Greetings, and welcome to RingCentral Third Quarter 2018 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. I would now like to turn the conference over to your host, Paul Thomas.
Please go ahead.
Thank you. Good afternoon, and welcome to RingCentral's Q3 2018 earnings conference call. I'm Paul Thomas, RingCentral's Senior Director of Investor Relations. Joining me today are Vlad Schmunis, Founder, Chairman and CEO Dave Sipes, Chief Operating Officer and Mitesh Dhruv, Chief Financial Officer. Our format today will include prepared remarks by Vlad, Dave 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 non GAAP to 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. With that, let me turn the call over to Vlad.
Good afternoon and thank you for joining our Q3 earnings conference call. 3rd quarter results were excellent. Revenue growth, non GAAP operating margin and EPS came in, in at or above the higher end of our guidance ranges. Our core subscription performance led by our mid market enterprise business and momentum with our general partners continues to be strong. And we expanded our product portfolio and TAM with the acquisition of Dimelo, a leading B2C digital customer engagement platform.
Let me begin by covering some of the key highlights of the quarter. 1st, total revenues for the Q3 grew $274,000,000 This is a 33% increase year over year above the high end of our guidance range. 2nd, our core subscription business normalizing for the legacy AT and T base continued to outperform. Core subscription revenue grew 38% year over year, up from 34% in the same quarter last year. 3rd, mid market and enterprise business continue to lead the way.
We define mid market and enterprise as 50 seats or greater. This grew 75% year over year and is now a $270,000,000 annualized business. Our enterprise business defined as customers with $100,000 or more in annual recurring revenue or ARR grew over 100% year over year. By itself, this business is now over $145,000,000 4th, momentum with channel partners continues. In the Q3, our channel business grew over 90% year over year to over $160,000,000 5th, we again saw outstanding performance internationally with several large deals in the U.
K. And our first $1,000,000 plus TCV deal in Australia. Finally, this quarter we extended our relationships with both AT and T and BT. AT and T agreed to reengage with RingCentral and has restarted selling Office at Hand, which is based on the RingCentral platform. AT and T plans to sell the solution through direct and indirect sales channels to enterprises and to vertical sectors like financial services, healthcare and government.
S2bt, they opened up their mid market and enterprise customers to RingCentral solution. The Mobile First solution, which has been rebranded as BT CloudWork, provides the key communications capabilities enterprise need to engage customers, drive greater workforce productivity and enhance mobility. We're winning because legacy solutions simply cannot meet the needs of modern mobile and distributed workforces. Our success is rooted in our deep commitment to technology, product excellence and customer satisfaction. This is being clearly recognized by customers and experts alike.
It is clear that the cloud is winning and RingCentral is winning in the cloud. According to Gartner, by 2021, 90% of IT leaders will not purchase new premises based UC infrastructure, up from 50% today. And we are proud to share that for the 4th consecutive year, Gartner has recognized RingCentral as a leader in the Magic Quadrant for Unified Communications as a Service. In the Magic Quadrant, RingCentral is now positioned furthest within the leaders quadrant for completeness of vision and ability to execute. In recognizing our leadership, Gartner stated that the RingCentral UCaaS offering is strong across the board, UCaaS features and capabilities, project management, sales and operations.
Not resting on our laurels, we are always looking to strategically expand our product portfolio, enhance the value we deliver to our customers and to expand our TAM. Our first technology acquisition 3 years ago was a team messaging and collaboration platform, Glip. It allowed us to enable internal team communications via means beyond voice. This acquisition has been a resounding success and is helping us win key enterprise accounts. This quarter, we are excited to announce the acquisition of Dimelo, a leading cloud based digital customer engagement platform.
Dimelo enables external customer communications via non voice channels. This fills an emerging need of large brands to connect with their customers via multiple digital channels, including messaging, in app messaging, social media, live chat, e mail and community forums. Dimelo is deployed by leading global organizations such as Alliance, AXA, BNP Paribas, ENGIE, Orange and Telenor spanning multiple industries including telecom, financial services, insurance and retail. The successes of this quarter are still just the beginning. We are in the early innings of what we expect will be a massive shift of all business communications to the cloud.
RingCentral is in the lead. We aim to extend our leadership position with continued investments in product and technology innovation, enterprise sales and channel relationships. With the widening gap and mode between us and our competitors, we believe that we are well positioned to achieve our goal of exceeding $1,000,000,000 in revenue in 2020. Now for some color, I will turn the call over to our Chief Operating Officer, Dave Sipes.
Thank you, Vlad. It was
a great quarter and we are pleased with the continuing momentum in our mid market and enterprise business. We continue to build on our mid market and enterprise momentum by expanding both our direct sales presence and channel partnerships across the U. S. As well as internationally in Europe and Asia. Channel continues to be an important part of our enterprise success.
This quarter over 80% of our top 20 largest deals came through our channel partner network. Let me walk you through just a few customer win examples from our Q3. We have highlighted in the past that enterprise businesses with large workforces dispersed across a significant number of retail locations are well suited to benefit from RingCentral. This quarter, we have a new major win with Monroe, a leading automotive services company. With RingCentral, Monroe can centrally manage their thousands of locations.
In addition, they plan to adopt our team collaboration capabilities, Glip, across both their corporate and retail locations. Also this quarter, Intersection, the smart cities technology and media company chose RingCentral to power communications on over 1500 digital kiosks that are transforming urban environments such as Link in New York City. This has the potential to grow globally as Intersection enters new urban markets across the world. Our open platform continues to grow rapidly and is a key factor in many purchasing decisions. CRM applications are among our most popular integrations.
For example, this quarter RingCentral signed the Tampa Bay Buccaneers. The Bucks are replacing a legacy Avaya system and chose RingCentral for its ability to easily integrate with their cloud CRM system. This is the 3rd NFL entity to choose RingCentral. Internationally, we continue to expand the capabilities of RingCentral Global Office. This quarter we added 2 more countries with native dialing experience, Hungary and Croatia bringing the total to 39 countries.
In the U. K, we had a marquee win with the Financial Times, one of the oldest and most distinguished business publications in the world. The Financial Times is digitally transforming the way their staff work, embracing mobile and collaborative technologies. After an extensive market analysis, Financial Times chose to partner with RingCentral to deliver enterprise grade cloud communication and collaboration solution to over 2,000 other staff across the globe. In Australia, we have made rapid progress in a short period of time.
Recall that in Q1 of this year, we announced that we had opened our 1st sales office in the region. This quarter, we are pleased to share that we signed our first $1,000,000 plus TCV contract with TechnologyOne, one of the largest enterprise software vendors in Australia. They selected RingCentral for our user experience, quality of service reporting and global capabilities. In addition to these sizable new logo wins, we continue to expand with our existing enterprise customers. For example, Red Lobster started with around 200 seats last year.
This quarter they added 2,000 seats with the potential to add more as they roll out RingCentral to all their North American locations. Central to all their North American locations. Ring Central solution improved the performance of Red Lobster's to go ordering process while reducing system costs compared with a legacy solution. In summary, it was a great quarter. We are seeing the momentum of our prior wins drive significant new wins and expansion from existing customers.
We're gaining traction both domestically and internationally as we continue to build our direct and channel presence globally. We continue to believe we are well positioned to win the significant market opportunity in front of us. Now for some color on financials, I will turn the call over to our Chief Financial Officer, Mitesh Dhruv.
Thanks, Dave, and good afternoon, everyone. Before I begin discussing RingCentral's results, I'd ask you to refer to the slide deck posted on our IR website. This provides the key points of our call today as well as supplemental information. We adopted ASC 606 as of Jan 1, 2018 under the retrospective method. We have provided comparative numbers for the respective periods of 2017 in the slide deck and press release.
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 press release and in the slide deck. With that, let's move on to the results. We had an outstanding Q3. All our key financial metrics came in at or above the high end of our guidance.
This was led by continued strength in our mid market and enterprise business supported by channel partners. In the Q3, our subscription revenue grew 32% year over year to $158,000,000 up from 30% a year ago. Our core subscription revenue normalized for the legacy AT and T base grew 38%, up from 34% a year ago. Total ARR grew to 674,000,000 dollars up 31% year over year and ARR for RingCentral Office grew to 592,000,000 dollars up 36% year over year. Our performance again was led by robust growth in mid market and enterprise business.
It was up 75% year over year with ARR of 270,000,000 dollars Our enterprise business of over $145,000,000 growing in triple digits year over year represented over half of this business. As it relates to new sales, the share of mid market and enterprise business was over 60% for RingCentral Office, up from over 50% a year ago. Channel partners again made a significant contribution to our growth. ARR from our channel partners was over 160,000,000 and grew more than 90% year over year. In addition to our Q3 financial results, I also want to share some encouraging long term trends.
We are seeing multiple benefits because of our focus on mid market and enterprise customers and working with our channel partners. 1st, lower churn. In the Q3, we saw record low gross churn. Mid market and enterprise customers have less than half the gross churn rate of small business customers. In addition, customers acquired through channel partners have less than half the gross churn of customers who purchase directly.
2nd, growth through land and expand. Typically, customers begin transitioning to cloud communications by purchasing a subset of our product portfolio for just a portion of their employees. This presents a significant opportunity to cross sell and up sell. Recall at our Investor Day, we shared that we were only about 15% penetrated in our mid market and enterprise customers. Leveraging this opportunity, once again this quarter, over 40% of our new office business came from existing customers.
The combination of lower gross churn and robust land and expand drove strong net retention in Q3. Now moving on to our Q3 financials. Total revenue increased 33% to $174,000,000 above the high end of our guidance range. Subscription gross margin was 83.1%, up 130 basis points year over year. Operating margin was 8.2% at the high end of our guidance range.
We ended the quarter with $577,000,000 in cash, an increase of $10,000,000 from Q2. We closed the acquisition of Dimelo in late October. The acquisition is not estimated to have any significant impact on FY 2018. Before turning to our outlook, I want to share color on 2 points. 1st, taxes.
Given our recent non GAAP profitability, we will be introducing a non GAAP tax rate in fiscal 2019. The rate is expected to be in the range of 22% to 24%. We determined this by applying an average long term expected tax rate. Note that we do not expect to pay any cash taxes given our carry forward losses. 2nd, disclosures relating to core revenue.
With the return of AT and T as a partner, we want to ensure that the metrics we disclose continue to offer insight into the fundamentals of our business performance. We will continue disclosing the core revenue metric through the end of this year for comparative purposes and we will share our plans for 2019 during our next earnings call. Now, let's turn to our outlook. We are raising our 2018 guidance. We expect software subscription revenue to be between 606,000,000 to $608,000,000 for an annual growth of 30% to 31%.
We expect core subscription revenue to grow 36% for the year. We expect total revenue to be between 664,000,000 $667,000,000 for an annual growth rate of about 32%. We expect non GAAP operating margins of 8.4%, up 90 basis points year over year consistent with our earlier guidance of delivering 75 to 100 basis points of expansion. We expect non GAAP EPS of $0.71 to $0.73 based on 86,000,000 fully diluted shares. The difference between GAAP and non GAAP EPS is expected to include the following $0.81 of stock based compensation, $0.20 of amortization of debt discount relating to our convert and $0.09 of amortization of acquired intangibles and acquisition related expenses.
We do not forecast any effects of currency re measurement, which could be a significant reconciling item between GAAP and non GAAP EPS, because it is difficult to predict and subject to constant change. Now for our Q4 guidance. We expect subscription revenue to be between $165,000,000 $167,000,000 for an annual growth of 27% to 28%. We expect core subscription revenue to grow 33% to 34%. We expect total revenue to be between $179,000,000 $182,000,000 for an annual growth of 27% to 29%.
We expect non GAAP operating margin of 7.9% to 8.1%. We expect non GAAP EPS of $0.17 to $0.19 based on 87,000,000 fully diluted shares. The difference between GAAP and non GAAP EPS is expected to include the following: $0.22 of stock based compensation, dollars 0.06 of amortization of debt discount and $0.02 of amortization of acquired intangibles. Again, we do not forecast any effects of currency remeasurement. All our guidance details are available in our press release and our earnings deck.
In summary, we had a strong third quarter, both financially and strategically, seeding several long term drivers. Our core business continues to perform well reaching 38% year over year growth. We had significant new customer wins both domestically and internationally. We had record low churn and robust net retention. We reestablished our relationship with AT and T and expanded our engagement with BT.
We extended our lead over the competition and again were recognized by Gartner as a UCaaS Magic Quadrant Leader. And we completed an important strategic acquisition Dimelo, expanding our TAM in the B2C customer digital engagement market. With that as a backdrop, we are confident we will achieve our goal of exceeding both the rule of $40,000,000,000 in revenue in 2020. Finally, a brief reminder that our 3rd annual user conference, ConnectCentral is happening next week in San Francisco on November 12 to 14. Space is limited, so please reach out to our IR team if you would like to attend.
We hope to see you there. With that, let me turn the call to the operator for Q and A.
At this time, we will be conducting a question and answer session. Our first question comes from the line of Terry Tillman with Raymond James. Please proceed with your question.
Hey, good afternoon, gentlemen. Hopefully, you can hear me okay. I've got some background noise. But first, congratulations on the quarter. Great set of results.
Mitesh, I wanted to ask you specifically as it relates to the enterprise business. It's a scale it is now still seeing the triple digit growth. I'd like, if you could, just some more details on maybe some of the drivers kind of that is driving that triple digit growth, is this much higher level now of revenue?
Sure, Terry. Yes, it was a good quarter, good performance from our enterprise segment, as you said. It's a $145,000,000 business, growing very nicely, still over 100%. So I'll provide color in 2 ways. One is the large deals we saw and then what it means in terms of land and expand.
So in terms of large deals, this Q3, it being albeit a seasonally slow quarter, we saw a record number of deals over $1,000,000 It was up from Q2 last quarter and from Q4 of last year. So seasonally slow quarter, but it actually outpaced the momentum for both last quarter and seasonally strong Q4. What is interesting is that within that, if you pass it out even further, 80% of those new deals were new logos. So that provides a land and expand opportunity in the future. So that's on the new logo side.
Now if you look at the expansion side, we had shared at the Analyst Day that only about 15 ish percent, Terry, in our mid market and enterprise installed base is penetrated. So that itself gives us a lot of headroom to grow just within that installed base. One example we gave in this quarter was Red Lobster, where we saw a 10x increase in the seats from 200 seats to 2,000 seats this year versus last year. That's just one example of and there are many more like that in terms of land and expand. So just to give to summarize, landing record number of new logos with expansion potential, which then drives future business lends itself to a very durable growth story in the future.
That's great. Thank you for that. And I guess my follow-up question and I'm not sure who this is for, so I'll just I'll throw it out there, I'll go on mute because again I think I got some really loud background noise. With Dimelo, I mean, I get it in terms of it's a large market, customer engagement, messaging, conversational messaging, etcetera. It's a high growth area, but how are you all going to attack that market?
And are there any synergy opportunities, maybe some things you've been doing on kind of vertical selling in retail or financial services. But I'm just trying to understand the go to market on that. It seems like a big growth opportunity, but it feels like it's a little bit different than kind of knowledge worker productivity and things of that nature that you focus on. Thank you again. Take care.
Sure. Thank you, Terry. This is David Sipes. On Dimelo, we are seeing a way to expand customer engagement for our customers in addition to voice centric contact center solutions and adding digital focused agents as the new employee the new consumer generation is using messaging in app, social to much greater extents to connect with businesses and this allows companies that have large engagement or large brands, typically consumer facing brands that are engaging with customers in high volumes to centralize that activity through administrative portal. We've and often becomes their first opportunity to move to the cloud as they've been on some of the largest legacy systems historically.
Our customers have been very receptive in initial discussions with them at adding this type of capability and we think it's a way to add non voice capabilities to our current offering as we see that growing over time. For verticals, we see this has penetrated historically large telecoms, financial services, large brands that are dealing with a lot of consumers and that gives us additional vertical capabilities to align with where we have been successful historically with healthcare and financial services.
Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question.
Thanks for taking the question and congrats on
the solid results this quarter. So Mitesh, maybe I'll start with you. Just if we think beyond the Q4 guidance, how should we think about the balance of growth versus margin expansion going forward? Any light you can shed on that?
Sure, Brian. So let's start with growth first and then we will double click on growth with growth economics, the investments we are making and then we will wrap up with margin and then we will dive into longer term for fiscal 'nineteen beyond Q4. So if you look at the growth itself, it was a strong quarter across the board for us. Our core growth rate was 38% ex AT and T. And if you look at how qualitatively we performed, we did break away further from the back in terms of competition.
If you look at Gartner's results, we further were up into the right. So that's growth. But what's as important or if not more important, our growth economics to drive that growth with cost to book and then retention. And we saw improvements in both those measures. So if you look at cost to book, our mid market and enterprise cost to book was down or lower year to date versus last year.
So we are seeing some sales cycle shortening at the margin, given the improvements and awareness of the cloud space with the larger enterprises. So cost of book is coming down. And on retention, customers are staying longer and they're buying more. So with the growth and growth economics working, the bias is to keep investing and further separating from the back to capture this unbounded story here. And so we will be investing in our go to market segment with pipeline generation, demand gen, brand and then also on a product road map, product portfolio to further separate the lead on innovation.
But having said all of that, to wrap up with margin, we will show operating margin expansion the way we've been doing previously and we'll be growing in a fiscally disciplined manner to drive shareholder value just the way best in class companies do. So that's sort of the overall backdrop for growth versus margin trade off. If you look at beyond the Q4 for fiscal 2019, we're not going to give out specifics on 2019. We'll have to wait for the Q4 guidance. But I do want to highlight the fact that as you guys do your models, look at sequential trends the way we have been in the past and model accordingly.
So that's one. But overall, we feel really good about the long term prospects of the business here, and we have some long term drivers, which are new in place and I think that will help the long term potential growth of the company.
Thanks, Mitesh. And just following up, obviously, there's some good news with some carrier partnerships this quarter versus maybe what we talked about previously. It sounds like there's much more of an enterprise focus there. I'm curious, has that helped your enterprise business already in the Q3? And when should we see that as a real accelerant to the enterprise ARR?
Thanks guys.
Yes. This is Dave Sipes. So we were happy to announce both the AT and T expansion, the BT expansion into their BT into the corporate segments and major account segments, that's up to 1,000 employees and then major accounts is over 1,000 employee segment as being the preferential UCaaS provider in that sector and with AT and T expanding the relationship. Those are still very early. We have had sellers.
As we have been able to roll it out, we still have significant enablement that will go on with for some sellers that this is new to them, some that have been with us for a long time or been with AT and T for a long time, they are able to sell immediately. But I would say, it's still at the very early stages, but we have been very happy with the receptivity and enthusiasm that we are seeing.
Our next question comes from the line of Meta Marshall with Morgan Stanley. Please proceed with your question.
Great. Thanks guys. First, I just wanted to kind of ask a question on what you're seeing on sales cycles. I know the past couple of quarters you would have some examples of very quick wins, but just overall what you're seeing as far as kind of in the mid market how long it's taking to achieve sales? And then second, the gross margin was on the subscriptions was obviously extremely impressive this quarter.
And just wondering how to think of the progression of that or how we should think about how high kind of subscription gross margins can get, because we are above where your targets were? Thanks.
Hey Matt, this is Dave Sipes. I will do the sales cycle and
then I
will hand it over to Mitesh for the margin question. On the sales cycles, we've talked about it being 6 to 9 months that may be shortening at the lower end to maybe 4 to 9 months. In some instances, we do have instances like TechnologyOne, which is a $1,000,000 deal we announced in Australia of being under 2 months in sales cycle. So there are examples of very large deals that come in quickly. But overall, we still see that kind of similar trend with maybe a slight improvement.
Hey, Meta,
on the gross margin side, yes. So gross margin, there are 2 dynamics going on. One is, underlying, we are seeing scale take over where we are seeing our fixed cost spread over a larger base. So you are seeing scale in that. We are also seeing our scale in or cost reduction in our telco costs.
So those 2 are helping the COGS and the gross margin. The offset is our contact center business, which is inherently a lower gross margin business. If you add the 2 together, again, this quarter, we did punch over 83%. But as contact center takes share over the long run in the next year or so, I would model gross margin around an 82% zip code plus or minus. That's the way to think about gross margin.
Still very healthy over 80%, but look, there will be some pressure on with the contact center. So that's the way I would model it. Great. Thank you.
Our next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question.
Hey, guys. Congratulations. Consistently nice job here. Maybe I'll start off on sort of the international business here. You've had some really nice large international deals throughout the last couple of quarters.
I guess, Mitesh, maybe I'll direct it to you first and I have one follow-up for Mr. Seipps there.
But I just love to understand sort
of what the drivers are and then sort of how you're expanding or what the plans are for expansion inside the U. S? Sort of
how do you see the trajectory
of that business over the next, say, 3 to 5 years? Just hoping to understand maybe mix and things like that and then what the drivers are?
Sure, Bhavan. So international remains an interesting vector of growth for us. It's in the very, very early stages, but it remains a key growth future driver, which will be layered on to our story in the upcoming years. So I will give you color in 3 dimensions. I will start with the performance of international, then we'll talk about the investments we're making as you asked, and then we'll tie it in with the recent BT expansion and the Dimelo acquisition.
Starting with the performance on the international side, about if you look at the all the deals we had over $1,000,000 20% of those deals came in through the international markets in the U. K. And in Australia. And the story is just the same playbook. Large companies are ripping out their Cisco and Amaya boxes to go to the cloud.
So that's what we are seeing. We had 2 deals this quarter, Technology 1 in Australia and Financial Times, both marquee names in the UK. So we are seeing some momentum there. And why are they choosing us? They are choosing us for 2 simple things.
1 is the global capabilities we have stamp out countries across the globe. And second is our open platform, because more and more enterprises want to tether other applications to their core communication stack. So that's on the performance. So given the early success, we are going to be doubling down and investing in the international markets in brand, in both the direct and the indirect channel, and that will all take hold and ramp next year very nicely. So that remains a future driver for us.
And the 3rd point on BT and Dimelo, they are both again new emerging long term drivers for us. Again, as Sykes mentioned earlier and mentioned in the call, we expanded our relationship with BT with to open up their our solution to their enterprise and mid market accounts, which was not done before. So that remains a vector. And Dimelo's acquisition gives us a good start in France because most of the success has been in Europe or in France. So that gives us something to start with.
So hopefully, we will be able to cross sell in other international geographies.
Got it. Got it. That's really helpful, Mitesh. I guess, maybe one for the broader group there, David. Mitesh, let me jump in here.
There's always a build versus buy philosophical question that exists. And your approach so far clearly seems to be resonating. It seems you're correct one given sort of the current market position. But how do you think about this? Obviously, you've made some acquisitions, but you've also done some organic investments and growing internationally.
As you think about products that I'd love to understand philosophically how you think about Zolpi versus Zai and sort of the strategic benefits of either one? Thanks.
Yes. Vlad here. Maybe I'll take this one. Well, look, to be clear, so with Dimelo, yes, we've acquired a French company here. And certainly, they have a very nice foothold there with great accounts like Alliance and Orange and a few others.
But we don't view them as a French play or EU play. It's we view them as a global play. The digital channel engagement platforms that they provide is needed by enterprises and in particular by brand across the globe. So this is just to clarify that. But to your question, okay, well, when do we build versus buy?
Look, we've had a very consistent message over time. We are about it's not really about build versus buy for us. It's about how do we deliver the best user experience, the best value and the stickiest, the most engaging product that we can. If we can buy to plug up a gap or 2, then we will. And this is our 2nd acquisition now.
As I think most of you know, our first acquisition Glip was very, very successful, has differentiated us in a very meaningful way. To this day, we are the only scaled up provider with full UCaaS, full cloud phone system as well as team messaging and collaboration all on the same platform and now all seamlessly integrated in the same app. So that's been really great for us. 1 of lots of enterprise accounts, including many of our 7 digit TCV accounts came through that. And I have to say, it's very early with Dimelo, but we are optimistic.
The announcement has been well received by the analyst community. I can share that we have had some
let's put it this way,
we have not had any negative customer feedback on this and people are intrigued. So, yes, moving forward, as if and when we can find other nuggets of advanced world class efforts that we can acquire, we will. Whatever we cannot acquire, we'll develop. And as a reminder, we are at our scale now and our growth, our commitment to technology and R and D really dwarfs at this point, dwarfs the next guy down line by like a factor of 4 now. So we expect that those continual efforts will continue bearing fruit.
Our next question comes from the line of George Sutton with Craig Hallum. Please proceed with your question.
Thank you. Vlad, let me follow-up on that last question with a little bit more of a direct question relative to both video and contact center, two areas where the trends are obviously around acquisitions and having them fully integrated. Is that a goal of yours or do we read the continued increase in R and D as really you are going to pursue some of these things via an internal build?
Yes. Look, yes, no, I appreciate the more pointed question here. But it's pretty much the same answer. So but let's build again on Dimelo. The thing with Dimelo is that even though it was not a huge company, actually a fairly small company, but in our judgment, they had and frankly in many other people's judgment, including all of their customers and even companies like Apple who selected them as one of the very early integration partners for Apple Business Jet.
So that's a big deal. So what this team was able to demonstrate is very high end, polished, digital customer engagement capability, which is really second to none. And this is why people have been continuously selecting them over much better established companies, for example, like Genesis, who have some of the similar capabilities, but not nearly as published. So we felt this was a little bit of a diamond and so we've integrated. As to your question then, okay, so what's next?
As far as the contact center is concerned, Dimelo is a contact center to be clear. It does not have the voice capability, but it has every other capability. And as Dave already mentioned, we believe that the world is moving to at least augment voice with digital channels, But more and more people probably will be using less voice and more non voice messaging, in app messaging, social media and the like of that, texting. So anyway, that is definitely our foray into the contact center space. We do expect to continue working with inContact, NICE, Closet as we have been.
They of course have a very differentiated product. And look, I'll just have to say, we will have to see what the future brings. Eventually, we do see RingCentral offering world class industry leading and hopefully in time Magic Quadrant leading as well technologies in voice contact center as well as non voice. So that's on that side. Yeah.
And with Vidya, you know what, similar answer. We will provide best available experience in partnerships if we have to through acquisition if we can or our own development if as necessary. But for now we're very, very happy with relationship there.
Thank you. You pointed out a GLP related win. I'm just curious, can you give us
a sense of how broadly that is getting adopted? Yes.
We are seeing GLP adoption very strong in our large accounts. It's become part of our standard implementation process. It's also been standard in our pre sales activities. We have been very happy with the adoption we are seeing there across some of these biggest accounts and it's really a product we bought 3.5 years ago, but we have kept improving it and it's gotten to the point where it's a world class solution that
we are proud of.
Thanks guys.
Our next question comes from the line of Nikolay Beliov with Bank of America Merrill Lynch. Please proceed with your question.
Hi, RingCentral team. Congratulations on the results here. Mitesh, to start off a question for you. Just a little bit more puts and takes on net retention rates in the mid market and enterprise and how that translates into sales and marketing efficiency which has been increasing when you look at incremental sales and marketing dollar producing incremental subscription revenue that's been getting better?
Sure, Nikolay. So if you look at the net retention, it's driven by 2 things, our gross churn and then upsell. And so let's start with the first one, gross churn. We did see a record low gross churn this quarter. If you look at our office business, the gross churn was up 10% annually.
So it was the lowest we have ever had. And it's basically, as you know, it's driven by in large part the move to mid market enterprise customers, because naturally the business mortality is lower and it's stickier. That's on the gross churn. On the upsell, again, we saw a very strong upsell quarter this time as customers bought more seats and bought more products like contact center, global office and some of the video capabilities. So one example we shared was Red Lobster earlier, but again, there are several others like Avery Dennison, which is a total potential customer of 20,000 seats, again tripled its footprint from last year to this year to close to 2,000 users this time.
So combining both the gross churn and upsell led to a very strong net retention quarter that it was about 130% again for the mid market enterprise segment. And as this flywheel keeps on turning, it leads to a higher predictability in the business model as we march to $1,000,000,000 in revenue.
And, Nitish, my follow-up was how that ties into improving sales and marketing efficiency?
Yes. Look, exactly. So that it's a virtuous circle, right? So we have got lower churn, more upsells and then our cost of book is coming down, even though we are moving to the enterprise segment. So these three factors combined is very, very accretive to the business model.
Now what we don't see from the outside in is that we have been taking all that money and then further reinvesting it into pipeline, into demand gen, into a brand. So over the next year or so, we'll hold sales and marketing as a percent of revenue flat or slightly up, but underlying, we will maybe at the next Analyst Day further show you how the unit economics have been further improving. So that's the way to think about it. Got it. Last quick question for you.
One thing that we
are hearing from your partner is that you've done a pretty good job surrounding your call center OEM relationship with additional tools that's resonating with customers.
And if you can just refresh
our memory what they are and the types of use cases they drive and how does it jibe with Dimelo? Would a call center customer also maybe acquire Dimelo for whatever reason or just trying to like get some clarity on the use cases between the existing call center solution in light of the advancement versus the mailer?
Yes. And the safe side, so I think the question is how have we surrounded the contact center with additional capabilities. Well, Glip has been core to that and surrounding agents and spreading information out across the entire organization, not just keeping it in the contact center to that and we announced Pulse, which creates smart alerting within a contact center and notifies back out through Glip into the rest of the organization. We also do standardization or synchronization of contact center teams with team messaging teams. All of those capabilities are definitely fruitful opportunities for the new Dimelo product as we look to enable those digital agents to also have access to the entire company as well as experts within the company.
So those are things that we're considering. So stay tuned as we announce new integrations with that product.
Thank you.
Our next question comes from the line of John DiFucci with Jefferies. Please proceed with your question.
Hi, this is Samad Samana here for John. A couple of questions if I could. First, very nice strength in the enterprise and mid market. I was wondering as you think about the growth there, could you maybe help us assess out the growth in average deal size versus the growth in units? Just trying to get an idea of what the bigger contributor to that very strong performance is on the enterprise and mid market side of the business?
And then I have a follow-up question.
Sure, Samad. I think the average I think we are seeing both. It's a mix. The deal size is getting larger and as well as we are seeing a pickup in units. So you are seeing and that's where if you look at the ARR we published for the mid market enterprise segment, which is $270,000,000 business, that actually takes into account, it normalizes for all of that.
So you don't have to then try and divide by the deal size or deal duration, it's all normalized for that.
Great. That's helpful. And then maybe one for Dave Dipes. On the congrats on the first $1,000,000 plus deal in Australia. Could you help us understand maybe how penetrated UCaaS is in that market and compared to North America and EMEA and any potential competitive advantages that RingCentral has as it tries to penetrate that market?
Sure. I think UCaaS is still new across all these markets. We know legacy has the dominant share today, but is shrinking in size over time. In Australia, there has been a big push on fiber roll for the whole country that's helped ancillary services like UCaaS. And so we are seeing great reception when we went into that market.
We have been in there with our channel team less than 4 months. We have already signed up 50 partners in that market and contribute helped contribute to the TechnologyOne win, but the receptivity is very high. So we've been encouraged with the expansion there.
And Mitesh, maybe just one housekeeping question. On that 4th quarter guidance, is there any contribution baked in from Dimelo? I know it's not necessarily material, but is there any revenue in that from Dimelo and the new part of the AT and T deal, the incremental part of the AT and T expansion? Thanks again.
Sure, Samad. So both are totally insignificant. And Dimelo, it's a very small company. It's more of an acqui hire, so nothing significant there. And on AT and T, again, we just signed the contract in September.
So it takes a long time for the recurring revenue base to build. So not material at all. But that said, both these what you said is both these are very, very interesting long term drivers of the business and we expect over the next couple of years, both will contribute pretty meaningfully, hopefully, aspirationally to this to our growth vectors.
Our next question comes from the line of Heather Bellini with Goldman Sachs. Please proceed with your question.
Great. Thank you. I just wanted to follow-up on a couple of the comments that you had in your prepared remarks. You talked about the success you're having with the partner community. I was just wondering if you could help us think about the percentage of your enterprise deals that partners are driving now and kind of maybe what that looked like a year ago?
And then also, how much larger would you say your lands are now versus a year ago in these large partner led deals? And I guess the last metric, Mitesh, would just be you guys talked about lower churn. I'm just wondering if you could share with us kind of the delta between the enterprise customer churn and the rest of the population? Thank you.
Sure. So this is
David. So on the I think one question there was the enterprise and how is channel contributing to the enterprise. I think we are seeing it in over about 70% of the enterprise business. We have been able to continue to grow the channel strongly. We had a record number of new partners signed.
Even quarter over quarter, it's almost 25%. We have been able to sign a couple of very large partners, for example, like PCM, which is a national partner, which is a large Cisco dealer, which is over $2,000,000,000 in annual revenue and 800 direct sellers, as well as a segment AGC, which is large global Avaya partner. So those have helped as we've moved into enterprise to add the resellers, the partners that have been more enterprise focused over time. And so that's where you are seeing the positive contribution. I'll hand it to Mitesh on the margin question.
Sure. I'll just clarify one thing what they have meant to say is that the 70% is of the new deals we signed, not of the total base. So just I'm sure you picked up on that, but just wanted to clarify that to set the script straight. In terms of the churn, Heather, the delta is pretty sizable where the gross churn for the mid market and enterprises is less than half the churn, gross churn of the SMB side. If you just look at the enterprise side, I don't think we've lost a single account.
So it's sort of almost like 0. But if you combine the mid market and enterprise, it's a sub 5% annual gross churn rate and then the other SMB is over 10%. So that's the way to think about it.
Great. Thank you so much.
Sure, Heather.
Our next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question.
Yes, thanks. Hi, guys.
Can you talk a little bit about how you're dividing up the new resources that you're bringing on board given the success that you're having in the mid market and enterprise versus what resources are still going towards the more traditional lower end? So in other words, how are you dividing up the hiring specifically in sales and marketing and R and D?
Yes. This is David Sipes. We continue expand the upper ends as we feel most strategic is expanding into that category as well as having lower churn and longer net life of those revenues. So we have been expanding the up market teams and we do that at a rapid pace as we grow new business and new pipe into that channel into the segments.
Yes. So Sterling, just to add on to what Dave said, exactly what he said, but also what's happening is, as you know, SMB segment is very, very efficient for us and it's a machine for us to generate profitability and we are taking all those dollars as we had highlighted at the Investor Day and re funneling those dollars into the enterprise pipe. So that's what is happening under the hood.
Our next question comes from the line of Michael Turrin with Deutsche Bank. Please proceed with your question.
Thanks and good afternoon. Core subscription revenue growth actually accelerated on a tougher comp to 38% growth. Wondering if you can just walk through some of the key factors driving that strength. Is there any commentary you're able to add around either ramped reps or underlying productivity trends you're seeing?
Sure, Michael. So yes, the core revenue did accelerate at 38%. I would please do not extrapolate that, but soon we'll be at 70% at that rate. So don't set the expectations there. Yes, it was a tough comp.
Understood. But couple of things we it was a broad based strength. And I'll point out to 1 or 2 or 3 factors that led to that. First is, again, the enterprise in the mid market segment, that growth rate was over 75 percent on a base of $270,000,000 ish. So about quarter or 30% of our office business is coming from the enterprise and mid market side.
That provides obviously a natural tailwind to the overall growth rate. That's one. And second is, in terms of the ramp, we are seeing a little bit more of our enterprise sales folks being ramped. So that is providing a natural, again, second tailwind to the productivity there. So that again, we saw that phenomenon as well.
So both those together led to the 38% growth rate uptick.
Okay, that's helpful. And then just going back to the churn comments quickly, you're seeing record lows in gross churn. Mitesh, I am just wondering how much room for improvement there still exists in your view in aggregate as you continue this move up market and into the channel? Thanks.
Yes. No, it's a good one, Michael. So look, if you look at the churn, as Heather asked, if you look at the upper end of the segments, the churn is sub 5% annually. And at the SMB side, it's a little bit over 10%. Now, as the mix shift continues towards the upper end, it's a mix shift issue or it's a mix shift dynamic.
Over 60% of our new business is coming from the upper end. So as the mix take holds even shifts even more to the upper side, you can see maybe a point or so, point or two points over time of an improvement just because of the mix shift. And hopefully, we'll be performing organically better in the SMB side as well. So I think you cannot expect churn to just asymptotically go to 0, but there are a couple of points of tailwinds there over the next couple of years.
Great. Thanks guys. Congrats on the strong results.
Thank you.
From here on out, please limit your questions to only one question. Our next question comes from the line of Catharine Trebnick with Dougherty. Please proceed with your question.
Hi. Thanks for taking my question. Mine's on resellers. Is there any way you could tell us how the top maybe 3 performed year over year this year versus a year ago? And anything different you did to support sales enablement or new portals or any type of pricing to help stimulate the growth throughout of that segment?
Thank you.
Sure. Catherine, it's Mitesh. So nothing different in terms of sales enablement. We all are trying to do the same thing and it's a pretty formulaic equation there. I think what we've been hearing at least from the channel partners, it's again, it's about the product that's driving it and the ease of use and the way our global capabilities are is what's really driving the momentum in the channel side.
And if you look at the contribution from channel partners, it's been very consistent year over year.
Our next question comes from the line of Matt Van Vliet with Stifel. Please proceed with your question.
Yes. Hi. Thanks for taking the question. I guess as you look out towards 2019 and even your 2020 revenue target, where do you feel like you're at in terms of sales coverage from your quota carrying reps maybe in the U. S.
Versus how much more growth you need internationally? And then how should we think about the mix of increasing sales and marketing spending going to sales productivity enhancements versus marketing marketing versus overall headcount growth?
Yes. So I think
the question is, how do we see expansion of those upmarket teams and we continue to still see a lot of opportunity domestically. There's huge demands internationally also. So we carefully try to measure the best bang for the buck and where we expand the team. But we do see opportunities across the board to continue to expand that team.
Our next question comes from the line of Brian Schwartz with Oppenheimer Funds. Please proceed with your question.
Hi there for Brian Schwartz. Congrats on the quarter and thanks for taking the question. This question is either for Vlad, David or Mitesh. So Dimelo is one of the preferred vendors for Apple Business Chat and that's great. And I believe it also can provide messaging on Facebook Messenger and WeChat too.
Just curious to hear your high level thoughts on Google's next gen SMS platform for 1st Android platform? I think they call it the rich communication system. And is the Daimler technology set up to quickly enter that messaging channel
we hope that Dimelo will become one of Apple's leading partners or providers. But for now, they've been just to clarify what I said is they've been chosen as one of the very early integration partners. So we'll have to see how things develop. But obviously it's not a good place to start from. Look, as to Google, there is nothing the thing we most like about the Dimelo platform is actually channel agnostic.
So what this means is that really the smart of it is in the queuing engine and ability to direct messages from any digital channel to the most appropriate agent and keep track of all of these threats in a sane manner, call it, okay. So they already integrate with a wide range of providers where messages can be originating from. And some of the bigger names now Apple, WhatsApp, we certainly Facebook for that matter, we certainly expect them that as new technology becomes available, we'll absolutely expect to be within the 1st echelon of available integration. And as you all know, we have a pretty special relationship with Google. One of our Board members is a very senior executive there.
So, I would be very surprised if somehow Google's integration is lacking with that.
Our next question comes from the line of Will Power with Robert W. Baird. Please proceed with your question.
Hey, guys. Thanks for taking the question. This is actually Charlie Ehrlich on for Will. Just had a quick one on the competitive environment. Any changes overall from your perspective?
And how are you thinking about some of these new entrants like Google and Zoom and also Avaya as they push more towards the cloud? Thanks. Yes.
Maybe I will take. Well, look, it's a really great question because what we see so far is a little bit of a repeat like we saw with Microsoft and Cisco a couple of years ago, whereby there were all the announcements and media and all of that, but the products haven't materialized. And as a matter of fact, they still haven't materialized to this day. And what we hear is that, for example, if couple of years ago, people were always asking, okay, well, what about Microsoft? What about Cisco?
Now people are asking, just like you are, okay, well, what about Zoom? What about Google? The truth of the matter is none of these companies and that includes still to this day Microsoft and Cisco and Avaya and some of these new entrants, they really don't have a fully featured UCaaS product. But some of them like with Google, they've just announced a they made an announcement a few months ago. We haven't heard much since.
Zoom has pretty much stated that there will be mostly competing with Skype for Business. I think they even mentioned us on the call or the user conference saying that for higher end, higher requirements enterprise implementation, that point people in our direction. Look, it's a very, very heavy lift as we found out the hard way. And where it has there is a wide moat and we have one of the probably world's largest dedicated teams on this and that includes any vendor you can think of. So, yes, I mean, we will have to see how it all develops, but just the way we look at it, very large market, very underpenetrated, and we're in the lead.
Doing everything we can from this side, I can assure you to stay in that lead and improve the gap.
Our next question comes from the line of Jonathan Kees with Summit Insights Group. Please proceed with your question.
Great. And congrats on the quarter. I'll add my kudos there. Even though I have a couple of strategic questions, I'll make mine easy. I just want to it will be more housekeeping.
My question is more on the I didn't quite catch it. Did you go over the number of 7 figure deals that you had, 7 digit TCVs and then the number that were also included contact center? Thanks.
Sure, Jonathan. So we would give some color on that. We said that the Q3 deals for $1,000,000 TCV was a record this quarter. In a seasonally slow quarter, we did have more deals than last quarter and versus the strongest quarter we had, which is seasonally strong Q4. And those deals did include contact center as well.
So what we saw in the $1,000,000 TCV deals was pretty interesting dynamics. We saw more than 70% come to the channel. We saw a mix of contact center. We saw international and we saw some mix of vertical. So it was a really, really broad based strength in the $1,000,000 TCV side.
And also overall, if you look at the enterprise segment and the overall business of close to $150,000,000 it was a very, very broad based trend across verticals, across channel. And so hopefully this momentum is here to stay.
Ladies and gentlemen, we have reached the end of our question and answer session And this does conclude today's 3rd quarter earnings call. Thank you for joining. You may now disconnect.