Awesome! Well, hello everyone. Thanks so much for attending this session with RingCentral. We have Sonalee, who's the CFO. Thanks so much for coming, Sonalee.
I'm delighted to be here. Thanks for having me, Taylor.
Yeah, of course. So yeah, so Tarek, unfortunately, was a bit under the weather. So it's amazing, we have Sonalee, who's gonna rockstar instead—but, we hope that Tarek's feeling better. But, Sonalee, maybe a good place to start because, you know, Tarek's come in, there's been some changes within the organization. I'm sure there's a period of transition. Maybe you can talk through to the group, you know, the areas of focus. Should we expect any changes in the near term? I guess, how are you, you know, approaching this new phase?
Yeah, absolutely. So, a couple of points I would make there. One is that, Vlad Shmunis, our founder and, executive chairman now, one of the biggest changes is that he is fully, fully focused right now on innovation, new products, R&D, tinkering with toys, and, and releasing really exciting, cool, new products. And I always say that one of the reasons I joined RingCentral in the first place was, this very, very strong innovation DNA that's part of the company. And, we also have this incredibly strong, install base of customers, $2.3 billion of ARR. And, wouldn't it be great if we had even more products to sell into that base? And that's exactly what we're doing right now, is we are very, very focused on innovation.
You may remember, at the end of last year, we took some efficiency measures, including, you know, around our workforce, and difficult decisions that were made. But part of that decision-making was also where will we invest the efficiency dollars from some of those actions. And we all, as a management team, felt very strongly that it was important to continue investing through the cycle in products and innovation. And hence, in the last two quarters, you've seen, hopefully, some prolific announcements from us in terms of new products. And you know, one that we are incredibly excited about is RingCX.
So it's our own native, and maybe you're gonna ask me about it, but our own native, you know, AI-infused, contact center, aimed at really where we believe our customers, you know, saw a need for a more simple, easy-to-deploy, you know, amazing contact center solution, and we're already seeing great traction with that. So I would say innovation, number one. You know, delivering. Hopefully, you've seen us executing on what we committed to, delivering on, you know, both growth and also increased profitability. That's something that I have been driving for the last year and a half, and I hope you've seen, you know, some very significant improvements in our operating margin, and in our free cash flow.
You know, I always say, I pray at the altar of free cash flow per share growth, and, you know, that's something that I will be very, very focused on as we look forward into 2024.
Perfect. I was gonna ask you a RingCX question, so I might as well just ask those questions now. That just recently became generally available, right?
Mm-hmm.
Could you maybe talk a little bit more about the opportunity there, how you're thinking about that adoption ramp? You mentioned customer feedback has been really good. Could that be a material driver of growth as soon as 2024, or how are you thinking about that?
Yeah
Materializing?
Absolutely. And I think even if you look at third-party data, you can see that the contact center market is continuing to grow very, very strongly. You know, I think the, some of the third-party data is showing certainly a double digit, but mid-double-digit growth. And as you know, we already had a strong presence in contact center through our partnership with NICE inContact. So it's an area where we feel like we have a right to win, and not only that, we've proven our right to win because you know, over 60% of our $1 million plus TCV deals have both UC and CC. We also know from experience, this isn't just surveys, that customers want to buy UC and CC from the same vendor.
And, you know, our RCCC, which is our partnership with NICE inContact, was very, very good for, you know, upper middle market and enterprise. It's sort of the, you know, more complex, higher feature use case. But what we found from our customers is that many of them, who are SMBs and don't necessarily have their own large IT departments to deploy a contact center solution or don't have their own professional services staff, they wanted a solution that was much more plug and play, that can be up and running in a matter of a week, as opposed to many weeks or months, and that was at a price point that was more digestible to these customers as well. And we did announce our pricing on RingCX.
We had a big launch event, and I would encourage anyone who's here or dialed in to watch the event because it was amazing and very well attended. Thousands of customers attended it. But, you know, they definitely felt that there was a need for this more simple solution, and we are already, even pre-general availability, and I called it out in our last quarterly earnings. We're already seeing very, very strong traction from those customers. And not only in the SMB and mid-market, but we also landed a very large Fortune 500 company in the waste management sector, which we're really proud of, and that was pre it going GA. So can it be a significant revenue driver?
You know, we do believe it can be. Will it have impact in 2024? We believe it will. I know we haven't guided yet to 2024, and my head of IR is sitting over there, so he'll kill me if I say anything. But, you know, certainly, it's one of the things that I'm including in the plan as we look forward. But, you know, here's a little caveat there, is we are $2.3 billion of ARR today.
Yeah.
So as you become a much larger company, moving the dial becomes, you know, that much more challenging. So yes, it will have an impact. Yes, it will be incremental. It will also be, you know, higher ARPU. Again, we disclosed the pricing, $65 per agent per month, and it should be margin accretive as well.
Got it. So that's really helpful. And then, on this market, so you have a lot of players from different areas within software that are going after this opportunity. You have the cloud infrastructure players, the CRM players, other contact center players that are all trying to, I think, offer similar functionality to RingCX. So can you talk about what makes RingCentral well-positioned-
Yeah
to grab that opportunity? How important is being the owner of the voice channel for that?
Yeah.
Maybe elaborate.
Yeah, so that's exactly what I was gonna say. So you, you answered it well. I, I think we are in a really unique and privileged and, like, leading position because of the huge voice base that we have and, and phone base that we have. And, you know, out of our $2.3 billion of ARR, you've heard me say contact center or CCaaS today, is probably the last time we disclosed, which was a quarter ago, was about $330 million. So the rest is, is really the, the remaining MVP business, and a bit of global service providers in there too. But it's a very large base, and it is the largest base, in, in terms of revenue market share.
We also, with our RingCX product, we're infusing AI in everything, every part of the experience. So that's before the agent's call, during the call, and after the call. And it's not just the agents that will benefit from the AI we're infusing in that. The agents, their supervisors, there's all sorts of features and functionalities that we've added into our product, which, you know, again, we feel like it will be very additive to the overall customer experience. And companies and customers, they are... You know, part of the value proposition today is the overall customer experience. People are realizing that. Our customers are telling us that. And anything that you can do to elevate that for your customer, they're often willing to pay for it. And, you know, we did announce our pricing model.
It is very disruptive, you know, deliberately so. And again, we're seeing, really nice adoption across various segments. But we do think that the sweet spot is likely to be the SMB mid-market that are looking for that simple use case. And given that strong base we already have, you know, to be able to go out and sell into that base, who maybe RingCentral Contact Center, RCC, was not the right product for them, but this will be, and then all the additional, functionality.
Like, for example, if this were on a call right now, and you were using RingCX, the tone of my voice, you know, the questions that you ask and the intonation in your voice, the number of times that you ask a certain question, or the number of times a certain keyword comes up, that would flash in front of the agent and say, "She sounds really excited about RingCX." You know, gear the call towards that. And it's that kind of thing that can be, you know, really change outcomes for our customers. And I do find, and I'm lucky in being able to assist in some of the customer calls and events, and I was actually involved in closing two of the largest deals last quarter, so I told our CRO that I should be on commission.
I'm not, but you know, hearing from customers what they value and just knowing how our product... You know, we don't come with a legacy, large base of CCaaS, where we're afraid of cannibalizing. I think some of the peer set that you mentioned, you know, they might drag their heels on certain parts of adopting new features because it could cannibalize their current revenue stream.
Yeah.
We don't come with any of that legacy, but we come with billions of minutes on our network that, you know, our customers will want to drive insights from. So I think that's the opportunity.
Yeah, makes total sense. And I wanna touch on something that you said, 'cause you mentioned, especially with the contact center offerings, those being more geared towards, you know, smaller potential companies that maybe you haven't targeted in the past. So I know last earnings call, you guys made a comment that in terms of focus areas, one is tailoring more to the SMB and mid-market-
Yeah
And another one was expanding on partnerships. Now, when I first heard that, I said, "Wait, I always thought, you know, they catered more towards maybe SMBs." They do have, like, a big, you know, mid-market presence. They've done all these partnerships with Avaya, Atos, and others. So can you talk about, like, can you describe to the audience what's new behind your strategy-
Yeah
And how to think about how that differs?
Yeah, absolutely, and it's, it's a really good question. So firstly, what I would say is that, yes, we absolutely—the sweet spot and the foundation of RingCentral was, and, and very much continues to be a large proportion of our overall customer base, is SMB and what we call mid-market. We then later added enterprise, and enterprise has been and continues to be a strong growth driver overall. So we're not saying that we're not focusing on enterprise anymore, but what we are saying is that the new products that we're introducing, and particularly RingCX—
Mm-hmm
Which again, you know, we, we hope and expect will be additive to our growth profile and a new driver, and really turn us into a true multi-product company. We feel like that is very much targeting that mid-market, and, and SMB market for all the reasons I described earlier. The other thing that I would say in terms of SMB and mid-market is we see an opportunity to be able to segment that part of the market in a more granular fashion than we have.
Mm-hmm.
That includes, you know, how we, our CMO targets certain verticals, and we see an opportunity to go a lot deeper in terms of a verticalization strategy among that customer cohort, or those customer segments. And, you know, we've talked about golden verticals, but areas and verticals where we feel like we have a right to win, and we've proven to have very, very strong traction, partly due to our extremely deep integrations in these golden sectors. And those are retail, healthcare, professional services, financial services, and public sector. And again, I think with these new products, there's an opportunity to go very deep in that segmentation and really take it to the next level. And that also allows you to be smarter with your marketing dollars.
It's something that we started in 2023 as part of our efficiency drive, as part of, you know, driving margin improvement. And one of the things I found so fascinating was we actually cut back on our demand gen spend significantly, and you see it in the numbers, right? And we actually ended up with stronger, better pipeline and better leads converting from early pipe to late pipe, spending less money.
Mm-hmm.
Because we were being much more targeted on how we were spending those dollars. You know, I used to call it the Jackson Pollock method, when you just throw things everywhere.
Mm-hmm.
This is a much more focused. And we feel like we can go further as we look into 2024 on that strategy.
Yeah. Digging into that piece a little bit more, when you think about the SMB and mid-market segment versus the enterprise piece, is there something specific to that group that you say: "Hey, this is why the CX opportunity is better?" I know when we've had conversations with enterprises, it sounds like there's an opportunity for enterprises to do some of the Gen AI themselves, right? And maybe not rely on a vendor, and so maybe that's the opportunity that you're talking about. And then the second part of the question is, when you talked about the vertical approach, is there certain capabilities that RingCentral has? You mentioned maybe some regulated industries that you know give you guys the confidence and comfort that if you you know put dollars there, that you'll see the-
Yeah
Fruits of that?
Yeah. So really good questions. So the first one on AI, and I know it's such a buzzword, and again, like, it's how many times did we say it in this conversation? AI .
Mm-hmm.
So yes, I think in answer to your question, yes. SMB and SOHO, you know, small office, home office, they aren't going to be able to invest in their own LLMs. We're not even investing in our own LLMs.
Mm-hmm.
We're leveraging very large players. You know, we're leveraging OpenAI, for example. We're leveraging that LLM to drive better outcomes for our RingSense platform. And actually, we won't limit ourselves to OpenAI. We want to be actually quite agnostic in terms of which LLMs we use. And you know, you have to be cognizant of you know, where your customers are likely to want to invest and where they're gonna drive maximum ROI. And you know, one of the things you've heard us say before, and this isn't specific to AI, but you know, customers that buy UC and CC from the same vendor, the payback period is much shorter.
Mm-hmm.
It's well under a year. It's around six months. So in terms of actually underwriting that investment decision, if you're a CFO or if you're a CIO, or a proprietor of a smaller business, it's quite easy to make that decision as opposed to, like, if you're investing in a huge, you know, new AI project. If you're a small business, I think you're unlikely... 'cause you wouldn't- that wouldn't bear fruit for a really long time.
Yeah.
So you would be unlikely to do that. You know, where do I, where do I think RingCentral has an advantage? One is that we already have that customer base, and they are turning to us and saying, "How can we derive more insights from the things that we already have today?" And, you know, we, you know, once you already have the relationship, it's much easier to then do an upsell. And, you know, speaking of upsell, that's an area that I've talked about being challenged in the last couple of quarters. We believe that's, you know, a large macro component there. But also, we have been, for the most part, a single product company up to now. We've sold message, video, and phone, leading with phone.
Now we are a truly multi-product company, and we're hoping that, you know, the upsell into these SMB customers will help net retention as we look forward. You know, I think when you look at the overall market landscape, it's still early days on AI. Like, I don't wanna, you know, sit here and profess that I have all the answers, but we do believe we're in a position where, you know, starting actually as of last quarter, like, it's been additive to us.
Yeah.
And it will be additive to us in 2024 in terms of our revenue and margins.
Then you mentioned, or I think alluded to earlier, growing efficiently. So what I thought was interesting on last earnings call, I think you mentioned operating leverage as being the last of the key priorities. So was that at all intentional? Like, was there any part of that saying, "Hey, you know, we see a huge opportunity here. We might, you know, favor growth over operating leverage in the near term?" Then the second piece to that, as you think about going after this AI opportunity, and you know, shifting gears a little bit more towards SMB, are there any changes that need to be made on the go-to-market motion or any incremental costs associated with that?
Yeah. So to answer your first question, you know, we are very focused, and I hope I'm being consistent here on durable, profitable growth.
Mm-hmm.
You know, and hopefully, you see that when we put out commitments and guidance, you know, we meet or beat it. I think when Vlad actually became our exec chair, he said, "You know, this is my 40th quarter, and my 40th quarter of beating the results, the expectations we set with Wall Street." You know, going forward, has that meaningfully changed or changed in any way? No. It's interesting that you say I said it last, the operating leverage. I think the reason I did that, and it was. It was fairly deliberate, is that, you know, when I arrived a year and a half ago, I said that we were certainly like, for a $2 billion SaaS company, we weren't profitable enough.
Mm-hmm.
It struck me, and it was part of the reason I joined, is like, I saw a big opportunity to improve operating margin and free cash flow. Actually, our largest investor said he remembers the first time he met me, that I said that. Fast-forward to today, hopefully, you've seen significant margin improvements, and when I arrived, you know, our operating margin was 10%-ish plus. This year we have guided to 19%, and exiting Q4 at 20%. Taylor, if you ask me, am I gonna see another 10, you know, percentage increase in the next year and a half? Like, the answer is no.
Yeah.
Because, part of it is the operating leverage in the model, but part of it is also, you know, actions that we took that we won't necessarily repeat this year. Because, you know, actions that you take in a certain macro environment are different from actions that you take when you are launching new products and going into adjacencies and trying to capture share in areas perhaps that you haven't before. Like, that does require a degree of investment, and-
Yeah
You know, we're going through our planning process literally as we speak. You know, we do an annual operating plan, like we have for the last several years, and one of the decisions that we make, and we look at the levers, is: how much do we want to invest to drive growth as opposed to, you know, particularly with some of the more legacy products, how much can be more on maintenance mode and therefore, you know, drive more, operating leverage and benefit to bottom line?
I think as I look forward and as we look forward, being a multi-product company, we will be more inclined to want to invest to capture that opportunity, because the worst thing that could possibly happen is you invest all this R&D in great new products, you know, you launch them, and then you don't actually... You, you starve the baby.
Mm-hmm.
Like, I don't wanna starve any babies.
Mm-hmm.
So I think, you know, when you think about 2024, and again, I'm not providing any guidance, you know, we will invest more of those efficiency dollars in driving further growth. And, you know, the other thing I would say is that when you look at new products, you're not necessarily, and this is to your go-to-market question, you're not necessarily selling into the same persona. And what we found is AI purchases, for example, are not necessarily done by the head of procurement. It's more a line of business. And then when you think about how you drive pipeline for that, it's slightly different. So there are nuances on the go-to-market side.
The other thing I would say is in terms of how we've organized our sellers, you know, we do feel like we need to drive further efficiency in our sales and marketing, and paying less people in the overall sales process.
Mm-hmm.
That's not just in the new products. That's across the piece. So bringing down that customer acquisition cost, again, that was something that I focused on in the last year, but there is more to go for there. And, you know, that's something that even though we're investing in the new product growth, I need that customer acquisition cost to come down.
Yeah.
That's something that I feel like we do have scope to improve. We can become, you know, a bit more efficient. We've come a long way, but we need to go even further.
Yeah, and adding on to that, because I would agree that the improvement that you guys have seen on the operating leverage side has been very impressive this year. And the way your stock's trading, at least when you look in the out years, it almost, it's almost like people don't believe, right, that these levels are sticky. So going off of what you just said, it sounds like there are some areas on the sales efficiency side where you continue to make improvement, where then you maybe could make the argument that, you know, these levels are a little bit stickier, but you're also messaging that, "Hey, we- if things open up in the market and there's these opportunities, we wanna make sure that we capitalize on them.
Sure.
So what, I guess, how should we think about balancing those two, right? And the levels that we've seen so far, how durable those could be. I get that, you know, don't assume the same level of improvement, but in terms of the durability of-
Yeah.
So durability, I would say,
You know, and again, without wishing to guide specifically-
Yeah.
Like, the improvements you've seen in the overall margin structure, I am very confident on the durability of that. But as we look forward, you know, again, we have these several products that we've launched in the last two quarters. You know, the RingCX, RingSense, RingSense for Sales. We'll have other personas of RingSense for, you know, other parts of the business. RingSense for procurement, for example. Like, that's—I'm just giving an example, but there will be, you know, additions to RingSense. That is our AI platform, and we intend to infuse AI in everything we create going forward. But, you know, there's also, you know, potential new products beyond that. You know, we did the RingCentral for Teams embedded app 2.0.
Mm-hmm.
You know, that's really important because that's gonna be a driver of growth. There's going to be more products that we're gonna be investing in. Like, we're not gonna stop now, and I think, you know, one of the things that great software companies do is, you know, once they master... Like, I believe certainly on unified communications, like, we are the market leader. You know, Gartner Magic Quadrant, you know, again, very, very top right. We have the number one market share in terms of revenue market share by a significant and wide margin.
Mm-hmm.
But, you know, we don't stop there, and part of it becoming a multiproduct company is a much stickier, and as you see with, you know, great software companies that are household names, they expand into new products, and then their customer base actually becomes stickier. And, you know, we didn't talk about net retention, but that's an area that I'm really focused on. You know, I touched on the upsell, but, you know, we should, and we need to, and we will be focused on improving that metric. I feel like it was very impacted by the macro, but, you know, you quite rightly say, markets are cyclical. Like, everyone in this room in dial-in knows that. And, you know, the market has been challenging. It's not getting more challenging, which is good.
Yeah.
But, you know, eventually it's actually going to, you know, come back, and I wanna make sure that we have the investment dollars and the capacity to be able to invest there. And, you know, we're not seeing signs of the macro recovering in any meaningful way, but we're not seeing it get worse, and I wanna make sure that I retain, and we retain flexibility there. And part of driving the free cash flow, which we have, and again, hopefully you've seen in the way that I guided for this year, you know, close to $300 million of free cash flow, and again, I'm not wishing to give guidance, but a high level, like, that cash flow number can also go a lot higher.
Yeah.
You know, another thing I would just mention there is, you know, SBC is something that has held us back a bit, and we-
Mm-hmm
Over-indexed there.
Yeah.
You know, when you're growing 30%, you can use SBC as a tool, but then as you become a $2.3 billion company with operating leverage, you can change more of that comp into cash. That's what companies do, and that's what we, you know, a lever that we have at our disposal. So hopefully, when investors look at us, and, and, and you quite rightly point out that, you know, the reaction on, on, you know, beating our numbers this last quarter and, you know, the, the share price reaction afterwards implies that there's a lack of confidence in the, the, the medium or long term. But what I will be focused on is driving, one, growth, durable growth. Two, delivering on free cash flow and free cash flow growth. And then importantly, free cash flow per share growth.
Because SBC, we, you know, fully recognize that we had over-indexed, and that trend needs to come down. And, you know, hopefully you will see, you know, when we guide in February, you'll see positive momentum there.
Perfect. And I wanna, just because the macro is so topical, and you mentioned it earlier, I wanna make sure that we touch on that.
Yeah.
So you had some software companies that have SMB exposure that I think highlighted incremental weakness-
Yeah
This last earnings season. You're talking more seeing stability. I know for you guys, I think your growth in your smallest customer base decelerated a little bit more-
Yeah
And then I think your NRR maybe, you know, ticked down a little bit below, below 100%. So in terms of what you're seeing on that front, like, was there any incremental change there? And then when we look at, you know, NRR, could this be more of the bottom? Where do we stand in terms of seat optimizations?
Yeah.
I'm sure to some degree, you're gonna have these other demand tailwinds that will start to offset, you know-
Yeah
Some, some of that, but would love to get your thoughts there.
Yeah. So you're right, we talked about stable macro overall, and when I talk about macro, I'm thinking about things like, sales cycles, deal approvals-
Mm-hmm
Initial deployments, linearity. Because linearity, you've heard me say this on previous calls, it became much more back-end loaded and in an exaggerated way almost, even in the last two weeks-
Mm-hmm
Or even final few days, which does impact, right? Because, you know, when you do your plan, firstly, churn happens, linearly, but then your bookings can be quite back-end loaded, so that can impact things like ARR. But in terms of the demand environment and in terms of, you know, what we see going forward, a stable macro is what we continue to see. You know, I don't wanna try and, tell the future, but within that, we had seen a very resilient SMB base, and last quarter, you're right, we saw, and now I'm reading... You know, I actually just read a research note this morning where somebody was talking about, NRR, particularly in an SMB cohort.
Mm-hmm.
And yes, we did see some, you know, I would say a bit of decel relative to what we were expecting in SMB.
Mm-hmm.
That's not a trend that we're seeing continue to play out. We're not seeing any big dichotomy.
Okay.
And again, I know what you've been reading 'cause I'm seeing the same. We're actually seeing fairly resilient SMB. And then net retention, like, is at the bottom. Yeah. You know, if you hear me say I'm really focused on improving net retention, then we don't guide on retention. We disclose it.
Mm-hmm.
It's around 100, but that is not good enough.
Yeah.
That is something that, again, a metric that we're investing in improving, and part of it is upsell with new products, and part of it is also, you know, on the customer success side, which is really important. We're actually bringing in some super cool technology tools on the customer success side, which we think will be additive in terms of improving churn and downsell.
Perfect. Well, we're out of time. Thank you everyone in the audience for joining, and Sonalee, thank you so much for your time. This was great.
Thanks, Taylor.
Awesome. Thanks, everyone.