RingCentral, Inc. (RNG) Earnings Call Transcript
September 15, 2026
Earnings Call Speaker Segments
Question to begin with. So look, IT spending from what we are seeing remains healthy, it's growing at the macro level. I think the color underneath is AI is definitely becoming a larger share of that budget, the existing budget and incremental budgets, if you will. I think what we are seeing is that customers are incrementally looking at solutions where they can drive real ROI. I think customers are beyond the experimentation phase. So they are looking for solutions that can drive outcomes, drive productivity, they can measure ROI -- and then the third trend that we are also seeing emerges, customers want to buy AI from existing software vendors versus having to put point solutions together -- and those are some of the trends we are seeing in the business, frankly. Our demand is stable, no material changes in sales cycles. We anyway play in the communications and customer engagement space, which is mission-critical for our customers. And AI is rising to be a priority within that. And that plays well into our strengths because for us, AI is natively integrated into our communications platform, and we are applying it through the entire journey of the communication life cycle. So overall, trends remain healthy. Demand sales cycles are remaining healthy and customers are increasingly focused on buying GI.
Yes, it makes sense. I want to get to AI in a few minutes here. But One of the things that seemed to pop up here on the sort of off-calendar earning cycle was this notion around SMB top of funnel. And like I said, you guys have a decent viewpoint into kind of how SMBs are thinking about it. What are you seeing in terms of how SMBs are acting differently, potentially, how you are approaching that side of the market in terms of website traffic being impacted by AI and the sort.
Yes. So certainly, there's a evolution in terms of how customers are discovering and evaluating software now with the lens of AI. So we are evolving our kind of investments and broadening our investments from the traditional, call it, search engine optimization. And we are investing or reallocating spend into making branding and content more available for AI-led search. Having said that, in our case, we have a multifaceted kind of customer discovery process and motions wherein we go through the -- obviously, the search engines and the AI kind of tools. But we also have a direct motion. We have a large customer base where we can go and upsell, and we have a large network of channel and global service carriers who help us get to the customers. So in our case, while we are evolving the way we are discovering and reaching the customers, we also have a multifaceted motion. And in fact, the SB portion of our business is growing in double digits. There is strong demand, and it's a highly optimized motion for us. It's almost a rule of 40 business.
Got it. The -- 1 of the more exciting parts, I think, to the RingCentral story here is you guys have 600,000-plus customers -- and meanwhile, you have a couple of new, I'll say, toys to play with between CX or ACE, how should we think about that opportunity, that white space opportunity within your installed base? What sort of penetrations you and the team are kind of thinking about -- or not just for this year but over kind of the next couple of years here?
Yes. No, we are very excited. Look, 1 of the metrics we had disclosed at earnings was the cohort of customers or ARR of customers that have bought at least 1 paid AI product is 13% of the total base. So our total base is, call it, $2.5 billion plus. So that mathematically gets you to $350 million odd. So I guess there's a couple of points there. The first point is that we are very, very early on. It's only 13%. So by definition, there's a long runway to be had. We are still in the early innings -- the reason we provided that metric was to show the AI penetration, the customer adoption. And to my earlier point, I think what we are seeing is customers are moving beyond experimentation. Now they see real value in our products. They see value in AI being integrated and tethered to a platform versus having to stitch together multiple point solutions, if you will. So they are seeing the benefit of that, and therefore, they are willing to pay for it. And within that cohort of customers, we are seeing higher net retention rates, higher ARPUs, and it's being driven by the AI uplift. -- the most part. So we are seeing that. So there's a lot of runway ahead of us. We are still very, very early on. And while AI is contributing to our growth today, it's growing off a small base. and it's small relative to the overall size of the business. So our expectation and where we are working very hard is to come out with products in operate and come out with a product suite that can address real use cases for customers so that, that AI adoption grows. And over time, it will become a more meaningful contributor to overall growth.
Yes. Is there a way to think about how much AI is an uplift here. And really, the crux of my question is we're getting this back as to like if you take the 13% versus this point last year, the rest of the business seems still growing, but kind of flattish. So how much of an uplift are we getting there? And additionally, how do we balance the growth between sort of AI versus that core business?
Yes. So both sides of the business are growing. The core business is growing in line with the market. We are continuing to maintain our #1 market positioning in the UCaaS space. And then the AI product portfolio is growing faster than that. It's a question of mix. The core product is about, call it, 80% of our business. And the AI products are still relatively young and still early in their kind of contributing cycle. So as adoption grows, as they become a bigger part of the mix, they have the potential to take the growth profile of the company up.
Got it. And so how -- in your role, are you trying to balance the sort of growth initiatives versus kind of the margin uplift? Because you guys have done arguably 1 of the top quartile in terms of software expansion of margins in the last few years. What's going on between the balance between the 2? How are you using AI to sort of help yourselves internally? And what's left to optimize in the business?
Yes. So there are multiple questions there. So let me start with -- we absolutely look at it as the power of and, which is we want to grow the business and expand operating margins and free cash flow at the same time. What's helping us do that is our recurring margin business. We have a very scaled recurring margin business that is producing 80% gross margins. So that allows us to reinvest back into the growth of the company. And then there are structural drivers to expand margins and free cash flows over time. Now where we are investing in growth is clearly AI and the new products, wherein 1 of the statistics we provided is we are investing over $250 million in R&D, a large majority of which is going into developing our AI products. So that's an example of where we are investing in the growth because the market opportunity is so large. The flip side to it is we also make sure that when we are investing the dollars, they come in with we are focused on returns as well. So everything goes through a scrutiny of we look at metrics like time to pay back and LTV CAC and customer lifetime value. So we are not just making investments. We are making bets on investments where we will get returns. So that's the first part of your question. The second part is, where can we get more? How much more is left Look, I think there are structural drivers in the operating margin profile of the company for every $100 of revenue I'm adding, I'm getting $80 of gross margin and the fixed cost base is not increasing in the same proportion as revenue. So like a simple way of saying it is, there's operating leverage in the business. And then we are also being very disciplined in terms of our cost profile. -- head count spend, vendor spend. And we are increasingly -- that's the third part of your question is we are increasingly using AI across the company. And this past quarter, we made an announcement where we did a pilot with open and 2,000 -- we have over 2,000 engineers, all the engineers went through a case study alongside open AI and everybody is trained in that organization. So over time, as AI takes hold, that will be an incremental driver of operating margins.
Yes. Maybe to a sell-side, I'd ask a dry part question there, by the way. But you guys speaking of partnerships, you guys actually just expanded your relationship once again with NICE on the contact center side. Why the decision to kind of go back to that route given you guys were looking at potentially a direct economic benefit with Ring CX? And how do you think about now just the opportunity for Ring CX within your installed base?
Yes. I think -- so 1 way to frame the conversation is, so when you look at communications now, the idea for us is to have a complete customer engagement platform. And what that means is being able to address all forms of communication, whether it's human to human, it could be human to a nondedicated agent. It could be human to a dedicated contact center agent or it could be human to an AI agent. And the 1 trend we are seeing is customers are increasingly kind of looking for kind of integrated platform, wherein they can orchestrate all these communications across the singular platform, if you will. So within that umbrella CX is absolutely a strategic priority for the company. Where it plays well is in situations where customers are looking for a simpler solution, -- it's simple to deploy. It's easy to use, it's price disruptively, and it is AI native. So there are a lot of use cases wherein customers don't need all the bells and vessels of a full on contact center. So that's where that product is doing well. And as you rightly pointed out, we get owner economics -- and then on the higher end of the market is where the nice solution plays wherein customers are looking for addressing more complex use cases. They may have more distributed support organizations and whatnot. So that's where the NICE partnership plays in. And the announcement that we made this past quarter was to announce a bilateral nature of the relationship. So we've been selling their CX1 product. Now they will start selling Green GX into their base -- and what that does is 2 things. It allows both companies to get access into the enterprise space, and it also allows customers more choice points in terms of getting an integrated UC and CC solution.
Yes. So maybe along those lines, we're going to talk about competition here. Have you seen any change year-to-date or over the last year in terms of what's going on competitively, we hear all the time about stand-alone AI start-ups as well as like what are some of the CRM vendors doing over the top and of course, some of your more direct competitors -- how are you guys thinking about the competitive level out there?
Yes. Look, on the core UCaaS side, no material changes in the competitive. It's always been competitive, continues to be that way. we usually see Zoom and Microsoft teams there. And the way we differentiate ourselves is on the strength of the cloud voice solution that we bring that is highly reliable, secure, it's global, has several hundred of hundreds of integrations across the board. So that's how we differentiate ourselves. And where we win is in customer bases where in voice continues to be a primary mode of communication. And there are a lot of use cases, think health care, retail, financial services, like these industries kind of work on voice and texting -- so that's where we do well in terms of AI. So we come across both AI kind of start-up companies as well as the established vendors -- and then when we go up against the AI startups, look, there's a lot of companies where we are winning against them is on scale. Like we have the scale, we have the infrastructure, which they lack. We have a large customer base and the strength of the R&D investment. And against the incumbent players, a lot of incumbent players may not have the entire suite of AI products. So that's where we are trying to differentiate ourselves as provide a complete solution, communication, customer engagement with AI kind of natively built and embedded.
What about the RingCentral architecture especially on the voice architecture differentiates you.
Yes. So look, our voice infrastructure has been built over the last 20-plus years. It's taken over 2 decades for us to get here. And the voice infrastructure has several unique requirements. -- like it's a highly regulated industry in a lot of different markets that are telco interoperability requirements that are there. And there are a lot of unique like E911 emergency requirements that billing and taxation requirements -- so we've kind of architected this over the last 2 decades, and it's taken a lot of investment. And we believe that's a unique asset for us that's very hard to replicate. And it will not be, frankly, cost effective to replicate as well. So in terms of the architecture, think of us having the infrastructure layer, the communications layer, there's a lot of data that's flowing through the platform. And in the past earnings, we've kind of laid out some metrics around tens of billions of calls and billions of SMS messages that are going through the platform. And then AI is natively built wherein it's getting applied throughout the life cycle of a conversation or interaction.
Yes. So maybe on that voice side, especially for more business, almost a decade ago, I believe, when you joined roughly. A large part of the RingCentral thesis was -- we are the #1 in UCaaS. We're getting now all these partners kind of shifting their on-prem endpoints to us. How did that play out in your view? What's left in terms of what's going to make that enterprise or SMB actually change at this point if they haven't already. I mean we went through a pandemic and what's the next catalyst here on that side of it?
Yes. So a few things are still true. We are still maintaining our #1 market share in UCaaS positioning as per studies from Gartner. So we've maintained that I think I'll make maybe 3 points. One is on the go-to-market motion. Again, we have a multifaceted go-to-market motion strategy. So we have direct sellers. We have over 16,000 channel partners. We have 16 GSPs and then we have the partners that you mentioned -- and each 1 of them are contributing to growth in their own way. So we are not dependent on any 1 channel per se. And there -- the second point is there still continues to be a lot of opportunity. the lot of -- by many accounts still tens of millions, hundreds of millions of on-prem seats that are still out there. And the catalyst for the change of the those seats are already migrating at their own clip, but the catalyst will be AI for customers to be able to benefit from AI. I think they'll have to migrate from on-prem to the cloud to be able to take that benefit.
And is there a way to think about how some of these major partnerships are contributing to net new customers?
Yes. I think to my earlier point there, look, they're all contributing. When you look at our -- like the metrics that we provided, GSP partners, for example, that part of the business is growing in double digits. It's a rule of 40 business. We announced a nice partnership, which is now bilateral kind of we are going to provide EXtheirCX1 solution into the base. So that will start contributing into the future -- and then our direct and the channel motions are already contributing.
Yes. So we always talk about voice with you guys -- but 1 interesting bit that you guys called out last quarter was SMS growing double digits. I guess why now is it growing double digits? What's happening underneath?
I think it was always growing double digits. It's a matter of we kind of provided more color around it. And the color, frankly, is when -- even when you think of our daily lives, when you are when consumers are interacting with their providers, they are either calling or texting or SMS thing. So has always been a big part of our business, like that volume of traffic has been growing and it's going through our platforms. It's a high, call it, high converting channel, if you will. And AI is just improving how SMSs are being used. Now with AI, it's -- AI is enabling businesses to understand the intent of SMSs and you can personalize SMS messages. So I think that's a catalyst. And then relative to us because call, voice and SMS messages are going through the same platform, it allows customers to get context across those 2 channels. and get intelligent -- more intelligent outcomes, if you will.
Makes sense. So as we kind of move down the P&L a little bit, 1 question we get is around gross margins. And how is AI going to impact gross margins versus the traditional seat-based model as well in terms of shifting from seat-based to consumption.
Yes. So overall gross margins, we are holding at 80%, call it, plus/minus. Now within that, our AI products are generally holding to the corporate average. And when you look at gross margins for AI product, it's a function of pricing the ARPUs and the cost side. So maybe I'll cover both. So on the ARPU side, Look, we are very deliberate in terms of pricing decisions that we are making. The idea is value-based optimization. So customers are paying for the usage and the value that they're getting. And customers are willing to pay for these products because they are able to measure ROI both from a cost as well as from a revenue standpoint. And we provided several examples in our earnings around air wherein customers are able to capture more leads. Those leads are converting to more revenue and therefore, they are able to drive more customer growth and then reinvest back into the business as an example. So that's on the pricing side. On the cost side, it's -- we look at the costs in terms of model selection. We are looking at inference efficiency and we are looking at the infrastructure cost. Those are the the big pieces. In terms of the models, look, we are currently using frontier models, and there are 2 dynamics that are happening as inference is getting better across the models, the price per unit is coming down -- and then over time, there is a potential for us to use open source models wherein the price, again, the price differential is quite meaningful. So we haven't switched yet, but that's the potential to get price efficiencies -- and then in terms of infrastructure as well as AI products scale, we will naturally see efficiencies across the infrastructure. So those are kind of the 2 or 3 drivers for gross margins. So at net-net, we expect to hold gross margins at 80% plus at the corporate level.
Got it. And so then as we think about kind of 1 shift down again, what's left in terms of the low-hanging fruit? What's the structural operating margin of RingCentral here? Where do free cash flow margins kind of get to over time?
So look, we are very focused on expanding both GAAP as well as non-GAAP operating margins. If you look at our history, we had a big step function change 1 year and then we've been steadily increasing between 100 to 200 basis points every year. So again, with the operating leverage and the structural discipline that we have put in the business and increasing use of AI across the company, my expectation is that we'll continue on that path. -- so there is more room to grow. And again, it's a function of the fixed costs with 80% gross margins. The fixed cost base will not continue to grow. We are being very disciplined in terms of our hiring practices -- we are offshoring our vendor spend goes through multiple levels of scrutiny. And with AI, I think the expectation is that the direction of travel will be up into the right.
Makes sense. And so I know you're not going to guide here for 20 but you obviously had some headwinds in terms of the last of the sort of COVID-19 renewals coming in. Any puts and takes to think about as we start thinking about next year's growth rate?
I mean what you should expect for next year is durable growth. I think the COVID headwinds that we had talked about will start to kind of moderate next year. I think our expectation certainly is that AI will continue to kind of grow faster than the core business as AI gets integrated into the core portfolio. We are very focused on expanding margins and free cash flows. We will be disciplined and are again focused on getting to the 3% to 4% target that we had laid out on -- so you should see progress on that front as well as a 20% GAAP operating margin target.
Last one, quickly, capital allocation. I think you surprised everybody with the dividend to start the year to a degree. I guess what's the philosophy behind that, especially now that you actually increased it already mid-year.
Yes. It's just the confidence in the free cash flow profile of the company and the sustainability of that. Look, we've stabilized growth. We are expanding margins. Those margins are converting into free cash flows. And we are using those free cash flows in a very disciplined and a smart way. And the goal for us, frankly, is to optimize free cash flow per share. This year, we've guided to over $7 of free cash flow per share, which is best-in-class amongst our peer group.
Well, it's a good spot to leave it. Thank you very much for your time and all your inputs here. So -- and thanks, everybody, for joining us.
Thank you. Thank you. Thank you. Thank you.
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