All right, everybody, welcome to Take a Seat. Sonalee, you ready to go?
I am ready.
All right, we have RingCentral back here today. Sonalee Parekh, CFO. You know, it's funny, we talked last year, same room, same conference. There's been a lot of developments over the last 12 months, so I'd love to understand from your perspective, what are the key things that have happened over the last 12 months?
Yeah, great. Well, firstly, thank you for having us back, and it's a pleasure to be here. I was just saying, no one needs to convince me too much to spend, you know, this time of year in New York City. It's so beautiful, so thank you. And yes, it has been a very busy year at RingCentral. So, I'll, I'll cap off a few highlights, and then you'll probably want me to go deeper in certain areas. But I think firstly, what I would say is that, it's been a year where we have, you know, delivered on our commitment to drive durable, profitable growth. Hopefully, you see us today as a significantly more profitable company than we were a year ago. About 700 basis points of operating margin improvement. We are also significantly more cash generative.
So, if you look at how we are guiding for the full year, on free cash flow, it's a nearly doubling of unlevered free cash flow. We have also done a lot of work on our capital structure, and our treasurer is sitting in the back row, Aziz Megji. And, you know, we have taken very, very big chunks out of our 2025 maturities, as well as 2026. But I think most importantly, have really demonstrated a financial profile that can support, you know, the quantum of permanent capital that we now have on our balance sheet. And, you know, I think that that has... We were just joking in the last one-on-one meeting that nobody asks about the converts anymore, which I think is a really great thing.
It has also been a year of prolific new product introductions. I can go through all of them, and hopefully, you're going to ask me a bit more about some of them. But one in particular, RingCX, which is our native AI-infused, purpose-built contact center as a service business. It has just gone into GA a couple of weeks ago, seeing great traction and you know, really excited to go out and you know, get our go-to-market guys pushing that, pushing adoption across the base. We are now you know, close to being a $2.3 billion ARR company. We feel like we have never been stronger in terms of our financial profile and our product portfolio, and you know, are now very much a multi-product company.
So, hopefully, that's enough for a year.
That's great. Although, all right, so there is one that you missed. So Tarek joined us as CEO. Now, I know he was on the board previously, and you've worked with him in the past, but you would love to understand what his priorities are, and we'll hit on some of the stuff you mentioned. But what have you seen early on from Tarek's impact?
Yeah, absolutely. And, of course, Tarek has joined us, and as you say, it was very much continuity from my perspective in that I've known him for many years. But also, Vlad, our founder and chairman, is still very much part of RingCentral every single day. And, you know, something you've heard me say in the past, and actually, we talked about it last time I was in this seat, is how important innovation is to RingCentral, and it, you know, runs through our veins. It's part of our DNA. And investing in new products and investing for growth is exactly what Vlad and I are partnering on at the moment.
Tarek has set out some strategic priorities, which, you know, in many ways are, cementing, you know, what hopefully you, you saw, from me when I arrived about a year and a half ago, really driving that durable, profitable growth profile. You know, we believe there's a lot more we can do around certain golden verticals where we have been extremely successful and where we truly feel we have a right to win. Some of those, you know, are, in healthcare, health services. You know, the three largest dental service, providers in the United States are RingCentral customers, but also in retail, in public sector, you know, sectors where, reaching your end customer by phone is extremely important and mission-critical.
We think that there's even more we can do in terms of segmenting that base and our new products, and particularly RingCX, but also RingSense, which is our AI platform. We really believe we can target those SMB and mid-market customers who perhaps, you know, doing a larger, you know, more complex call center deployment would have been too onerous for them.
Hmm.
We listened to those customers, and they said: "We want a simple, easy-to-use solution that we can deploy in weeks, not months, where we don't need a massive, you know, internal IT department to do the deployment." And again, it's really about going after that sweet spot of where we see very strong end-user demand, and that's where that segmentation and really focusing on where we've historically been so strong, in that SMB and mid-market.
Well, I was gonna hit on product later, but you mentioned RingSense and RingCX. Like, what are the early traction point or data points that you've seen, and, and how do we think about that opportunity as you think about your TAM longer term?
Yeah. So, great question, and I think, you know, I'll start off on RingCX and then add RingSense. And RingSense, you know, is early days, and as I said, it's our AI, AI platform. And on RingCX, what I would say is that we have already proven, and we have seen from our own customers, that, you know, customers want to buy UC and CC from the same vendor. That is a very powerful value proposition to customers. One, because it allows the payback period to be significantly shorter. So, in terms of total cost of ownership, you know, that is an easy sell. But secondly, there are strong, strong efficiencies that customers can gain from that.
You can just imagine, you know, having both your front office and back office linked on the same platform, and that's something that we can offer. I think we at RingCentral are actually the only truly integrated UC and CC platform. Again, it's just a very, very strong value proposition for the customer and also for us. You know, if we lead with a CX contact center sale, there's often some very, very strong UC pull-through on that. So, we're looking forward to seeing, you know, our sellers gain more and more traction with that product. Without giving too much away, we have seen an extremely strong start in terms of, you know, interest from our base and actually, new customers from RingCX.
And last quarter, one of our largest deals, which is a, you know, multi-thousand seat deal, in the waste management industry, where we competed against, you know, very big names in contact center, we won that because of, you know, the value proposition that we deliver to our, our customers. And, you know, again, it's a very proven sales motion for us, and, we built, you know, a close to $330 million CCaaS business, in the eight years. You know, that's as large as many of, you know, some of the largest SaaS companies out there. And although it's early days on RingCX, our own native product, you know, we feel very, very optimistic about the, the growth it will drive. On RingSense, you know, we're still, trying to figure out the,
I think not just us, but including, you know, the broader ecosystem in terms of how we're going to price it.
Mm-hmm.
You know, we've been really clear on how we priced RingCX, super disruptive pricing, $65 per agent per month. That's a significant discount to pretty much anyone across the board. You know, very deliberate strategy. On RingSense, you know, some part of the RingSense for Phone platform will be embedded within our MVP product,
Mm-hmm.
... which we, you know, sell as a bundled product today to customers. But we also believe that there will be demand, particularly from that SMB category that we were talking about, mid-market, for, you know, a AI or RingSense-only SKU, and we think that can also be additive to ARPUs. But again, you know, in terms of the impact you'll see next year, I would expect to see more from RingCX than I would from RingSense in terms of the actual ARPU accretion, as we, you know, figure out the business model, and again, us and I think the broader ecosystem overall.
That's, that's a great overview on that. Maybe, maybe taking a step back, I think everybody's been debating the macro here at the conference. You know, we'd kinda love to understand, you know, what you've seen over the course of the year, and how would you maybe segment that between, you know, enterprise, mid-market, and SMB?
Yeah, great question, and we are still discussing the macro ourselves as well. You know, no one has that crystal ball, and depending on which research you read, you know, it's either gonna be a great year next year or a- you know, it depends on what happens to rates, et cetera. So what we do is we plan for several eventualities, which you would expect a CFO to do. What we're seeing in front of us right now is a fairly stable macro. You have heard me say that the last couple of quarters.
Mm.
You know, certainly in Q3 and Q4 of 2022, we saw, you know, a worsening. That started to stabilize around Q2, Q3 of this year. And when I say stabilize, I mean things around deal cycle times.
Mm-hmm.
You know, layers of approval, the size of initial deployments. You know, we did see those drop and then drop further at the end of last year. We've seen a stabilization there. We are still seeing very strong end user demand in the form of pipe. So, you know, our marketing team does demand gen activities, and we have, you know, early pipe and late pipe and, you know, conversion of that pipe. That continues to be very, very strong. Good question on the segmentation, because earlier on, in this macro, which I guess started hitting Q2, Q3 of 2022, we saw the SMB business hold up surprisingly well, and actually, enterprise was slightly more impacted within our base. And I think that's partly because enterprises are, you know, they often have their own procurement department.
Mm-hmm.
Or they'll have a CFO that starts getting involved in the decision-making, and SMBs, you know, are not set up in that way. We did, in Q3, see some weakness in our SMB business for the first time. Enterprise actually held up better, and I think, you know, reading again of some of the peers are saying and some of the analysts are writing, I do believe that, you know, a weaker SMB backdrop was seen across the market. We are not seeing any worsening of that.
Okay.
... in the current quarter. The other macro theme that you've heard me call out, and I find with every quarter, it is actually becoming even more or ever more exaggerated, is this back-end loading. I remember seeing it in Q4 of 2022, particularly that month of December, in an exaggerated way, and that's continued all through this year. You know, look, we're still not through the quarter, but I would expect, and I highly suspect we'll see again that very, very strong back-end loading. When I say back-end loaded, I don't just mean the last month. I'm talking last two weeks or even the last week.
Well.
That is different,
Yeah.
... from what we saw before. And one other point I'll make there is, when you're at $2.3 billion ARR base, you know, you have a certain proportion of the base that churns as well.
Sure.
However, churn happens fairly steadily within the quarter, and then sometimes the bookings will just come in the last week or the last day, depending on how customers are, you know, buying. And, you know, Q4 tends to be a very enterprisey quarter as well.
Yeah.
And enterprises tend to be even more back-end loaded. So I suspect that's what we're gonna see this time.
So higher level, just on the TAM, it's always—it, it's funny, we have a lot of debates, and we're, you know, talking about converts and things like that. But if you think about the TAM in front of you guys, and where the cloud penetration is, I feel like sometimes that's missed. So maybe kind of remind us where we are in terms of industry penetration.
Yeah.
... and what kind of opportunity you still see in front of you on the UCaaS side?
Sure, absolutely. So it is an enormous TAM, and, you know, sometimes people think about it in terms of number of seats out there. I think in, in some ways, that can be a little bit misleading in that some of those seats, and I think the number that's been used, and, and we've used it, and third-party data has, has definitely used it, is the, there's 400 million seats out there. Some of those seats, quite likely, are obsolete and will never end up converting.
Mm-hmm.
But even if you took that TAM and, you know, cut it in half, and said it's 200 million seats, if you look at the number of UCaaS seats out there today, I mean, it's tiny, minuscule penetration.
Yeah.
So in other words, there is still a ton to go for, and we continue to be the leader in UCaaS in terms of revenue market share. And, you know, customers choose us because of our reliability, you know, five nines, 99.999% reliability. Like, what does that mean in real life? It means that your phone will be down less than five minutes per year, including scheduled maintenance. None of the competition can even come close, and that is 20+ years of R&D that got us there. And, you know, this is for the ninth quarter. Actually, I think the last two quarters, we were six nines reliability. Also, the deep integrations we have. You know, think of almost any software. I was talking about golden verticals, like healthcare.
You know, there are certain integrations that our UCaaS offering has with, you know, other software, other APIs, and again, no one comes close in terms of the number and depth of those integrations. That is why we continue to lead and win in UCaaS. You know, in terms of the opportunity or what might catalyze the opportunity, I think AI could be a very big enabler there. I think, AI is starting to drive discussions around perhaps some of those industries that were a little bit slow on, cloud adoption in UCaaS.
Mm-hmm.
I think they're, you know, afraid that they might actually miss, you know, a change in the technological landscape, such that, you know, as they look forward, they might not be able to keep up with the advancements. I think that that could be a catalyst. Again, we're certainly seeing more and more conversations, and our sellers are telling us about that. So we think AI could be a game changer here. You know, we also, obviously, you know, with our RingCX product, are looking at significantly different revenue and profit pool-
Mm.
... from what we had access to before. I think what makes us slightly different there is, we don't have a legacy base to protect there.
Right.
We have a relationship with NICE inContact, where, you know, we sell, but we partner with them on, their, CCaaS, technology and product. But we don't have, within our RingCX base, a legacy revenue base to protect. So in other words, we can be very, very disruptive in using AI as a tool for, encouraging adoption, and, we can really lead with it in a very disruptive way, and we think that that will put us at, a huge advantage. And, you know, again, you've, you've seen our prolific product announcements this year. You know, we will continue to invest very heavily in, you know, innovation, and particularly around the AI side of things, which, Vlad, our founder, calls the mother of all megatrends, which I actually think is an understatement.
Because not only is it the mother of all megatrends, it's the speed,
Yeah.
... at which it moves. And again, that's why I think we might see some of these laggards, in terms of moving from PBX to the cloud, really decide to adopt, you know, this UCaaS technology.
So it's interesting, you also have a lot of channel partners, strategic partners from a go-to-market side. What role could they play in helping to facilitate this? And as you think about your reach and your touch points, like, how should we be thinking about some of those strategic partnerships?
Yeah, so great question, and you're right. We, I think one of our, you know, critical success factors over the last couple of years has been our distribution,
Mm-hmm.
... and the breadth of it and the depth of it, and those, you know, unique partnerships that are exclusive, and I think that's really important, and needs to be emphasized. So we have, you know, 15,000 partners that sell RingCentral today, and therefore, we have 15,000 partners that will be selling RingCX and RingSense and RingSense for Sales and RingSense for MVP, and, you know, so on and so on. And I think that is, you know, the power of having this not only very large ARR base, but these, you know, deep and long-standing partnerships. It means that when we bring in new products, we can really go after that opportunity in a scaled way.... So the partnerships that, you know, I would specifically call out, Avaya and Mitel are the exclusive ones.
And, you know, Avaya is today the largest, if you talk about TAM, you know, the largest base of legacy PBX seats. And we, RingCentral, are the natural destination for those seats to move to. And again, I do strongly believe that AI can be an accelerant there. And you see that's where we're investing our R&D dollars as well. And then we also have fantastic partnerships with the global service providers or Telcos, and cable operators. And, you know, we've added Vodafone in the last couple of years and Charter in the last year. Vodafone is a great foray and entry point and foothold into the European market,
Mm-hmm.
One of the largest telecom providers across Europe. And also on Charter, you know, one of the big cable operators, and that partnership has, you know, far exceeded expectations, and continues to deliver. So I think there's more we can do there, and you've heard Tarek talk about, you know, even going beyond the partners we have today. You know, you saw a couple of quarters ago, we announced a partnership with AWS that's starting to generate significant and, you know, really attractive pipeline, which we're gonna go out and convert. And, you know, AWS sellers can retire quota selling RingCentral. But, you know, there are ISVs and software companies that we can, you know, look to partner with.
And again, those are, you know, opportunities that we will pursue as we look forward.
You mentioned a lot of investment in AI. We've also seen significant margin leverage. You know, as we're thinking about the growth opportunities and the go-to-market and everything, how do you think about balancing growth versus profitability from your seat going forward?
Yeah. I think about that all the time.
Always a balance, right?
Yeah, exactly. So look, I feel like we have made tremendous progress on operating margin, as you say,
For sure.
... this year, and it was driven, you know, by some of it was actions that we took, very specific actions around headcount at the end of last year. And you know, that was a big tailwind, but also the inherent operating leverage in the model when you get past $2 billion of ARR, which again, we're in the enviable position of being in. So yes, you will continue to see increased operating leverage as we grow, as we continue to grow. And you know how I guided for this year. And as we look forward, I think it's going to be very important that we do balance growth and profitability. So sales and marketing, you've heard both myself and Tarek say, sales and marketing as a percentage of revenue is still too high.
We need to become even more productive in the way we sell and even more efficient. We need to drive customer acquisition costs down further, but don't expect anything like what you saw in the last year and a half in terms of margin expansion, because we also feel like it's extremely important that we invest for growth. And we have these great products, and it's very, very important that, you know, we don't want to starve any babies.
Yeah.
We want to nurture those babies. I think in that sense, you know, expect a more balanced margin revenue profile next year versus last year was significant, significant. Not just margin, but I think, and again, I'm gonna come back to this, is free cash flow.
Yeah.
That delta between operating margin and free cash flow, hopefully you saw, move in the right direction this year, and you should expect more of that next year.
So I was gonna say on free cash flow, obviously, the generation's picked up quite a bit. You know, how are you thinking about deploying that and priorities for capital deployment? You know, would love to get some perspective on how you're framing that.
Yeah. So, you're right, we are significantly more cash generative. So this year, we're guiding to a midpoint of $295 million unlevered, versus $140 million last year. How are we gonna deploy that? So we think about capital allocation really in a dynamic way. And, you know, I think about it on several pillars. So one is, we absolutely will continue to invest in organic R&D and, you know, new product development. So that's very, very important. Secondly, we do still have, you know, $430-something million remaining on our 25 converts. We will likely use some of our own free cash flow generation to pay down debt, and we'll continue to do so as we look forward.
We will continue to buy back shares as and when we see an opportunity, and you saw we have done that over the last couple of quarters. And then, you know, you've seen us do some M&A recently, and I think as we become more cash generative and as opportunities particularly around AI and... You know, it has to be strategically relevant, obviously, and relevant to our customer base. But, you know, as we see more and more opportunities arise, we will look, and as we have more cash flow, we will look to see if any of those deals make sense. And, you know, we are constantly being shown interesting opportunities, and you saw we grabbed one when we bought the Hopin Events business.
You know, we think that that was a terrific transaction for us. Not only did we get amazing tech but I think most importantly, we got incredible talent, 25 engineers that, you know, are leading the way, and, you know, we now have them also working on our video product. So it's been, you know, a fantastic acquisition. And again, speaking of new products, we didn't mention events, and I probably should have, but that's,
Did you wanna add on, expand on it? Yeah.
Yeah, that's another, like, a amazing business. And, you know, we just hosted an event for a very large public Silicon Valley company, where I think, you know, 35,000 people attended. So it's a highly, highly scalable product, and the customer list is like a who's who. I can't remember who we're allowed to name and who we're not, so I'm not gonna say it here, but literally, it's every brand that you can think of as, you know, a potential customer, and many are already customers. So we think that that's opened up a whole opportunity for us to not just sell events into that base, but cross-sell, you know, other products into that base. So more to come there.
I think what I would say is, if, you know, there were 20 Hopin deals out there to do, we would, we would look to do 20. So think about capital allocation as being very dynamic, and it will be, you know, debt paydown, organic investment, inorganic investment, and share buybacks.
And so, we're coming up on time here, but, you know, if we're, if we're here a year from now, same room, same situation, what do you think that, that we would be talking about? So what, what are the strategic priorities for you in, in 2024?
Yeah. So, I think really, and hopefully you'll ask me next year, like, how have those new products that you've invested in, you know, how have they hunted with clients and customers and what are customers saying? And, you know, I think being a multi-product company is really exciting for us, and, you know, I know I've sat in on a couple of customer calls, specifically on and with these new products, and it's amazing to see how customers are the ones who are actually thanking us for coming up with these solutions. So I think, you know, I'll be really excited in a year from now to tell you, you know, how much RingCX and RingSense we've sold, and how much it's, you know, added to our our overall top-line growth.
And then hopefully, you'll also see that we've become an even more efficient company in driving that growth. And then lastly, you didn't ask me, but I'm just gonna put it out there 'cause I know some of you in the room are thinking about it. I hope you'll see that we have made strong progress on SBC as well and share dilution. It's something that, you know, it is a personal focus of mine, and I have, you know, senior members of my team working on how we will drive that down as we, you know, conclude our 2024 planning. So you can ask me about that in a year.
See you guys next year.
See you next year.
All right. Thanks, Sonalee.