Welcome, everybody. I'm Meta Marshall. I cover the communication software space here at Morgan Stanley. Delighted to have RingCentral here with us today. For any important disclosures, please see the Morgan Stanley disclosure website at morganstanley.com/researchdisclosures. If you have any questions, reach out to your Morgan Stanley sales representative. Again, let's move on to the more exciting part than disclosures. Vlad Shmunis, Sonalee Parekh. We have the CEO, co-founder, and/or founder, and then Sonalee Parekh, CFO, with us here today. Maybe let's kick off. Vlad, you know, you stepped back into the CEO role at RingCentral. What do you think are the most important things or tenets to the RingCentral strategy that investors should understand?
Yeah, fair enough. So thanks for having us. Look, it's a few things. So, one is, we're turning into a multi-product company. That's a big change. Maybe a bit overdue, I don't know. But, when I was—for a few months, I was not in the CEO chair, I was running tech for the company as well as being executive chairman. We've had two significant introductions, which is, one was RingCX, our own cloud contact center. The other one is RingCentral Events, which is, a highly competitive, well-received product based on the technology we acquired from Hopin, a little bit earlier in the year.
These two new products, plus our RingSense AI platform, is really our foray into enabling our fairly large and potent sales force, both internal, as well as our general network of over 16,000 partners. So enabling them with multiple products, we think it will do great for us as far as TAM expansion, SAM expansion, upsell, ARPU expansion. So just total goodness there. So this is one area of focus. And the other one is, I think there was maybe a bit of a, I don't know what you call it, something I'm not aligned with that was said, which is, "Hey, SMB is going to RingCentral is going to retrench into SMB." So that is very far from my strategy.
Enterprise is a billion-dollar business for us. 20% of Fortune 1,000 are meaningful customers. Meaningful, meaning over $100,000 ARR, and it is a growth driver for us. And especially nowadays, when Teams is taking such strong growth into enterprise. Our Teams integration, which is industry best at this point, is really playing well and will continue to be a growth driver for us. So that is going to be an area of focus for me as well, is to reestablish ourselves as an enterprise leader.
Okay, perfect. I mean, you just introduced it there with mentioning Teams. You know, just how has the market opportunity you see changed over the last five years as Teams, AI, video usage have kind of meaningfully changed the UC landscape?
Yeah. Look, sure, there was much less Teams, maybe no Teams five years ago. But, you know, different set of competitive dynamics. Also, you know, about four years ago, COVID hit, so many things got reshuffled.
Sure.
Yeah. But, as far as what we see now is, we absolutely see continual traction in the enterprise. The play at this point is not so much about the entire collab stack, because in the enterprise, at least U.S. enterprise, clearly Teams dominate. But it is about peaceful coexistence with Teams and the ability to add value there, and we're extremely well positioned. We don't overlap with them that much. We're known as a voice-first provider and not as a video-first provider. To have, for a video-first provider to coexist with Teams, there's just, you know, a lot more overlap there and a lot more competitive.
But then also don't forget that Teams is, in the end, mostly enterprise and mostly North American, much less so in Europe, for example. That leaves out the rest of the world, that leaves out SMB, which is also a + $1 billion business for us. Plenty of room to grow.
Okay. So I mean, maybe the overarching question I get from investors sometimes is, you know, we've largely thought of this market over time as this 400 million seat opportunity and, you know, somewhere between a $20-$30 monthly ARPU. However, that no longer seems appropriate, just given, you know, seat adds or channel checks as far as kind of what the voice ARPU is. Is there a better framework that we should be working with, particularly as you expand out the product portfolio?
Yeah. Well, yeah, things obviously have changed over time. And, you know, there were new technologies, there are new players, COVID, and the work patterns changing. So, look, the 450 million seats is what incumbents, legacy providers, PBX providers, have cumulatively shipped over time. So that's where that number came from. Now, is every one of those lines going to migrate to the cloud? Probably not. Okay. You know, I think your own research shows 80 million lines that would be migrating, and specifically migrating into mission-critical applications, which is, for example, not where Microsoft is particularly strong.
Right.
Okay? So there is still a gigantic opportunity out there. On the ARPU side, look, there are—yes, there is absolutely pricing pressure, as, you know, more people have voice or good voice. But the flip side of it is that we're also not standing still. So with our new product introductions, with RingCX, which is priced at $55, and is, you know, and a, a pricing disruptor in the segment at this point, with RingCentral Events, where we have, also, just reimagined the way that that product needs to be sold.
I can tell you that we've been having super strong reaction to the new packaging and pricing there, including this one recent win that we've announced with Harvard University, which was a direct competitive situation against a very well-known provider that we won. Okay, so both of those products, while disruptively priced, are still a huge tailwind to our pool as a whole. So again, there is puts and takes, but if you look at the number of seats that we have and the revenues that we have, you'll see that overall we are holding steady, closer to the 20-30 range-
Okay.
-uh, ratio.
Okay. So maybe a smaller seat, but a bigger ARPU kind of number at the end of the day?
Yeah.
All right. You know, consistently over the years, one of your largest advantages has been your channel partnerships, and the partnerships you've had with legacy vendors. Do any of the changes that we've talked about, you know, just in terms of expanding out that portfolio, or just the impact of teams, change that partnership or channel strategy? And is there a part of that market where the channel and partnership strategy still gives you the greatest advantage?
Well, it's still a very strong asset that we have, 60,000 channel relationships. A number of leading global service providers, GSPs, starting with AT&T, and British Telecom, and Vodafone, Charter Communications, just some of the more notable ones that we have. So, look, it's a very large opportunity. We're talking about business communications worldwide. There are only so many providers, and you can count them on one hand probably, that can even do this, that can address the footprint. We're definitely one of them. We're still in a very good position from the leadership perspective.
For voice-centric applications, and that's a major strength of ours, and you know, channel recognizes that. So absolutely, it's an asset that we have and continue to nurture.
Got it. You know, you've changed incentives for the channel and the structure of some of these partnerships a fair amount over the last couple of years. Where have you seen success with those changes? And, you know, where have you kind of revised some of the changes that you've made?
Yeah. Look, it's about optimization. Generally, we are, you know, we're a non-commodity from the channel perspective. They know that it works, they know it's sticky. They know that if a customer has a voice-centric mission-critical application, we should be at the table, and if we are at the table, we tend to win more than not win, you know? So again, all of that is still, you know, there. And again, like I said, we're nurturing those relationships. Where the tweaks are being made is in, you know, getting them to do a little bit more heavy lifting from the channel partner side, trying to optimize our spend.
Very importantly, with our multi-product strategy that's emerging now, we're very much interested in incentivizing the channel as well as our own sales force, in not just relying on the, you know, well-proven RingCentral PBX, but in expanding those efforts. So we are specifically incentivizing people to be selling multiple products, and that's how they get accelerators. And look, it's early, but so far, we're more than pleased with both our RingCX introduction and RingCentral Events.
Got it. You noted that the partnerships, particularly the GSP partnerships, have been performing to expectations as of late. You know, where are you seeing kind of the most traction, and just how should investors judge you on this? You know, I think this is a question we've gotten over the years. Should it be percentage of install base? Should it be percentage of revenue coming from new partnerships? Just something to kind of benchmark, for investors, what your progress is here.
Look, firstly, I'm sure you all have your own different models and so forth. Look, I think it's fairly simple, from my perspective. It's, you know, it's combination of growth of... and profitability.
Yeah, and trying to hit that sweet spot. It's definitely not growth at all costs like it used to be. We've made substantial improvements into rationalizing our spend. Well, it's still Sonalee's thunder , but obviously major improvements in profitability, in free cash flow, major re-rationalization of SBC. So we're talking about not just profitability, but you know, per PPS.
Yeah.
Not just earnings, but earnings per share. So Sonalee will address all of that. And then there is growth, you know?
Yeah.
And so, thickness of the user base. Look, as we sit here today, yeah, we're not growing like we used to, but out of the public competitors, so we're the only one growing.
Yeah.
You know, there is also that.
Yeah.
Yeah.
I'm sorry, Meta. Just on the partnership question, the one thing I would add is, you know, Vlad talked about the 16,000 channel partners that we have.
Then we have our strategic partners, then the global service providers, which we're adding, you know-
Yeah
... we mentioned Charter, but that partnership has gone exceptionally well. But we aren't over-indexed to any one partner, and I think that's an important point. And, you know, partnerships have been a part, you know, a significant part of our growth, and they will continue to be a significant contributor to our growth going forward.
Is there an internal benchmark, or, you know, do you, what kind of metrics internally, even if we don't know exactly what those metrics are, you know, are you using internally to kind of judge the success of those partnerships?
Yeah, exactly, because we don't disclose-
Yeah
... kind of seat numbers by partner.
Right.
And you can imagine with all these different partnerships and commercial agreements, like, there is commercial sensitivity there-
Yeah
... which is partly why we can't be specific. But of course, we judge—I mean, we don't look just at seats, because not all seats are cre-
Right
... created equally, and I think we've made that point a couple of times. But, you know, we look at the overall, not just revenue and ARR and ARPU that we get from a specific partnership, but also the unit economics around that.
Yeah.
That's really important. What Vlad was saying earlier about, you know, working with the channel and ensuring that we're optimizing the economics for us.
Mm-hmm.
Hopefully, you saw some goodness in our sales and marketing line-
Yeah
... over the past year, but there's gonna be more to go for there. And part of it is really looking at those unit economics and, you know, direct selling versus selling through the channel versus GSPs. And we are a portfolio, and we absolutely manage the business as a portfolio, but we wanna optimize each one of those go-to-market motions.
Okay, perfect. So let's switch gears to CCaaS. You know, as, as you noted, you've been seeing impressive early traction with RingCX. How are you managing some of the conflicts between RingCX and then your products with NICE? And just how does the go-to-market or kind of customer segmentation differ between the two?
It's actually not that complicated.
Mm-hmm.
They're both CCaaS products, granted, but one is an enterprise-grade product, which is, you know, the one that is NICE-based, for complicated use cases, for larger contact centers, way more, you know, involved workflows, many more integrations.
Mm-hmm.
You know, very, very strong WFO voice, basically, you know, obviously, which is where they're coming from to begin with. So it bifurcates fairly easy. You know, for smaller contact centers, for simpler use cases, CX is a clear winner because, you know, it's because of its pricing, because of its packaging, and all-in-one model, that's what differentiates it.
Okay, got it. So, you know, on the latest earnings call, you outlined kind of expectations for the combination of RingCX, RingSense, and Events to reach $100 million of ARR by 2025. Just how should investors think about this ramp? And is this a metric that you would hope to kind of report as we go throughout 2024?
Yeah, sure.
Go ahead, please.
Shall I take that? So absolutely.
Mm-hmm.
You know, at least $100 million of ARR from those-
Yeah
... three new products by 2025. So clearly, 2024 is a ramp year. When you think about when these products actually went live, you know, second half of 2023 and even Q4 of 2023. So expect it to be more back-end loaded in 2024, and certainly it's a lion's share in 2025. Will we update you? Absolutely. We haven't quite discussed the cadence or the right cadence or the right metrics, so we haven't firmed up on that. But what we will do and commit to do is update you by the end of this year on where we are.
Okay, great. Just how should we think about the gross margins of these products ramp, either because of additional professional services or just additional compute resources that these products might need?
Yeah. So, great question, and as you know, we have, you know, leading gross margins today-
Yeah
... 82% subscription gross margins , 82% plus. We don't expect any meaningful impact from the ramp-up in the new products. Now, of course, we are investing in new products on the R&D side, clearly, on the sales and marketing side, clearly. But in terms of gross margin, there's actually a lot of our infrastructure that we can leverage.
You won't see any downdraft there. Then on the professional services side, if you look at RingCX, RingSense, and RingSense Events, they're not heavy lift in terms of professional services. They're easy to deploy, easy to use, easy to maintain.
Mm-hmm.
So again, you wouldn't really need to model in any impact there on gross margin.
Okay, got it. Vlad, just in early days of kind of having some of these products out, just where do you feel like AI adoption is strongest in UC and CC? Or kind of what feature sets are customers reacting most positively to?
Super early.
Mm-hmm.
Super, super early, okay? We just recently had an industry analyst day-
Mm-hmm.
-to where we exposed some new innovations. We did it under embargo, so I should probably not be breaking it myself. But we will have presence at Enterprise Connect-
Mm-hmm.
in Orlando later this month, so please, please come on by.
Yep.
We will have a few things to say. But, I can tell you that amount of interest is, you know, through the roof.
Mm-hmm.
And, again, it's very, very early, and people are just trying to just beginning to understand the realm of possibility here.
And maybe we'll hear more about it at Enterprise Connect. But just how should we think about, you know, what does RingCentral think that they can be differentiated at with some of these new AI capabilities, versus kind of what is going to be, you know, best provided by either partners or others?
AI is an enabling technology. It does not stand on its own.
Yeah.
You know, maybe ChatGPT, but even that is more for curiosity at that point, right?
Yeah.
So the business applications are, I believe, going to be, industry specific, use case specific. Value of RingCentral AI, it's not in the AI, you know?
Mm-hmm.
It's an application of that AI to our use cases, which is mission-critical business communications. Historically, voice first, but over time, clearly expanding into other modalities, such as video or contact center, which is omni channel to begin with. You know, even events, for example-
Mm-hmm.
where there are absolutely great applications for AI. So we view ourselves as an open platform, and what it means is that, A, we are using our own AI, and we did make an acquisition in that space, a few years ago. So we, yes, we do have our own models, but, we're also working with, OpenAI, we're working with Google, we're working with Amazon, all of the usual suspects, okay? And there are ways to... You know, some are more appropriate for certain use cases than others, given current state of tech, okay? And our own AI, AI technology, we also intend to make it available, outside of the RingCentral suite itself. So it's dynamic, but again, huge, opportunity to disrupt, and, you know, and we, we, we, we should be, on the beneficiary side of that.
Okay. I wanted to circle back to something that you said earlier, just about kind of one of the things that you, stepping back into the role, wanted to make clear was just RingCentral's role upmarket with enterprise. Just how do you see kind of the needs of the enterprise? Is it that they will adopt more products, whereas kind of SMBs, you know, may have more differentiated voice needs? Just what do you feel like is the difference in needs between maybe an enterprise and an SMB customer today?
Yeah, no, great question. Look, enterprises tend to be a lot more complicated.
Yeah, they tend to be a lot more global. They tend to be a lot more, you know, sensitive to, you know, various regulatory, you know, obligations, right? SMBs tend to be much more interested in usability, ease of deployment. In many cases, you know, it's going to be, for very small enterprises, you know, it will be the proprietor, you know himself or herself that would be responsible. Okay. And where RingCentral fits in is we really are trying to provide the best user experience and engagement, and we are known for that-
Yeah
I n this space. It's not an easy area to simplify, but we have been at it for many years.
Sure.
So we're trying to empower small businesses with all of the features that an enterprise would use, and we are also trying to make enterprises' usability as simple and intuitive as for a small business.
Okay. Okay, perfect. You know, last year at Enterprise Connect, you guys were talking a lot about the opportunity with frontline workers, you know, potentially adding to the market opportunity for RingCentral. Just, you know, how has this part of the strategy developed?
I mean, we're seeing good traction-
I n all of those initiatives. You know, there are different ways to define frontline workers, workers, of course.
Yeah.
But we are seeing we have our golden verticals, what we call them, and frontline workers is one of them.
Yeah.
Okay? But RingCentral, you know, we're not planning to retrench into a frontline worker.
Yeah
Application, you know. It's one of them.
Okay. Okay, perfect. So maybe moving on to you for a little bit. You know, RingCentral's margin expansion in 2023 was particularly impressive after, you know, multiple years of this, as you drove, you know, 600 basis points of operating margin expansion. So then you expect to have another 200 basis points of it in 2024. Just how are you balancing investment versus cost savings, you know, particularly as you guys expand the portfolio?
Yeah. No, it's a really good question, and thank you. Yes, we're really proud of the work we've done over the last two years on margin, but not just margin, free cash flow as well. And of course, we think about the balance between growth and profitability, and as you see, the way we guided this year is a 200 basis point operating margin improvement as opposed to 600. However, a couple of things to call out. One is that we made a very deliberate decision to switch some of our stock-based comp into cash-based comp this year, and that was about a 100 basis point headwind for 2024.
So without that, we would have been guiding to a 300 basis point improvement in operating margin, so about half of what you saw last year. And then also, you know, your point about investing in new products and in growth, we see a very big opportunity ahead of us. And, you know, these products, from what we've seen, are early days in terms of customer traction, it's been very, very strong, but it does require investment. And not just investment in sales, but also in pipeline, because the pipe generation for those products, for some of these products, is actually different from our core business.
That requires investment as well. If you take those two things into account, it's about 200 basis points of headwind. Ex that, the margins would have improved +400 basis points. As we look ahead, you know, it's really important to balance growth and profitability, but as you can see from the guidance we've given on NPI, new product introduction, you know, we are definitely going after the growth. And you know, if you were to ask me, if I had to decide which end of the seesaw to push on, you know, we clearly want to go after growth, but sustainably and profitably.
Mm-hmm.
We think we can, we can deliver both.
Okay, got it. You've also made a lot of progress towards balance sheet cleanup. Just how are you thinking about cash flow and capital allocation over the next couple of years?
Yeah, really good question. So in terms of balance sheet, yes, we've made a lot of progress on certainly on our converts. So, we had, you know, as we entered 2023, we had a $1 billion maturity in March 2025, and then a $650 million maturity in March 2026. We've basically dealt with the twenty-five. We have $161 million remaining on the twenty-five, but we clearly have sufficient liquidity. And, you know, you see how we've guided on free cash flow for this year, so about $420 million at the midpoint. So, you know, we could easily cover that with our own cash flow.
So, so you heard me when I first actually joined RingCentral, I had said, "You know, we won't allow our convertibles to go current." But given the financial profile that we're driving today, you know, we actually are comfortable with certain portions of it going current, because we've demonstrated we have lots of capacity and optionality to deal with those, those maturities. Also for the 2026s, you know, they currently yield 0%.
And you saw in 2025, we were opportunistic in certain at certain times, where we were able to buy back those convertibles at significant discounts, and it allowed us to deleverage. And if you look at our leverage today, you know, we ended the year 2023 at about 2.5x , where if you look at 2024 and the way we guided, what's been implied there is that we'll be, you know, just above 2 x. So we're very, very comfortable with where we are in terms of leverage. So when you think about uses of cash and capital allocation, which obviously as a management team, we discuss and debate heavily, you know, clearly investment, organic investment in new products will continue to be very, very important.
And you continue to see us investing in R&D. But we also feel that, using our cash to buy back our shares, given the price of the trade-out, particularly price, you know, on a free cash flow basis, we see a lot of value in that.
And you saw at earnings, we announced a $200 million authorization, which, you know, and you saw the amount we did in 2023. Share buybacks will continue to be a part of our capital allocation, and then we will also continue to delever a bit with our own free cash flow. And finally, you know, Vlad mentioned the Hopin transaction, the Hopin deal earlier, but if we find suitable and interesting and, you know, assets like a Hopin, we will continue to do those. And as we become a more free cash flow generative company, obviously that gives us, you know, more firepower to be able to do those types of deals.
What we love so much about Hopin is, one, it really elevated our video offering, but two, it brought with it such amazing tech and talent.
And those are the kind of deals that we wanna do. So we really think about our capital allocation policy very, very dynamically. And you'll see, you know, you'll see us move on all four of those levers that I outlined.
Got it. I mean, we didn't spend a lot of time talking about macro, but just, you know, as you thought about putting together kind of your 2024 forecast, just either in terms of impact of down sales, impact of, you know, what you're seeing just as far as deal sizes, in terms of what you're seeing just as far as, far as deal cycle elongation-
Mm-hmm.
Can you just kind of contextualize what you're kind of incorporating from macro?
Sure, absolutely. So, we did see a stabilization in those trends, exactly those ones you called out. So the sales cycle elongation, that is now stabilized. The initial deal deployment being, it was getting smaller and smaller, it's now stabilized.
Mm-hmm.
Levels of approval, you know, we're not getting as many layers. And actually, again, this feeds into the kind of deal cycle. Where we continue to see some challenges are on the upsell side of the house.
While new logo acquisition and new acquisition remains strong. What we're doing there to address that is clearly the new product.
We think that that will go a long way to addressing any weakness that may persist there. In terms of how we've guided, we made a deliberate decision not to assume any improvement in the macro. You know, we've seen a stabilization this last, you know, say, last two quarters, but I think it's too early to call a trend. You know, I read all the same newspapers that you all read and listen to the news, and I think there's a wide range of outcomes that are possible as we look ahead in 2024. You know, one of... You specifically asked about churn and downsell as well.
You know, we've assumed stable churn and downsell trends, but of course, stable on a larger base is a larger dollar amount that exits the business, so it makes that acquisition and upsell bogey that much higher. So if we were able to improve that, and there are initiatives that we're driving internally, and that has been an area of investment for us around customer success and customer care. If we do see an improvement there, then that should be beneficial, too, relative to where we guided.
Got it. Are there any questions from the audience? Might as well jump in. Maybe ending with our last couple of minutes, Vlad, just, you know, clearly, you stepped back into this role. You've been in this, you know, you founded this company. Just what do you think is kind of misunderstood about the RingCentral story today?
How mission-critical we are.
Mm-hmm.
How sustainable revenue stream is, how much opportunity is still ahead of us, how little overlap, and inversely, how much room to operate there exists still between us and Microsoft?
Yes.
So yeah, all of the bear cases are, I think people looking at the glass half empty or mostly empty, when it is in reality maybe it's not all full, but certainly more than half full.
All right. Well, perfect. Vlad Shmunis, thank you so much for being here today. I appreciate it.
Thanks, Meta.
Thank you.