Greetings, and welcome to the RingCentral 4th Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Goodman.
Please go ahead, sir.
Thank you. Good afternoon, and welcome to RingCentral's 4th quarter 2019 earnings conference call. I am Ryan Goodman, RingCentral's Head of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO Anand Ishwaran, President and Chief Operating Officer and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Anant and Mitesh, followed by Q and A.
Some of our discussions and responses to your questions will contain forward looking statements. These statements are subject to risks and uncertainties. Actual results may differ materially from our forward looking statements. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. RingCentral assumes no obligation and does not intend to update or comment on forward looking statements made on this call.
I encourage you to visit our Investor Relations website at ir. Ringcentral.com to access our earnings release, slide deck, our GAAP to non GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral. For certain forward looking guidance, a reconciliation of the non GAAP financial guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. Unless otherwise indicated, all measures that follow are non GAAP with year over year comparisons. A reconciliation of all GAAP to non GAAP results is provided with our earnings release and in the slide deck.
With that, let me turn the call over to Vlad.
Good afternoon and thank you for joining our Q4 earnings conference call. We delivered an outstanding 4th quarter with continued strength in mid market, enterprise and channel. Additionally, we had a number of major announcements and achievements during the quarter. First, I am pleased to announce that we finished the year achieving an important milestone, namely we have surpassed our long term goal of $1,000,000,000 annual revenue run rate ahead of schedule. This is a significant achievement for RingCentral and we continue to be the largest and fastest growing pure play UCaaS vendor.
In October, we announced our strategic partnership with Avaya. In November, we announced that we expanded our relationship with AT and T. And today, we announced our first strategic system integrator partnership with ADOS. On the leadership team, we added Anand Aswaran as President and Chief Operating Officer. I will expand on these key announcements later after a review of Q4 results.
Revenue and non GAAP EPS exceeded the high end of our guidance. Key drivers continue to be mid market, enterprise and channel. We continue to see strong contributions from our vertical market initiatives focused on financial services, healthcare and education. We also saw another strong quarter from contact center. Key metrics for Q4 were solid across the board.
First, total revenues grew to $253,000,000 This is a 34% increase year over year and is above the high end of our guidance range. Mid market and enterprise continues to be a key driver of our performance. We define mid market and enterprise as $25,000 or more in annual recurrent revenue or ARR. This grew 59% year over year and is now a
$479,000,000 business.
Enterprise, defined as customers with 100,000 or more in ARR, grew 71% year over year to $293,000,000 Channel ARR grew 63% year over year to 300,000,000 Overall, 2019 was a transformational year for RingCentral as we extended our leadership in the UCaaS market. K. A. S. Market.
Looking forward, our technology leadership, experienced management team and unique strategic partnerships put us in a better position than ever to maximize our opportunities in the $50,000,000,000 plus UCaaS market. On that note, I'd like to welcome Anand Etwaran to the RingCentral team as President and Chief Operating Officer. Prior to RingCentral, Anand was Microsoft's Corporate Vice President for Global Enterprise Business. Anand will be responsible for leadership and execution across products, engineering, sales, marketing, services, customer care, operations and human resources. I'd also like to take a minute now to express our gratitude to Dave Sipes.
Dave announced that he will be retiring from the company at the end of Q2. Dave has played a pivotal role in RingCentral's journey from an approximately $10,000,000 revenue company to our current $1,000,000,000 run rate. Dave, we wish you all the best in the next stage of your journey and look forward to your continual friendship and mentorship. I'll now provide an update on the strategic partnership front. 1st, the Avaya partnership.
We attended Avaya's Engage user conference last week, where we showcased a first look of Avaya Cloud Office by RingCentral or ACO. Feedback was positive from customers and channel partners. RingCentral and Avaya teams are working together well. ACO is well on track for its scheduled launch at the end of this quarter. The marketing, sales and support teams have made solid progress to ensure customer success and training efforts are well underway with sales and channel partners.
Next, AT and T. In November, we announced that we expanded our relationship with AT and T. AT and T made Office at Hand by RingCentral a lead offer for UCaaS as part of its voice and collaboration portfolio. It has been a few short months, but we are already starting to see encouraging trends that are exceeding our initial expectations. And today, I'm excited to announce our 3rd strategic system integrator partnership with Addus.
Addus is a global leader in enabling enterprise digital transformation with annual revenue of approximately $13,000,000,000 The partnership will help extend RingCentral's reach into large enterprise accounts moving forward with digital transformation initiatives. As part of this partnership, we will introduce a co branded U. K. S. Solution.
This co branded solution will be a key part of Etos' digital workplace solutions. To wrap up, 2019 was a stellar year. We are still in early innings of the global cloud communications transformation story. We are well positioned to further extend our leadership with our commitment to innovation, customer first mindset and the unique strategic partnership strategy. With this momentum in place, it has never been more clear that the cloud is winning and RingCentral is winning in the cloud.
Now for some color on Q4, I will turn the call over to our new President and COO, Anand Eswaran.
Thank you, Vlad. I'm humbled and energized to join Vlad and the RingCentral team. We are at an inflection point in the way we communicate, collaborate and work as every company transforms to be a digital business and workplace. RingCentral is uniquely poised as the leader in UCaaS to partner with these companies in their digital journeys. I am so excited by the large opportunity ahead of us to transform business communications globally.
I also want to thank Dave for building an exceptionally strong innovation and go to market team, which has taken RingCentral to a $1,000,000,000 run rate. I have enjoyed getting to know Dave really well as we spend every minute together partnering and working through the transition. Thanks to Dave for the help and support. I will now provide some color on Q4. Q4 was again a strong quarter.
It was driven by strength in mid market, enterprise and channel. We continue to win based on our superior platform and differentiated go to market capabilities. First, our platform, which integrates voice, video and team messaging continues to resonate with our customers. Our open platform ecosystem expanded to nearly 30,000 developers. I am also excited to announce that we surpassed 3,000 certified integrations.
The ease and flexibility with which our customers can integrate business applications with our communications platform is a game changer. In fact, over 70% of our 7 figure wins in Q4 cited open platform as a key capability in their decision to go with RingCentral. An example of where open platform and mobility where Key is a Fortune 500 utility company with approximately 8,000 users. They replaced legacy on premise Cisco systems with RingCentral Office. Integration of multiple business applications with RingCentral Office, including Office 365 and Workday was important for the customer.
Additionally, the ability of field employees to be connected to a single enterprise communication solution using rugged Caterpillar mobile devices was important. We saw upmarket strength in our focused vertical markets of financial services, healthcare and education. In aggregate, during Q4, these accounted for over 40% of our 7 figure wins. In Financial Services, we had a standout quarter. First, we are excited to announce a win with Arch Capital, a global leader in providing specialty insurance and reinsurance solutions.
We are pleased to see a global 2,000 multibillion dollar enterprise like Arch Capital select RingCentral for their global cloud communication needs. Another financial institution win in the quarter was CreditHuman, a large credit union based in San Antonio with members across the country. The ability to integrate a complete unified communications platform with key financial services applications, including Jack Henry, was an important differentiator in securing this nearly 1,000 seat win. In healthcare, we secured a 4,500 user win with Aviana Healthcare, the nation's largest provider of pediatric home care. They wanted to standardize to a single communications experience across approximately 240 locations, including headquarters and regional offices.
Our ability to provide a single unified solution with high reliability was key to this win. In addition, our mobile capabilities were a strong fit with the home care business model. We also signed a 3,600 user win with U. S. Renal Care, a leading provider of dialysis services.
This customer needed a single communication solution across more than 300 locations. They also needed the ability to integrate with existing paging systems. In higher education this quarter, we had a win with National American University. Our unified platform with integrated team messaging and the ability to implement custom emergency workflows were key driving factors in this win. Let me now provide a brief update on the success we are having with contact center.
Over half of our 7 figure wins included contact center in Q4. Contact center is a key element of our land and expand strategy. For example, earlier this year, we secured a 10,000 seat win with a Fortune 1000 Multinational Software Company. In Q4, this customer added 150 contact center seats. Also, earlier this year, we secured a nearly 6,000 seat RingCentral office win with Crawford and Company and in Q4, we added over 400 contact center seats.
Additionally, in Q4, we delivered a marquee win for Engage Digital, our native digital customer engagement solution. Richmond is a well known Switzerland based luxury goods holding company of many luxury brands, including Mont Blanc. They needed a single digital customer engagement platform across 8 of their luxury brand divisions. Richmond plans to deploy Engage Digital globally on several digital channels, such as Facebook, Instagram and Messenger. We also continue to see increasing traction with our native Engage Voice outbound blended solution with a record number of wins last quarter.
Now for the financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.
Thanks, Anand and welcome aboard. Looking forward to working together as we scale RingCentral to the next level. I would also like to express my gratitude to Dave for the terrific partnership over the years. Good afternoon, everyone. 2019 was a solid year on several key fronts.
First, we exited the year with a revenue run rate of over $1,000,000,000 2nd, we grew 34% with an operating margin of over 9%, executing above the rule of 40. We delivered on the $1,000,000,000 and the rule of 40 a year ahead of commitment to our shareholders. These milestones are a testament to the large market opportunity as well as RingCentral's focus on consistent execution. We believe that the rule of 40 is a key metric to evaluate profitable growth across SaaS companies and is a high bar we will strive to sustain. 3rd, we are winning larger enterprise customers with well over 100 and 7 Stigert TCV deals for the year.
And finally, we signed an industry redefining partnership with Avaya. Our Q4 capped the year with strong performance on all key financial metrics. Total ARR grew to $960,000,000 up 32% year over year and ARR for RingCentral Office, our core UCaaS solution grew to $877,000,000 up 36% year over year. Key drivers continue to be mid market and enterprise with record contribution from channel partners. MedMark and Enterprise had another strong quarter with ARR up 59%.
This was bolstered by enterprise ARR growth of 71%, driven by digital transformation momentum at large scale customers. Overall, mid market and enterprise yet again accounted for over 60% of new bookings. Higher upmarket mix is a positive indicator of our profitable growth given better lifetime value. Channel partners are a key element of our strong momentum with larger customers. Channel ARR reached $300,000,000 in Q4, up 63% and also accounted for a record number of our 7 figure TCV deals.
We continue to broaden our channel network and deepen relationships with key partners such as Carousel, Telarus and Westcon. Upmarket and channel drove strong results across the board in Q4. Total revenue grew 34 percent to $253,000,000 Subscription revenue grew 33 percent to 229,000,000 dollars Non GAAP subscription gross margin was 82%. Non GAAP operating margin was 9.6%. Non GAAP EPS of $0.22 was above our guidance.
Operating and free cash flow includes approximately $37,000,000 of one time payments stemming from our recent partnerships. Excluding these items, our free cash flow margin would have been approximately 8%. Now let me provide some financial color on our recent partnerships that we believe to be additional drivers of our long term performance. Starting with the latest news first, as we announced today, Atos will become a strategic SI partner to RingCentral. We expect RingCentral to accelerate its large enterprise reach by joining Atos' digital transformation portfolio.
Given the sales cycles for larger enterprise, we are not assuming much contribution from Atos in 2020. And now for our industry redefining Avaya partnership. ACO is on track for launch
at the end of this quarter.
We have received positive feedback and interest from both customers and partners alike. As we mentioned before, it will take time to ramp the go to market motion following the launch. As such, we continue to expect revenue contributions from ACO to start towards the end of 2020. Now to the 2020 financial outlook. We expect total revenue to be between $1,125,000,000 $1,135,000,000 for an annual growth of 25% to 26%.
We expect non GAAP EPS to be $0.93 to $0.94 based on a fully diluted share count of 94,500,000. This reflects additional imputed shares from the convertible debt due to stock price appreciation as well as shares issued to Avaya in November. Excluding these items, our EPS guidance range would have been $0.04 higher. In summary, 2019 was an outstanding year for RingCentral. Our industry leading product innovation is driving increased demand from customers, channel and strategic partners.
Long standing industry leaders with vast go to market are selecting RingCentral as their UCaaS solution for their customers. With these tailwinds, we are more confident than ever in our ability to continue to lead in this $50,000,000,000 UCaaS market. With that, let me turn the call to the operator for Q and A.
Thank you. We will now
be conducting a question and answer session. Our first question today is coming from Bhavan Suri from William Blair. Your line is now live.
Hey, guys. Can you hear me okay? Yes.
Great. Congratulations. That was a phenomenal, phenomenal end to the year. And you've beaten revenue nicely and consistency over the many, many years I've covered you, but you absolutely crushed it to beat both percentage and total dollar wise I think is the biggest I've ever seen. I guess maybe Mitesh starting off with you,
just drivers to just the strength
of the upside in performance here on the top line and subscription would be helpful.
Thank you, Bhavan, for the kind words. The beauty of having multiple drivers in the business model is that not every driver needs to work every time. But this time, we did have strength across the board. I'll hit the hotspots on the drivers here, Bhavan, for you. So the first one is large deal momentum and new logos within that.
We did have record number of over 30 deals, which are 7 figures or more this quarter and 70% of those deals were net new logos, which actually exceeds London expand going forward. So that's point number 1. Within point number 2 is Within point number 2 is strong upsell in the quarter. We did see very consistent upsell in the quarter and again over 40% of our new business came from existing customers. 3rd one is booking linearity, which was a surprise to our expectations at least, where we had a faster start to Q4 than usual Q4s.
And this is despite the fact that we are going further upmarket, which may be an indication of shortening sales cycles at the margin and plus our push in the vertical side. So that's number 3. And last is channel, where we did have a very strong quarter on the channel. 70% of the deals over $1,000,000 came from the channel. So those are the 3 or 4 drivers that really led to the upside.
Now going forward, we are layering on more growth dials like Avaya, like AT and T, like Atos, which will provide even further long term durability to our growth story.
That's really helpful, Mitesh. Thanks.
And then one quick one for Anand.
Just as you think about RingCentral today, obviously, Vlad and Mitesh and team have done
a really nice job moving from really small businesses to midsized businesses, enterprise.
Your history is again with SAP and Microsoft with very large enterprise. As you think about sort of where RingCentral might be in, no near term, but 5 years, just I'd love to get some color on how you think about the go to market changes or the go to market layering you'll do to sort of drive even further growth within the enterprise? What do you think the setup today is will get you there without sort of incremental investments or changes? Thank you.
That's a great question. So one of the key things you said is important. It's not go to market changes as much as layering because what we have is a great foundation and we have we will continue to accelerate the growth we create out of the mass market segments. The growth layers we expect, Mitesh walked through some of them. Our partnerships with Avaya is going to be a big contributor of growth as we look ahead and that's going to span all customer segments.
We expect the same benefits to come in through the other relationships we are creating and we talked about Athos right now. And then the other layers, which we will start to look at even more broadly is 1, expanding on getting deeper into verticals and starting to actually create a little more density of both focus and coverage, but also innovation and IP from a vertical standpoint. That's going to be key. And that will allow us to then actually go and penetrate upmarket, basically midmarket and enterprise in a much more broad strategic manner. So partnerships and basically vertical focus is going to be some of the keys on how we look at adding layers to growth.
Got it. Got it. Helpful. Thanks and congrats guys.
Thank you. Our next question is coming from Terry Tillman from SunTrust Robinson Humphrey. Your line is now live.
Yes, thanks for taking my questions and I'll echo the congratulations. I guess maybe Mitesh, first question for you just relates to historically the philosophy of profitable growth. You obviously have some new growth vectors here and then layering on more investments in the existing go to market. But I'm just wanting to hear about the balance of these investments, but also showing sales efficiencies. I'd love to get a perspective on sales efficiencies and maybe pinpointing where you might see some of that if you're going to see some of that over the next 12 months?
And then I have a follow-up.
Thanks, Terry. Yes, for us, it's always about disciplined investment and profitable growth, as you pointed out, to capture this large market. If you look at the go to market motions, there are 3 key areas of investments for us. 1 is direct site, 1 is channels and then one is, as you call, layering of the strategic partners. So let's double click on each one of them.
If you look at the direct side, what we are seeing is that we are able to maintain our sales and marketing efficiency year over year, despite the fact that we are going up market, which is typically longer sales cycles. The reasons for that are, one is, a higher percent of our reps are ramped in the segment, which lends to more productivity. And if you actually look at the highest end segment within the enterprise side, we our reps are producing about 15% more year over year. So those two vectors are playing really nicely. Then if you look at the other 2, which is channels and strategic partners, both of these growth come at very accretive growth economics to the overall margin profile for 2020, given the lower upfront cost we have to do and lower churn.
So if you add all these three motions together, they are actually helping our efficiency and as we further go up market and they are actually freeing up dollars for us to invest in the future. So it's a virtuous cycle for us, Derek. That sounds great.
And I guess as it relates to these newer or expanded partnerships, I think you all laid it out well in terms of Atos, don't expect really much this year because of longer sales cycles, Avaya start ramping. But let's go back to AT and T. I'd like to get an update on that in terms of just the increased emphasis by them to actually push your product. You said you have seen some early interesting activity. But I am curious how material could this expanded relationship with AT and T be this year?
Thank you.
Yes. For AT and T, yes, it could be a materially new driver for us. We have not dialed in much in 2020 here. It's going to be stabilizing. But at the last go around, it was a $50,000,000 business.
So given the new expanded relationship and them choosing us to be a lead provider, this could be a broader one this time.
Thank you. Our next question is coming from Heather Bellini from Goldman Sachs. Your line is now live.
Great. Thank you so much. I had a question, Vlad. Just you mentioned that at the Avaya meeting, the partnership meeting last week that you met with a number of partners and customers. And I was just wondering what feedback you got and if there's anything you can share with us terms of whether it be specific industries that maybe showed the most interest or size of customers?
And then I had a follow-up question on that just related to the fact that if you look at the Avaya SMB customers that are currently paying, where can you walk us through kind of how to think about the incentive structure for those people to move over to ACO? Thank you.
Sure. Yes. Hi, Heather. So, okay, let's do that in that quarter, like you said. So, we and me personally met with 3 or 4 of their partners.
Everyone was universally positive. Frankly, major message was, quote unquote, what took you guys so long. The field clearly wants a cloud based, pure cloud product from Avaya and here it is. There was really no pushback. One of the partners in particular, and it's a major one, was basically saying that, hey, we are all in.
We are not so much even interested in offering anything but ACO to the customer base. So that was great for us to hear. I mean, people have questions as to the logistics, But by and large, we're able to handle those. So I would say that there are no red lights. There are not even yellow lights at this point.
I mean, it's just people are just waiting for the product to really be there. And most of our conversation really was, look, are we providing enough training? Please tell us sort of what else, what other supporting materials you need like that. So it's just operational sort of tactical stuff, but nothing at all negative or even inquisitive on the product side or overall partnership.
Great. Thank
you. Right. Thank you. And as far as the second part of your question,
what is the incentive to ACO customers? Should I address that?
Well, yes, no, it was more a big question that people have is, is the product going to have its most success at first with the non paying customers of Avaya in the SMB channel? Or could it be that the functionality of ACO for the existing paying SMB customers is vastly better. So like they might actually be the easier ones to convert at first. I'm just trying to think through kind of that and the potential and incentive for them just from a functionality standpoint? Thank you.
Yes. I just want to be sure, no, very fair question. I want to be a little bit nuanced here. There is no such thing as a non paying Avaya customer, okay? When people say paying versus non paying, I think they mean maintenance contract or not, but even people who do not pay maintenance are very much paying customers.
It's just they are not paying Avaya directly, but they are paying to a number of service providers to light up that box. And either they are paying maintenance to someone else, maybe it's a general partner, maybe it's another maintenance organization or maybe they are just self insuring. But to keep up a corporate PBX does take money. That stuff does not run for free even if you take initial CapEx depreciation out of the equation. So at the high level, answer is and we highlighted it, but I will reiterate, we highlighted when we were first introducing the partnership, our core belief is that we can commence even into a customer that is sitting on fully depreciated hardware and still make a business case to where they get all of the power of the cloud and our industry leading product, which is, as you well know, has world's best, most best received voice business voice, but also has messaging, has video, has open platform, has largest available international footprint.
And they can get all of that for no more than they're paying now to even keep up the legacy technology, okay? So, hopefully, that answers the question. Now having said all of this, just as a reminder to everyone, much of the base is really covered by their partners. So it's really whomever partners find easiest to get through and we are just following the lead. And early sort of anecdotal evidence seems to suggest that it just cuts across the board.
It's people paying maintenance as well as those who don't because in the end, people want to go from legacy on prem to the cloud. So it doesn't really matter. The few dollars a month they may or may not be paying to Avaya for maintenance doesn't really matter given the overall productivity enhancements that Ring and Avaya Cloud offers by RingCentral have to offer.
Great. Thank you very much, Vlad.
Thank you. Our next question is coming from Brian Peterson from Raymond James. Your line is now live.
Congratulations, gentlemen, and Ananda, welcome to the call. So I wanted to just go back to Vlad's comment on AT and T ramping earlier than expected. Clearly, that's been a large relationship in the past. I just want to be clear on what's baked into that guidance in 2020 and maybe beyond from the AT and T relationship?
Yes. Thanks, Brian. Yes, Terry asked about this question as well. So what we financially, we saw an uptick sequentially in bookings by about 15% to 20% after AT and T made us a lead provider. So that was a sort of a change step function change we saw.
Overall numbers for the bookings are still small, but given the new business growth we are seeing, the overall installed base has stabilized now and it won't be a drag to growth as in the previous year. So it should overall it should help the financial performance of RingCentral overall going forward. And we are looking forward to build upon successes with deepening the verticals and geos there in AT and T.
Got it. Thanks, Natasha. And maybe just one for you. Any thoughts on how you could target some of the key verticals here at RingCentral? It would just be useful to kind of hear how you're thinking about that playbook over the next few years.
Thank you.
Absolutely. No, it's a great question. So the way we are looking at it is, 1, partnerships are a key avenue to actually targeting verticals. So that's why we talked about the strategic partnership with Atos and you can expect to see strategic partnerships as our key vector. And when we work with Anatos, we are working in how they work with their customers and their digital transformation journeys by vertical.
And we are basically plugging our open platform across UCaaS and CCaaS into that digital workplace playbook. So the first vector of how we expect to do this is through the strategic partnerships. The second thing we are doing is actually going at the specific verticals we want to focus on. And we are basically looking at the critical processes and workflows within these verticals to see where is it that our platform will actually be a core part of these processes customized to each vertical. So basically that workflowIP combination and the strategic partnerships which we will double down on, those 2 come together to allow us to actually create meaningful vertical solutions which connect to the customer's business and their outcome.
So that's the playbook.
Thank you. Our next question is coming from Sterling Huddy from JPMorgan. Your line is now live.
Yes, thanks.
Hi, guys. So you talked about the timing of the release of the initial ACO product. Just kind of curious what your thoughts are on the initial timing of the migration tools to help customers get up on to ACO?
So I can take that. So the product launches on March 31. And right off the bat, we will essentially be supporting all of the Avaya endpoints. And right off the bat, we will have the automatic migration capabilities embedded into the product. So, there is no lag in timing between product launch and the automatic migration capabilities to take every customer of Avaya on prem to the cloud.
Got you.
And then one follow-up on the Atos partnership. Very familiar through the years, the work that Atos has done, especially in Europe around a lot of infrastructure software, etcetera, but I'm not as familiar with their UCaaS capabilities. Is this something that they have a broad practice already Or are they using RingCentral to kind of launch their presence into bringing UCaaS to their customers?
That's a great question actually. So what we saw as we look to work with Atos is they have a core the core of Atos' transformation is around their digital transformation practice on how they are taking their customers in their journey of transformations to be a digital business. And one of the core elements of what Atos is doubling down on there is essentially the digital workplace because at this point every company looking to digital transform the critical success factor of either failure or success is actually culture and how they change the way companies both internally and externally communicate, collaborate and work. So essentially, our partnership with them is to be this foundation of their digital workplace offerings in their work with their customers' digital transformation. So that's literally where this whole thing fits in, digital workplace to help Atos digitally transform their customers.
Got it. Thank you.
Thank you. Our next question today is coming from George Sutton from Craig Hallum. Your line is now live.
Thank you. I was lucky to do a demo of the HCO at the of iEngage last week. And it was fairly clear that the collaboration tool would be your glip. It was less clear what the plans
Yes. Vlad here.
Yes. Vlad here. No, I appreciate the question. Look, we are going to provide which as we indicated is going to be later this quarter. What I can tell you is that each and every component of ACO will check all of the boxes, will be world class and we'll address our customers' needs.
But as to the specifics, if you can just please indulge us for a few more weeks.
Just a quick follow-up. It looks like there was some IP acquired in the Atos deal. Can you talk about what IP that might be and will that extend into the U. S. As well?
I'll start with the second part. Yes, of course, IP is IP. It's sort of international in nature. There are no limitations associated with that IP. Broadly speaking, it's in the messaging, communications and collaboration space.
And it includes know how, some code and a fairly sizable patent portfolio. But that's all contractually, that's all we can share at this point.
Okay. Thank you. Nice results.
Thank you very much.
Thank you. Our next question is coming from Nikolay Beliov from Bank of America Merrill Lynch. Your line is now live.
Hi. Thanks for taking my questions. My first question is for Mitesh. Mitesh, looking at the growth in channel business, grew 63% for 2 quarters in a row, which is pretty good performance. And the growth rate channel seems to be tracking closer to the enterprise growth rate rather than to the mid market growth rate.
Just want to dig into this a little bit and also what are you guys seeing with channel economics, where do we stand versus let's say a year ago?
Sure, Nikolay. Yes, channel is going to has been a key growth driver for us. It's a $300,000,000 business, as you said, growing over 60%. It is now about 35% of our total ARR, gained 5 points of share since last year. Channel, we did see record bookings in the channel this quarter.
And even in the upmarket side, we saw over 70% of our total $1,000,000 deals come from the channel. And that again not tails into, okay, is it just growth or is it a good growth economics? I think channel is a very profitable business for us. It's more profitable in dollars wise than the direct business, given the higher lifetime value to CAC with the lower upfront investments we have to do and better churn. So I think the strategic partners going forward will add to the flywheel effect there and help us drive more profitable growth.
And question for Vlad, I want to circle back on the ACO migration to our conversations with channel partners, both Avaya and RingCentral. The channel guys are really excited about the migration to us. So if you can maybe help us illustrate, okay, today an Avaya customer is moving to RingCentral, let's say, an Avaya mid market customer and it maybe takes 2 to 3 weeks, whatever it is, to do the migration, the menu migration and whatnot. With ACO version 2, which is going to launch in May June, when you're going to have the migration tools, what percentage of the migration do you think is going to get automated? And by how much is going to cut down the migration time?
And clearly, that has implications on time to revenue and competitive dynamics and all that. Just trying to understand this a little bit better. Thank you.
Sure. Hi, Nicolas. So, look, so firstly, thank you for noting and understanding that the MVP that's going to go out in like we said later this quarter, migration tools are really not going to be there. And we have not as of yet committed to a at least publicly, we have not disclosed any specific timeframe for migration tools. I can tell you that it is very much front and center for us to get this going once the basic chair boxes are done.
Look, the idea is to simplify migration. And at a high level, that means basically being able to import all of the account specific information, whether it be IVR trees, companies' contacts, potentially, we can talk about importing even voicemails that were left with on Avaya systems, etcetera. So that's the extent. I would expect more of a gradual process. It's going to be sort of a moving train.
We'll be introducing these tools over time. But certainly, we hope to cover all of the migration cases eventually. So, I would say, over time, to the extent possible, 100%, Just with the caveat that Avaya has multiple user bases internally. And for example, some of the Nortel customers, it may be hard to get the data out just because of the generation of that technology. But for IP office, where there is more modern software involved, we expect to be able to get to the data and to be able to import it into ACO.
Thank you. Great.
Thank you. Our next question is coming from Meta Marshall from Morgan Stanley. Your line is now live.
Great. Thanks. First question just on the Atos relationship. Any additional investment needed by you guys to launch or will they on this kind of co branded product, will they be fronting that investment? And then maybe second question on the contact center business, just seeing that your kind of attach rates are increasing there, just any color as to whether those are still primarily kind of in contact implementations or whether you're seeing uptick of the kind of the Mellow Connect 1st homegrown products?
Thanks.
Sure, Meta. Hey, it's Mitesh. I'll take both. The first one on Atos, yes, of course, there is investment required to get this up and running. It's all contemplated in our guidance.
So our guidance would have been up even more if there were not these investments. But that said, we do given the go to market motion there, we do think that this relationship is going to be accretive right from the get go. So that's part 1, part 2. On the contact center, right now predominantly it is our in contact business. Although we are seeing some green shoots with the Dimelo, Anand did call out this Swiss brand with Mont Blanc.
I love those pens, by the way. So yes, so we are seeing green shoots there, but early days for that.
Got it. Thanks, guys. Congrats.
Thank you. Ladies and gentlemen, we ask that you please ask one question from this point forward. Our next question is coming from Michael Chern from Wells Fargo. Your line is now live.
Hey, there. Thanks. Good afternoon. Mitesh, we've seen a bias in UCaaS towards customers paying on a monthly basis. Just wondering if you could provide some color around your expectations given that backdrop for the shape and variability of deferred revenue in the model here.
Yes. Sure. Thanks, Michael, and welcome to rejoin RingCentral earnings call. So thank you for again, taking up coverage here. So in terms of deferred revenue, yes, deferred revenue is a function of more the payments the customers have and not quite a function of the length of the contract.
So on the prepayment, what we are seeing here is 2 trends. We are seeing a normalization of our customers paying us on annual prepays, which is actually helping us give less discounts upfront. That's 1. And products like contact center are typically built in arrears. So that actually had an impact on deferred revenue.
But on the length of the contracts, customers are signing up for multi year contracts with RingCentral given the more comfort level they have with us. And so, if you were to take a duration impact from this overall equation, I think ARR extracts this noise and it levels the playing field in terms of forward looking indicators. So I think for our business and quite frankly businesses which have more bias towards monthly payments, I think I would steer our investors to look at ARR growth.
Thank you. Our next question today is coming from Nandan Amladi from Guggenheim Partners. Your line is now live.
Thank you. Good afternoon. So now that you've passed the $1,000,000,000 run rate a year ahead of schedule, have you thought about updating your long term model?
Sure, Nandan. We have thought about it. First of all, thank you for noticing that, yes, we did clear this $1,000,000,000 hurdle ahead of schedule. And the goal is, again, to look keep on layering on more investments in both how all these initiatives are panning out, be it AT and T, be it Avaya, be it Atos and then provide a very thoughtful long term model over time.
Thank you. Our next question today is coming from Will Power from Robert W. Baird. Your line is now live.
Okay, great. Thanks. Yes, I guess, I just
want to come back to Atos. It sounds like this could be the first and maybe some additional strategic opportunities. So I guess I wonder, A, how many more deals like this potentially out there are there either in Europe or the U. S? How should we think about that?
And as part of that, is there any way to kind of help us frame how to think about the ultimate size of this? I know you're not expecting much revenue contribution this year, but is this something that you'd expect to contribute maybe $50,000,000 of revenue a few years out? Could it be somewhat similar to AT and T over time? How do we kind of think about that? Thanks.
Yes. Hi, Will. I think it's again, look, we just seen the deal last quarter. So early days. But if you look at the overall potential, Atos is a number one digital transformation player in Europe with deep transformation projects across the board.
And I think there is an opportunity for us to have a place where communication becomes a hub with all these major cloud transformation projects they have, A. Part B, they also work with G Suite, Microsoft, ServiceNow, Salesforce, all of these which are key integrations for us. So there is a real avenue where we are dragged along with these end to end projects. Now in terms of what revenue opportunities there could be, it could be meaningful. But again, it's very hard to tell at this stage given we just inked the deal.
So stay tuned.
Our next question is coming from Samad Samana from Jefferies. Your line is now live.
Hi, good evening. Thanks for taking my question. So, Mitesh, just for clarity, for the 25% to 26% growth outlook for 2020, does that include the Avaya ramp later in the year that you mentioned? And then maybe just international, how did performance go there? We haven't heard much about that and maybe just how large deal performance was outside of the U.
S? Thanks again for taking my questions and congrats on an awesome quarter.
Samad, you were supposed to ask one question. You jammed in 4, but it's okay. So first of all, on the guidance, it does assume some minimal contribution from Avaya in the guidance, but not material, at least because we are getting started. That's part 1. In your what's the second part of the question, internationally you said?
Yes. International yes, we saw international is about, call it, 10 ish percent of our revenue and it is growing very nicely above the overall growth of the business. We feel that Atos and Avaya will be vectors for amping up the international growth for us going forward as both of these companies have significant international presence.
Thank you. Our next question is coming from Rich Valera from Needham. Your line is now live.
Thank you. Let me add my congratulations on a nice finish to the year, gentlemen. Follow-up on the contact center discussion before, clearly you've had great success in selling a tightly integrated contact center with your UC product.
Just want
to think about how you're thinking about ACO, you're going to have essentially a UC product, UC Cloud product.
Avaya is going to
have a cloud contact center product presumably by the Q3 of this year. So how
do you think about sort
of the long term trajectory of ACO with a cloud contact center and how critical that is to making this ultimately successful?
Yes. That's a good question. So what I would say is it's always beneficial for RingCentral when customers decide to move different applications and especially in the case of contact center to the cloud. We'll be able to better get at least as it relates to Avaya's CCaaS product. We'll be probably able to better gauge the impact of that once it is on the market.
It's hard to actually say anything to it right now.
Thank you. Our next question is coming from James Fish from Piper Sandler. Your line is now live.
Hey, guys. You've done a fantastic quarter and end of the year. And congrats on the new report here. Just I'll squeeze one in for you. Can you just walk us through exactly what sales and marketing changes were made to make the Avaya partnership ready to go already?
And I guess any sense to how channel partners can get compensated compared to the traditional go to market? Thanks.
Sure. In terms of the
can you repeat the second part
of the question again? It didn't come through. Let's try to
understand how the channel partners are going to be compensated compared to your traditional approach.
Sure. So on the second one, there is going to be no difference in the channel compensation. They are going to be compensated the way they have been getting compensated. In terms of our go to market changes, it's more train the trainer model where we have our product and our overlay team, the channel overlay team. That channel overlay team will be responsible or has been training the Avaya salespeople and the Avaya channel.
So that's the motion where we have been we will be able to leverage their vast go to market capabilities.
Thank you. Our next question is coming from Mike Latimore from Northland Capital Markets. Your line is now live.
Yes, thanks. Great quarter. How did average revenue per unified communications seat end up in sort of fiscal 'nineteen versus '18? Was it flat, up, down a little bit?
Yes. Sure. So ARPU has been staying very consistent, Mike. No discernible changes.
Thank you. Our next question is coming from Andrew King from Dougherty and Company. Your line is now live.
Hey, there. Andrew King on for Catherine Trebnick. Thanks for taking my question. So on Avaya's earnings call this morning, they had mentioned that originally ACO would only be released in the U. S.
I wanted to get a little bit more color into what the next regions that they'd be launching into and what that timeline would look like? Thanks.
Sure, Andrew. So for this year, there's a plan to roll out U. S. Initially and a couple of countries internationally, which I would say, if you net it all out, we will be able to cover at least 60% to 70% of all the geo regions where the Avaya's presence is with the ACO product.
Thank you. We have reached the end of our question and answer session.