All right, we're going to get started. Again, welcome to JPMorgan's high-yield conference in South Beach. As most of you know, my name is Tom Egan, and I cover high-yield technology and telecommunications for JPMorgan. It's my pleasure today to introduce the folks from RingCentral: Sonalee Parekh, the Chief Financial Officer; and Aziz Megji, the Senior Vice President of Finance and Treasurer. So today we're going to do a fireside chat format, so I'll get started with that as soon as I get this clicker out of the way.
Maybe I'll start with the question that probably everybody asks me when they see that Vlad is back, and that is, "Okay, was there a thought process around strategy change or something that might have changed from when the bond deal was done, when Tarek was the CFO or, sorry, CEO, and Vlad had been the CEO prior, now he's back?" So maybe you could talk a little bit about what the strategy is today. Is there a little bit of a strategy change? Maybe what the thought process was on why you went in the direction you went.
Sure, yeah. Great and very fair question. One thing I will just say, though, is that Vlad has always been at RingCentral. He clearly is the founder, chairman, and CEO. But even when Tarek came in as CEO, Vlad was still very much a part of RingCentral and continued as the exec chair. So in many ways, it's back to the future. There hasn't been a significant change. And in terms of strategy itself, and particularly you asked relative to August when we did the bond deal versus where we are today and whether Tarek leaving has any impact on that, I would say no. In many ways, the strategy today is very much building on the strong foundation that we've built at RingCentral. Today, we're a $2.33 billion ARR company with operating margins above 20% when we exited Q4, very solid free cash flow margin, continued to grow.
We feel like we've delivered on the durable growth that we promised you. Even more exciting than that, there's the foundation, but then we've added to that becoming a truly multi-product company today. While the core UCaaS business continues to grow and continues to grow above market, we now are adding to our TAM with our RingCX, which is a native contact center product, our RingSense AI platform, as well as our RingCentral Events business. For the first time ever, we provided guidance on those new products, and we are targeting at least $100 million of ARR from those new products by the end of 2025. At the same time, we continue to drive efficiency, particularly on the sales and marketing line, and also driving free cash flow per share growth.
We've decided this year to significantly address SBC as a percentage of revenue and share dilution, so expect to see more goodness there. So in terms of overall strategy, the core will continue to grow above market. The new products will be incremental and additive, and we will go after new TAM. Today, we are a highly profitable and growing multi-product company.
Great. And then sort of staying high level for a minute, one of the things that always comes up is the macro. So some companies are starting to see a light at the end of the tunnel, and some companies are still saying, "You know, there's folks out there who are making buying decisions that are still sort of taking longer than they used to take to make those buying decisions." So maybe you could talk a little bit about what RingCentral is seeing, and if you are still seeing some sluggishness, how you attack that.
Yeah, great question. And it's something that I did talk to in our recent earnings call. We've seen a stabilization in the macro. It's probably too early to call a trend, but some of the characteristics that you just mentioned, the longer sales cycles, lower or smaller initial deployments, extreme levels and additional levels of approval, we've seen a stabilization there, so certainly in the sales cycles and the deployment size. Where we continue to see some macro pressure, which we firmly believe is macro, is around the upsell side of the business. So our new logo and our acquisition of new customers remains very strong, but where we've seen challenges is on upsell. And what are we doing to address that? So I just talked about the $100 million ARR target for new products.
We have continued to invest through this cycle, and innovation is the lifeblood of our company. And when you ask about Vlad, innovation and P&T runs in his blood, and it's something that we will always prioritize. And as a result of that, we have a lot of great, highly differentiated new products that we think our customers will value highly that we will upsell into our base. Now, it doesn't happen overnight, and there are some slight modifications we're making on the go-to-market, so there's a scaling process that needs to happen, but that is absolutely how we're addressing that challenged upsell. And then on the other side, when you think about a $2.33 billion ARR business, there is churn and downsell as well. And while acquisition remains strong, there's also a portion of the base that exits the company every year.
What we're doing there is investing heavily in customer success and customer support and driving our NPS score higher and making some really fundamental changes to how we cover our customers and how many of our customers actually receive coverage from a customer success manager. Unsurprisingly, you're less likely to churn if you're covered by a customer success manager, and that's an area of the business we've invested in, and we expect to certainly reap benefits from this year. In terms of how we've guided, we decided to be deliberately conservative. We have not incorporated any improvement in the macro. As I said, we've seen stabilization, very strong new acquisition, but we'd prefer to just be prudent in the current environment.
Okay. And that is kind of a nice segue into new products. So maybe you could talk a little bit about what the new product strategy is in a little bit more detail and who you're targeting for new products and how you're seeing that pipeline develop.
One second. Sure. So the new products that we introduced over the course of 2023 are really an extension of our core and some of the trends we were seeing in the core. So we've been very successful scaling our UC+CC offering through the partnership with NICE. We disclosed on the last earnings call that's now the lion's share of the $350 million ARR that we generate in CCaaS. And so seeing that success and the ability to scale in that market, we introduced our native contact center, RingCX, which is really differentiated by its ease of use, ease of administration, ease of deployment, and all at a disruptive price point, not only disruptive but transparent price point. So that is clearly focused at the small and mid end of the contact center market, while the NICE partnership is mid and high end.
We're seeing some strong proof points through customer wins. We've doubled the number of logos that we've added to the platform in a mere matter of a couple of months. We've also won some large customers there who see the benefits of ease of use and ease of deployment as a real differentiator. We're really excited about that, and that's an important part of the $100 million ARR target that we are targeting by the end of 2025. Mostly small mid end of the market, which is large and a growing TAM. It's a new TAM for us. It's not something we could address with the existing NICE partnership. That's a key new logo and upsell opportunity. The second is really extending our video platform.
So we have a very strong video offering, and now we've extended that to events through the acquisition of Hopin Events business, which we acquired late last year. So now we have a leading platform for virtual, hybrid, and in-person events. And so some of the largest brands and companies are using Hopin today, like Spotify, Reddit. We talked about a recent win with Harvard University, which we're really excited about. So a really powerful platform there that extends kind of our core presence in video. And then lastly, this theme of AI. So AI is infused across all of our products, and we're excited about it differentiating the core and adding new applications we can monetize, and one of which is RingSense for Sales.
So this is targeted at sales persona to help drive valuable insights during the call, after the call, for not only the sales agents but their management to assess effectiveness of calls and areas in which to drive better outcome with customers. So we're seeing also really strong uptake in that application as well. And the three together, RingCX, Events, and RingSense for Sales, will comprise that $100 million ARR target that we're setting forth for 2025.
You mentioned the Harvard deal, and that was actually a question that I had on my mind when you guys held your recent earnings call. So maybe you could talk a little bit about who did you compete against when you went into that deal? How did you win that deal? You don't have to talk about the financials of it, but maybe just talk about the significance of that.
Yeah. So we're really strong with events in the education vertical. So we power actually a number of large universities, large virtual events, and hybrid events. Harvard, in particular, we want to. I don't think we can say the name, but it was a well-known player in the events space that is also a strong player in video. And we win in events because of the platform and the UI, the features, the capabilities. The personalization and ease of customizability of the platform is a real differentiator, as well as the scalability. So people love the platform. They've loved it for many, many years. One of the things we did when we acquired it was we invested in additional capabilities, including AI capabilities, as well as revamped the pricing and packaging to make it more competitive.
And we're seeing, as a result, really strong demand and pipeline building for the product. So we're really excited about that, and Harvard is a key testament to the differentiation and our ability to win in that market.
Well, let me just take that a step further because one of the questions when you guys did your bond deal, one of the questions that I heard over and over and over again and that you probably haven't answered more than a million times or so, and it was, "Well, isn't this sort of a pandemic lift that everybody got when folks had to go online and do stuff like that? So isn't that part of what RingCentral is getting as well? And what happens when that sort of is over and the big guys that you compete against who don't have to worry as much about price?
What happens when that all comes back together?" So maybe you just talk a little bit about not so much the pandemic piece because I think people are past that, but maybe what about the big folks that you compete against, and how do you do that in a market where some of those folks have more money than just about anybody?
Yeah. So it's a great question, and yes, we get it a lot, less so these days. But look, I feel like our execution and the numbers that we continue to print quarter after quarter demonstrate that we are not a pandemic story. We are here to stay. We have never been stronger financially. We're guiding to 8%-9% revenue growth this year on a very large base, 21% operating margins, and 17.5% free cash flow margin, and free cash flow at the midpoint of about $420 million. So very much hopefully, you see that we are delivering, and it wasn't just because of a spike during the pandemic. We continue to grow well above the overall UCaaS market. We continue to take share there. And although the industry is competitive, it has always been competitive.
We do believe, and we hear it and see it from our customers in terms of our win rates that we provide a differentiated product. Our founder, Vlad, talks about trust innovation partnership. Trust is extremely important, particularly around the reliability of our UCaaS platform. So we are five nines reliability, so 99.999%. What does that mean in the real world? It means in a given year, you have less than five minutes of downtime, and that's including scheduled maintenance. So if you need to rely on a phone to reach out to your customers and contact your customers, you want to be working with RingCentral. Our customers are willing to pay a premium for that, as well as our features, our integrations. They're all unparalleled. We have been investing in this UCaaS business for many, many years, 20+.
It's not that easy to replicate, as our competitors have seen. I think, again, acknowledging that it is competitive out there, I think each of us leads with our own strength. We lead very much with phone, although we have an increasingly competitive video product as well and messaging. But there are many businesses. 70% of SMB businesses rely on phone as the number one modality to engage with their customers. That is where we lead and where we continue to lead. We also have guided to above-market revenue growth in CCaaS. In CCaaS, we go to market two different ways, so contact center as a service. One is via the OEM partnership with NICE inContact, which today is the lion's share of our $350 million ARR. But we also have our own contact center business, RingCX, which we've recently unveiled.
I have to say, we have been unbelievably pleased, excited, even surprised by the extent of the traction we've been seeing from our customers there, which is why we felt so confident to put guidance out on the new products. There, we will certainly grow well above the market and, again, take share. Now, it's quite a different use case from our OEM with NICE in Contact. The NICE in Contact use case is more upmarket. The RingCX business, although we have won some mid-market customers, it's more focused on simpler use cases, easy to deploy, doesn't have a heavy professional services lift. It's going out to a very different base.
We believe that we can continue to thrive in all of these markets and certainly the pandemic feels like it was a long time ago, and we will continue to execute over and beyond that and out-execute the competition.
You mentioned the profitability improvement a couple of times this morning. So I'd just like to ask you if you could dig down into what, if you were thinking about the components of how that profitability improvement is happening, is it more products per customer? Is it folks? Is it all in the upsell? Is it the new products coming in? Are you being careful with costs? Is it just leveraging your base in that every time you grow, that your base seems to just get more profitable?
Yeah. So it's a little bit of all of those things, some more than others. So a couple of things to call out. So you're right. We have become significantly more profitable in the last two years. So when I joined in mid-2022, our operating margins were around 10.4%. We exited Q4 2023 at above 20%. This year, we've guided to 21%, so 11% or 10.5% improvement over that period. As you look forward, don't expect that same quantum over that time period, but we actually feel like there's more to go, certainly as we scale above well, above $2.3 billion now. So part of it was the inherent operating leverage within the model. So as you get bigger, you don't have to incur the same OpEx as you do on every single customer. There's the unit economic improvements just from that operational leverage.
But we also made some difficult but necessary decisions at the end of 2022, which really kicked in in 2023 with respect to our workforce. When I joined in 2022, what I realized very quickly is we had a plan, and we had hired based on a certain plan, and then the macro for the entire world ended up being very different. And so we probably got a bit fat, and we needed to slim down. And so we went on a bit of a diet, and as a result, we had to make a very difficult decision, and we let a portion of our workforce go. We were extremely careful not to impact frontline sales and actually almost anything that touched a customer. So think customer success as well and even sales enablement. And it was more on the G&A and sales and marketing side, but again, not sellers.
On the marketing side, what we found when we started digging in deep as we were running this efficiency exercise is that we weren't optimizing our demand gen dollars at the time. And what we've actually found is we've cut back significantly on demand gen dollars but actually ended up with a higher quality pipe. And what we've done is focus much more on verticals where we know we have a right to win. And I think Aziz called some of these out, but it's distributed retail. It's healthcare. We count the four largest dental service providers as customers. It's SLED, so state, local, education. We talked about Harvard, but we have some other many, many large logos in the education sector and then financial services and professional services.
And we decided to be a lot more targeted and go deeper on those verticals, and that has really reaped benefits for us. And then there were some branding expense that we had incurred in 2021 that we weren't seeing the right ROI on, which we decided to reallocate. Then we also did what I think many companies did and just looked at our overall SG&A, G&A in particular, travel, entertainment, and other areas, professional services spend. And we found when we were a lot more disciplined and Aziz runs procurement for us, but we did a very large project around procurement, it generated significant, significant savings.
So again, taking all of that into account and particularly as we look ahead, there's more to do, but we wanted to become a lot more efficient around customer acquisition, sales and marketing, the way we procure the goods and services for our business. As an above $2 billion company, you have quite a big OpEx base to attack.
Let me just switch gears a little bit, but it might go along the lines of some of the cost saves you talked about. It's funny because when ChatGPT showed up, everybody started talking about AI again like it had never been here. I think maybe computers have been winning at Jeopardy and chess for decades. So for your company in particular, because you have contact center business and things where there are people contacting other people in different ways, I'm wondering, how do you see AI for RingCentral? How do you plan to use it? How are you using it now, and where do you think that maybe takes you?
Yeah. So we see AI as a significant opportunity. I think Vlad calls it the mother of all megatrends, and we're infusing AI through our entire portfolio. So if you think about on the UCaaS side with our core product, which is called MVP, it's really about we're utilizing AI to make interactions to get deeper insights and takeaways from interactions, and whether that's before the interaction, real-time during the interaction, or post the interaction. And AI is not new to us either. I mean, we bought a company in 2018 called DeepAffects, which was a leading AI company in Israel. And now that serves as really the foundation for our RingSense for sales and our RingSense platform that permeates our entire product suite. So we see it as a significant opportunity.
We've infused AI into our core product, and customers are using it today to automate note-taking, automate transcripts, not only have kind of the direct read-through of a call but key insights and takeaways from the call. You can imagine how powerful that is if that's not only being generated from your calls but then with the integrations that Sonalee mentioned, having that data be automated with some of your key workflows in enterprises and SMBs becomes super powerful. And that's why in certain verticals, we are the leader and see really high win rates is because our customers are really using our product deeply integrated with their workflows, and AI allows them to drive even more value from our product, especially when integrated in those workflows. So we see on the UCaaS side as a significant opportunity.
And then on the CCaaS side, we do think that there's an opportunity to disrupt in that space. There's a lot of players who are per-seat models. AI will definitely automate the contact center and reduce the number of seats and move TAMs. And RingCX, our native proprietary contact center product, is AI-first. It's disruptive from an AI perspective and from a price point. And we feel really good about our opportunity to kind of lead in AI in the contact center as well and have some interesting technologies that we've developed and on our roadmap that will help accelerate that. So real opportunity for our customers. And then internally, we're using AI to drive down cost, to manage spend, to drive greater insights into our organizations, especially with automating processes. So it's a real opportunity on both sides.
Since we're at a debt conference, I'll ask you some debt-related questions.
It's why I brought him.
Yeah. Yeah. Well, and because you came in on the red eye, I didn't want to have you just sit up here and not answer anything. One of the other questions that comes up a lot is, you've got a small amount of 2025. You've got a substantial amount of 2026, converts. How are you thinking about those converts? Do you refinance them as converts? Do you take them into warm market? Do you do something other than that?
Yeah. So we now have presence in all three of the major financing markets, converts, high yield, and the bank market. So we feel with our financial profile, based on the guidance that Sonalee shared on earnings, our EBITDA is continuing to grow. And based on that EBITDA for this year, our leverage will come down from 2.6 today to something in the low twos. And we feel really good about that leverage. I think we had said either at a previous conference that 2x is where we were targeting, and we have line of sight into that by end of the year.
So that profile from our EBITDA, net leverage, free cash flow—not only the free cash flow but the quality of the free cash flow and the growth of the free cash flow—and our strong credit rating, double B credit rating, gives us access and flexibility and optionality in all of the major financing markets. So we're enjoying the 0% interest today on the 2026. There's no hurry to go rush out to do something, but we will be proactive and move decisively if we see our share price move closer to where we think the intrinsic value is. Maybe a convert would make sense. We'll monitor the rate environment, and potentially another high-yield offering will make sense. But the nice thing is, on the 2026, we have luxury of time. It doesn't go current for another two years.
On the 2025 convert, which is about $161 million, we started last year with $1 billion in that balance, and it was a key focus of Sonalee and mine to take that down and diversify. We've successfully have done that through a high-yield offering in August and a Term Loan A in February of last year. And now with our cash flow profile and the liquidity available to us through our revolver and a term loan, an additional commitment that we can draw upon, we have more than ample liquidity to address the 2025 converts. So a lot of flexibility and optionality with the financial profile that we've built. With the 2026, which are $609 million, we have time.
Is there, because I know your target was originally get below 3 times, and you've actually done that, and you're gone through that. So is there a thought process around potentially targeting an IG rating at some point, especially given where interest rates are today? Does that help you in any way?
Yeah. We'd have to weigh the cost of capital benefits with the financial policy. So we've just begun discussing kind of the trade-offs and whether that would make sense for us or not in the future. It's certainly a possibility. It's a great point. But I think the key for us we started the end of 2022, we were at 4.2x . Now we're at 2.6 with line of sight to two. So the capital structure is supported by the financial profile now, and investment grade could be in the cards, but we haven't really fully debated whether that makes sense for us or not. But the good news is we're trending towards that. It could be a possibility.
And then I'll throw this one at you, which is probably a question you haven't had before, and that's just because I just did this on Friday, I think.
I think we just do.
You issued what I always call the universal shelf. Some people call it a mixed shelf, which talked about general corporate purposes, which everybody in high yield means something besides general corporate purposes. But it also threw M&A in there as a possible use of mixed shelf. So maybe you could talk a little bit about what the purpose of the mixed or universal shelf was and if M&A is sort of on your radar at this point.
Yeah. So the mixed shelf was not with M&A in mind. This is something that we have in place for flexibility. Last year, we acquired Hopin Events business. We were really happy about the outcome of that acquisition, acquiring really high-quality IP and an incredible team at what we thought was a very attractive price point. We'll look for more Hopin. We'd love to do those all day, things that are strategically and financially aligned that accelerate our roadmap, bring us to new markets, or strengthen our core, our real focus areas. And as we become larger and have a much more robust free cash flow profile and capital structure we can support, if there are things that are slightly larger that make sense from financial strategic vantage, we'll seriously look at that.
So nothing big or medium-sized in the horizon now, but it will be a key lever in our dynamic capital allocation policy. And we'll weigh it and the benefits and the returns vis-à-vis retiring our debt or buying back our stock.
Okay. We have a couple of minutes left. Let me just see if anybody in the audience has any questions. Are there any questions from the folks in the audience? Here comes the mic. That gentleman right there.
Thank you. Thank you for the presentation. I was just wondering because you mentioned last week that one of your targets for 2024 was to reduce SBCs. I was wondering, how does this reconcile with improving profitability and improving free cash flow, please?
Yeah. So absolutely, that is one of our targets. And we spoke to that in our earnings call, and hopefully, you've seen we've actually delivered on that. So in the last year, we brought SBC as a percentage of revenue down 4% or 400 basis points from 2024 to 2020. And this year, we're guiding to around 16 and change SBC as a percentage of revenue. Of course, it's not something you can solve overnight because part of what goes through the P&L is related to past grants. But within that guidance for this year, we've said that new grants will be down by about 50%. So how do you square that with improving profitability? So we are moving a portion of our stock-based comp to cash, and we have said that the impact of that is about 100 basis point headwind to our operating margin.
So if not for that, we would have guided to an operating margin of 22%, not 21%. So there is an impact there. But we felt strongly that it was the right decision to make. And actually, when we looked at how our peers obviously, we used benchmarking, etc., to look at how the overall software market compensates their employees. And what we found is we were paying stock-based comp across the board to every employee. And in fact, most companies only started around the manager level and above. So we've, in many ways, just gone back to market. The other thing is some of the actions that we took at the end of 2022 on the headcount side of things, as well as some in 2023, had a corresponding impact on bringing down SBC.
And then finally, we looked at things like new hire grants and also giving grants to people when they're promoted as opposed to one time a year. And all of that, taken into consideration, helped us to drive stock-based comp down to where we're guiding to 16% this year. And we've said, for next year, expect a further several hundred basis point improvement.
It looks like it's right at the end of the time. That's perfect timing. Thanks again for coming, folks, and thank you, Sonalee and Aziz.
Thank you for having us.
Thank you.