Maybe we'll go ahead and dive right in. Thanks everyone for joining. I'm Sanjay Rao with JPM on the West Coast from the investment banking side, and we're super excited to have Vlad and Sonalee here today, coming off a really strong quarter, so always great timing on that regard. Maybe with that, we'll just dive right in and open it up, and I'll kick off with some of the recent product announcements and initiatives. So you guys have announced RingCX, RingSense, RingCentral Events over the past 12 months. There's a ton of innovation going on in the portfolio. Can you maybe talk a little bit about these new angles to your platform and some of the things that you're seeing with customers and hearing from them, especially with your March up market and the momentum that we're hearing about?
Yeah, definitely. So first, thanks for having us, and hopefully, mics work. Okay, look, there is a bunch of things going on, okay? Just trying to think what order to present this. One is, we are turning into a multi-product company. We've been around for a quarter century, RingCentral. I've incorporated in 1999. And we've been pretty successful as a single product specialist in moving UC to the cloud, so UC to UCaaS. And you know, we started with a nice round number of $0 in revenue, and we are what are we this year?
Close to $2.4 billion.
Close to $2.4 billion.
So we feel relatively good about that, but that's all in rear view. So moving forward, this question is: how do we continue this march? And what's clear is that while there is still an amazing opportunity left in the call it digital transformation of business communications, so UC to UCaaS, you know, and it's maybe 20% penetrated, if that, in and just in our gold verticals. But there are other opportunities that are adjacent that we need to go after, and they include CX, so contact center, they include video and very importantly, they include all of the innovation that is now possible through AI, through the mega trend of AI.
So when I say several things going on, we're diversifying the portfolio, we are infusing AI across our entire portfolio, and, we are now, beginning to pivot from a horizontal strategy to a more verticalized strategy. So we're talking about our gold verticals and, where we are seeing outside traction, and the 40,000 seat win, for example, we've announced, just last quarter, is in one of those, verticals, which is retail, okay? So we're busy, and, it seems to be paying off.
When you are talking to customers, especially as you're marching up market and some of those large seat deployments, where are they on the AI journey? Are they still early or midway through it? Any feedback you have there?
I mean, how can you be midway through something that didn't exist two years ago, you know, or didn't. Yeah. No, look, it's super early. I think people are trying to find their footing. There are all of these major applications and implications that are coming about because of this brand-new technology. It's very hard to create a mega trend.
We have always been of the opinion that it's better for us to leverage and ride mega trends.
We founded the company on what was then mega trends of broadband, mobility, mobility of workforces, mobility of devices, smartphones. You know, that lasted us a couple of decades, but this is the next one, and it's a lot bigger. The advantage we have, amongst, not all competition, because there are obviously some other people very much in this game, but against vast majority of competition, is we have a very large network.
Yeah.
We're moving billions and tens of billions of minutes of B2B traffic.
So we have learnings and exposure and attention of the customer base that are hard to replicate. And when you apply AI and these innovations, as well as our multi-product strategy matures, and you are able to cross-sell into the base, which in the end, is becoming a major asset for us, that's where the magic happens.
That's helpful. It sounds like, so CX, RingSense, your core UCaaS plus AI, that's a pretty fulsome platform with a lot of cross synergy as you expand forward and drive up market, if I got that right, Vlad?
Don't forget video.
Yeah, video, yeah.
In particular, we're seeing very good traction with RingCentral Events used to be Hopin Events. And look, it was a high flyer, you know, COVID baby fairly, in fairness. But, you know, they used to be valued, what, at $8 billion? We paid a little bit less than that. But, interestingly enough, for the first time in many quarters, which predated us, we are now seeing re-acceleration in that business.
Wow!
I think it grew 25% quarter-over-quarter, which is significant.
Wow!
for a business
That's great
In logos.
In logos.
Yeah.
In logos. Thank you.
That's great. Could you double-click on your contact center strategy? So you have the existing partnership with NICE, and there's been some change there over the past week, which would be helpful to get some of your commentary on, and then you have your own contact center solutions. So how do those two play in market together, and what's your long-term strategy around that part of your business?
Right. Yeah, well, the change at NICE is, you know, it's been announced.
But so far, no change. You know, I think, Barak is saying that he'll stick around, you know, through transition, what have you.
So yeah, we don't expect any change. It's a long-term relationship.
Strictly speaking, it predates NICE itself, because it started out with inContact before their acquisition. And look, we have lots and lots of customers that are enjoying UC and CC together. And more and more, we're more and more, we're actually seeing enterprises, actually of all sizes, really want their, all of their business communications, you know, together under one umbrella, which has been always our foot forward on that. As far as RingCX is concerned, look, it's a much newer product. We own it 100%, so that obviously gives us some advantages on the economics, control of the roadmap, control over pricing, and so forth. And look, it's been nothing short of disruptive so far.
Yeah.
You know, what did we say?
So in terms of, y eah, in terms of customer numbers, we, you know, nearly doubled Q1 on Q4. We're now well above 200 RingCX customers. So, you know, seeing very, very strong demand and traction, and our sellers, you know, are finding they're seeing a lot of demand and wanting to push this to our, you know, sticky install base.
Yeah. So having said that, it is a lighter weight product. It does not have nearly the complexity of InContact. And, you know, there is a very natural bifurcation. If you have, you know, lesser number of agents, and if you are more digital or omni-channel oriented, then CX is the right solution for you. If you are more traditional, kind of heavier use, then, you know, we'll lead with our CCC.
That's very helpful. And then, as you look out next few years, what are other strategic focus areas as it relates to building out your platform and other products that we could potentially see?
Well, look, d on't under appreciate all of the heavy lifting that needs to be done to add additional products into the portfolio, because our sales force has been historically selling a single product.
Now, they're selling multiple products, and we're seeing, let's call it, early success in that.
So we definitely need to continue with that. But as far as, you know, I already outlined, look, there is AI that gets us, and the rest of the industry, gives us an opportunity to rethink the value prop that we are providing. In the contact center space, for example, historically, it's been about workflow management and how do we make an agent force most productive, okay? Now, it's shifting towards, let's actually reduce the headcount and let AI start taking, you know, start taking share w hich is actually great for up-and-comers like us, because we don't have, you know, a base to protect there.
Okay, so that's one opportunity. So again, AI throughout the portfolio, and I already mentioned, verticalization. Okay? This very large win, 40,000 win, well, you know, let's do more of those. Yeah?
So we know what these people needed, so you imagine that we'll continue, you know, going after what is now lower-hanging fruit for us.
This is just one example, there are others.
Yeah. And you've done a really good job building out the ecosystem around the company and routes to market to get some of these 40,000 seat wins. How many more of those are there? I mean, there's so much of the market still on-prem, if it's UC contact center that hasn't converted to cloud. And how much more do you see opportunity there?
So, as I mentioned, it seems that the market is no more than 20% penetrated, maybe closer to 15%. In our particular gold verticals, what makes them gold is that that's where we're seeing outside traction, and, that's healthcare, that's financial services, and, retail, and public sector, very important, okay? We have a number of major universities, for example, that are customers. So just in those, conservatively, we see, you know, another 100 million seats that can be had. And, you know, we are in strong single- digit seats, you know. You know, you have one or two competitors where, which are maybe in the same range, and that's about it. A nd that's just in the cloud verticals. So huge amount to go, and this does not count, or account for the CC part of it.
It does not account for events or video in general. It does not account for messaging, which is also part of our platform. So huge runway ahead.
That's helpful. And then, the macro has definitely been volatile the past couple of years. You put up a really strong quarter recently, so maybe you could talk to some of the things you're seeing in market demand that, you know, others might not be seeing in other parts of the software industry.
Well, we're seeing strong demand.
We're doing well on new logo acquisition. We have seen now in rear view, people have overbought a little during COVID, so upsell has been more challenged for us. We believe it will normalize as COVID effects just, you know, blow through the system and settle down. But what gives us, you know, incredible hope, okay, and puts a bit of a bounce in our step, if you will, is the fact that the pipe is strong, early pipe is strong, late pipe is strong, okay? These are formal definitions, how we do it, as I've been consistent over years.
Conversion, you know, lead to close conversions are strong. So there is a lot of new business out there. We do believe that, over time, upsell will stabilize and, hopefully reverse, as well. We are able to hang on to logos.
Okay? It's very, very important. So our logo retention is healthy. As people are downscaling from COVID, you know, those are the headwinds that we're seeing.
Got it. Very helpful. And then back to my point on the ecosystem you've built, it's been a big differentiator in your company, this broad ecosystem you have around Ring. Can you talk about if there are other ecosystems you're focused on as the platform expands into these new categories, like RingSense, RingCX, that become important there? And also, what's worked well with those, what hasn't worked well, and you can take some of those learnings and I guess apply it to new ecosystems that you continue to build around your strategy.
Right. So we've been talking about core to our strategy, or TIP, as we call it t o our strategy, which stands for Trust, Innovation, Partnerships.
We've covered I, I think, that now in this chat. Trust is our six 9s, five 9s officially, but really six 9s availability, which is unique in the industry and surpassed, as well as all of the attention to security and customer data protection. Okay, so let's talk about P because it is a very big P. Look, we have a very differentiated approach to the market. We actually pioneered, for a SaaS company and for a UCaaS company in particular, we pioneered the channel, okay? Because we have been extremely instrumental in switching this channel over from only selling on-prem to now being used to the SaaS model. And it's a big change because they used to be all pay the front you know, sell a $5,000 box, get, you know, $500 bucks.
Yeah.
Well, not anymore so, right? So now they need to be retrained in, you know, accepting long-tail recurring revenue, which in the end is better for them, better for us. So we have 15,000 identified partners, and that translates into something close to 100,000 feet on the street through those partners, okay? I'm not saying that everyone has sold a copy of RingCentral, but many have.
Okay, and this is just active partners. So that's definitely there. But what is really unique are the two other legs of the stool. So one is our GSP practice. GSP stands for Global Service Providers, and it's companies like AT&T, Vodafone.
Charter.
BT, Charter, very importantly, so we are now expanding into MSOs.
We have just announced a relationship, partnership with Optus out of Australia which is our second largest provider. Look, it's a very healthy business for us. We see very little competition there. We have a multi-year positive track record, and, you know, they compete amongst themselves, but also they all refer, you know, there is a network there. And I would say that we have a pretty solid reputation.
Expect more to come there, okay? So there is that. Now, as far as you mentioned about, t hen there is what we call strategic partners.
The one that's really standing tall is Avaya.
We have recently extended the relationship.
I have just presented at their Avaya Engage Conference, which was, what, last week? Where we introduced a new product, a hybrid office product, which allows for their current enterprise customers to keep their telephony on-prem, while all of the collaboration is done in the cloud and through us. And, look, Avaya certainly has their fair share of, you know, issues and frictions. It's still the world's largest, by far, the world's largest installed on-prem, UC base, as well as, by far the largest on-prem installed CC base. So we continue seeing very good traction and very good, you know, lead source, Avaya as a lead source there. And there are others, but I would, I would highlight this one. Back to verticals, look, as we're expanding and people are hopefully now beginning to understand that, we are quite strong in the enterprise.
I think there has been some confusion relatively recently that we are going to be de-emphasizing enterprise. We're doing exactly the opposite. We're re-emphasizing enterprise at this point. There are just many networks out there. You can think a size horizontally, but you know, there are specific networks, say, in public sector, you know, in state and federal and those, so imagine that we'll be expanding into those.
That's very helpful. And then as you expand and build your channel, do you run into situations where they're also selling your competitors, and how do you manage that with all your partners?
Yeah, look, you know, we're not a monopoly, you know?
Yeah.
We'd love to build one, but, you know, look, it is competitive, but we have, we have our differentiators. Again, it's our reliability, it's richness of our offering, in particular in the business voice space. And, you know, we have a reputation as a company that generally, you know, does what it says as what it does, and that helps. Of course, we have competition, but our biggest issue is not in head-to-head, you know, because we tend to win our fair share or more, okay? It's really getting to the table, getting into those RFPs and RFIs, and I can tell you that we are definitely making very specific steps and motions in improving awareness for RingCentral, aided, unaided awareness.
We just need to get all add more ad bets at the table, and then we tend to do well.
Got it. That makes sense. As you look out, do you see a convergence of you have RingSense, you have RingCX, those markets to some extent converging? 'Cause, you know, the interaction with the end customer ends up being a lot of similar building blocks between both sides of your portfolio.
Yeah, look, RingSense, RingSense is a platform.
It's an interesting way, you know, you can say it's converging. It's a red herring that just goes throughout the entire portfolio.
There are different variants or flavors of RingSense, but at the high level, you can think that there are some basic capabilities, and I say basic, they're not so basic, you know. You know, it's translations, it's transcriptions, it's summaries, it's insights like that. But then, as you start verticalizing, for example, you know, we've announced RingSense for Sales which is also, you know, growing geometrically at this point. Sonalee always will give you those numbers. What did you say on RingSense?
RingSense for Sales is growing. We doubled logos.
Wow!
Yeah, more than doubled logos Q1 on Q4.
Right
So over 600, and today would be well over 600.
So yeah, so there's clearly demand.
This is RingSense for sales, okay? Which specifically provides insights to sales forces and sales managers and, you know, we talk about, you know, turning salespeople into super salespeople. Okay, you know, whichever way you want to package it for marketing. Imagine that there will be more. It does not need to stay at, as RingSense for Sales. It could be a RingSense for dentists. It could be but I'm serious. It could be RingSense, you know, for stockbrokers, okay?
With this technology, you can gain tremendous insights, which are industry-specific, so that will be an ongoing direction of us.
Then, do you have an advantage in some of these newer markets, take contact center, by having one of the newer architectures, when you think about leveraging AI to the benefit of contact center, versus some of the older, more on-prem legacy architectures that are out there, which are a good share donors probably for you?
Prem is going to die. It's just a question when.
Yeah.
You know, nobody is going from the cloud to prem, like no one ever, okay? So it's just a matter of time. It is taking time. These are sticky bases. It's not all going to go to RingCentral, but, for us to re-accelerate our growth, you know, even the $2.4 billion is absolutely not out of the question, given the size of the opportunity and the type of disruptions that's happening in the industry.
Great. Maybe we'll shift gears. Sonalee, we've been letting her off the hook here with some questions. So we can talk about the 2024 guide, which was, I think, a great number you put out there, and you beat Q1, raised guidance. What are you seeing in the market and confidence, conviction you're hearing from customers? You talked a lot about momentum in some of the newer parts of your platform.
Yeah, so we did indeed, beat, raise, and, raise in spite of an incremental $10 million FX headwind. So the actual raise was well above, what, what the beat was, and, you know, what gave us the confidence? So some of the trends that Vlad's been talking about, and specifically, he was talking about enterprise, and we saw for the fourth consecutive quarter, 13%+ ARR growth in that segment, and I think that was a big factor. It's that stabilization, the stability, and that was a big driving force. And then, you know, as you say, in terms of the new products, it's early days, but what we're seeing in terms of traction, it's significant in terms of being a growth driver as we look forward and again, being this multi-product portfolio.
If you look at the last year and a half, where we've seen some challenges, it's really been in that upsell, and we think the best mitigator to that upsell, as a multi-product company, is having more amazing products to sell into that extremely sticky customer base. So I think it's taking all of that together, but if I were to give you one word, it would be stability. That stabilization is what gave us the confidence to raise.
That's great. And then I think the other element that's very interesting is you increased the free cash flow guide. You know, you're investing along the portfolio, and you're also taking up your guide, which is, I think, great metrics to put out there. Can you talk about the efficiency that you're seeing in the business model and leverage as well?
Absolutely. So, in 2023, we dramatically changed the complexion of our company in terms of free cash flow, and operating profit. So, our OP margins increased 700 basis points in a year. This year, they're going to increase further. You know, I've guided to 21% operating margin for the full year. But I think more interesting is as, exactly as you say, is the convergence of free cash flow and operating margin. So this year, based on the midpoint of where I've guided on free cash flow, you should expect to see about a 34% year-on-year increase in free cash flow.
Within that, you know, the efficiency measures we took over the last year are still feeding through the P&L, but we're also doing more on the S&M side, sales and marketing, which is an area that still is not where we want it to be. We believe there are further efficiencies to gain there, particularly on the marketing side, where we've done a lot of interesting work. And what I love as a CFO is giving the stat where we actually reduced our demand gen spend fairly significantly and actually saw better and more relevant pipe. And it comes down, a lot of it, to that verticalization, being very, very focused on where we're spending those dollars. So expect to see more there.
You know, I said we're not happy yet with where we are in sales and marketing. We're around 40%-ish, but that's coming from 46%, you know, just over a year ago, so we are making good progress there. In terms of free cash flow, the other thing I am, in case you don't ask me, I am going to use this opportunity to voice, is that we're also very focused on stock-based compensation and bringing that down. So really, what I would urge people to look at and judge us on is not just our free cash flow generation, the 34% year-over-year increase, and, you know, the midpoint of our, i f you look at unlevered, unadjusted free cash flow, sorry, unlevered, adjusted free cash flow, we're guiding $440 million-$445 million this year.
But if you look at free cash flow per share, given that we now expect, based on a revised guidance for our share count, to actually decline year-over-year, 2024 and 2023, you're getting even more growth in terms of free cash flow per share, in excess of 36%. So I think, you know, taking all of that into account, we've made huge progress. There is more to do, but we're really proud of what we've achieved.
That's great. Maybe double-clicking on that, just if you could spend a minute on capital allocation, broadly, how you think about it right now, and then longer term would be helpful.
Yeah, absolutely. So, you've heard me say before, our capital allocation is very dynamic. You know, there are a couple of levers that we have and a couple of independent evaluations that we make. We use our cash, obviously, to invest organically, and, you know, part of the reason that we have this extremely full multi-product portfolio is because we continue to invest in the cycle. And actually, one of the great things about having higher operating margin is it does free up cash flow and frees up profitability to go and invest in innovation and new products. That will always be important at RingCentral. We will always innovate for growth. Secondly, we use our cash to pay down our debt, and you may ask me about the converts, but I'm just going to use the opportunity here.
You're better asking yourself questions, s o I'll let you.
We have $161 million remaining on our 2025 convertible, and we will use some of our own free cash flow, as you've seen us done in the last year, to address that. We also have other potential sources, including an undrawn term loan facility at our disposal. But I think most importantly is that we now have the financial profile such that, you know, the quantum of debt that we have today is very easily supportable by the cash flow that we're generating. But then we also consider other uses of cash, including share buyback. You saw at our last earnings, we increased our authorization by a further $250 million. So we currently have an outstanding authorization of about $375 million.
And if you do the math on the free cash flow per share growth that I just talked you through, it won't surprise you to say that we think that buying back our stock at current prices is a very ROI positive venture and accretive. So that is something that we will continue to do, but we will always evaluate it against other sources and other uses of cash and including potential M&A. And Vlad alluded to the Hopin deal. We love that deal. It's now rebranded RingCentral Events. But not only did we get, you know, the assets and talent at a great price, but it just brought incremental capabilities to our customers. It really, really upleveled our video offering, you know, our overall product suite.
I can't underscore the importance of bringing in that talent, and again, at a great valuation and at the right price. And I think, you know, what you will find from us is that we will continue to be very disciplined about any M&A we do. Obviously, it needs to be very, very strategically relevant, but it also needs to work financially, and we will maintain a discipline around that in terms of use of capital.
That's very helpful. Maybe we'll pause here and see if folks in the audience have any questions. I think we have a microphone back here, so on its way.
Just curious how the partnership with Teams works. You know, when does that decision get made, and how sticky is that revenue? Is that base safe over time, or does Microsoft try to bring that into their own ecosystem over time? Thanks.
Yeah. Look, partnership is a strong word here. Teams is an open platform, okay? So, Microsoft is certainly well aware of us and obviously vice versa. We are not competing with Teams, you know, using your words more, partnering with Teams. We are competing with Teams Phone, okay? So let's remember that. So, when we talk about these enterprise wins and Teams penetration, that, you know, we do displace Teams Phone. But if you look at, for example, the cost of an E1 or an E3 license, and then add what Microsoft would charge for Phone, for Teams Phone, and compare that same package with RingCentral Phone, you get a lot more for a lot less, okay?
And what we're seeing from Microsoft is that in the end, they are, at least for the time being, they seem to be more interested in proliferation of Teams as a platform into the enterprise versus, you know, any particular aspect of Teams. So all I can say is that it seems robust and healthy for now, and, hopefully, you know, will continue that way. And customers are buying. Very importantly, customers are buying, and it's not just, c ost is important. It's not just the cost. They really, you know, Teams, not Teams, Teams Phone, simply does not have the features or the reach that we do.
One thing I would just add there is the Fortune 500 win, the 40,000-seat deal that we announced last quarter, that was in a Teams environment. So they're using Teams for messaging and, video, but RingCentral for phone.
All right, we have a minute left, so I'll keep going. As you go upmarket in some of those big deals, is it a different set of companies you're competing against there, or is it the same ones you've been competing with for smaller seat count type deals? Any sense on that'd be helpful in the last minute we have.
Sure. We'll get some of each. You know, there are certainly people that only specialize in SMB or SB, and, you know, they tend to be smaller companies. You know, they generally compete on price. We will sometimes, you know, don't necessarily, you know, match their pricing, in which case they will win, but that's all they have going for them at this point. In the upper segments, look, again, it's your usual suspects. You know, we see Teams and Teams Phone in particular. And again, our strategy, you know, certainly we're not there to take on Teams directly, and, you know, not something that we think is a winning strategy. But, there, you know, we are very much, we have our battle cards against Teams Phone, and, you know, we have our reference cases. Look, we used to hear a lot of Zoom.
We hear less of that now, for whatever reason. I think they, they have their own hands full with, you know, Teams and what's, what, what they're doing to their market. Cisco, almost never, you know, and that's it. Those are the large companies, you know? Everybody else is a long tail.
That's great. Well, Vlad, Sonalee, thank you so much for your time here today. Super excited to have you at the conference.
Thanks, Sanjay.
Great.