Thanks, everybody, for joining. Good morning. I'm Will Power. I cover cloud software for Baird. It's my pleasure to introduce our next company, RingCentral. I'm sure many of you know, a leader in cloud phone and they've been embarking on a mission to continue to expand the platform capabilities, and I'm sure we're gonna hear a lot more about that today. So, pleased to have Sonalee Parekh, who is the Chief Financial Officer, and we have Will Wong, who heads up investor relations. So again, thanks so much for being here. I guess maybe, Sonalee, just to help kind of level set, I know we have some generalists in the group, too.
Maybe just a little bit of background on RingCentral and kind of your core target market, and we'll kind of jump into a fireside chat format.
Great. So firstly, Will, thank you so much for having us. Super happy to be here in one of my favorite cities. So RingCentral, who are we? As you say, we are a cloud communications company. And we are today about $2.5 billion of ARR. Actually, a little bit less than that, but close to $2.5 billion ARR. We are a leader in cloud phone, but we actually have a full collaboration suite, so message, video, and phone. And as you correctly pointed out, we are now a multi-product company. We also have a contact center as a service business, as well as an AI platform called RingSense, which I hope you'll ask me about. And we are also an events platform.
You may ask me about an acquisition we made in events, at the end of last year. But we are the number one market share in terms of revenue market share, for cloud telephony, and excited to be here.
Awesome. Okay, well, that's great. So boy, I guess you've been here about two years now.
It's my anniversary, yes.
Is that okay? There you go.
Literally, yeah.
Yeah, I guess it'd be great if you could just talk about how, you know, the company has evolved over the last, and over the last two years. You know, since you've been here, there's been a lot of changes operationally, financially. And then, you know, as you look over the next, you know, couple of years, kind of what are your key priorities for the company?
Yeah, sure. So, why don't I start off with sort of where we are today and then kind of look at where we've come from. So, as I said, you know, close to $2.5 billion ARR. I think one of the things that I'm most proud of is that, we've been able to maintain that double-digit ARR growth, whilst also becoming significantly, significantly more profitable and more free cash flow generative. So, when I joined two years ago, our operating margins were 10.4%, non-GAAP. This quarter, Q2 of 2024, I'm guiding to 20.7% operating margin. So that's, you know, for those of you who are good at math, more than a 10%, or a 1,000 basis point improvement in operating margin.
But we didn't stop at operating margin. On free cash flow, we also have come from, you know, generating, two years ago, less than $100 million of free cash flow per year. This year, I have guided to $440 million-$445 million of unlevered adjusted free cash flow, so significant, significant improvement there. But we've also become a multi-product company. So I think whilst investing, for growth and investing in, innovation, we've been able to add, significant products into our suite, which are actually big growth drivers, for us as we look forward. And, you know, I'll talk more about the products.
But then on the, the capital structure side, I think it's worth calling out as well, that, you know, at the end of Q1, we were at, 2.5x leverage, coming from above four, two years ago. And if you look at where I've guided this year and the trajectory, we will end this year at less, at around two and change, net debt to EBITDA. And, our convertible maturities, which two years ago were at about $1.65 billion, a billion, in 2025 and $650 million in 2026. We've taken very big chunks out of those maturities, and we now have $161 million left on the 2025, and lots of cash flow to be able to address those.
But I think more importantly for me, you know, the financial profile of the company today is one that can easily absorb and you know handle that quantum of debt as we look at various uses of our cash. Oh, and in terms of priorities going forward, so I think one you know continuing to drive efficient growth. So we're not done. You know, we won't stop at 21% operating margin, which is where we've guided this year. But secondly, it's really important that we continue to invest in product and technology. That is paramount to who we are. It runs through our company's DNA, and you know hopefully you're seeing these prolific product announcements. We had three last year: so RingCX, which is our contact center solution, infused with AI.
We also have RingSense and RingSense for Sales , which is our first AI product. And then finally, RingCentral Events, which was on the back of the Hopin, the Hopin acquisition. So, for me, it's really important that we balance both, driving more profitability through the inherent operating leverage in the business, but, but also importantly, driving growth.
Okay. Well, I thought that's a great rundown. I, I'm gonna come back to some of the different products. Let me, maybe higher level, it'd be great to get your perspective on what you're seeing in the broader macro environment, particularly in light of, you know, some mixed signals from other software companies, even over just the last couple of weeks. As you look across, you know, your enterprise focus, but also, you know, you have SMB, you know, exposure as well. So I- it'd be great to kind of hear what you're kind of seeing real-time in, in, in the marketplace, whether it's sales cycles, customers' willingness to spend, you know, et cetera.
Absolutely. You're right, we have a large enterprise business. We have over $1 billion of ARR from enterprise today. You know, we were very pleased, and you heard me talk about this last quarter, to see stability in that business. That business has posted 13%+ ARR growth for four consecutive quarters. Pleased, really pleased to see that stability. On the SMB side, you know, we did see some impact, and continue to see some impact from the macro, but I think we fared better than many of our peers, certainly than our peers and many enterprise software companies. We saw a slight decel there, but nothing like what you saw in the broader software space.
And I think there, our SMB customers, and that's a very large business for us, and it's also our roots were in SMB. I think their customers are feeling the pinch and delaying some buying decisions as a result of, you know, inflation staying stubbornly high, rates not coming down as quickly as people might have expected. But, you know, we are mission-critical to our customers, particularly on that SMB side, and I think, where we see that mission-critical nature of our products, we do continue to win. And I think importantly for me. You know, whilst we have seen some macro trends stabilize, the demand trends and, you know, end user demand has continued to stay very strong in both SMB and in enterprise. And I see that through top of funnel.
So I, you know, obviously, look at our pipe. What we saw during this, you know, macro, which I feel like we're lapping two years of when we first started seeing this, somebody told me that it's called the COVID hangover. So the COVID hangover started about two years ago, and, you know, what we saw was the elongated sales cycles, and for a while, those trends were getting worse throughout 2023, but we saw a stabilization in that, at least at RingCentral, in the last couple of quarters. But we also saw, you know, increased layers of approval, smaller initial deployments, and then something that you've heard me call out a lot on earnings calls, the last two quarters is this challenging upsell environment.
So while our acquisition, our new customers and new logos has been strong, it's that upsell, that sort of classic land and expand motion, where we've seen some challenge. And, you know, net retention is a big focus of mine. And, you know, when Vlad and I were looking at the business and, you know, as we planned for this year, which was exactly about a year ago, it was really important for us to continue to invest in innovation and new products, because we felt like the best way to address that upsell challenge was really through new products, because we have this very large, sticky installed base, and we wanted more products to sell into them. And that's exactly what we're doing today.
So maybe just coming back to enterprise AR growth 13%. I mean, I guess that's one of the big questions, is trying to understand, you know, the sustainability of kind of a double-digit, you know, enterprise, you know, growth rate. I mean, there's still a big TAM out there, right? I mean, there's still most of the phone seats globally are, you know, sitting on, you know, on-premise platforms, Avaya, Cisco, you know, et cetera. So I mean, I guess, you know, what gives you kind of the confidence, and what does that look like for, you know, kind of a sustainable enterprise growth rate over the next, you know, kind of few years?
Yeah.
What are the kind of building blocks of that?
Yeah. So I have my head of IR here, so I can't talk about, you know, guidance beyond what we've guided to. But what I would say, like, what gives me the confidence? Look, it's still early innings. And yes, it hasn't been as quick, the move from PBX to the cloud, as we would have liked. I think certainly the pandemic did cause a bit of a rush towards that transition, and there was probably some overbuying that took place, and we're now lapping that and, you know, on the other side of it.
You know, what gives me confidence is there are still, in the verticals where we play, you've heard me talk about these golden verticals, where we truly have a right to win, and we see this over and over in our win rates and when we go to market. The verticals that I'm talking about are healthcare, retail, financial services, professional services, public sector. And if you look at just those golden verticals, there are 100 million seats out there, of which we believe penetration today is around 15%. So you see the magnitude of that opportunity. And it's not a question of if, it's a question of when. And I think during this current macro, there has been a degree of reprioritization of spend.
And perhaps if you have a fully depreciated PBX phone, which I noticed at this hotel, in the meeting room I was in, they still are on PBX, PBX phones, so we need to do a sales call here afterwards. But, you know, eventually, these phones are gonna move to the cloud, and it doesn't go the other way around. Like, you don't see, you know, cloud going back to on-prem. So we still feel really excited about the opportunity, and there's a strong ROI in terms of making that move. So I think, you know, when we do see the macro, you know, what we're seeing in front of us right now and what I've guided on is a stable macro. But if we do see that macro lift, I think that there will be...
And I actually believe AI could be an accelerant here as well. I think we're gonna see that pace of migration improve.
Yeah. So I guess, I mean, I guess the big investor question, of course, has been kinda competition-
Yeah.
Concerns on pricing forever. I know you, you've all called out for a long time that RPU overall has been, you know, pretty stable. I mean, what do win rates look like versus, I don't know, Teams, Zoom, you know, others, in the market? I mean, it sounds like those win rates in those particular, I guess, you call them golden kind of verticals are, is probably, probably better. But most of those companies also point to improving win rates. And, yes, has there been any changes there? And kinda, what kinda helps still set you apart versus some of those other platforms, I guess?
Yeah, sure. So we are still today, you know, the number one undisputed leader in terms of revenue market share on UCaaS. Why do we win? It's firstly, our reliability. You've heard Vlad, our founder, talk about five nines reliability, 99.999. What does that actually mean in real life? It's less than five minutes of downtime in an entire year, including scheduled maintenance. So for those verticals that we were talking about, where it's mission-critical to, for those businesses to reach their end customers, you need to have the dial tone there.
Yeah.
They choose RingCentral. The other thing is our integrations are unparalleled. Like, we're... I didn't say in my opening remarks, but, you know, we've been a public company for 10 years. We've been around for 25 years. That's a lot of R&D dollars that have been spent. And that is why we have these features and the functionality and the certifications that many of our competitors do not have. The other thing is the UCCC being able to, you know, the one throat to choke, and we see that particularly with our larger deals. You know, customers want to buy UC CC from the same vendor. Again, I think AI just amplifies the fact that people will want to buy both together.
We are Gartner Magic Quadrant top right, with both the UC and CC offering that we have with our RCCC offering. In terms of our win rates, they've been stable. Who we win against and who we're competing against, now, that has evolved a bit.
Yeah.
Upmarket in enterprise, we see more Teams, and we see more Zoom. You know, downmarket, or sort of mid-market, I think, you know, historically and traditionally, we saw a lot of 8x8. I think we are seeing less of them today, and I think they have a more deliberate strategy, and, you know, if you listen to their earnings call, they talk about being more CCaaS. So in UCaaS, we're competing against, you know, Vonage, Nextiva. But, again, in terms of features and functionality, and you can look at third-party data here, too, the Gartner Peer Review, we really stand out in terms of the quality and reliability, and that's why customers choose us. So are we winning share? Are we taking share?
I'm certain we are, because if you look at, again, third-party data, IBC, Gartner, whoever you want to use, Synergy, the overall UCaaS market is growing about 5%-ish. You know where I've guided in terms of what we're going to guide this, grow this year, 8%-9%, and you saw what we grew last year. So we are outpacing the overall market growth, and I continue to believe that we will. And then on the CCaaS side, I think third-party data says, it's about 15% growth, and we are growing well above that. We have, and we will continue to. And certainly with our new RingCX product, our own proprietary solution on contact center, that's going to grow well in excess of the overall market growth.
So I think that's what gives me the confidence. And, you know, I, as the CFO, get involved in a lot of the customer conversations, and, you know, customers are choosing us because of our differentiation.
Yeah. Well, let's maybe, you know, touch on contact center, right? That's a big focus, you know, for you all, and I think investors, too. You've had a great relationship with, you know, NICE for a number of years.
Nine years.
Yeah, that's a sizable business for you. So I'd be curious kind of how you think about the continued growth opportunity there in conjunction with, you know, your RingCX product, your core RingCX product, that you're starting to push more aggressively, adding more features to. I mean, how do you manage those kind of in parallel? And, you know, what are the different target markets for those two different?
Yeah. Yeah, so that's, that's exactly the point. They are very different target markets, so we see them as two fairly distinct kind of swim lanes, if you will. So, RCCC, which is our OEM with NICE inContact, that's much more upmarket enterprise, you know, complex use cases, multiple geographies. Often, you know, customers that would deploy RCCC would have their own professional services staff, because these are heavy lifts. The implementations take many, many months. Then you have RingCX, which is our proprietary solution, and that one is much more targeted at simple to use, simple to deploy, you know, very low professional services lift. Although it can be a large customer in terms of the number of seats, the use case is really simple.
You know, we had a very large win two quarters ago, which was a waste management company, but they have thousands and thousands of employees, and actually, the deployment was over 1,000 seats. But they have a very simple use case, i.e., you know, it's two or three different reasons that someone would call their call center. They don't need multiple languages. They don't... They're only in the U.S., and that's an example where, you know, it was a large enterprise customer, but not for the... You know, RCCC would not have been suitable for their use case. So again, we see it as two distinct businesses and use cases. And, of course, like, from time to time, you're going to have friction, from time to time.
But you know, I've been around the tech industry for a long time, and I think that happens in almost, you know, when you're dealing with channel partners and partners, no matter what. But for the most part, you know, there are very distinct rules of engagement and swim lanes, and you know, we both stick to those. And you know, both parts of the business are growing really nicely for us.
Right. Okay, well, I guess somewhat fresh off the release, but, you know, and I don't know how much you've looked at this yet, but Microsoft, you know, announced a new contact center capability at Contact Center Week, I guess, this week in, in Las Vegas, and planning to get more aggressive in that market. It sounds, I mean, they made-
I did notice that.
Yeah. They made some noise a couple of years ago, but, you know, embedding Copilot and generative AI. So I guess I'd just be interested in the initial thoughts of what that could mean, you know, competitively, whether it's on the, you know, upmarket and a nice relationship-
Yeah.
versus, you know, your RingCX product.
Yeah. So, firstly, like, when you asked me earlier, you know, where do you, who do you compete against in various segments of the market? So where we see Microsoft is much more in the large enterprise.
Yeah.
That would be, you know, more squarely within the RCCC side of our business.
Yeah.
...If you look at us and RingCentral today, I mean, today, 85% of our revenues are, you know, exposure is UC. So CC is very important to us and important to our growth. But, you know, in terms of overall exposure, it's fairly limited, and in terms of risk to that profit pool. On RingCX, we wouldn't expect to see Microsoft, really. Or if we did, it would be in, you know, very limited. And I think with Microsoft, they tend to go very, very broad, but not necessarily deep. And customers choose us for those deep integrations. They choose us because, you know, four of the largest dental service providers in the United States are RingCentral customers.
That is partly because we have certain integrations for dental service providers that, you know, it would take many, many years to be on a par with if there was a new entrant that tried to get the integrations to the level that we have them. So I think in that sense, we feel fairly limited exposure in terms of what Microsoft announced, but, you know, I would need to spend more time on what they've announced in order to give you the, you know, a full response.
Yeah. I, I still have a number of questions, but I'll let the audience know, if there are any questions, you can submit them via email. You have instructions on, on the tables, and I'd be, I'd be happy to get those in here, too. Well, so I guess, yeah, I want to make sure we touch on some of the other new products, like RingSense, you know, events. What- I know it's, you know, picking your favorite child, right? But, but, but, you know, where's the biggest growth opportunity, you know, outside of contact centers, you look at some of the other new products that, that, you know, that you've announced?
Yeah, so we've put out guidance, you know, which I think gives a degree of confidence that we expect to generate at least $100 million of ARR from new products by next year. And of course, they are little babies today, and we don't have any favorite children. But RingCX, so the contact center product, you know, we know - we already know how to sell that, right? We've proven, like, if you look at our RCCC business, our contact center business, which our go-to-market is out there selling as we speak, you know, that's already one of the largest contact center businesses in the world, and now we have our own proprietary product. So we - I do expect that to be the largest contributor to that $100 million target.
That being said, you know, we're really excited about RingSense, which is our AI platform, and I think, you know, we're uniquely positioned in many ways to be able to take advantage of the fact that we have billions of minutes of conversational data on our network, and our customers are actually asking us to help them make sense of that data. They want to derive insights from that data. So, you know, RingSense does exactly that. And, last quarter, we've talked about a number of customers. We haven't really given a lot of financials, and again, it's small today, but growing and growing, you know, well above the overall average growth. But, you know, we more than doubled our RingSense customers sequentially, if you look at Q1 on Q4.
And we now have over 600 paying customers on RingSense. The price point is also really attractive from our perspective. You know, customers are paying $60 per month to add RingSense on. And earlier, you alluded to our ARPU, which today are above $30, and you're right, they're holding steady and stable. They have been over the last nine or so quarters. Actually, they're above $30. But you know, these new products will be and should be accretive to our overall ARPU. So I would say, like, RingSense is probably what I'm most excited about because I think it's really augmenting and improving business outcomes for our customers. And like, at the end of the day, what makes a customer sticky is, you know, adding value to their processes.
And, you know, it won't surprise you if I tell you, customers that buy more than one product from us tend to stay with us. And now we have proven, and hopefully, you're seeing, that we can be a multi-product company. And, you know, one of the beauties of being a large company with, you know, a significant ARR base is if you can find more useful products to sell into that customer base, you've already got the go-to-market there. You know, ours is one of the strongest and most diversified sales forces out there. We have, you know, 15,000 channel partners that are selling RingCentral today. I've heard it's between 75,000-80,000 boots on the ground.
Yeah.
So, I'm really excited about what that's going to bring.
Well, I think, yeah, your channel relationships have been a key differentiator for a long time. And it's nice to hear the progress on RingSense. So that sounds, you know, sounds encouraging. I mean, I guess maybe I should touch on it then. You know, outside of your traditional channel partners, of course, you've had other big channel relationships with Avaya and Atos and Alcatel-Lucent, and then you've got, on the separate side, you've got a lot of the communication service providers.
Correct.
You know, Verizon, Vodafone, a number of others. Maybe any update across those two larger cohorts of kind of-
Yeah.
What you're seeing and, you know, any kind of improved traction, similar, yeah, any kind of-
Absolutely.
updates.
So, I'm going to start off with the GSPs, Global Service Providers, so think, you know, the Vodafones, AT&T, Telus. We've just added Charter, Optus in Australia. So we have 12 global service providers working with us today, and you can imagine they have enormous install bases. So they are a great, you know, feeding ground for potential cloud customers. And that business is growing well above, you know, the overall growth for our company, which, you know, today I've guided 8%-9%. The GSPs are growing well above that. And, you know, when you think about those businesses or those GSPs, they're also a great way to go to market internationally, because you almost have, like, instant distribution.
So that's why Vodafone is one that we got super excited about because, you know, we started off in the U.K., but we're now in over five countries with Vodafone and seeing good traction there. We announced a very large win with IKEA, I think it was two quarters ago, with, with Vodafone. And that was in partnership with Vodafone.
Okay.
And then on the strategic partners, which you called out, the Avaya, Mitel, and Alcatel-Lucent. So on Avaya, I think worthy of an update, we attended their customer event a couple of weeks ago. Our founder and CEO, Vlad Shmunis, was on stage with Alan, and we announced an exclusive hybrid partnership with them. Where, you know, if you want to stay on Avaya on-prem for phone, you can use our collaboration suite for video and messaging, and that was a new announcement. But importantly, in terms of our, you know, former relationship with Avaya, even as they emerged from bankruptcy last year, we were able to preserve our exclusivity with them. So we are their exclusive provider for cloud phone or ACO, Avaya Cloud Office.
So if you are an Avaya customer moving to the cloud via Avaya, you will do it with RingCentral. There is no other provider, like, you know, we are, we are the destination. And I think, you know, that, that was really important for us to preserve that exclusivity. And I would say the go-to-market and, and, you know, relationship is stronger than it's ever been. And, and we remain optimistic about that, that, that relationship. And, you know, we did negotiate minimum commits as part of that, restructuring of the agreement. And, what I've said is, you know, when I guide and, and how I've guided, we've only factored in, the minimum commits to the guidance, so anything above that would be upside.
Okay, let me we're actually down to our last minute, so maybe I should ask one on margins. So done a great job, you know, since you took the CFO seat a couple of years ago, helping expand margins. Where are the additional levers, you know, on the margin front? I know you want to drive a combination of growth and profitability.
Yeah.
Should we expect margins to continue to increase? I don't know, 100 or 200 basis points a year. I mean, what, what's the outlook on that front?
Yeah. So, you know, last year we did 650 basis points. Since I've joined, it's been, you know, about 1,000. If you look at where we're guiding for Q2. I would say in terms of direction of travel and kind of quantum of margin improvement, if you look at what I'm guiding to this year, 21%, it's nothing like the 650 basis points we did last year. So I would say that would be, you know, the right way to think about it. But the other thing is, you know, we're also very focused on free cash flow and free cash flow margin, and free cash flow per share growth.
Right.
You know, we're out of time, but I just want to say, like, SBC is something that's top of mind for me. Hopefully, you've seen the right trend there. You know, we are committed to growing free cash flow per share above operating margin and free cash flow.
Yeah, that's, that's good to hear. I know that's a nice distinction or standout area for you. So, we are out of time, so please join me in thanking Sonalee for all her comments up here.
Thank you. Thank you.
We do have a brief breakout, if there are some other questions, around the corner. All right.