Hi, good morning, everybody, and thanks for joining us. So we're kicking off the 2024 Jefferies Software Conference with a former Jefferies employee and alumnus. So happy to have you here. We have Sonalee Parekh from RingCentral. Sonalee, thank you so much for joining us. How are you today?
Thanks, Samad. It's great to be here in these beautiful surroundings.
You know-
Of course, with you.
I know where I rank in that, okay? It's perfect. So number two. So you've been the CFO now at Ring for two years. I think it's great to start, maybe reflect back a little bit. Can you walk us through some of the key changes at the company since you joined a couple of years ago?
Yeah, absolutely. A great place to start. So maybe I'll start with where we are now and then talk about some of the things we did to get there. And I think some of my, my proudest accomplishments, and when I say my, I mean collectively, RingCentral and my team, and you know, it takes a village. You all know that. So firstly, when I arrived at RingCentral, we had operating margins of 10.4%. Very proud to say, when I last guided for Q2 of 2024, we've guided to 20.7%. And for those of you who aren't that good at math, that's more than 10% improvement or 1,000 basis points of margin improvement.
And we did have to make some tough decisions to drive that improvement, but I think we have never been in a better position, healthier position financially. And one point I would make there, specifically, is around the balance sheet, another, I think, key and major accomplishment. I remember when I first joined RingCentral, there was a lot of focus on our convertibles. We had $1.65 billion of convertibles maturing in 2025 and 2026. And since then, we have managed to take very, very large chunks out of those maturities, such that, you know, the maturity profile is very, very manageable. Not to mention that the financial profile that we have today, and if you think about where we guided on free cash flow, it is certainly healthy enough to support that quantum of debt.
And the way we took chunks out of those maturities was actually, you know, somewhat diversified. So we did a Term Loan A, we also tapped the high-yield credit market for the first time and saw very, very strong demand. We went out and got a credit rating, so we're double B rated. And, you know, when I arrived, our leverage was above four times. For those of you who listened to the Q1 call, we ended Q1 at about 2.5 times net debt to EBITDA, and we'll end this year based on where I've guided, at two and change.
Nice.
So, really solid progress on dealing with the balance sheet and the cap structure. On the margin side of things, you know, some of the actions we took was managing our workforce, and it was the first time RingCentral had ever done, you know, a headcount reduction to that extent.
That's right.
And again, those are tough decisions, but what it really did was it allowed us to reprioritize and invest in areas. I think you're going to ask me about growth a little bit later and product, but it freed up cash for us to be able to invest-
I was like-
... in the areas where we saw outsized potential for growth and ROI and returns. And, you know, we also became much more disciplined in our spending. You know, the growth of an at-all-cost era is far behind us, and I think many companies and certainly great companies. You know, we did a massive procurement program. We generated significant savings. Those are still working their way through the P&L and cash flow. We also managed to drive significant free cash flow growth over that period. So, this year, if you look at the midpoint of where I've guided, we will be generating about 36% year-over-year free cash flow per share growth. I think that puts us in a very small group of companies that can actually do that.
So I think, you know, just major, major progress in that sense. And then, you know, on top of all of that, we have also launched a significant number of new products, and we have successfully become a multi-product company and platform.
Great. That-
Is that enough in two years?
That, that's a lot in two years. It's more than I've done in the last two years. So I also like that you looked at me when you said, "The people that are bad at math," you locked eyes with me, so I resent that a little. But so you know, you mentioned the growth and the priorities. Obviously, we're a software conference; we have to talk about the growth side. So as you think about what you just laid out and the priorities going forward, some of the newer products you've introduced, how should we think about that growth prioritization versus balancing with the not growth at all costs as you look forward in your priorities?
Yeah. So thank you for asking about growth. And of course, you know, when I talk about all the progress we made on operating margin, cash flow, and capital structure, we managed to do that while still delivering double-digit growth on a very large ARR base. And we are, you know, no question, very committed to continuing to grow and investing in our growth. And I think you can see if you look at the actions we took over the last two years on the cost optimization side, we were actually very careful to protect R&D investment. And for those of you who know Vlad, and I recognize a lot of you in the room, you know him, you know, innovation is core to who he is.
It's in his DNA, it's in the company's DNA, and that is something that will not change. And, you know, we have to maintain the features and functionality and reliability of our core product through investing in R&D, but also in all the new products. And, you know, it was a prolific year for us in terms of new product intro at the end of last year and, you know, hopefully you're seeing this year. So we announced RingCX, which is our native, AI-infused contact center product. We also announced-
Yeah.
RingSense, which is our AI platform, and the first big product that's come out of RingSense is RingSense for Sales. And then we also have our RingCentral Events business, which I think really upleveled our overall video offering. And, you know, all of those products are growing really nicely in terms of logos. You heard me at earnings reiterate our 100 million ARR guidance, at least 100 million of ARR from new products, by next year, by 2025. You know, Vlad would say the products are babies today, and you have to give them time to learn to walk and grow, but, you know, these babies are growing at a great pace because when we announced earnings, we talked about RingSense for Sales having more than 600 customers.
That's more than doubling sequentially. And RingCX, so our contact center product, we announced a near doubling. So we now have well over 200 RingCX customers. And then on RingCentral Events, which you may recognize, was the Hopin acquisition we made at the end of last year. Again, I think it was a really well-timed and, you know, well-priced acquisition for the IP and talent we managed to get. And that business is growing logos at 25% quarter-over-quarter, so sequentially, that's Q1 over Q4. And if you look at the customers that we have in that business, it reads like a who's who.
The last one we announced was Harvard University, but you know, the logos keep coming in, and the other thing is we're adding a lot of features to the events business, even since it's you know, come under our ownership, and some really cool AI features. On RingCX, in terms of investment, just to give you an idea, in the last quarter, we announced 300 new features on RingCX alone. It's also available now in six countries.
Awesome. It's great to hear that. You mentioned multiple times, both in the overview and just now, talking about the 1Q earnings call. We're only a few weeks removed from that, but I'd say that's probably enough time to get a sense of maybe where we're at now. So as you think about the start of May to now, maybe help us understand a month later, what are you seeing in terms of the demand environment from customers, especially as you think about some of the newer products that you just mentioned?
Yeah, sure. So, without guiding ahead, apart from what, you know, what I've said about Q2 and the full year, what are we seeing now? When I guided, I talked about a stable macro. That is very much what we're seeing today and at the moment, and I think our earnings were May twentieth, so we really are not very far from when we reported. So, a couple of things to say there. Firstly, on macro, you saw that our enterprise business has been stable, growing 13% ARR for four consecutive quarters.
So we really have, and we felt comfortable talking about this stabilization, where, you know, the things that you heard me talk about actually a year ago, sitting in this very seat when the, deal cycle times were elongating and elongating further, and you were getting more and more people brought into the approval processes, including CFOs. And by the way, I get involved in way more procurement decisions today at RingCentral, which you would expect. But you're seeing, you're not seeing that get any worse or you're not seeing the cycle times, get longer. The other thing that we were talking about in the past that, again, we've seen stabilize is sort of the, the initial deployment sizes.
So I think, you know, the way we've guided and the way I guided at last earnings was really around this kind of stable macro. And I think we're really proud of what we managed to achieve in the business, particularly if you look at some other enterprise software companies in the last quarter, where I think there's been a lot of weakness around SMB. Now, a few words on SMB. You know, that part of the business was not as strong as enterprise for us, and again, like, similar to other software companies, but I think we held our own. And importantly, there, we're seeing very strong fundamentals. So demand is there. We're actually seeing very strong acquisition. We're actually seeing stable win rates.
You know, what we're seeing there and what we believe is macro is, you know, for SMBs, I think they're being impacted by, you know, the inflationary environment. I think they're being impacted by rates staying higher for longer, and that is impacting their buying decisions and causing a slightly more cautious environment relative to what we were seeing from the enterprise, side of things.
That's, that's very helpful. So I, I don't want to keep you, pushing you on the guidance outlook, so we're gonna, we're gonna pivot away from that a little bit. One of the things that we've gotten a lot of questions about since the, since the results was the company announcing that, that you signed the largest deal in the company's history, right? And so I was wondering if you could maybe just help us understand how that precipitated, who you replaced, and how does a deal like that come about, and, and is that a sign of maybe potential other deals like that in the pipeline?
Yeah. So we were really excited about this deal, and it is indeed the largest seat deal in the company's history, so 40,000 UCaaS seats. So let me tell you a bit about the customer without naming them. Fortune 100 retailer, and they have $20 billion of revenue, highly distributed. They had issues with their legacy system, and RingCentral from, you know, everything I've heard from our sellers and everything I've read, we were the only solution that addressed their pain points, all their pain points across the board. And we did replace a legacy system. The legacy system was Skype, which, as you all know, is now owned by Microsoft.
And the other thing I would point out about this particular win is that it happened in a Teams environment, i.e., they are still using Microsoft Teams for their messaging and video capabilities. But they needed the reliability that we bring and, you know, five nines reliability. What does that really mean? It means less than five minutes of downtime, including scheduled maintenance, in an entire year, and we have been able to deliver that for 23 straight quarters. Actually, the last couple of quarters have been six nines. But there were also integrations and features that we offered and, you know, this retailer happens to operate across you know, many geographies, and they, for example, wanted to be able to have different messaging and hold music, depending on where the customers and branches were located.
We were able to do that. This retailer also has a pharmacy associated with it, and they needed special functionality to be able to fax prescriptions back and forth. Their HR department wanted to be able to use the SMS solution to be able to get in touch with candidates in an automated way. Again, RingCentral was able to address that. So it was a complex use case, and that's again, where we really thrive and where we tend to win. And, you know, who did we compete against? You can imagine for a customer this big, it would have been a large RFP process, and, you know, the usual suspects would have been there. We don't always know who we're competing against. They don't always tell you.
But you can imagine, for something this size, the large guys do participate. It's rare for them not to. And you know, in terms of, are there more out there? Absolutely. And I just want to add, this was, you know, the largest win in the company's history, but if you look back in the prior quarter, the quarter before and the quarter before that, we did have some 20,000-seat deals. Again, Fortune 100 insurance company, Fortune 500, you know, one of the largest tire manufacturers in the world. So we are winning large deals and, you know, our enterprise business today, the one that's growing 13%, is over $1 billion.
It's a very, very large business and one that we're, you know, investing in and committed to, and, and again, feel like we have a true right to win.
You mentioned Microsoft, and if you maybe step back and take more of a high-level, 10,000-foot view down, can you talk about the Microsoft environment? And it seems like more and more in the last several earnings calls, you've talked about success there, tightly integrating, and maybe what role, just especially for the audience that may be less familiar, how Ring is making that environment actually work for it as you go out and win deals more broadly than just that one that we just talked about.
That one is a great example, but, you know, that, that is just one. And what I would say is, if you look at, our $1 million+ TCV wins in the last quarter, and actually, if you look at our enterprise base, but certainly in the last quarter, more than 50% of the deals we won over a $1 million TCV were in a Teams environment. So, you know, we absolutely, again, can thrive in a Teams environment. We, we've showed that we can displace Teams, particularly, you know, Teams Phone. And of course, Microsoft Teams is an open, API, right? So, we, we believe, and, and, you know, if you look at third-party data as well, we have the best integration, with Teams, and the only one, again, I believe, that you don't have to toggle from screen to screen.
So you can be in a Teams environment, on a single pane of glass and use the RingCentral phone on the back end by just clicking, you know, an icon on the screen. So it's very easy to use, and, again, we've seen great success, certainly in the enterprise side of things and certainly in our larger deals, and if you look at our enterprise base today. And I think, you know, Microsoft goes broad but does not go deep, and we're really good at going deep. Thousands of integrations, right? Certifications, HIPAA compliant. You've heard me and Vlad talk about our gold verticals. You know, in those gold verticals, the integrations we have, you know, with Epic and healthcare, Cerner, these take time, these take investment, these take R&D. RingCentral's been around for...
I think it's our 25th anniversary. A lot of R&D has gone into that phone solution, where it is mission-critical for the phone to be there for you when you need it. RingCentral is a very obvious choice, and we win against Teams in those circumstances.
That's great to hear. We're at a software conference. I might go to jail if I don't bring up AI. I know you mentioned it. I'm legally required to ask about it. So you've talked about embedding AI capabilities into your platform. You mentioned it earlier, RingSense, some of the features that you guys are rolling out. How do you think about AI and the role it's going to play for RingCentral's product portfolio and maybe in helping you guys continue to drive that growth algorithm going forward?
Yeah, so, firstly, AI, I know, of course, it's a buzzword, right? Or two buzzwords right now. We've been investing in AI for a really long time. You know those backgrounds that you, when you, when you're on a, a RingCentral, call, that, that's actually using AI. Noise cancellation is using AI. But of course, we're infusing it more and more and, leveraging the LLMs. You know, we're not going and building our own LLM, but, we're leveraging them for our customers, to get richer insights from their communication data. And, you can imagine, a company like RingCentral, with the number of customers we have, you know, over 400,000, and the data that, that those phone calls generate, you know, it's literally billions of minutes of conversations on our network.
Our customers actually want to use that data and are asking us to help them derive insights from that data. We very much believe that our AI products are not only unique and differentiated, but customers are willing to pay more for them and will be ultimately accretive to our ARPUs. You mentioned RingSense for Sales. You know, our sales force are using it, and it actually replaced another product that they were using previously, and they've told us that they actually prefer using RingSense for Sales. Our customers, you heard me say, you know, they more than doubled quarter-over-quarter. Customers are engaging with it and are finding it extremely useful, and importantly, are willing to pay for it.
RingSense for Sales, for example, we sell for $60 per seat per month. You know, you may ask me about ARPU later, but our overall ARPU is $30 per seat per month. That's in aggregate. RingCX, so our native contact center solution, again, that's been very disruptively priced, so $65 per seat per month, but that's very accretive if you look at our aggregate ARPU. I think if you look at the features that our AI products are actually providing for customers, things like real-time note-taking, or if you're a contact center agent, you know, for the manager to be able to see what strategy has been successful for a contact center agent so that they can then replicate that across all agents, you know, used for training, things like that.
You know, not just keyword searches, but like, what key search- what keyword drove a certain outcome? If we were using RingSense right now, and it was recording this, they would look at to see, you know, how many times did Samad say a certain word, and how did Sonalee respond to that word, and, you know, what does that mean? You know, it, it drives so many insights. And then it would say, you know, "Action item: Oh, Sonalee should do a road show with Samad and go to New York because investors are..." You know, and, and, and I think that's really powerful. And, again, our customers are willing to pay for it, so we absolutely believe that this is something that will be accretive to us, and as you said, a growth lever.
I already like the insights that RingSense provides. You know, I'll tell Jefferies to take a look. You mentioned CX, contact center. I know that for a long time you guys have partnered with NICE, but you've also innovated and released your own solution. Maybe you could just help us understand the CX customers that you have, the 200 or so customers, and maybe what makes them want to use the RingCentral solution, and where they see value in that, and maybe how you still coexist with NICE as well.
Yeah. So we absolutely do coexist with NICE. So we have RingCentral Contact Center, RCCC, which is an OEM with NICE. I think the last time we gave you an update there, it was about a $350 million+ business. That's the NICE OEM business. That is for much more complex use cases. So RingCX, really, you know, how it came about was we were listening to our customers, and our roots, as a company were very much in SMB and mid-market. And those customers don't necessarily have, you know, massive IT departments or, you know, huge professional services budgets to be able to do, a NICE-style implementation. And they don't have the need for a contact center in 20 languages. They need something simpler.
They needed something simpler to use, simpler to deploy, quicker to deploy, because some of the larger contact centers, you know, can take certainly more than six months and sometimes up to a year to implement. So if you look at the 200+ customers we have today, again, they're simpler use cases. It can be a larger company, an enterprise company, but that just has small contact center needs. And we have a couple of those. But we see it as very distinct swim lanes. The beauty of RingCX is, you know, many of our customers like to buy our contact center and UCaaS from the same vendor. You know, it's the one throat to choke, so to speak.
But also now, when we talk about AI, it's great to have the two of them integrated because there's more and more insights you can derive from that, and, and richer and richer data sets. So, you know, we, we've proven we have a right to win in contact center. Clearly, our go-to-market is well-positioned, and we've seen that with, you know, the logo wins that we've announced to date, to be able to go out and sell this. And I think one of the things, or one of the, you know, powerful things about RingCentral is we have this huge, fairly sticky install base, and we now have more and more products to sell to them. And that really goes to, you know, where we started this conversation. You know, what's gonna...
As you look forward, and, you know, you talked about growth, what's gonna drive growth? We really feel that being a multi-product company and being able to deliver more and more value to customers who trust us is absolutely gonna be a driver of value for all of us.
Awesome. Well, Sonalee, thank you for helping us kick off the conference. I think that's a great place to leave it, and we ended where we started. So thank you again, and have a great day.
Thank you.