Greetings, welcome to RingCentral's 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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, welcome to RingCentral's third quarter 2018 earnings conference call. I'm Paul Thomas, RingCentral's Senior Director of Investor Relations. Joining me today are Vlad Shmunis, 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&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, thank you for joining our third quarter earnings conference call. Third quarter results were excellent. Revenue growth, non-GAAP operating margin, and DPS came 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 channel partners, continues to be strong. 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. First, total revenues for the third quarter grew to $174 million. This is a 33% increase year-over-year above the high end of our guidance range. Second, our core subscription business, normalizing for the legacy AT&T base, continued to outperform. Core subscription revenue grew 38% year-over-year, up from 34% in the same quarter last year.
Third, mid-market and enterprise business continued 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 million 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 million. Fourth, momentum with channel partners continues. In the third quarter, our channel business grew over 90% year-over-year to over $160 million. Fifth, we again saw outstanding performance internationally with several large deals in the U.K. and our first million-dollar-plus TCV deal in Australia. Finally, this quarter, we extended our relationships with both AT&T and BT. AT&T agreed to reengage with RingCentral and has restarted selling Office@Hand, which is based on the RingCentral platform.
AT&T plans to sell the solution through direct and indirect sales channels to enterprises and to vertical sectors like financial services, healthcare, and government. As to BT, they opened up their mid-market and enterprise customers to RingCentral solutions. The Mobile First solution, which has been rebranded as BT Cloud Work, 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.
We're proud to share that for the fourth 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're always looking to strategically expand our product portfolio, enhance the value we deliver to our customers, and to expand our team. Our first technology acquisition three 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, email, and community forums. Dimelo is deployed by leading global organizations such as Allianz, 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 investment in product and technology innovation, enterprise sales, and channel relationships.
With a widening gap and moat between us and our competitors, we believe that we are well-positioned to achieve our goal of exceeding $1 billion in revenue in 2020. Now, for some color, I will turn the call over to our Chief Operating Officer, David Sipes.
Thank you, Vlad. It was a great quarter, and we're pleased with the continuing momentum in our mid-market and enterprise business. We continue to build on our mid-market 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 third quarter. 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 Monro, a leading automotive services company. With RingCentral, Monro 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 1,500 digital kiosks that are transforming urban environments such as LinkNYC. 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 Bucs are replacing a legacy Avaya system and chose RingCentral for its ability to easily integrate with their cloud CRM system. This is the third NFL entity to choose RingCentral. Internationally, we continue to expand the capabilities of RingCentral Global Office.
This quarter, we added two 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, "The Financial Times" chose to partner with RingCentral to deliver enterprise-grade cloud communication and collaboration solution to over 2,000 of their 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 first sales office in the region. This quarter, we are pleased to share that we signed our first $1 million-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. RingCentral solution improved the performance of Red Lobster's to-go ordering process while reducing system costs compared with a legacy solution. In summary, it's 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.
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 January 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 third quarter. 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 third quarter, our subscription revenue grew 32% year-over-year to $158 million, up from 30% a year ago. Our core subscription revenue, normalized for the legacy AT&T base, grew 38%, up from 34% a year ago. Total ARR grew to $674 million, up 31% year-over-year. ARR for RingCentral Office grew to $592 million, 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 million. Our enterprise business of over $145 million, 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 million and grew more than 90% year-over-year.
In addition to our third quarter 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. First, lower churn. In the third quarter, 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. Second, 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 upsell. 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. Moving on to our Q3 financials. Total revenue increased 33% to $174 million above the high end of our guidance range. Subscription growth 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 million in cash, an increase of $10 million 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 two points. First, 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%-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 carryforward losses. Second, disclosures relating to core revenue. With the return of AT&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 will share our plans for 2019 during our next earnings call. Let's turn to our outlook. We are raising our 2018 guidance. We expect software subscription revenue to be between $606 million-$608 million for an annual growth of 30%-31%. We expect core subscription revenue to grow 36% for the year.
We expect total revenue to be between $664 million and $667 million 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 75-100 basis points of expansion. We expect non-GAAP EPS of $0.71-$0.73 based on 86 million 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 remeasurement, which could be a significant reconciling item between GAAP and non-GAAP EPS, because it is difficult to predict and subject to constant change. For our fourth quarter guidance.
We expect subscription revenue to be between $165 million and $167 million for an annual growth of 27%-28%. We expect core subscription revenue to grow 33%-34%. We expect total revenue to be between $179 million and $182 million for an annual growth of 27%-29%. We expect non-GAAP operating margin of 7.9%-8.1%. We expect non-GAAP EPS of $0.17-$0.19 based on 87 million fully diluted shares. The difference between GAAP and non-GAAP EPS is expected to include the following: $0.22 of stock-based compensation, $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&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. 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 and $1 billion in revenue in 2020. Finally, a brief reminder that our third annual user conference, Connect Central, is happening next week in San Francisco on November 12th-14th. Space is limited, so please reach out to our IR team if you'd like to attend.
We hope to see you there. With that, let me turn the call to the operator for Q&A.
At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. 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. First, congratulations on the quarter. Great set of results. Mitesh, I wanted to ask you specifically as it relates to the enterprise business. At the 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 that is driving that triple-digit growth is much higher level now of revenue.
Sure, Terry. Yeah, it was a good quarter, a good performance from our enterprise segment, as you said. It's $145 million business growing very nicely, still over 100%. I'll provide color in two ways. One is the large deals we saw and then what it means in terms of land and expand. In terms of large deals, this third quarter, it being, albeit, a seasonally slow quarter, we saw a record number of deals over a million dollars. It was up from Q2 last quarter and from Q4 of last year. 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 parse it out even further, 80% of those new deals were new logos. That provides a land-and-expand opportunity in the future. That's on the new logo side.
If you look at the expansion side, we had shared at the Analyst Day that only about 15%-ish, Terry, in our mid-market and enterprise install base is penetrated. That itself gives us a lot of headroom to grow just within that install 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. Just to summarize, landing record number of new logos with expansion potential, which drives future business lends itself to a very durable growth story in the future.
That's great. Thank you for that. I guess my follow-up question, and I'm not sure who this is for, so 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 get it in terms of it's a large market, customer engagement, messaging, conversational messaging, et cetera. It's a high-growth area. 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. 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. Dimelo, we're seeing a way to expand customer engagement for our customers in addition to voice-centric Contact Center solutions in adding digital-focused agents as the new consumer generation is using messaging, in-app, social to much greater extents to connect with businesses. 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. 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, that gives us additional vertical capabilities to align with where we've 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, congrats on the solid results this quarter. Mitesh, maybe I'll start with you. Just if we think beyond the fourth quarter guidance, how should we think about the balance of growth versus margin expansion going forward? Any light you can shed on that?
Sure, Brian. Let's start with growth first, we'll double-click on growth with growth economics, the investments we are making, we'll wrap up with margin, we'll dive into longer term for fiscal 2019 beyond fourth quarter. 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&T. If you look at how qualitatively we performed, we did break away further from the pack in terms of competition. If you look at Gartner's results, we further were up and to the right. That's growth. What's as important or if not more important are growth economics to drive that growth with cost to book and then retention. We saw improvements in both those measures.
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. We are seeing some sales cycles shortening at the margin given the improvements and awareness of the cloud space with the larger enterprises. Cost to book is coming down. On retention, customers are staying longer and they're buying more. With the growth and growth economics working, the bias is to keep investing and further separating from the pack to capture this unbounded story here.
We will be investing in our go-to-market segment with pipeline generation, demand gen brand, also on a product roadmap, product portfolio to further separate the lead on innovation. Having said all of that, to wrap up with margin, we will show operating margin expansion the way we've been doing previously, we'll be growing in a fiscally disciplined manner to drive shareholder value, just the way best-in-class companies do. That's sort of the overall backdrop for growth versus margin trade-off. If you look at beyond the fourth quarter for fiscal 2019, we're not going to give out specifics on 2019. We'll have to wait for the fourth quarter guidance. 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. That's one.
Overall, we feel really good about the long-term prospects of the business here, we have some long-term drivers which are new in place, I think that will help the long-term potential growth of the company.
Thanks, Mitesh. 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 third quarter? When should we see that as a real accelerant to the enterprise ARR? Thanks, guys.
Yeah, this is David Sipes. We were happy to announce both the AT&T expansion, the BT expansion into their, at BT, into their corporate segments and major account segments. That's up to 1,000 employees, then major accounts is over 1,000 employee segment as being the preferential UCaaS provider in that sector, and with AT&T expanding the relationship. Those are still very early. We've had very good receptivity with AT&T sellers. As we've 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&T for a long time, they're able to sell immediately. I would say it's still at the very early stages, but we've been very happy with the receptivity and enthusiasm that we're 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 had had some examples of very quick wins, but just overall, what you're seeing as far as in the mid-market, how long it's taking to achieve sales. Then second, the gross margin 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 subscription gross margins could get because we're above where your targets were. Thanks.
Hey, Meta, this is Dave Sipes. I'll do the sell cycle, and then I'll hand it over to Mitesh for the margin question. On the sell cycles, we've talked about it being six to nine months. That may be shortening at the lower end to maybe four to nine months. In some instances, we do have instances like TechnologyOne, which is a $1 million deal we announced in Australia of being under two months in sell cycle. There are examples of very large deals that come in quickly. Overall, we still see that kind of similar trend with maybe a slight improvement.
Hey, Meta, on the gross margin side, Gross margin, there are two dynamics going on. One is underlying, we are seeing scale take over where we are seeing our fixed cost spread over a larger base. You're seeing scale in that. We are also seeing our scale in our cost reduction in our telco costs. Those two 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 two together, again, this quarter, we did punch over 83%, 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 margins.
Still very healthy over 80%, look, there'll be some pressure with the Contact Center, 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, then I have one follow-up for Mr. Sipes there. I'd just love to understand sort of what the drivers are and then how you're expanding or what the plans are for expansion inside the U.S., and how do you see the trajectory of that business over the next, say, three to five years? Just love to understand maybe mix and things like that, and then what the drivers are.
Sure, Bhavan. 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. I'll give you color in three dimensions. I'll 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, if you look at all the deals we had over a million dollars, 20% of those deals came in through the international markets in the U.K. and in Australia. The story is just the same playbook. Large companies are ripping out their Cisco and Avaya boxes to go to the cloud. That's what we are seeing.
We added two deals this quarter, TechnologyOne in Australia and The Financial Times, both marquee names in the U.K. We're seeing some momentum there. Why are they choosing us? They're choosing us for two simple things. One is the global capabilities we have to stamp our 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. That's on the performance. 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. There remains a future driver for us. The third point on BT and Dimelo, they are both, again, new emerging long-term drivers for us.
As David Sipes mentioned earlier, and mentioned in the call, we expanded our relationship with BT to open up our solution to their enterprise and mid-market accounts, which was not done before. That remains a vector. Dimelo's acquisition gives us a good start in France because most of the success has been in Europe or in France. That gives us something to start with. Hopefully we'll be able to cross-sell in other international geographies.
Got it. That's really helpful, Mitesh. I guess maybe one for the broader group there. David, Mitesh, why don't you jump in here. There's always this build versus buy philosophical question that exists, and your approach so far clearly seems to have been resonating. Seems the correct one, given sort of the current market position. How do you think about this? Obviously, you've made some acquisitions, but you've also done some organic investment in growing internationally. As you think about product set, I'd love to understand philosophically how you think about build versus buy and sort of the strategic benefits of either one. Thanks.
Yeah. 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 Allianz and Orange, and a few others. We don't view them as a French play or EU play. We view them as a global play. The digital channel engagement platforms that they provide is needed by enterprises and in particular by brands across the globe. This is just to clarify that. To your question, okay, well, when do we build versus buy? Look, we've had a very consistent message over time. 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 two, we will. This is our second acquisition now. As I think most of you know, our first acquisition, Glip, was 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. That's been really great for us. Won us lots of enterprise accounts, including many of our 7-digit TCV accounts came through that. I have to say, it's very early with Dimelo, but we're optimistic. The announcement has been well received by the analyst community. I can share that we've had some.
We have not had any negative customer feedback on this, and people are intrigued. 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. As a reminder, at our scale now and our growth, our commitment to technology and R&D really dwarfs at this point, dwarfs the next guy downline by like a factor of 4 now. 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&D as really you are going to pursue some of these things via an internal build?
Look, I appreciate the more pointed question here, but it's pretty much the same answer. 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, 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 Chat. That's a big deal. What this team was able to demonstrate is a very high-end, polished digital customer engagement capability, which is really second to none. This is why people have been continuously selecting them over much better-established companies, for example, like Genesys, who have some of the similar capabilities, but not nearly as polished. We felt this was a little bit of a diamond, so we've integrated.
As to your question, okay, 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, it has every other capability. As Dave already mentioned, we believe that the world is moving to at least augment voice with digital channels. 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. That is definitely our foray into the Contact Center space. We do expect to continue working with NICE inContact, close as we have been. They, of course, have a very differentiated product. Look, I'll just have to say, we'll 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. That's on the other side.
Perfect.
Yeah. With video, you know what? Similar answer. We'll provide best available experience in partnerships if we have to, through acquisition if we can, or our own development as necessary. For now, we're very, very happy with the relationship there.
No, that's great. Thank you. You pointed out a Glip-related win. Just curious, can you give us a sense of how broadly that is getting adopted?
Yeah, we're seeing Glip 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've been very happy with the adoption we're seeing there across some of these biggest accounts, and it's a product we bought three and a half years ago, but we've kept improving it, and it's gotten to the point where it's a world-class solution that we're 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. If you look at the net retention, it's driven by two things, our gross churn and upsell. 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 sub 10% annually, it was the lowest we've ever had. 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.
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. 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. As this flywheel keeps on turning, it leads to a higher predictability in the business model as we march to $1 billion in revenue.
Mitesh, my follow-up was how that ties into improving sales and marketing efficiency.
Yeah, exactly. It's a virtuous circle, right? We've got lower churn, more upsells, and our cost to book is coming down, even though we are moving to the enterprise segment. These three factors combined is very accretive for the business model. Now, what we don't see from the outside in, is that we've been taking all that money and further reinvesting it into pipeline, into demand gen, into brand. Over the next year or so, we'll hold sales and marketing, as a % of revenue, flat or slightly up. Underlying, we will, maybe at the next Analyst Day, further show you how the unit economics have been further improving. That's the way to think about it.
Got it. One quick question for you. One thing that we're hearing from your partners is that you've done a pretty good job surrounding your Contact Center OEM relationship with additional tools that's resonating with customers. If you can just refresh our memory what they are and the types of use cases they drive. How does it jive with Dimelo? Would a Contact Center customer also maybe acquire Dimelo for whatever reasons? Or just trying to get some clarity on the use cases between the existing Contact Center solution in light of the enhancement versus Dimelo.
Yeah. Dave Sipes, 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 end 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. Those are things that we're considering. 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 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 suss 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. I have a follow-up question.
Sure, Samad. I think we're seeing both. It's a mix. The deal size is getting larger, and as well as we are seeing a pickup in units. That's where if you look at the ARR we publish for the mid-market enterprise segment, which is a $270 million business, that actually takes into account, it normalizes for all of that. 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. Maybe one for Dave Sipes. Congrats on the first million-dollar plus deal in Australia. I guess, 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's been a big push on fiber roll for the whole country that's helped ancillary services like UCaaS. We're seeing great reception when we went into that market. We've been in there with our channel team less than four months. We've already signed up 50 partners in that market and helped contribute to the TechnologyOne win. The receptivity is very high, we've been encouraged with the expansion there.
Mitesh, maybe just one housekeeping question. On that fourth quarter guidance, is there any contribution baked in from Dimelo? I know it's not supposed to be material, is there any revenue in that from Dimelo and the new part of the AT&T deal, so the incremental part of the AT&T expansion? Thanks again.
Sure, Samad. Both are totally insignificant. On Dimelo, it's a very small company. It's more of an acqui-hire, nothing significant there. On AT&T, again, we just signed a contract in September, it takes a long time for the recurring revenue base to build, not material at all. That said, what you said is both these are 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 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 % of your enterprise deals that partners are driving now and kind of maybe what that looked like a year ago. How much larger would you say your lands are now versus a year ago in these large partner-led deals? 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 the delta between the enterprise customer churn and the rest of the population. Thank you.
Sure. This is David. I think one question there was the enterprise and how is channel contributing to the enterprise. I think we're seeing it in over about 70% of the enterprise business. We've been able to continue to grow the channel strongly. We had a record number of new partners signed even quarter-over-quarter. It's up almost 25%. We've been able to sign a couple very large partners, for example, like PCM, which is a national partner, which is a large Cisco dealer, which is over $2 billion in annual revenue and 800 direct sellers, as well as ScanSource and AGC, which is large global Avaya partner. Those have helped as we've moved into enterprise to add the partners that have been more enterprise-focused over time. That's where you're seeing the positive contribution. Hand it to Mitesh on the margin question.
Sure. I'll just clarify one thing. What Dave meant to say is that the 70% is of the new deals we signed, not of the total base. 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 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 zero. 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%. 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 J.P. Morgan. Please proceed with your question.
Yeah, 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? In other words, how are you dividing up the hiring, specifically in sales and marketing and R&D?
Yeah. This is David Sipes. We continue to expand the upper ends as we view them both strategic as expanding into that category, as well as having lower churn and longer net life of those revenues. We have been expanding the upmarket teams, and we do that at a rapid pace as we grow new business and new pipe into that channel, into the segments.
Yeah. Sterling, just to add on to what Dave said, exactly what he said, but also what's happening is, as you know, the SMB segment is very efficient for us, and it's a machine for us to generate profitability. We are taking all those dollars, as we had highlighted at the Investor Day, and refunneling those dollars into the enterprise pipe. 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. 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. Yes, core revenue did accelerate at 38%. Please do not extrapolate that, because soon we'll be at 70% at that rate. Don't set the expectations there. Yeah, it was a tough comp.
Understood.
Couple of things. It was a broad-based trend. I'll point out to one or two or three factors that led to that. First is, again, the enterprise and the mid-market segment. That growth rate was over 75% on a base of $270 million-ish. About a 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. Second is, in terms of the ramp, we are seeing a little bit more of our enterprise sales folks being ramped. That is providing a natural, again, second tailwind to the productivity there. That, again, we saw that phenomenon as well. Both those together led to this 38% growth rate uptick.
Okay, that's helpful. Then just going back to the churn comments quickly. You're seeing record lows in gross churn. Mitesh, I'm just wondering how much room for improvement there still exists in your view in aggregate as you continue this move upmarket and into the channel? Thanks.
Yeah. No, it's a good one, Michael. 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%. 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. As the mix take holds 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. Hopefully, we'll be performing organically better in the SMB side as well.
I think you cannot expect churn to asymptotically go to zero, 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 three performed year-over-year this year versus a year ago? Anything different you did to support sales enablement or new portals or any type of pricing to help stimulate the growth out of that segment? Thank you.
Sure, Catharine, it's Mitesh. Nothing different in terms of sales enablement. We all are trying to do the same thing, 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, the ease of use, the way our global capabilities are is what's really driving the momentum in the channel side. 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? How should we think about the mix of increasing sales and marketing spending going to sales productivity enhancements versus marketing versus overall headcount growth?
Yes. 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. We carefully try to measure the best bang for the buck and where we expand the team. 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 & Co. Inc. Please proceed with your question.
For Brian Schwartz. Congrats on the quarter, and thanks for taking the question. This question is either for Vlad, David, or Mitesh. Dimelo is one of the preferred vendors for Apple Business Chat, and that's great. 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 first Android platform. I think they call it the Rich Communication Services. Is the Dimelo technology set up to quickly enter that messaging channel opportunity in the future? Thank you.
Yeah. Hi, Brian. Vlad. Firstly, just to clarify, we hope that Dimelo will become one of Apple's leading partners or providers. For now, they've been chosen as one of the very early integration partners. We'll have to see how things develop. Obviously it's not a bad place to start from. Look, as to Google, the thing we most liked about the Dimelo platform is actually channel agnostic. 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 threads in the same manner. Call it okay. They already integrate with a wide range of providers where messages can be originating from. Some of the bigger names now, Apple, WhatsApp.
Facebook for that matter. We certainly expect them that as new technology becomes available, we'll absolutely expect to be within the first echelon of available integration. 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 us.
Our next question comes from the line of William Power with Robert W. Baird. Please proceed with your question.
Hey, guys. Thanks for taking the question. This is actually Charlie Erlikh 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.
Yeah. Maybe I'll 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 of 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. 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.
Some of them, like with Google, they made an announcement a few months ago. We haven't heard much since. Zoom has pretty much stated that they'll 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 requirement enterprise implementations that point people in our direction. Look, it's a very heavy lift, as we found out the hard way. Whereas 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. Yeah, we'll have to see how it all develops, but just way we look at it, very large market, very under-penetrated, and we're in the lead.
We're 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. Congrats on the quarter. I'll add my kudos there. Even though I have a couple strategic questions, I'll make mine easy. It'll be more housekeeping. My question is more. I didn't quite catch it. Did you go over the number of seven-figure deals that you had, seven-digit TCVs, and then the number that were also included Contact Center? Thanks.
Sure, Jonathan. We gave some color on that. We said that the Q3 deals for million-dollar 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. What we saw in the million-dollar TCV deals was pretty interesting dynamics. We saw more than 70% come through the channel. We saw a mix of Contact Center. We saw international, and we saw a mix of verticals. It was a really broad-based strength in the million-dollar TCV side. Also overall, if you look at the enterprise segment and the overall business of close to $150 million, it was a very broad-based trend across verticals, across channel, 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 third quarter earnings call. Thank you for joining. You may now disconnect.