Perfect. Hello, everyone. I hope you're enjoying day one of the UBS tech conference. For those in the audience that don't know me, my name's Taylor McGinnis, and I head up the application mid-fast space here at UBS. Before we dive into our session with RingCentral, I just want to let you all know that if you have a question, you should be able to ask within the app. I'll leave a few minutes at the end to answer any questions. With that, today we have Vlad, who's the CEO and founder of RingCentral. We also have Vaibhav, who's the CFO. Thank you guys both for being here today.
Thank you for having us.
Of course. Vlad, maybe a great place to start is over the last few years, RingCentral has embarked on a significant transformation. You started in the unified communication space. You have been evolving the product to encompass customer experience in the contact center, more recently artificial intelligence. Maybe you can just give the audience an update on where you are in that transition. Is 2026 going to be the breakout year for some of these emerging products? What specific initiatives you and the team are putting in place to chase after a lot of these broader growth opportunities?
Great. Wonderful question. For the record, we only got 27 minutes left. I have a very long answer. You probably have more questions. Yeah. Look, RingCentral, we are one of the original SaaS companies. The company is over 25 years old. I'm the founder. We started out by moving business communications from on-prem to the cloud. Okay? We call it RingCentral 1.0. We were rather successful coming up from approximately zero revenue to approximately $2.5 billion in revenue in that amount of time. RingCentral 2.0, as we view it, is when we went to become a multi-product portfolio company. That's when we stopped viewing ourselves as a single product or service provider and more as a platform with multiple apps and now engaging into customer engagement, a.k.a. the contact center, video, video events, messaging. That's RingCentral 2.0.
It contributed to our growth and our success and really set us up for where we are now, which is RingCentral 3.0. 3.0 is one that's going to overshadow everything we've done prior. This is where we are not just making it easier for people to communicate, more devices, more locations, cheaper, more self-service, but we are fundamentally changing how they communicate. Now 3.0 is about embedding AI into human interactions. Some of it will be replacing humans, but a lot of it, and certainly that's where the industry and where we are now, is less about replacing, maybe just yet, and a lot more about enhancing. We've introduced not one, not two, but three products just recently, the three A's, as we call them, AIR for AI Receptionist, AVA for AI Virtual Assistant, and ACE, AI Conversation Expert.
Between these three, we cover every stage of an interaction: before the call, AIR; during the call, AVA; and after the call, ACE. It is super early, but these products are growing in triple digits, not annually, but sequentially. It gives us every confidence that to your question, is 2026 going to be a breakout year? Yes. And so will 2027, so will 2028. There is a lot to cover here. We believe that we are extremely well-positioned to be one of the main beneficiaries of this AI revolution.
Perfect. Let's dive in a little bit more on the three A's that you mentioned. AIR, AVA, and ACE. Could you talk about, it's early days, but in terms of where you're seeing the most customer interest, which of those three products? And then two, as you think about the evolution of adoption and monetization, what does that look like potentially in the coming years?
Sure. As far as sheer numbers are concerned, numbers of accounts, it's AIR. We are well over 5,000 accounts as of our last announcement. We're well over whatever we've announced back then now. We're signing up multiple hundreds of accounts per week. It is just beginning. The big ones haven't really spoken yet. One of the big ones, for example, is AT&T that started shipping. They now have multiple hundreds of accounts, if not more than that. Most GSPs, global service providers, which is this unique GTM we have in addition to direct and regular channel, most of them are picking up at least some of these. I can tell you that there is a lot of excitement about AIR in particular because it is so easy to relate to. It simply gets you to where it replaces and augments, really, more augments and replaces human receptionists.
It can answer a number of questions, directions, work hours, price lists like that, anything it can scrape from your website or your knowledge base as a customer of ours. It can direct calls. It can set up appointments for you. People do not realize how many calls they are actually missing with the best of intentions. People simply do not like leaving voicemail anymore. What do they do? They hang up. That means missed leads, missed cases. One of our customers is a healthcare clinic. Serious stuff. People have a breakdown, and they need to get through. If there is no one to pick up that phone, it is not a good situation from many perspectives. AIR sort of resolved that because simple questions it can answer. Less simple questions, it can actually get through to whomever it needs to get through.
This one company is a small company, but they're saying $1.7 million in annual recurring business for them once they deployed AIR. It allows them to expand and buy a new business. Hopefully more of that. This is just one little example. Numbers-wise, AIR, Avery is very, very early. In all fairness, a lot of what AIR does is embedded in some of the higher tiers anyway. We have this wonderful customer, some of you may have heard of, Detroit Pistons. They love it. They're using it, they get lots of traffic, people who call Pistons for whatever reason. They get it to document, to document and annotate calls. ACE, it's really quality management and sales training. It's queuing more upmarket, but popular with financial institutions. I have to say, we use all three products ourselves as well.
We got 7,000+ people in the company, about 2,000-strong contact center, call center of our own. We have AIR in front. We have ACE in the back, training agents, and ACE for anything in between. There is definite traction. Again, we're very well-positioned because with all of the talk, maybe it's fading now a little bit that, well, voice is going away, and who is using voice anymore? All I do is I'm on Teams or Zoom or something. Yeah, maybe B2B, and even that, by far, not 100%. B2C, it's all voice. Voice and some text, some SMS. We're the leaders there. We have a market share. We're doing some of the numbers to share. What, a billion calls a month? That's 3 billion minutes a month, over 30 billion annually. A billion SMSs a year.
Everything is growing and at or even above our growth rate as a company. The trends are only getting stronger. With this much traffic, we're just uniquely positioned to deploy AI at every stage of a transaction, of a workflow. Not too many companies can claim that.
Yeah. That was great background on the competitive differentiation. I’d love to dive into that a little bit deeper. In terms of the competitors that RingCentral runs into frequently on the AI side, what does that look like? There’s a number of players in the space. You have the CRM players trying to offer some solutions in the space. There’s the contacts players entering it. You see competitors. Who do you see most frequently? How is RingCentral trying to position itself in this industry?
Look, CRMs are great. We use the CRM. They do not answer calls or texts. That is the thing. We did not run into them that much, at least not yet. Again, a consumer calls a business. Salesforce is not going to pick up that call. We will. Certainly, especially for larger enterprises, of course, there is going to be handovers. Of course, we will w3ork with Agentforce or whichever agentic cloud will have protocols for that and all of that. We do that. Again, we are in the first position. To your question, who do we see? The startups, sometimes we see, but the thing is, they do not have the traffic. They do not have the presence. Anecdotally, yeah. I mean, usual suspects, there is Microsoft and the Copilot, but that is very specific. There is no AIR equivalent anywhere.
There is not a scaled-up competitor with an AIR-like product that we know of. I mean, we see Microsoft. We will see some Cisco. We will see some Zoom. It is a very large market. We also all have bases to cater to, bases to protect. Certainly, our customers are choosing our product predominantly. I have to say that a new motion for us has been PLG, product-led growth. 50% of AIR deployments are actually our existing customers going online without our intervention and just signing up for a free trial. That is working great. We are certainly going to promote it more and more. Again, early days, but strong will get stronger. Hopefully, we will continue being one of them.
Perfect. Vaibhav, over to you. You have set a goal of achieving $100 million in ARR from these emerging products. Could you break down what that $100 million could potentially look like across these individual products? Any additional color in terms of the growth trend you are seeing by product as well, I think would be helpful for the audience.
Yeah, of course. Of the $100 million, the biggest proportion right now, or the biggest portion, is RingCX, which Vlad talked about, followed by ACE and AIR. Just to remind people, the new products are very new. RingCX was introduced less than two years ago. Within two years, we have over 1,300 customers growing 150% year-over-year. That's pretty impressive. AIR, we've added close to 6,000 accounts, actually, the last reported number, within a matter of a few months. As Vlad indicated, it's continuing to grow. I think the pace of innovation has been really impressive. I think we, as a company, the genesis of RingCentral has been innovation, particularly around products. Very pleased with the results. That's the breakdown.
In terms of the trends, look, it's a little under 5% of overall ARR now, based on the last guidance we had provided. We went from zero in 2023 to $50 million in 2024, and we've guided to over $100 million by the end of this year. The numbers speak for themselves. It's a pretty impressive trajectory. It's a little under 5% as of now. I think our next goal, and Vlad had articulated that at our product day, is to be approximately 10% of our revenues in 2027.
Perfect. In terms of the remaining 95%, 90% going into next year, it still sounds like a lot of the core business is in the RingEX business. Could you give a little bit of an update in terms of the performance of that business, the underlying demand trends you're seeing, and what the catalysts of that business look like going forward? Is it really a function of improvement of demand environment? Are there any interesting initiatives that you guys have underway to spark further growth in that business? How should we think about the underlying drivers there?
Yeah. Look, it is a mothership. It's a $2 billion business that's growing. It has been growing more in line with the market, certainly not underperforming. Markets have slowed down, there is no doubt, because it's maturing. It went through its growth spurt, let's say. There are still tons of opportunities there. There are still lots and lots on-prem left. People do not realize how much on-prem is still left. There is a lot. People like Cisco, people like Avaya, they are still sitting on tens of millions of on-prem seats. Every seat migrates to the cloud over time. It does not need to be every seat to move a needle on our 8 million seats. There is that driver. Also, the way that we look at it is now more as a platform, more as a share of wallet.
To grow UCaaS, you don't really grow UCaaS. You grow your revenue as a company. You grow our pool. You grow our PA. The direction we're taking is not just concentrating on net new bare minimum seats, but enhanced seats. Seats with AIR, AVA, ACE, with CX. We're having huge attaches. Okay? New customers are taking AIR a lot. New customers are taking RingCX a lot. It all really works together. It's much more symbiotic, I would say. One little example is we have recently introduced something called customer service bundle. Okay? This is going to this idea that when people, maybe historically, would think of UC and CC as two distinct islands with very little overlap. There is this new area called customer engagement, which is an in-between.
It's for lightweight, informal contact centers where you have a 10, 20, 30-person business and not really a dedicated call room, but people in business still behaving like agents when customer calls are coming into them. Okay? By that count, there are a few features that are telltale signs, use of call queues in particular. A 1/3 of our calls are going through call queues. By that count, if you count the number of individuals involved, it's well over a million called non-dedicated agents. Okay? We actually have a product now aiming and catering straight specifically for that community. That's going extremely well. Again, we just introduced it last month, but we're talking about explosive growth at this point. It presents us with an opportunity for net new logos as well as for upselling into the base.
Hopefully, I answered the question.
Perfect. We've talked a lot about the growth trajectory that you're seeing by product, but I'd love to touch on the growth trajectories that you're seeing by customer segment. There's been a big focus down market. You've seen a nice reacceleration of SMB business back up to double-digit growth. I think there's some more challenging dynamics happening in the enterprise space. Could you just talk through what demand trends you're seeing amongst those two customer bases, how RingCentral is trying to position the company, and how you think about those customer segments going forward?
Look, demand remains strong. Sure. SMB is now growing in double digits, and enterprise is not. I have to say, though, that used to not always be the case. Hopefully, we'll get enterprise back up there as well. With enterprise, really what we're doing is we're fighting harder comps. We're still adding tons and tons of new business. We're adding lots of new logos. We're having very healthy upsell into the base. Our logo retention is as good as it's ever been. We are dealing with lapping COVID contracts at this point. It may seem like ancient history, but it really is not. We were signing long-term contracts during COVID at higher prices for more seats because people were just buying, buying, buying, buying. It's now reverting back to normal. This trend or the situation will normalize next year.
By the end of 2026, which should be done with those COVID contracts, there is a new normal, which, by the way, is the same as the old normal was before COVID. We just came back to that. It is going to be easier comps moving forward. We also had this situation with NICE inContact where we were reselling, where and are reselling their technology under our brand. We built a sizable business on it. They were going through some management changes on their side, new CEO, all of that. There was a bit of uncertainty in the market. Frankly, our channel dried up there. We kept the base, but new leads were drying up. The contract has since been renewed. There are, I would say, very, very good relationships between the companies again at this point. Lots of opportunities together.
It takes a long time to refill their channel. Again, we're fighting a harder comp, which should, if nothing else, normalize next year or after next year, and maybe even as the new pipes get refilled. Meanwhile, on the tailwind side, we have this new product, and we have RingCX, our own contact center, maturing and becoming more powerful. It is going to be hunting more and more up market, as well as our AI portfolio. There, ACE in particular, used to be called RingSense, is hunting up markets with dedicated call centers with dedicated sales teams. That is where it is playing. We're pretty optimistic, actually.
Yeah. On that latter point that you made, you talked about there's been a little bit of a mix shift from the NICE partnership to your newer CX offering. I think that has had a little bit of an impact to ARPU because I think the RingCX offering is lower ARPU than what you see with the NICE partnership. Could you talk about how you see that evolving over time? Are we largely through the impact that that might be having to growth? How do you think about that going into next year and beyond?
It's a true statement. I have to say, firstly, even just apples to apples, yeah, it's an impact on the top-line growth. The bottom line, I mean, we have owner economics on CX and not on inContact. What falls down to the bottom line is same or better with CX. Let's not forget that. Moving forward, look, CX is getting stronger. The partnership has been renewed. We feel we can cover the entire gamut now from very small contact centers. Very, very small ones we do with the customer engagement bundle. Okay? Then a little bit more formalized, more formed, we have CX, and that's going into multiple hundreds of seats. We think we'll be 500-1,000 seats. We have some examples even above that, even now, which we are one of them, by the way. Okay?
A company called Genpact, which is one of the largest BPOs in the world, is a CX customer now. They have like thousands, thousands, but those are still few and far between. Again, between CX moving up, CC, which is inC ontact-based, again, being in the field and the multi-year extension of the contract, and AI coming in and helping all of it, and with AIR in particular, not currently aiding receptionists. Moving forward, it will be aiding agents and eventually replacing agents. Again, we think we're pretty well positioned. We're putting our dollars where our mouth is. Dollars to the tune of $250 million a year is our R&D budget. Over half of it is already going to new products. Hopefully, we're here next year, same time. I hope it's going to be meaningfully, meaningfully more than half by then.
Perfect. I'd love to shift gears to the free cash flow improvement and profitability, which has been a bright spot in the RingCentral story. Vaibhav, maybe you could just talk about the runway that's still left there and the opportunities for continued leverage, both on the free cash flow side and also on the EBIT margin side.
Absolutely. Yeah. We are very proud of the improvements or the expansion we've delivered in both free cash flow and operating margin. Look, it's been a story of discipline, and we are very maniacal about revenue growth exceeding operating expenses growth. That's been a large part of the driver of free cash flow expansion. I mean, over the last three years, we've gone from $100 million of free cash flow to over $525 million, which is where we guided this past quarter. The improvements are coming from two or three places. There's operating leverage in the business. We are growing as a company and at 80% gross margins. A lot of it is dropping to the bottom line. There continues to be discipline in terms of spending. We are very disciplined in terms of our headcount hiring. We are doing a lot of vendor consolidation.
We are offshoring to low-cost locations. As Vlad alluded to earlier, there is increasing use of AI within the company. I think he coined the term ring on ring. We are using AI extensively. It is early on, but it is being used across multiple departments from R&D to customer support to sales. That is driving operating margins up, and that is flowing through to free cash flows. The second point there is we have also done a lot of work around working capital improvements. The quality of the conversion from operating margins to free cash flows has been improving. There used to be a bigger gap, I would say, five to six points gap two, three years ago. We have now kind of shortened that, and we have a point or so of difference. That is point number two.
Point number three is we are also looking at free cash flow in conjunction with reduction of SBC and share count over time. The metric we look at overall is free cash flow per share and free cash flow per share expansion. We are taking steps to improve free cash flow, reduce SBC, reduce share count, which is now at 2020 levels. Based on the last guidance, we are now at $5.70 of free cash flow per share, which both from a dollar standpoint as well as from a growth profile standpoint is best in class. The business model that we have around the recurring model that we have with the diversified customer base across SB enterprise and the growing portfolio of AI products gives us confidence that we'll be able to sustain that in the future.
Perfect. I'd love to talk a little bit about the investments in AI and then also how you're using AI internally. I think you've made comments in the past that a big focus of R&D today is going into your AI product. One, can you talk about that, how that is being allocated internally? Secondly, you mentioned using AI, right, as an area to save costs and improve efficiency. Maybe you can give some examples of the initiatives that are underway there.
Sure. As far as R&D dollars, I guess, are taken in that order. Look, all of R&D is becoming more efficient across the board. Certainly, we're not unique in that, but I don't feel that we are particularly behind anyone either. We got about 2,000 engineers, and they are required by mandate to use AI or else look for another job. Vast majority of them are choosing to use AI, I can tell you that. There is some resistance because it's new. Culturally, kind of they all understand that that's the future. This resistance is not very—they're not there again. Okay? Look, proof is in the pudding. We are able to innovate at a rate that we never have been. Okay? We are introducing multiple new products per year, if not per quarter.
Just the pace of innovation, the number of features being released is multiples of what it used to be. We're hearing some very crazy numbers internally, 70% improvement. I don't know. I want to be a little bit careful. What I can tell you is that we are not growing engineering headcount, yet pace of acceleration is improving. Just look at our announcement. Okay? There will be more of that to come. As far as use it internally, it's really across the board. We use it, certainly, like you said, ring on ring, AIR in front of our contact center, ACE behind our contact center. That's already the reality. Our agents are being assisted with AIR, being trained and quality managed with the help of ACE. Using our own products, we were able to move to our own WFO.
Let's not forget we've added that to the portfolio recently. We did it in a number of weeks. Our prior experience with the prior vendor was a number of months. That is a step function change. We use it in marketing. We use it in search engine optimization. We use it in sales, literally across the board. I'm personally absolutely not above using it for earning scripts and for end of the days because it makes sense. It is just a new tool, and if you use it right, only goodness will come.
Perfect. I'm sure that makes Steven's job easier. I'm sure he's excited about that use of AI. Maybe a last question for both of you. We're wrapping up 2025, headed into 2026. Vlad, first for you, what are you hearing in terms of customer conversations? What are your customers' spending plans potentially looking like going into next year versus what we saw this year? Vaibhav, for you, curious on capital allocation and how you're thinking about that strategy headed into 2027.
Yeah. Look, obviously, there is still some uncertainty on the macro side. Nobody's immune. Our customers are not immune. We're not immune. Uncertainty does not mean no business or less business, just where they're less sure. Some of these technologies we're bringing in, they are disruptive technology. AIR is disruptive. I don't want for the economy to go bad, but if somebody is laying off people, then certainly it's easier to replace receptionists with AIR than vice versa. In small business, it's the backbone of the economy. 40% of the U.S. economy is SMB. And it's been proving itself over and over and over again, and it will continue to do so. Again, this is really maybe one takeaway. When all is said and done, we are one of the very, very few mission-critical apps out there. If you're in business, you have to have customers.
If you have customers, you have to communicate with them. You have to provide means for them to communicate with you. As long as a business stays as a business, they need a solution like us. That is what we are hearing. Maybe sometimes we grow a little faster, sometimes a little slower, but it is always growing, and it always presents an opportunity to upsell.
Yeah. And then from a capital allocation perspective, look, our goal is to optimize free cash flow per share by investing in the business, growing revenues, paying down debt, and buying back stock. The beauty of having $525 million of free cash flows is it opens up optionality. The first use of cash always is putting it back in the business, in innovation and growth. Case in point, Vlad talked about over half of our quarter billion dollars going in innovation. That is about five points of margin that we are investing back in the business. We are opportunistic about M&A. We acquired CommunityWFM because that was a product gap in our CX portfolio. Again, we look at M&A. We are also deleveraging and strengthening the balance sheet.
You look at our leverage profile, we went from over 4x to under 2x over the last three years. We have addressed our near-term convert maturities, and we have also made a commitment to reduce our gross debt to $1 billion by 2026, which will put us very close to investment grade at that point. Last but not the least, buybacks represent an attractive opportunity at the current stock price levels. We bought back $200 million worth of shares. We have $385 million left from a board authorization standpoint, which we will continue to execute on. Overall, big picture, the idea is to continue to optimize the business for free cash flow, pay down debt, reduce share count, which is now, by the way, at 2020 levels, with the goal of improving free cash flow per share and expanding that over time.
Perfect. We'll leave that there. Thank you all for joining, and let's give Vlad and Vaibhav a round of applause.
Thank you.
Thank you.
Awesome. Perfect.