Greetings. Welcome to the Alcatel-Lucent Enterprise and RingCentral Strategic Partnership conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Ryan Goodman. Ryan, please go ahead.
Thank you. Earlier today, RingCentral announced that it will become the exclusive provider of UCaaS solutions to Alcatel-Lucent Enterprise. Joining me today from RingCentral, we have Vlad Shmunis, Founder, Chairman, and CEO, Anand Eswaran, President and Chief Operating Officer, and Mitesh Dhruv, Chief Financial Officer. Also joining from Alcatel-Lucent Enterprise, we have Nicolas Brunel, President of ALE International, Rukmini Glanard, Executive Vice President, Global Sales and Marketing, and Moussa Zaghdoud, Executive Vice President, Cloud Communications Business Division. Some of our discussions and responses to your questions will contain forward-looking statements, including statements regarding the new partnership between RingCentral and Alcatel-Lucent Enterprise and its potential results and benefits and the potential size of the UCaaS market opportunity. 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 slide deck on the strategic partnership with Alcatel-Lucent Enterprise, a webcast replay of today's call, and to learn more about RingCentral. Unless otherwise indicated, all financial measures that are discussed on this call are non-GAAP with year-over-year comparisons. With that, I'll turn the call over to Anand.
Good morning, and thank you for joining us. We are excited to announce the strategic partnership between Alcatel-Lucent Enterprise and RingCentral. I am also delighted to introduce and welcome Nicolas Brunel, President of ALE International. Nicolas, thank you for joining us today, and welcome to the RingCentral family. Now, for the big announcement of the day. RingCentral will be the exclusive UCaaS provider for Alcatel-Lucent Enterprise to address the needs of its customer base of over 40 million to transition to cloud collaboration solutions. Alcatel-Lucent Enterprise is a leading communications infrastructure and solutions company with a strong presence in Europe and beyond. As part of the agreement, we will jointly introduce Rainbow Office powered by RingCentral, which is expected to be available in the first quarter of 2021.
To make the migration seamless and easy for Alcatel-Lucent Enterprise's customers, we will be jointly developing automated migration tools as well as endpoint compatibilities. This partnership was driven by the huge opportunity to accelerate Alcatel-Lucent Enterprise's transformation to the cloud business with a world-class UCaaS solution. This need was further accelerated by COVID-19. Needless to say, the partnership provides RingCentral the opportunity to address the needs of this different and complementary international customer base. In short, it's a huge win-win for Alcatel-Lucent Enterprise, their customers, and RingCentral. Now, it's my absolute pleasure to turn the call over to my dear friend, Nicolas, for some additional perspective.
Thank you, Anand, and thank you all, and good afternoon from Paris. I am with Rukmini Glanard, Executive Vice President, Global Sales and Marketing, and Moussa Zaghdoud, Executive Vice President, Cloud Communications Business Division, that will be pleased to answer your questions later on. It is as President of ALE International that I begin by providing a brief background on our company, followed by some additional thoughts on today's announcement.
Alcatel-Lucent Enterprise is a leading provider of communication, cloud collaboration, and network solutions. We have over 100 years of experience in delivering customized technology to enterprise customers. Our UC on-premise customer base of over 40 million spans over 100 countries, with a strong market presence in Europe. We are also a UC leader in France. Alcatel-Lucent Enterprise has been experiencing strong customer demand for end-to-end UCaaS solution and related traffic.
The ongoing COVID-19 pandemic accelerated the necessity for business to migrate from on-premise communication systems to the cloud to enable their employees to work from anywhere. In RingCentral, we have a great partner who is a recognized leader in UCaaS. RingCentral has a leading technology platform, global delivery capabilities, and a large ecosystem of developers.
With this strategic partnership, Alcatel-Lucent Enterprise will be able to strengthen its position to meet the needs of our customers to modernize and transform their business communications. We are excited to expand our Rainbow portfolio with Rainbow Office, powered by RingCentral. This new offer complements the already wide portfolio of communications and cloud solutions for Alcatel-Lucent Enterprise partners and customers. This partnership will allow Alcatel-Lucent Enterprise to develop and accelerate on Rainbow cloud strategy by focusing on development and on our vertical differentiation, especially for CPaaS, private cloud, and customized solutions.
Rainbow Office leverages RingCentral's unified solution, combining team messaging, video meetings, and cloud PBX. This provides our customers and prospects with a single global platform to manage their entire communications footprint. The transition from on-premise to cloud communications will be cost effective, as our customers can leverage their existing investments in Alcatel-Lucent Enterprise endpoints. Additionally, the automated migration tools will reduce the complexity of this transition. As a result, Alcatel-Lucent Enterprise can offer our partners and customers both public and private UCaaS, as well as customized and vertical solutions to suit all their business needs. Our community of over 2,900 channel partners, we believe Rainbow Office, powered by RingCentral, provides them an industry-leading UCaaS solution and will enable them to build a strong recurring revenue-based business. We are excited at the opportunity ahead. With that, I'll turn the call to Vlad.
Thank you, Nicolas. We're very excited that Alcatel-Lucent Enterprise chose to select RingCentral as your strategic partner, and we look forward to working together to streamline cloud communications transformation for your customer base. Cloud transformation of business communications platform has become a priority as companies adapt to a work from anywhere environment. COVID-19 is having a transformative impact on how businesses communicate and has caused a structural shift to cloud communications adoption.
We saw early signs of this trend in Q2, with strong business momentum along with an expanding pipeline. As we look out longer term, we are uniquely positioned to benefit from this structural tailwind for years to come. In addition to having the industry-leading message, video, phone or MVP global platform, we have carved out a distinct advantage with our unique distribution strategy of joining forces with key strategic partners. Each of our partnerships is complementary.
Each partner brings a distinct install base across diverse geographies. These strategic partnerships significantly expand our go-to-market reach across the globe by leveraging a combination of our industry-leading technology with strong brand loyalty and customer relationships of our partners that have spanned decades. Joining go-to-market forces with these partners, as well as providing a seamless cloud migration experience, gives our partners a strong competitive advantage to meet the needs of their customers. RingCentral has become the clear platform of choice for this once-in-a-generation industry transformation.
This tangible market opportunity for cloud communications migration consists of over 400 million users. Our partnerships put us in a pole position to address the cloud transformation needs of 180 million of these users. Contrast this with RingCentral's current install base of just over 2 million users, and you will understand why I'm so excited about the long runway ahead of us.
As these partnerships ramp, we believe we'll be able to drive durable growth for many years ahead. We're excited to have Alcatel-Lucent Enterprise join our partner ecosystem. Nicolas, thank you for joining us today for this exciting announcement. With that, let me turn the call back to Ryan.
Thank you, Vlad. We'd now like to open the call up for Q&A. As a reminder, joining us today from the RingCentral team, we have Vlad, Anand, and Mitesh. From the Alcatel-Lucent Enterprise team, we have Nicolas Brunel, President of ALE International, Rukmini Glanard, Executive Vice President, Global Sales and Marketing, and Moussa Zaghdoud, Executive Vice President, Cloud Communications Business Division. With that, I'll turn the call over to the operator.
Thank you. At this time, we'll now be conducting a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd 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 keys. One moment, please, while we poll for questions. Thank you. Our first question is coming from the line of George Sutton with Craig-Hallum.
Thank you, and congratulations on what looks to be a very logical partnership. My question is directed at either Nicolas or Rukmini. I'm curious if you could just explain the uniqueness of your customer base, the markets that you serve. I certainly know Alcatel-Lucent is very strong in France, but if you could broaden the discussion on the geographies and then also the types of customers that you serve, that'd be very helpful.
Okay. This is Rukmini Glanard speaking. At Alcatel-Lucent Enterprise, we serve customers globally. We pride ourselves in serving verticals, predominantly public and smart cities from a governance perspective. We are also very active in transportation, healthcare, education, and hospitality, we bring the breadth of reach when it comes to connectivity. Meaning networking, communication, on-prem, and cloud-based services. We do have presence in more than 100 countries, as mentioned by Nicolas. We do that indirectly with a very large ecosystem of partners that we have, very loyal to us, and serving those customers, and integrating our solution on the customer side.
That is. One other question, if I could. Will this be replacing an existing cloud offering, or will this be a new cloud offering that you're taking to your customers?
This will be complementary, but I would give the floor to my colleague, Moussa, in charge of cloud communications. Moussa?
Okay. Yes. Good morning. Good afternoon, everybody. Clearly here, what we are going to do is that we are going to provide Rainbow Office in all countries where we will be present, clearly with one unique UCaaS offering. In these countries where we are the current cloud provider from ALE, it will be replaced. Clearly, in those countries, we're not having two offers. We'll have only one, which will be the Rainbow Office offer there.
Wonderful. Thank you very much. Congratulations.
Thank you.
Our next question is from the line of Terry Tillman with Truist Securities. Please proceed with your questions.
Congratulations, Vlad, Anand, Mitesh, and the Alcatel-Lucent team. Mitesh, my question is for you. Just given this opportunity, how do we think over the next five years that the monetization opportunity and how it could potentially ramp in terms of seat expansion through this relationship, and then related to that, how we think about it from a revenue perspective and how that'll flow through the model? Thank you.
Sure, Terry. If you look at the growth rate over the next five years, it's going to be a layered approach. It's going to be driven by two key elements. Number one is the baseline existing business we have today, and number two is, as you mentioned, the layering on of all the partnerships we have. Let's start with the baseline first. Right now, we have a little over 2 million seats on the platform, which continue to grow very nicely above the overall market rate. We do expect that trend to continue because that's what we are seeing here. Now you layer on the strategic partnerships of Avaya, Atos Unify, and now Alcatel-Lucent Enterprise. We do have a unique call option or competitive advantage to get 180 million on-premise seats.
As these partnerships ramp on the partnership side, even if you were to assume conservatively a low single-digit attach rate on this 180 million aggregate opportunity of seat transition over the next five years, the seat numbers get pretty big pretty fast versus what we have now, which is very under-penetrated. Now if you tie it all together, the combination of our baseline growth, which we are growing nicely, and then you layer on the new partnerships, even without making any heroic assumptions here at RingCentral, it gives us a lot of confidence for a long, durable, compounding growth story over time. As it relates to your question on the growth rates, it doesn't take much to move the needle when you put it all together.
Thank you.
Yep.
The next question is from the line of Bhavan Suri with William Blair. Please proceed with your questions.
Hey, guys. Can you hear me okay?
Yep.
Yep.
Great.
Yeah.
Congratulations. I'll echo my congrats. This is a nice partnership on both sides of the equation, certainly, Mitesh, you mentioned 180 million seats is a big deal. I want to touch on two quick things. One, on the $100 million, you gave this payment or deal amount. Just some color on what does that imply from a seat perspective and a relationship perspective? Just love to get a little more color on about that $100 million. Then a quick follow-up.
Sure. I'll take that. Yeah. We mentioned in the press release contractually, the $100 million is for, I would say, three things: exclusivity to migrate the seats, a minimum commitment from ALE, and a prepayment from RingCentral's side. If you look at the nuts and bolts of the contract, given the large install base, ALE felt comfortable to assign a portion of that as minimum commitment because they're targeting 40 million seats here.
A portion of that is a minimum commitment from their side. As a reciprocal, we have given some pre-payments to migrate those seats. It's a sort of a win-win for both parties in that sense, how money is changing hands. That's more from a contractual answer. If you look at from a strategic point of view of what we are getting for the $100 million, I'll keep it simple, right?
It's reach and scale. ALE has a presence in 100 countries, and it's going to be a very cost-efficient way for us to build a presence in those countries. It lowers our cost of acquisition, and it's a pretty damn good return on ROI, and I feel that it's a pretty good efficient use of shareholder capital. That's the way we think about it.
Got it. I'd like to just push a little further on the economics here, and the synergies. Obviously ALE gets a cloud-based solution that's complementary. You guys get the seats, I'd love to dig into economics. Is the $100 million a little like what happened with some of your other partnerships? Should we all think of it as a prepayment on sales commissions and then some sense of the economics of the deal, who's paper, et cetera? Some color would be great there. Thank you.
Right. Yes, a portion of it, Bhavan, is going to be for prepay. Another portion is for the minimum commitment which ALE has given. It's two things into one. We've not broken down the exact specific on how much the prepayment is versus the other part, but you can just imagine, we do feel comfortable prepaying for a lot of seats here, given the opportunity. In terms of the economics of the deal, it's very similar to the other agreements at the surface level, where, yes, ALE will be sort of a master agent for the other channel partners, and it'll be on our paper. It could be billed on behalf of ALE, and that's the way the relationship is going to work.
Got it. Thanks and congrats, everybody.
Of course. Thank you.
The next question comes from the line of Brian Peterson with Raymond James. Please proceed with your questions.
Hi, everyone. Thanks for taking the question. Clearly there's a lot of growth opportunity here. Mitesh, I know we've had some comments on prior calls on the margin expansion, but if we're really looking at kind of 90x the seat opportunity, does that actually warrant maybe keeping margins flat or going the other way? I'm just maybe thinking about what investments are needed to kind of ramp a lot of these opportunities up and how we should think about that for the next few years? Thank you.
Yeah. No, I think it's a fair one. It again comes down, Brian, to unit economics, right? If you look at the inherent cost structure, it's very accretive to our overall margin structure because we have a lower upfront cost of acquisition and a much higher lifetime value of customers, given the lower churn dynamics in these partnerships. Once the partnerships ramp, it's going to be very accretive to margins. Initially, yes, there is some investments obviously to take these partnerships off the ground. If you look at the 2020 guidance on margin, we had already contemplated these investments in our guidance. If you strip it out, our margin profile is even higher organically. That sort of speaks to this power of these partnerships where you get scale and reach at a lower cost of acquisition.
Understood. Mitesh, maybe one follow-up, and pardon me because I haven't had any coffee yet, but you referenced 40 million customers. I just want to make sure customers and users in that case are the same numbers. We should think it'd be about 40 million users.
Exactly. 40 million seats. That's right.
Got it. Thank you.
Yep.
Our next question is from the line of Samad Samana with Jefferies. Please proceed with your questions.
Hi, good morning. Thanks for taking my questions. This is clearly another exciting announcement. Maybe one for the Alcatel-Lucent team. Can you maybe give us a little bit more insight into the base, what the average customer size looks like and/or maybe what the mix is based on 5,000+ employee organizations versus under 5,000 employee organizations? And just maybe what the age or duration is in terms of the last time customers have upgraded, and what that upgrade cycle typically looks like in the base?
Nicolas, you want to take that?
Yes. Basically today we overall cover a wide size in terms of install base. We are on the market of what we call the SMB, that we do qualify as being below 250 seats. We have customers above 250 seats. The split of our install base in that domain is about 60% in the SMB space and 40% in the mid-enterprise space. We are, with RingCentral, looking at addressing this entire market share.
Great. That's really helpful. Then maybe a follow-up for Mitesh. I know the economics question, but if I could just maybe get a sense of, for the $100 million, the portion that represents minimum seats, what's the time horizon for that minimum? Is it expected to be a minimum commitment for 2021, or is it a minimum commitment over the course of the partnership? Maybe just help us understand when that minimum is set for.
Right. Hey, Samad. Good morning. The minimum commitment is over the life of the contract with some milestones throughout the contract.
Okay, great. Very helpful, and thanks again for taking my questions. I'll pass along to the next person.
You bet.
Next question is from the line of Catharine Trebnick with Colliers. Please proceed with your question.
Thank you for taking my question. Congratulations. It seems like to me with these latest partnerships that you all are really looking at Microsoft as your primary competitor. You could put a finer point or more color around that thought and is that really your intended goal? That's the question. Thanks.
This is Vlad. Let me maybe take that at a high level, and other people perhaps can jump in. Look, this is not about Microsoft. Of course, Microsoft is there. Microsoft is both a competitor as well as a partner, especially given their latest announcement of indefinitely delaying the phone part of Microsoft Teams. I really want to be very careful here. This is not about Microsoft. It's about converting 40 million users out of the worldwide install base of 400 million users. It's about putting us in a pole position to move this community to the cloud. Given our other partnerships in place, we now have a very clear shot of converting upwards of 180 million users. That's almost half of the worldwide installed population, converting that to the cloud.
We would not be surprised if some, maybe many of these accounts, will end up sharing with Microsoft, because some of them may be running Teams. Certainly, as far as PBX replacement is concerned and real-time communications in general, we feel that RingCentral has a much differentiated technology, world-class, world-best, according to many industry analysts. This is why Alcatel-Lucent Enterprise has chosen us as their partner moving forward. We believe that this is exactly why our other strategics, namely Atos and Avaya, have made a similar decision. I hope this helps.
Thanks for answering that, and congratulations. Vlad.
Our next question is from the line of Sterling Auty with JP Morgan. Please proceed with your question.
Hi, this is Drew on for Sterling. Two quick questions from me. First, how long is the agreement? Secondly, how modern is Alcatel's customer base in the sense as how easy are they to convert?
Yeah. Hi, it's Mitesh. I'll take sort of both of them. Nicolas can chime in. The contract is a multi-year contract. That's the level of detail we've given. You can sort of figure it's multi-year. In terms of the install base, I think the way I'd characterize it is Alcatel-Lucent Enterprise, they have good relationships and visibility into a lot of their seats, almost all their seats, and I think we feel very good about penetrating that install base over time. Nicolas, if you want to add anything, please go ahead.
No. Correct, Mitesh. Just to add on what you were saying, we have a very loyal install base. The renewal, I would say, of this install base is a rotating element over a period of time, and we have very strong partners taking care of those customers and basically being the trusted advisors in terms of what to implement next. Yes, we are envisioning to convert a number of those customers during the duration of the contract.
Got it. Thank you.
Next question is coming from the line of Matt VanVliet with BTIG.
Hey, guys. Thanks for taking my question. Maybe just thinking about this in the broader RingCentral portfolio here. They talked about 100 countries that they're serving now with well over 2,000 partners. Curious how that overlaps from a geographic expansion, or reach for you compared to what you've built out organically, and then also with some of the key markets that, whether it's Avaya or Atos, have opened up for you across the world and maybe what this brings, either more strength.
Vlad, again, let me just maybe take it at a high level again. Look, these partnerships are mostly about converting existing installed bases to the cloud and namely to RingCentral cloud office solution. From that perspective, each and every one is complementary, with Avaya's 100 million seats and Atos and ALE having approximately 40 million seats each, those are the world-installed bases. We're working with these three strategic partners individually with going after those bases .
Now, as Anand and Nicolas, I think, already mentioned, we are going over and above simply providing our UCaaS solution. There will be migration tools that are partner-specific. There are endpoints that each of our strategic partners currently has in the field. This, of course, will be supported based on the differentiated individual versions of this technology. Now, as far as geographies are concerned, yes, of course there is some overlap.
Again, the user bases are distinct. In many cases, channel partners are distinct. Overall net is, we see this as being almost purely complementary with very little overlap. Nicolas, if you have something to add, or Anand?
The only thing I was going to say is, Nicolas, you should jump in. Here in this instance brings in a lot of differentiation, like they've had a unique transformational approach to their customers. They bring in CPaaS, collaboration, hybrid cloud, and vertical focuses like innovations that across, I think Rukmini said earlier, education, transportation, healthcare, hospitality, and so on. That's a unique differentiation and across their customer base, which makes a difference as well.
Great. Then maybe one quick follow-up on at least the time to development and some of the co-mingled resources that you're going to have here. How much of this is able to leverage on what you've already been doing with some of these other partnerships, knowing where some of the, maybe the pain points are or some of the more complex areas of developing these migration tools, and is this going to be sort of more readily and more broadly available from the start? I know the timeline looks to be a pretty quick turnaround here, so congrats on that.
Yeah.
Yeah. Anand, go ahead, please.
You learn from every partnership, right? That's why we expect the first product to be out towards the end of Q1 2021, launching in eight countries across Europe. Obviously, along with that, just sort of right after that, we expect the automated migration tools, the endpoint compatibilities, all of that to be available. We obviously learn from every partnership we do, and we become quicker and better and faster.
Okay. Thank you.
I just wanted to maybe quickly add to that. I'll just address the technology aspect from RingCentral's perspective. By having these partnerships and having multiples of these partnerships, we do feel that it provides for an additional differentiation and an additional moat to our technology, because our ability to go with core brands, while fully satisfying each partner's both brand values as well as other assets having to deal with, again, their endpoints, the way their on-prem PBXs, whatever data is contained in them, IVRs, messaging, et cetera. This is all part of our migration tool strategy. Sitting here today, we're simply not aware of anyone else having had exposure to these assets and having developed a platform that allows for fairly streamlined adoption as we onboard every partner.
This just loops back, links back to what Anand just said, where every motion, of course, we leverage all of the learnings, but also all of the technology that we have developed. There is a lot of technology in our ability to provide a co-branded, differentiated solution that meets expectations of both the installed customer base as well as modern companies who are wanting to complete their digital transformation and move their unified communications to the cloud.
Thank you. Our next question is from the line of Jonathan Kees with Summit Redstone. Please proceed with your question.
Hi. Great. Thanks for taking my questions, and I'll add my congrats. I guess I just have a couple clarification questions if I can here. I heard UCaaS, that's pretty clear, and with this agreement, this partnership is for. It sounds like video is included, and I'm assuming this is RingCentral's video, and analytics. This doesn't include CCaaS? That's the first clarification. Second question is, how does this impact the current RingCentral go-to-market team in Europe? Are they told now to just focus on non-ALE premise customers, or are they going to be working in collaboration with ALE's sales force? Thanks.
I'll take that. This is Anand. First clarification, you're right. The video is RingCentral's video, and the current construct doesn't include CCaaS. In terms of the existing direct sales force for go-to-market, right now, the enterprise footprint for Alcatel-Lucent Enterprise is very complementary to us. What we have done as RingCentral really well, I feel best in class in the industry, is how we have defined the rules of engagement, which are designed very specifically to promote channel harmony on how we work and our partners work with our strategic partners and their channel partners. What it does is, it makes sure that there's no significant channel conflicts and quick resolutions happen.
We feel very good about our channel program and how it actually brings everyone together in a fairly complementary working capacity. That's been working for us really well. We expect that to continue with how we work with Alcatel-Lucent Enterprise.
Great. Sounds good. Good luck, guys. Thanks.
Our next question is from the line of Jeff Kvaal with Wolfe Research. Please proceed with your question.
Thank you very much. This is a question perhaps for Nicolas on the ALE side. We don't necessarily always have a chance to speak to people who are on the ground in regions outside of the U.S. Could you help us understand a little bit about the color behind your comment about the pandemic tailwind, and how you feel like that pandemic has changed the tenor of your conversations with your customers over the past six months? Thank you.
Hi, thank you for the question. Indeed, the pandemic changed in the sense that it made accelerating the reflection about remote working for a number of companies. We have seen the need to add more capability to business continuity capabilities for the enterprise. Adding RingCentral in our portfolio allows us to have a larger offer going on top of all the rest that we do propose. Of course, on-prem solution, but also CPaaS capabilities, vertical solution that helps to address those specific needs. The addition of Rainbow Office over by RingCentral allows us to add on top also the traffic dimension, the video like it was presented in the previous thing, all embedded in one single suite. Really helping this support of the enterprises that they do need to build the future connected to their business processes.
With, again, our vertical approach in the different verticals that were mentioned earlier, allows us to really differentiate on the market.
Is there any way to quantify how much of an uptick in activity perhaps that you've seen during the pandemic?
We are not commenting on that dimension. Clearly, we have seen a real boost for all the remote capabilities of our solutions, and also about all what is protection of employees. Also on sites, we have seen growth of solutions, like for example, isolated worker, which was to ensure distance between people. We ended up with people working isolated in enterprises. We saw all those elements that have been impacted by the pandemic situation to grow in terms of needs.
Nicolas
Really an impact on the business.
Thank you very much.
Thank you. At this time, this will conclude today's conference. You may now disconnect your lines at this time. We thank you for your participation. Have a wonderful day.