has been always foot forward on that. As far as RingCX is concerned, look, it's a much newer product. We own it 100%. So that obviously gives us some advantages on their economics. Control of the road map, control over pricing and so forth. And look, it's been nothing short of disruptive so far. We -- what did we say?
So in terms of customer numbers, we nearly doubled Q1 on Q4. We're now well above 200 RingCX customers. So seeing very, very strong demand and traction and our sellers are finding -- they're seeing a lot of demand and wanting to push this to our sticky installed base.
Yes. So having said that, it is a lighter weight product. It does not have nearly the complexity of inContact. And there is a very natural bifurcation if you have lesser number of agents. And if you are more digital or omnichannel-oriented, then CX is the right solution for you. If you are more traditional kind of heavier use then we'll lead with our CC.
That's very helpful. And then as you look out next few years, what are other strategic focus areas as it relates to building out your platform and other products that we could potentially see?
Well, look, don't under-appreciate all of the heavy lifting that needs to be done to add additional products into the portfolio because our sales force has been historically selling a single product. Now they're selling multiple products, and we're seeing, let's call it, early success in that. So we definitely need to continue with that. But as far as -- outlined, look, there is AI that gets us -- and the rest of the industry gives us an opportunity to rethink the value prop that we are providing. In the contact center space, for example, historically, it's been about workflow management. And how do we make an agent force most productive, okay? Now shifting towards, let's actually reduce the headcount, and let AI start taking -- start taking share, which is actually great for up and commerce like us because we don't have a base to protect there, okay? So that's one opportunity. So again, AI throughout the portfolio. And I already mentioned verticalization, okay, this is very large win, [ 40,000 ] win. Well, let's do more of those, yes. So we know what these people needed. So imagine that we'll continue going after what is now lower hanging fruit for us. Yes. And this is just one example, there are others.
And you've done a really good job building out the ecosystem around the company and routes to market to get some of these 40,000 seat wins. How many more of those are there? I mean, there's so much of the market still on-prem, if it's UC, contact center that hasn't converted to cloud. How much more do you see opportunity there?
So as I mentioned, it seems that the market is no more than 20% traded maybe closer to 15% in our particular gold verticals. What makes them gold is that that's what we're seeing, outside, traction. And that's health care, that's financial services and retail, is -- in public sector, very important, okay. We have a number of major universities, for example, that are customers. So just in those conservatively, we see another 100 million seats that can be had. And we are in strong single-digit seats. You have 1 or 2 competitors were -- which are maybe the same range, that's about it. So it just is the gold verticals. So a huge amount to go. And this does not count or account for the CC part of it. It does not account for events or video in general. It does not account for messaging, which is also part of our platform. So huge runway ahead.
That's helpful. And then the macro has definitely been volatile past couple of years. You put up a really strong quarter recently. So maybe you could talk to some of the things you're seeing in-market demand that others might not be seeing in other parts of the software industry?
Look, we're seeing strong demand. We're doing well on a new logo acquisition. We have seen now in the rearview people have overbought a little during COVID. So upsell has been more challenged for us. We believe it will normalize as COVID effects just blow through the system and settle down. But what gives us incredible hope, okay, and bit of a bounce in our step, if you will, is the fact that the pipe is strong, early pipe is strong, late pipe is strong, okay? And these are formal definitions. So I will do it as I've been consistent over years. Conversion -- lead to close conversions are strong. So there is a lot of new business out there. We do believe that over time, upsell will stabilize and hopefully reverse as well. We are not -- we are able to hang on two logos, okay? It's very, very important. So our logo retention is healthy as people are downscaling from COVID, those are the headwinds that we're seeing.
Got it. Very helpful. And then back to my point on the ecosystem you've built. It's been a big differentiator in your company, this broad ecosystem you have around Ring. Can you talk about if there are other ecosystems you're focused on as the platform expands into these new categories like RingSense, RingCX that become important there? And also, what's worked well with those? What hasn't worked well, and you can take some of those learnings and I guess, apply it to new ecosystems that you continue to build around your strategy?
Right. So we've been talking about core to our strategy or a tip, as we call it, to our strategy, which stands for trust innovation partnerships. We've covered I. I think that now is this that. Trust is our 5 9s officially, but really 6 9s availability which is unique in the industry and surpassed as well as all of the attention to security and customer data protection, okay? So let's talk about P because it is a very big P. Look, we have a very differentiated approach to the market. We have -- we actually pioneered for a SaaS company and for a UCaaS company, in particular, we pioneer as the channel, okay? Because we have been extremely instrumental in switching this channel over from only selling on-prem to now being used to the SaaS model. And it's a big change because they used to be all paid the front, sell the $5,000 box, get $500, but not anymore so, right? So now they need to be -- they need to be retrained in accepting long-tail recurring revenue, which in the end is better for them, better for us. So we have 15,000 identified partners, and that translates into something close to 100,000 [ feet ] on the street through those partners, okay? I'm not saying that everyone has sold, a copy of RingCentral, but we need to have okay? And this is just our [indiscernible] partners. So that's definitely there. But what is really unique are the two other legs of the stool. So -- one is our GSP practice. GSP stands for Global Service Providers. And these companies like AT&T, Vodafone, Charter very importantly, which -- so we are now expanding into MSOs. We have just announced a relationship partnership with Optus out of Australia, which is the second largest provider. Look, it's a very healthy business for us. We see very little competition there. We have a multiyear positive track record. And they all -- they compete among themselves, but they also all refer, there is a network there. And I will say that we have a pretty solid reputation. Expect more to come there, okay? So there is that. Now as far as you mentioned about -- the answer is what we call strategic partners. The one that's really standing tall is Avaya. We have recently extended the relationship. I have just presented their Avaya Engage conference, which was what last week, where we introduced a new product, a hybrid office product, which allows for their current enterprise customers to keep the telephony on-prem while all of the collaboration is done in the cloud and through us. And look, Avaya certainly has their fair share of issues and frictions. It's still the world's largest by far, the world's largest installed on-prem UC base as well as by far the largest on-prem installed CC base. So we continue seeing very good traction and very good lead source via lead source there. And there are others, but that was -- I would highlight this one. But the verticals, look, as we're expanding and people are hopefully now beginning to understand that we are quite strong in the enterprise. I think there has been some confusion relatively recently that we are going to be deemphasizing enterprise. We're doing exactly the opposite. We're reemphasizing the enterprise at this point. And there are just many networks out there. You can think a size horizontally, but there are specific networks, say, in public sector, in state, and federal and those. So imagine that we will be expanding into those.
That's very helpful. And then as you expand and build your channel, do you run into situations where they're also selling your competitors? And how do you manage that with all your partners?
Yes. Look, we're not a monopoly. I would love to build one. But look, it is competitive, but we have our differentiators. Again, it's our reliability. Its richness of our offering, in particular, in the business voice space. And we have a reputation as a company that generally that's what the [indiscernible] does, and that helps. Of course, we have competition, but our biggest issue is not in head-to-head because we tend to win our fair share or more, okay? It's really getting to the table, getting into those RFPs and RFIs. And I can tell you that we are definitely making very specific steps and motions in improving awareness of RingCentral aided, unaided awareness. We just need to get all more bets at the table, and then we tend to do well.
Got it. That makes sense. And as you look out, do you see a convergence of you have RingSense, you have RingCX, those markets, to some extent, converging because the interaction with the end customer ends up being a lot of similar building blocks between both sides of your portfolio?
Yes, look, RingSense is a platform. It's not -- it's an interesting way. You can say it's converging. It's a red herring that just goes throughout the entire portfolio. And there are different variance or flavor for RingSense. But at the high level, you can think that there are some basic capabilities -- and let's say, basic, they're not so basic. It's translations, it's transcription, it's summaries, it's insights like that. But then as you start verticalizing, for example, we've announced RingSense for sales, which is also growing geometrically at this point. Will keep you on those numbers, RingSense...
RingSense for sales is growing ad. We doubled logos. So yes, more than doubled logos Q1 on Q4 to over 600. And today, it would be well over 600.
So yes. So there's clearly demand. And this is RingSense for sales, okay, which specifically provides insights to sales forces and sales managers, and we talk about joining salespeople into super salespeople, okay, whichever way they want package it for marketing. Image is that there will be more. It does not need to stay as a RingSense for Sales. It could be a RingSense for Dentists. It could be, I'm curious, it could be RingSense for stock brokers. Okay, you can -- with this technology, you can gain tremendous insights, which are industry specific. So that will be an ongoing direction of us.
And then do you have an advantage in some of these newer markets take contact center by having one of the newer architectures when you think about leveraging AI to the benefit of contact center versus some of the older, more prem legacy architectures that are out there, which -- good share donors probably for you.
[indiscernible] is going to die. Just a question when. Nobody is going from the cloud to prem, like no one, okay? So it's just a matter of time. It is taking time. These are sticky basis. It's not all going to go to RingCentral. But for us to reaccelerate our growth even the $2.4 billion is absolutely not out of the question, given the size of the opportunity and the type of disruption that's happening in the industry.
Great. Maybe we'll shift gears, Sonalee. We've been letting her off the hook here with some question. So when you talk about the 2024 guide, which was, I think, a great number you put out there and you beat Q1 raised guidance. What are you seeing in the market and confidence, conviction you're hearing from customers? You talked a lot about momentum in some of the newer parts of your platform?
Yes. So we did indeed beat, raise and raise in spite of an incremental $10 million FX headwind. So the actual raise was well above what the beat was and what gave us the confidence. So some of the trends that Vlad has been talking about and specifically, he was talking about enterprise. And we saw for the fourth consecutive quarter 13% plus ARR growth in that segment. And I think that was a big factor. It's that stabilization, the stability, and that was a big driving force. And then as you say, in terms of the new products, it's early days, but what we're seeing in terms of traction, it's significant in terms of being a growth driver as we look forward. And again, being this multiproduct portfolio. If you look at the last 1.5 years, where we've seen some challenges, it's really been in that upsell. And we think the best mitigator to that upsell as a multiproduct company is having more amazing products to sell into that extremely sticky customer base. So I think it's taking all of that together. But if I were to give you one word, it would be stability. That stabilization is what gave us the confidence to raise.
That's great. And then I think the other element is very interesting is you increased the free cash flow guide you're investing a lot in the portfolio and you're also taking up your guide, which is, I think, great metrics to put out there. Can you talk about the efficiency that you're seeing in the business model and leverage as well.
Absolutely. So in 2023, we dramatically changed the complexion of our company in terms of free cash flow and operating profit. So our OP margins increased 700 basis points in a year. This year, they're going to increase further. I've guided to 21% operating margin for the full year. But I think more interesting is as exactly as you say, is the conversion of free cash flow and operating margin. So this year, based on the midpoint of where I've guided on free cash flow, you should expect to see about a 34% year-on-year increase in free cash flow. Within that, the efficiency measures we took over the last year are still feeding through the P&L, but we're also doing more on the S&M side, sales and marketing which is an area that still is not where we want it to be. We believe there are further efficiencies to gain there, particularly on the marketing side, where we've done a lot of interesting work. And what I love as a CFO is giving the stat where we actually reduced our demand gen spend fairly significantly and actually saw better, more relevant pipe. And it comes down a lot of it to that verticalization, being very, very focused on where we're spending those dollars. So expect to see more there. And I said we're not happy yet with where we are in sales and marketing. We're around 40%-ish. But that's coming from 46% just over a year ago. So we are making good progress there. In terms of free cash flow, the other thing I am in case you don't ask me, I am going to use this opportunity to voice is that we're also very focused on stock-based compensation and bringing that down. So really, what I would urge people to look at and judge us on is not just our free cash flow generation, the 34% year-over-year increase. And the midpoint of our -- if you look at unlevered, adjusted free cash flow, sorry, unlevered adjusted free cash flow, we're guiding $440 million to $445 million this year. But if you look at free cash flow per share, given that we now expect, based on a revised guidance, for our share count to actually decline year-over-year, '24 and '23, you're getting even more growth in terms of free cash flow per share in excess of 36%. So I think taking all of that into account, we've made huge progress. There is more to do, but we're really proud of what we've achieved.
That's great. Maybe double-clicking on that, just if you could spend a minute on capital allocation broadly, how you think about it right now and then longer term would be helpful.
Yes, absolutely. So you've heard me say before, our capital allocation is very dynamic. There are a couple of levers that we have and a couple of independent evaluations that we make. We use our cash, obviously, to invest organically. And part of the reason that we have this extremely full multiproduct portfolio is because we continue to invest in the cycle. And actually, one of the great things about having higher operating margin is it does free up cash flow and frees up profitability to go and invest in innovation and new products. That will always be important at RingCentral. We will always innovate for growth. Secondly, we use our cash to pay down our debt. And you may ask me about the converts, but I'm just going to use the opportunity here.
You're better asking yourself questions, I guess, I'll...
We have $161 million remaining on our 25 convertible -- and we will use some of our own free cash flow, as you've seen us done in the last year to address that. And we also have other potential sources, including an undrawn term loan A facility at our disposal. But I think most importantly is that we now have the financial profile such that the quantum of debt that we have today is very easily supportable by the cash flow that we're generating. . But then we also consider other uses of cash, including share buyback. And you saw in our last earnings, we increased our authorization by a further $250 million. So we currently have an outstanding authorization of about $375 million. And if you do the math on the free cash flow per share growth that I just talked you through, it won't surprise you to say that we think that buying back our stock at current prices is a very ROI positive venture and accretive. So that is something that we will continue to do, but we will always evaluate it against other sources and other uses of cash and including potential M&A. And Vlad alluded to the Hopin deal. We love that deal. It's now rebranded RingCentral Events. But not only did we get the assets and talent at a great price, but it just brought incremental capabilities to our customers. It really, really up-leveled our video offering, our overall product suite, and I can't underscore the importance of bringing in that talent. And again, a great valuation and at the right price. And I think what you will find from us is that we will continue to be very disciplined about any M&A we do. Obviously, it needs to be very, very strategically relevant, but it also needs to work financially, and we will maintain discipline around that in terms of use of capital.
That's very helpful. Maybe we'll pause here and see if folks in the audience have any questions.
Just curious how the partnership with Teams works. When does that decision get made? And how sticky is that revenue is that base safe over time? Or does Microsoft try to bring that into their own ecosystem over time?
Look, partnership is a strong word here. Teams is an open platform, okay? So Microsoft certainly well aware of us and obviously is vice versa. We are not competing with Teams using your words more partnering with Teams. We are competing with Teams phone, okay? So let's remember that. So when we talk about this enterprise wins and teams penetration that we do displace Teams phone. But if you look at, for example, the cost of an E1 or an E3 license and then add what Microsoft would charge for phone -- for the Teams phone and compare that same package with RingCentral phone, you get a lot more for a lot less, okay? And what we're seeing from Microsoft is that in the end, they are, at least for the time being, they seem to be more interested in proliferation of Teams as a platform into the enterprise versus any particular aspect of teams. So all I can say is that it seems robust and healthy for now. And hopefully, we'll continue that way. And customers are buying. Very important, the customers are buying. And it's not just cost is important. It's not just a cost they really Teams -- no Teams -- teams phone simply does not help the features or the reach that with.
One thing I would just add there is the Fortune 500 win, the 40,000-seat deal that we announced last quarter that was in a Teams environment. So they're using teams for messaging and video but RingCentral for phone.
We have a minute left, so I'll keep going on. As you go up market in some of those big deals, is it a different set of companies you're competing against there? Or is it the same ones you've been competing with for smaller seat count type deals? Any sense on that would be helpful in the last minute we have.
Sure. I look at some of each. There are certainly people that only specialize in SMB or SB. And they tend to be smaller companies. They generally compete on price. We will sometimes don't necessarily match their pricing in case they will win. But that's also help going for them at this point. In the upper segments, look, again, it's your usual suspect. We see Teams and Teams phone, in particular. And again, our strategy certainly were not there to take on Teams directly. And not something that we think is a winning strategy. . But there, we are very much -- we have our battle cards against Teams phone we have our reference cases. Look, we used to hear a lot of zoom. We hear less of that now for whatever reason, I think they have their own hands full with Teams and what they're doing to their market. Cisco almost never. And that's it. Those are the large companies. Everybody else is a long tail.
That's great. Well, Vlad, Sonalee, thank you so much for your time here today. Super excited to have you in the conference.
Thanks, Sanjay.
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