RingCentral, Inc. (RNG) Earnings Call Transcript
August 12, 2026
Earnings Call Speaker Segments
Hello, everybody. Tim Horan here. I am the communications and digital infrastructure analyst here at Oppenheimer. Good afternoon, everybody. And by the way, My pleasure to be hosting RingCentral once again. RingCentral has been our top pick luckily the last few months. Hopefully, many of you have read our research. We think for a few reasons. It's a fairly amazing turnaround story that was on the incredibly undervalued, but we still think it's very, very undervalued. Luckily, we have a CFO whome I admire and respect quite a bit. Vaibhav has been talking to me for years and years. And when we were a little bit concerned with some of the trends, he was the greatest gentleman now that we've gotten substantially more positive. -- still very gracious gentleman, and has answered all my questions and been incredibly professional and very knowledgeable. And Vaibhav, how long have you been at RingCentral now? I know it's been a long time.
Yes. Thank you, first of all, for giving me the opportunity to join the fireside today, and thanks for the kind words. So I'm finishing up on my tenth year anniversary here at RingCentral in July actually as we speak. .
So you know basically more about the industry and the company than almost anybody out there, and I know you worked a way up from the bottom up and have -- frankly, we'll get into it, but amazing turnaround in the frankly, in the free cash flow generation, and we still think there's quite a bit to go. But at the same time, we're starting to see a pretty amazing grassroots turnaround in the revenue and then the product, but we'll kind of get into that. . So one of my big thesis when I got a lot more positive on the stock a little over a year ago. was the fact that business voice lines are the utility business voice lines, thanks to AI is improving dramatically. And I think the usefulness for people. And I think the willingness to keep business voice lines, grow them and pay more for business voice lines because the utility is going to improve pretty dramatically. And you guys are at the center really of applying AI to the business voice communications. Can you give us your thoughts on what you've seen so far, what AI is just meaning for the overall industry and business communications?
Yes, absolutely. Look, business lines have always mission-critical and in our strongest verticals like health care, financial services, retail and others. And if you look at our daily lives, like whether it's a health care provider, whether it's a financial adviser, whether you're calling your Jim or a furniture store, generally, those interactions are still happening either through a call or a CIC message on a daily basis. . So I think AI, what we are seeing is that AI will make business communications more useful, not less because it turns a business line from a simple voice endpoint into an intelligent customer engagement channel and essentially, that's what we've been doing over the last 12 to 18 months is to transform into -- from a payer communications company into a complete customer engagement platform -- so we can handle what our customers can handle all form of interactions. Now interactions today are very different than they were several years ago. Today, they are person-to-person could be a person to a nondedicated contact center agent could be with a dedicated contact center agent. And increasingly, we are talking more to AI agents. So I think AI will frankly be a tailwind. It's a generational shift. And I think Vlad talked about this extensively at our prior earnings, AI is just making business interactions, more and more kind of efficient, more intelligent. And this handoff between humans and agents is kind of incredible. I think badging the term humans in the loop and we are seeing that in practice on a day-to-day basis. So essentially, net-net, AI will just increase the value of a business line because it will become tied into productivity. It leads into better customer experience and better outcomes rather than just being a business line. And I think that's where we fit in well with our broader strategy of bringing voice, messaging, contact center and AI together into one platform.
And you're also doing this on an integrated or I'm not sure the right word, hybrid home where you can either get it on your smartphone or your business phone or your soft phone, almost any different devices. I mean a little bit like over-the-top television, where you can kind of watch it anywhere, you're going to be able to use your business voice line basically anywhere. Can you talk about customer adoption of that and how important that is?
Yes. So I think when you look at the genesis of RingCentral was to bring communications in the cloud. And what that meant was those communications or interactions were device agnostic. They were location agnostic. And obviously, we went through the generational shift of Internet of mobility and AI is basically next shift. So Here's what we are seeing. I think there are 3 trends that are -- or maybe 4 trends that are very, very evident to us. Number one, voice continues to be a primary mode of communication. -- in B2C settings like as consumers, when you want to reach your businesses, voice and SMS is the primary mode. And we are seeing voice traffic on our platform continue to grow. So that's one trend, and we are acknowledged leaders in voice. So essentially, we are -- voice is going strong, and we are strong in voice, if you will. So that's one trend. Number two is -- there is also this buying behavior wherein we are seeing customers wanting a bundled solution with a single provider, wherein they can manage all forms of communications and can seamlessly transfer between humans and AI because with the humans and the loop, it's not either or it's both. Like AI is making calls more efficient, more intelligent, but for more complex and judgmental type situations, you need a human. So customers want a singular platform versus I think there is this fatigue that setting in where you could have a lot of applications from different vendors and then it becomes eventually more expensive and difficult to manage. So customers are looking for one solution, which we are offering through our customer engagement bundle. And again, to my earlier point, customers will be able to manage all forms of communications, whether it's with humans or with AI agent. So that's the second trend. The third trend is for AI to be successful, you need a strong infrastructure layer. And we built a telephony infrastructure layer over the years that is now trusted by over 600,000 customers. There's a lot of traffic that's flowing through the platform. So the 40 billion plus calls that are happening on an annualized basis, billions of -- sorry, minutes and billions of calls and SMS messages that are going through the platform. So for AI to be successful, you need data and that data on the system as consumers, you're able to kind of utilize AI from the get-go and you're able to train your models on your own data. So that's the third thing. And the fourth trend is customers need to see measurable ROI. So what we are seeing through our AI product portfolio, which we point as a here an customers are seeing measurable ROI. Customers are using air to capture more demand, they are automating more repetitive work, like no taking with our AVA product and improving the quality of interactions through our ACE product and these products are all working in tandem with each other and improving on a daily basis. So I think those are some of the trends, Tim, that we are seeing. And those trends are getting reflected in the traction that we are seeing in our AI product portfolio.
Yes, that's -- and it all kind of ties together, obviously, being able to communicate on any device to be able more effectively, that flexibility is fairly incredible. And where do you think we are in adoption of both 4 of these trends? Like what inning are we in?
I think from a market opportunity standpoint, it's still large, like the market is large, it's still growing. I think Gartner estimates the whole market that is broken between UCaaS, CCaaS and AI to be $150 billion plus market and that is growing. So the market opportunity is large. We are seeing a trend wherein these disparate markets are now converging into a singular category of customer engagement. Again, it comes back to my prior point of consumers are looking for a singular platform for all of their interaction needs. Having said that, I think there's still a lot of opportunity from for on-prem to cloud migrations. Just on the core UCaaS side. There's still by different measures, tens of millions, it's not hundreds of millions of seats still on on-prem. And what customers are realizing is that to be able to benefit from AI, they need to be on a cloud solution. So I think, number one, the on-prem to the cloud migration is continuing to be there. We are capturing our fair share of it, and we are adding new logos at a healthy clip. In terms of the AI adoption, we are still in the early innings One metric that we disclosed was that our -- the portion of our customers that adopt at least 1 of our PDI product is about 13%. So by definition, there's a long way to go, like there's 87% to go. So we are still in the very, very early innings of this. And our product portfolio, we've done a good job at releasing products at a very, very fast pace. The velocity has been high. and we've come out with a portfolio over the last 12 to 18 months that is showing a lot of good early traction. So again -- yes.
I mean, I think 2 years ago, the AI products were a little immature. The ones I saw. They have improved dramatically. But I mean, do you think they'll be substantially better in 2 or 3 years from now?
Yes. I think the velocity of how the velocity of development is very, very high, especially with the use of AI. Customer needs are evolving fast. And I think what we are seeing is eventually everyone will need some form of AI, they will need AI agents to kind of sit alongside with humans and kind of make business interactions better, and they will all -- customers will also need a productivity suite to reduce the manual work. So overall, look, the product set will continue to improve like we have -- we are spending over $0.25 billion in R&D spend on an annual basis. and a large majority of that is into AI product development. And the idea is not necessarily to come out with more products but to keep improving the quality of the product sets and the features that we have through our current product set that we have introduced. .
It makes a lot of sense. And I know you touched on ROI. Like your AI reception is product air, what type of savings can customers get do you think? Like if they're spending $1 on you? Are they saving like $10?
Yes. I think, look, it depends on the use cases, but the reason here, I think we have about 16,000 customers now growing almost 4x. The reason we have seen that kind of traction is the ROI is immediate and it's measurable. So what does he do? So when calls are coming in and we recently had a customer from a health care institution that she ban, I think she spoke at our Analyst Day and when we spoke to her, the feedback we got was they were -- like they were getting, call it, thousands of calls on a daily basis, and they had 2 receptionist. So the 2 human reception is not answer those thousands of calls and then it's -- some calls are more important than others. So not everything is kind of created equal. So they implemented air. And by implementing are they were able to kind of able to filter out spam calls, Air was able to answer some of the basic questions like if you wanted to book an appointment, no hours and directions, Air was handling those calls and then it was really transferring and patients needed more kind of in-depth consultation. So what that did for this customer was they were capturing more leads. They were filtering out nonessential calls, and it was saving them, call it, millions of dollars in terms of not saving, but creating opportunities for millions of dollars of additional revenue which they were able to then kind of invest back into the business. We also recently ran a survey and air customers told us that they are reducing their miss calls from roughly [indiscernible] and others kind of cited saving thousands [indiscernible] a lot of opportunity. And the way we are addressing that opportunity is then -- we are acquiring new logos. Our sales teams, our channel teams and our GSP motion is all enabled to sell new products and AI. So they are offering these AI products as part of new sales. We have a large customer support organization and a customer success organization that is pitching products to customers in the installed base. And as customers are coming up for renewal, we are also engaging into conversations around these products. So net-net, look, there is clear ROI. There are measurable use cases at customers that these products are able to address and they are seeing real ROI and that's slowly translating into the trends that we are highlighting.
And for Vaibhav, how much a minute is it again for the air product?
$39 for 10 minutes -- for 100 minute entitlement. .
Got it. And is there -- that's the list price is the determined volume discounts?
Yes. I'm sure depending on the that you're buying, there are discounts...
And just lastly, is -- are you also finding that it's better than a human reception is over time? And is it improving on -- is it self-training as it gets used more?
Yes, absolutely. So it's -- look, it's handling. It's -- what it's doing for our customers is 2 things: a, it works 24/7 versus a human receptionist is working like a 9 to 5, right? So what Air is doing is it's working 24/7 and it can handle kind of multiple calls at the same time. So it can handle like several hundreds and thousands of calls that are coming in, and it can dispose of those calls and then transfer to a human as needed. So in that sense, it can address more capacity, if you will. And Secondly, it's training on these. It's constantly training and our 3 products are constantly training together. So air will also look at transcripts of the calls over time to see what types of questions customers are asking and then it will kind of improve its ability to kind of answer questions, then it will also train off the ACE product. I look at, again, customer sentiment and depicts from customer calls and its training so as to be able to better handle and address calls and deflect calls over time.
And I mean, this is almost like what you're describing is almost like a little mini contact center, which I know you're in the contact center business. Obviously, contact center would have a lot more capabilities. But I mean, maybe not are they converging over time where air might be able to tie into back office data or databases to -- or yes, how do those 2 look over the long term?
Yes. I think it's -- there's -- I think there is a convergence that's happening. And again, it comes back to my opening remarks on there is a convergence that's happening across UCaaS and has in the sense that the lines are getting blurry in that customers are looking for a platform and there are a lot of cases in which employees are acting as nondedicated agents. Then there are customers who have smaller contact centers and then there are customers who have very large contact centers. So I think there's clearly a convergence that's happening across the industry. And the idea is to have a product suite or a customer engagement platform that can handle all of these types of conversations through a mix of humans and AI together. And the reason it's important to have an integrated platform is it's easier to kind of do integrations, it's easier to kind of transfer calls as needed. The handoffs become more seamless. And the AI is kind of seamlessly embedded into the contact center work. So in that sense, it's kind of all the lines are getting blurry and it's converging in that sense.
And just while we're on the contact center, your pricing is substantially below what a lot of legacy carriers are charging. And in many ways, it's got better features and functionality. How are you able to do that? And how's the AI improvements going there?
Yes. So look, we offer actually 3 products in the contact center space. So again, our product portfolio has evolved over time. So obviously, for the very high end, where customers have dedicated contact centers and large contact centers that may be geographically dispersed and are handling a lot of calls we offer our RingCentral contact center product through our white label relationship with NICE. But over time, what we also saw was this greenfield opportunity in some sense of customers who were looking for a much simpler contact center solution. So there are a lot of customers who don't have like large contact centers, they may have smaller teams, and they were looking for a simpler solution. So that's where WingsXplays really well, and it plays well in 2 different ways. One, it's very -- it's meant for simpler use cases, so it's easier to deploy versus a full on contact center can sometimes take 6 to 12 months to deploy these the Ring CX can be deployed within a matter of days and weeks and months, if you will, depending on the use case. So it's simpler to deploy customers and who are requiring a simpler solution, don't want to pay triple-digit kind of seed prices. So that's why the pricing has been -- is the way it is. It's a lot more disruptive in that sense. And the reason we are able to do it is, again, the power of the platform, like we have the scale on our cloud PBX platform. So we are able to translate some of that scale onto the Ring CX solution.
And just -- well -- and before we get off this topic because I want to talk about some of the fears about the whole SaaS concerns out there, the SaaS business model. But -- the AI assistant or admin, I think you call it assisted. Are you seeing much traction there? And how are you pricing that product? .
Yes. So the AI, I think you're referring to the virtual assistant, Eva Yes, virtual assistant. So AI virtual assistant is available to all of our customers as part of the core EX product. So essentially, what the product does is back in the day, you and I were having a call or an interaction, we had to each take notes, and then we would go and follow up on those notes and do kind of things manually. Eva is essentially -- it's transcribing the call, it's taking action items [indiscernible]. And then the AI agent embedded in there is setting up follow-on meetings, follow-up appointments. And in a contact center setting, it's helping agents and supervisors get more effective. So essentially, there is an agent assist and a supervisor assist capability for agents as they are in a live call with the customer, the agent assist will help them answer calls in a better way by making knowledge articles and other kind of integrations available to them. And for supervisors, it gives them the ability to kind of get real time alerts and whatnot as the live call is going. So again, it's a product, the AV for Wix is not priced separately today. Now that could change in the future. but it's essentially helping -- that's an example of where it's helping customers be more efficient and effective by reducing the manual work.
And will filter calls for you too and I kind of know like this is a priority call we -- I get to let it through no matter what happens or yes.
That's more of the air product. I think Air does that filtering certifier out spam calls, -- it will try to answer questions and deflect calls and try to resolve calls and then to the extent needed, then it will transfer it to human agent at which point EVA will kick in.
And will those 2 converge over time because me, just my regular business line, I'd like to have all those capabilities, right?
Yes, yes. I think over time, I think our AI portfolio will converge into 1 broad, call it, RingCentral AI category. And the idea will be to provide customers with different skills-based agents so that they can kind of create their own agents and they can address whatever use cases are important for them because, again, different use cases are important for different settings. So it will give customers the ability to kind of do that.
So just to bring up the negative for a minute, a lot of investors have been worried about, broadly speaking, the software will get disrupted by AI. Can you describe why you're maybe not in that same category ...
No, I think that's a great question. And I heard the pause you had because even I'm not able to kind of pronounce that we [indiscernible] but I think it's a question that we get asked a lot. I think there's a few different reasons why we believe we are uniquely differentiated -- number 1 is voice and going away. -- voice interactions are increasing. Number 2 is AI is increasing the value of voice rather than replacing it. And it's a structural advantage for us. And the future to my earlier comment is it's increasingly AI plus humans working together, not AI versus humans, at least in the near to the medium term. So AI can automate routine interactions and can assess live age and satellite conversations, while humans in the loop will be there for judgment for more complex issues, right? So that makes the communication layer a lot more valuable because businesses will continue to lead to orchestrate those conversations late across humans and AI agents. And we believe we are well positioned because we combine carrier great voice infrastructure we have a large install base. We have deep integrations. There's a lot of data that's flowing through the platform and a broad product portfolio that we have that is addressing all these needs on a singular platform. And again, we built 1 of the largest and the most reliable and feature-rich voice infrastructure globally. Again, there's 600,000 customers, billions of minutes. So it's a very unique asset -- and it's hardly -- it's very difficult, and it's not cost effective to replicate. Like the simple of it is, it's very difficult to wipe code a telephony network. So that's a unique asset for us. And our platform is, therefore, a natural bedrock for AI. The other thing that we get asked a lot is, what about point AI solutions from other companies and start-ups since I think our differentiation there is that unlike point AI solutions that have to plug into somebody else's telephony network. RDI is very directly on top of our communications layer -- and that is helping us -- it helps kind of with the seamless nature of the services, there is no latency. There is preservation of context and the handoffs are a lot easier. So overall, look, we think we are different -- we are positioned uniquely in this AI transition. And we do not think AI will completely disintermediate voice. We think it raises the value of voice by making every interaction more automated, intelligent and getting better outcomes for our customers.
One of the most amazing things about the company is the expense discipline you brought to the company or the most amazing things about you becoming you guys not too long ago, we're burning 15% of revenue in cash per year just 3, 4 years ago. Now you're 20% of revenue now is free cash flow. I don't think -- the Street fully recognizes that yet. But I mean can the trends continue here on the -- and that's after stock-based comp, by the way. the way we measure it. Is there more operating improvements to come?
Yes, absolutely. So thank you for the call out on that. Look, we are very proud of the improvements we've made we will call it a 10% operating margin company. We've more than doubled over the last 2 to 3 to 4 years, call it, -- and the recent quarter and where we've guided to is another proof point of that, right? We are on a quarter-by-quarter on a yearly basis, we are consistently showing improvements in operating margins. And I think 1 important thing to kind of notice that these margin expansion trends you are seeing are structural. When you look at our base, we have a scaled recurring revenue model. We have this large base are generally strong. Net retention rates are stable. We have industry-leading gross margins at 80%. So every dollar of revenue that we are adding is resulting in $0.80 of gross margins. And below the gross margin line, like our fixed cost base does not need to increase in the same proportion. So there is embedded operating leverage in the model. Revenue growth is consistently outpacing expense growth and on top of that, we are just being disciplined on cost, right? There's a lot of discipline around hiring, offshoring vendor consolidation. And frankly, just as we are selling AI to our customers, we are also using AI internally to make things more efficient. And to your other point, look, we are also looking at operating margin expansion in conjunction with SPC, free cash flow and free cash flow per share. So SBC Again, we've been very disciplined in terms of new share grants, and we are consistently bringing that down by about 200 basis points or so. And that's resulting in our GAAP profitability going faster than non-GAAP now. And we've laid out a target of reaching 20% of GAAP profitability in 2 to 3 years, which is 1 year ahead of our original target. And the other important thing is operating margin is also translating well into free cash flow like we are producing over $600 million of free cash flow, which is expected for this year and that is allowing us to, frankly, be a lot of optionality in terms of investing back in the business and be disciplined on capital allocation. So again, the net-net is what I want to leave you with is more room -- there is obviously more room for margin expansion. We haven't laid out long-term target gets, but I certainly expect the direction of travel to be up and to the right. Again, our focus is on finishing this year. And as we drop the plan for next year and the next few years as we always make investment decisions. So we'll come out with specific targets, but my expectation is the journey will continue in terms of expanding margins, expanding free cash flow, expanding GAAP operating margins and reducing SPC..
Well, not to put words in Vevo's voice in the presentation here, but I was beating them up quite a bit just 3 years ago when sales and marketing expenses were 45% of revenue were down to 37% this last quarter. I personally think there's more room with that number, but we've already seen a amazing improvement there in large part because I think you were in agreement with me at the time. And we're not looking forward to give us new guidance here on the call. But for what it's worth, I think there is an amazing opportunity there. So I guess lastly and probably most importantly, you had a bunch of -- you had some headwinds here lately from COVID on the revenue growth. now you have all these new products that are going to, I think, enable ARPU and maybe just enable more share gains. Do you think you can get back to double-digit revenue growth longer term and the timing on that?
Yes. Again, look, I'll be careful in not giving our long-term guidance here, but we are working very hard to execute. I think you should not think of the 4% to 5% or the 5% to 6% is a structural cap on the growth rate of the business. I think we are still in the early evenings of a very large opportunity. And look, we are doing -- we are working hard. We are doing everything we can from our standpoint. And again, it comes back to -- I'll wrap it up with 4 points, Tim, that will kind of answer your question. But we have a large, durable kind of communications platform, which is our core continues to be mission-critical. We will do everything or we are doing everything to preserve that base and that's reflected in our strong net retention rates. That also is a unique asset, gives us an opportunity to kind of land and expand into that space. Number 2 is on top of that core. The portfolio of AI products is expanding. Again, we are early in these products, and we are seeing very encouraging signs. So we are working hard to kind of improve what these products can do and expand the go-to-market reach on these products. And we also have a differentiated advantage in terms of our global voice infrastructure, the data, the product breadth and the go-to-market reach. So all of this positions us well in the new kind of AI era. And last but not the least, we are translating all this business strength into a high-quality financial model, right, expanding margins, free cash flow, disciplined capital allocation -- so the key takeaway is there's a powerful flywheel. There's a durable recurring base, which funds innovation. AI is expanding that growth opportunity. Operating leverage will improve margins. and stronger free cash flows will enable us to have the capacity to reinvest and return capital to shareholders. And I think that's how we are delivering like $7 a gain in free cash flow per share but we are expected to deliver that for this year, which is 1 of the highest in our peer set. And look, from our standpoint, we are focusing on continuing to execute and let performance translate into long-term shareholder value and valuations will catch up.
Well, Viva, I think that's a good note to end it on. A great job as usual. Thanks for your support, and thanks for all the hard work, and I hope it continues.
Yes. Thank you, and thank you for your kind words.
Everybody, have a good day.
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