Day, and welcome to the RingCentral First Quarter 2026 Earnings Conference Call. I'd now like to turn the conference over to Al Petrie, Investor Relations for RingCentral. Please go ahead.
Good afternoon, and welcome to RingCentral's First Quarter 2026 conference call. Joining me today are Vlad Shmunis, Founder, Chairman, and CEO, Kira Makagon, President and COO, and Vaibhav Agarwal, CFO. Our remarks today include forward-looking statements regarding the company's business operations, financial performance, and outlook. These statements are subject to risks and uncertainties, some of which are beyond our control and are not guarantees of future performance. Actual results may differ materially from our forward-looking statements, and we undertake no obligation to update these statements after this call.
If the call is replayed after today, the information presented may not contain current or accurate information. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities and Exchange Commission, as well as today's earnings release. Unless otherwise indicated, all measures that follow are non-GAAP with year-over-year comparisons. A reconciliation of all GAAP to non-GAAP results is provided with our earnings release and in the slide presentation, which you can find under the Financial Results section at ir.ringcentral.com. With that, I'll turn the call over to Vlad.
Good afternoon, and thank you for joining us. We're off to a strong start to the year as we delivered another solid quarter with total revenue at the high end of our guidance. Importantly, we're also making meaningful progress in the quality of our operating model. We delivered record GAAP and non-GAAP operating margins, reduced stock-based compensation, paid down debt, and returned capital to shareholders, including our first-ever dividend.
These are important milestones and reflect a business that is becoming more efficient, more profitable, and more durable over time. As to free cash flows, we now expect approximately $600 million of free cash flow this year, which is approaching $7 per share that we believe is among the best in our peer group. Moving forward, we plan to continue to reduce SBC with a path toward our medium-term target of 3%-4% of revenue, and we're steadily building toward our goal of 20% GAAP operating margin in the next 3-4 years.
Our strong financial performance is rooted in operational discipline that is underpinned by our unwavering commitment to innovation and a strong competitive position. As one of the original cloud-native SaaS providers, we revolutionized customer communications by taking it from on-prem legacy infrastructure to the multi-tenant cloud. On the strength of that innovation, we've built a $2.7 billion ARR business that is growing, generating a healthy amount of cash, and is returning value to shareholders in a meaningful way. RingCentral's original success was rooted in the convergence of broadband, mobility, and cloud computing.
We leveraged these mega trends to transform how hundreds of thousands of businesses and millions of users worldwide communicate with their customers. Today, we're at the start of an even bigger innovation, namely AI, and specifically the rise of agentic voice AI. AI builds on top of all the world-class assets that RingCentral has created over the years. It plays directly to our strengths. With our robust platform, massive amounts of rich data, omni-channel communication capabilities, and global GTM and innovation of scale, we're well-positioned to leverage AI as a key driver of our long-term growth and profitability.
While agentic AI is very powerful and will be transformational to how businesses interact with consumers, our core belief is that it won't replace all humans. AI can and will do a lot, and it will make remaining humans in the loop more effective. RingCentral's secret sauce is to deliver agentic voice AI experiences at every stage of consumer-to-business interactions while enabling businesses to get human agents involved at the right time. RingCentral's differentiated approach is to make both AI agents and human agents smarter by working together seamlessly, resulting in better customer outcomes and greater cost efficiencies.
This hybrid human-in-the-loop model is where RingCentral excels. More specifically, our ability to orchestrate AI and human interactions at scale on a single platform across voice, text, and video, and do this at a global scale with industry-leading reliability, security, and quality of service. This is our structural advantage and the defensible competitive moat. RingCentral processes tens of billions of minutes and billions of calls and messages each year. As the front door to consumer to business interactions at scale, we are uniquely positioned to deploy AI across every stage of the journey before, during, and after human involvement.
We offer a modern end-to-end customer engagement platform spanning all consumer to business interactions. Our portfolio includes RingEX for cloud PBX, RingCX, and RingCentral Workforce Engagement Management or RingWEM for full features contact centers, and our recently introduced Customer Engagement Bundle or CEB for informal contact center capabilities. We embed agentic voice AI across our entire platform.
Our agentic voice AI portfolio or RCAI is currently comprised of AI Receptionist or AIR and AIR Pro, which automate customer interactions from the get-go. AI Virtual Assistant or AVA, which assists the human agent in real time, and AI Conversation Expert or ACE for deep conversational analysis and coaching. Overall, we are good at helping businesses connect with more customers, resolve issues faster and more cost effectively, capture more leads, and make remaining human agents more effective. Adoption of our AI product portfolio is strong.
Customers using our AI adopt more products, spend more with us, and stay longer, driving higher ARPU and net retention well above 100%. ARR from customers who utilize at least one of our paid AI products, which we refer to as RCAI-utilizing customers, has more than doubled year-over-year and is growing in double digits sequentially with favorable ARPU and retention metrics. Kira and Baibov will provide more details. In summary, I'd like to leave you with these four takeaways. First, RingCentral has a deep and defensible mode in an expanding market. We have built a carrier-grade communications platform with the scale, reliability, and trust required for mission-critical customer interactions.
As AI expands the scope of customer engagement, we believe that our market opportunity is only getting larger, and we are uniquely positioned to capture it. We are currently investing over quarter billion dollars per year in innovation with a meaningful and increasing portion dedicated to RCAI. This is another sustainable competitive advantage. We're confident in our ability to keep investing in innovation while continuing to further improve our operating metrics moving forward. Second, we are at the front door and top of the funnel for consumer to business communications.
We sit where interactions begin, where customer intent is first expressed, and where routing and resolution decisions are made. This gives us access to the real-time context and workflow intelligence that are increasingly valuable in the AI era. Third, we have a complete customer engagement platform powered by RCAI. This allows us to bring together AI agents and human agents on a single platform across voice, messaging, and video.
This is delivering real value for customers, and we're already seeing solid early adoption, growing monetization, higher ARPU, and strong retention across our RCAI-utilizing customer base. Important to note is that all of our RCAI and customer engagement products are fully owned by RingCentral with attendant benefits to control over the roadmap, time to market, and owner economics. We believe this to be another important competitive mode.
Fourth, we're delivering strong financial performance. We're improving non-GAAP and GAAP profitability, reducing SBC, generating meaningful free cash flow and free cash flow per share that is among the best in class, and returning capital to shareholders via buybacks and dividends. Our results speak for themselves, and we could not be more excited about the road ahead. With this, let me turn it over to Kira.
Thank you, Vlad, and good afternoon, everyone. Vlad laid out our vision, a complete customer engagement platform built on a hybrid model of AI and humans working together, delivering seamless customer experiences and better business outcomes. Here's an example of this vision becoming reality. Meet Cartelligent, a California-based automotive broker deployed our entire RCAI portfolio, AIR, AVA, and ACE. Previously, their high-value leads were being routed to an answering service where many calls were dropped.
With AIR, they decreased lead abandonment to 0, connecting 100% of live leads during business hours and achieved an 85% lead to sign-up target. AVA eliminated manual note-taking. ACE delivered visibility and coaching to keep improving. As the result of all 3 A's working together with human in the loop, they achieved a 9.85 out of 10 customer satisfaction score. Let me unpack these solutions further. AI Receptionist or AIR is designed for front office workers who demand it just works. Deployable in minutes, no developers required, built for businesses of any size.
AIR can now receive customer inquiries over voice and text messages. AIR is also integrated into Call Queues, handling overflow and missed calls to improve responsiveness without adding operational overhead. The market is responding well. We ended Q1 with more than 11,800 paying AIR customers, up more than 40% quarter-over-quarter. For customers requiring more complex configurable use cases, we recently introduced AIR Pro. With AIR Pro, customers can create multitudes of fit-to-purpose agents leveraging over 100 pre-built integrations, including EHR, CRM, scheduling, e-commerce, and billing.
Users simply describe what they need their AI agents to do. AIR Pro builds and deploys it, executing multi-step workflows. We already have our first paying customers, with healthcare emerging as a natural early fit given AIR Pro ability to address rich workflows while maintaining ease of deployment. One example is a federally qualified health center that was already running RingEX, RingCX, and ACE. They added AIR Pro to handle real-time shuttle routing for patients. The agent recognizes the caller's location, current time, and live shuttle status to guide patients to the right pickup point. It sounds simple. The underlying workflow is not.
That's exactly the point. AIR Pro makes complex orchestration feel effortless for the customer and for the business. Once the conversation ends, ACE takes over. ACE now has more than 5,200 customers, up 85% year-over-year. Sales, marketing, and compliance leaders use it to automate interaction reviews, connect conversation intelligence into their CRM and ticketing systems, and replace manual evaluations with complete visibility across every call. Take ATB, the largest financial institution in Canada. They added RingEX seats and ACE to eliminate the time lost on manual analysis, a strong example of AI and humans working together.
With human agents handling customer interactions, ACE delivers the post-call analysis, surfacing sentiment, gaps, and next steps, giving supervisors a clear picture of every conversation, scoring agents, and the coaching data to continuously improve human agent performance. As Vlad mentioned, we have an extensive R&D spend with a wave of new innovations opening up new use cases and expanding our TAM. These investments are leading to tangible results. Last week, we introduced branded messaging via Rich Communication Services, also known as RCS, delivering a verified business identity directly into customers' native messaging app.
This pairs up with enterprise branded calling, which displays a company's name and logo on outbound calls, driving higher answer rates from the first moment of contact. We've also extended support for SMS notifications with local numbers to 190 countries so businesses can engage their customers wherever they are with the same reliability they expect from RingCentral. Building upon our hybrid model of AI and humans working together, SMS is an important customer engagement channel for both. Customer Engagement Bundle, or CEB, is our latest product introduction, and it is off to a strong start.
CEB already has more than 5,000 customers with nearly 40% attach rate of our paid AI products. CEB brings informal contact center capabilities to RingEX, including contact center grade call queues and SMS shared inboxes. One example of a customer using these capabilities is Worldwide Steel Buildings, a Missouri-based company already using RingEX and ACE. They added CEB to manage queues, eliminate missed inquiries, and now get a complete view into every interaction, all on one platform.
Importantly, CEB is now available for Microsoft Teams, embedding voice, call queues, SMS inbox, intelligent routing, and analytics inside Teams, effectively turning Teams into informal contact center. As to formal contact centers, RingEX now has more than 1,700 customers, up over 70% year-over-year, with more than half utilizing AI. For example, Excelsior Orthopaedics in Amherst, N.Y., was struggling with a 22% call abandonment rate and hold times averaging 30 minutes. With RingCX and ACE Quality Management, they cut abandonment to 8% and reduced wait times tenfold, down to just 3 minutes.
Together, CEB and RingCX give customers powerful right-size options across both informal and formal contact centers and a clear path to grow with us as their needs evolve. The combination of our RingEX, RingCX, and AI portfolio, robust platform, omni-channel capabilities is fueling ongoing migrations from on-prem to cloud. For example, this quarter, Coca-Cola UNITED, the third-largest Coca-Cola bottler in the U.S. with 60 locations, is migrating thousands of seats to RingEX. A large Fortune 500 insurance company replaced their on-prem system and is further expanding RingCentral enterprise-wide deployment with tens of thousands of RingEX seats.
The New York Mets are replacing a decade-old on-prem system with RingEX, RingCX, and our Call Queues Booster. A major internet and streaming provider added RingEX to their existing RingCX deployment, along with AI capabilities including ACE, to drive greater operational efficiency. Casio, an iconic consumer electronics company, consolidated their legacy systems onto RingEX and RingCX and added ACE Quality Management to automatically score calls and improve visibility across every customer interaction.
Our innovations continue to be well-received by the channel and our GSP partner community in particular. Multiple GSPs partners are now extending their offerings to include our AI products. Cox Communications recently began deploying our native AI-powered contact center to their customer base. This quarter, TELUS and Spectrum Business have also started bringing our AI portfolio to their customers, expanding our reach and reinforcing platform's value at scale. In summary, we're delivering significant value to businesses, the industry analysts are recognizing this.
This quarter, we were named a leader in both the inaugural 2026 IDC MarketScape for Worldwide Communications Engagement Platforms and the 2026 Omdia Universe for Customer Engagement Platforms. From serving SMBs to enterprise and addressing simple to complex needs, with our unwavering commitment to innovation and a well-differentiated GTM, we're in a strong position to deliver a modern, complete AI-first customer engagement platform at scale. With that, I will turn it over to Vaibhav.
Thank you, Kira, and good afternoon, everyone. We started 2026 with another solid quarter and delivered against all the commitments we laid out entering the year. Q1 reflected continued consistency in our execution and further strengthening of our financial profile. Let me turn to our first quarter results. Starting with growth, total revenue was approximately $644 million, up 5.3% year-over-year, and at the upper end of our guidance, subscription revenue was approximately $623 million, up 5.6% year-over-year.
Customer trends remained healthy, including steady new customer additions and monthly net retention above 99%. These metrics continue to reinforce the resilience of our recurring revenue model and the mission-critical role our platform plays for customers. As Vlad noted, we are seeing encouraging early momentum in our AI-led new products. Customers using at least one AI product now represent more than 10% of the base, have doubled year-over-year, and are growing in double-digits sequentially. Within these cohorts, we see stronger ARPU and net retention rates above 100%.
Our growth profile remains durable and newer products are increasingly contributing to both expansion and overall revenue quality. Turning now to profitability. We delivered another quarter of strong margin performance. Subscription growth margin remains stable above 80%. Non-GAAP operating margin reached approximately 23%, up 110 basis points year-over-year and at the high end of guidance. We continue to view this margin expansion as structural.
It is being driven by the underlying leverage in a high recurring revenue model at scale, combined with disciplined hiring, expanded offshoring, vendor consolidation, greater internal use of AI, and continued focus on our highest return go-to market and products. SBC as a percentage of revenue declined approximately 400 basis points year-over-year to 9% in Q1. For the full year, we now expect SBC to be approximately 9% of revenue in 2026, down from approximately 11% in 2025.
This continued improvement reflects our disciplined approach to equity management and gives us confidence in our path forward toward a steady state level of 3%-4% in the medium term. The combination of stronger non-GAAP margin and lower SBC drove a record GAAP operating margin of 7.8%, improving by more than 600 basis points year-over-year in Q1. For the full year, we now expect GAAP operating margin to improve from 4.8% in 2025 to more than 9% in 2026. That is a meaningful step forward and reinforces our confidence in reaching our target of 20% over the next 3-4 years.
Turning to cash flow. We generated more than $140 million of free cash flow in the quarter, up 8% year-over-year. This reflects strong operating performance, continued efficiency gains, and improvements in working capital. We generated free cash flow per share of $1.62, up 15.4% year-over-year. Recurring revenue, strong growth margins, and improving operating efficiency continue to translate into substantial cash generation. As a result, we are now raising our full-year free cash flow outlook to approximately $600 million or a 13% improvement year-over-year.
Let me turn to capital allocation. Our approach remains balanced and disciplined. We are investing in growth, de-levering the balance sheet, and returning capital to shareholders. During the quarter, we addressed the $609 million convertible maturity by refinancing it with the undrawn Term Loan A. We reduced overall debt by approximately $46 million and lowered net leverage to 1.6x. We continue to make steady progress towards our goal of reducing gross debt to $1 billion by the end of 2026.
Importantly, we now have no maturities until 2030, and we maintain $355 million of undrawn credit capacity. We also continue to return capital to shareholders. During the quarter, we repurchased approximately 2.5 million shares for $81 million. At the end of Q1, we had approximately $418 million remaining under our repurchase authorization. Diluted share count declined 6% year-over-year to approximately 87 million shares, and we paid our 1st quarterly dividend of $0.075 per share during the quarter. With that, let me turn to guidance.
For fiscal 2026, we are raising subscription revenue to be $2.54 billion-$2.56 billion, representing growth of 4.7%-5.5%. Raising total revenue to be $2.62 billion-$2.64 billion, representing growth of 4.2%-5%. Raising GAAP operating margin to 8.9%-9.6%, expanding 450 basis points year over year. Raising non-GAAP operating margin to 23.3%-23.7%, expanding 100 basis points year over year. Raising free cash flow to $590 million-$605 million, up 13% year over year. SBC in the range of approximately $240 million-$245 million, improving 180 basis points year over year as a % of revenue.
Fully diluted share count of approximately 86.5 million-87 million shares, 5% lower year over year. Raising non-GAAP EPS to be between $0.0485-$0.0501, up 13% year-over-year. This results in free cash flow per share of $6.78-$6.99 for the year, up 18% year-over-year. For Q2 2026, we expect subscription revenue of approximately $628 million-$633 million. Total revenue of approximately $648 million-$653 million. GAAP operating margin of 6.6%-7.6%, up 110 basis points year-over-year. non-GAAP operating margin of approximately 23%-23.2%, up 50 basis points year-over-year. non-GAAP EPS of $1.15-$1.17, up 10% year-over-year.
SBC in the range of approximately $58 million to $62 million, improving 130 basis points year-over-year as a % of revenue. Fully diluted share count of approximately 87 million shares, lower by 6% year-over-year. In closing, Vlad has stated four key takeaways, namely deep and defensible moat in an expanding market, RingCentral as the front door and the top of the funnel for consumer-to-business interactions, complete customer engagement platform powered by RCAI, and strong financial performance.
To double-click on the last point, we have an efficient business at scale and a durable compounding free cash flow model. With approaching $600 million of expected free cash flow in 2026, we have the flexibility to reinvest for growth, strengthen the balance sheet, all while returning capital to shareholders, I couldn't be more excited about the opportunities ahead. With that, let's open the call for questions.
Thank you. We'll now begin the question and answer session. If you'd like to ask a question, please press star then one on your telephone keypad. To withdraw your question, please press star then two. Today's first question comes from Tim Horan at Oppenheimer. Please go ahead.
Thanks, guys. It's been a great quarter, and congratulations on expanding the margins and creating a lot of new products. Vlad, you kind of, well, you invented the UCaaS industry and had great vision there. Can you talk about where this new AI hybrid agent communications industry will be 5 or 10 years from now? How pervasive will AI be in voice communications? Can you talk about maybe any new products and services we'll see? How rapidly are AI models improving at this point? How rapidly are your services improving as you see it even right now?
Yeah, great. Hi, Tim, and you're too kind. Thank you. I'll go right to left. How fast are things improving? You know, speed of light. I don't know. These models are getting progressively better, progressively more independent. They are absolutely changing the way things are done across everything. We, RingCentral, we're actually in a very interesting position to where we're both very heavy users of AI internally and spending quite a bit of, you know, attention and effort on that, but as well as, of course, providing frontline, customer-facing AI tools.
Some of these AI tools are designed to, you know, basically get the human out of the loop, and some of them are specifically designed to enhance human productivity. To the first part of your question, what we see moving forward, I don't know, 10 years is a long time, but say for the foreseeable future, basically more or less a hybrid world. What I mean by hybrid is, some interactions are best handled by AI. That will only increase, and AI will become more and more powerful. We still very much see room for a human in the loop.
This comes in where, look, I mean, AI, at least for the foreseeable future, is probably not going to be able to address each and every inquiry. You know what? I'll give you a simple example. And sometimes people overseas this. There are things that AI will not be allowed to do legally, okay? For example, AI is probably not going to be in a good position to provide medical advice if it is on behalf of a licensed medical provider. For the, you know, foreseeable future, we don't see AI being licensed as a, you know, practicing physician or someone who can do prescriptions and so forth.
Where it all comes together is that let's say you have a customer inquiry or a patient inquiry coming into, you know, a medical provider, and AI answers whatever it can, and it can do quite a lot. It can answer billing questions. It can set up appointments. You know, it can maybe even read your test results without commenting. At some point in time, you well may want to ask for some specific advice, AI then has to connect you to an actual, you know, human being.
This is why when we talk about our RCAI portfolio, we talk about AI before a human gets involved, AI while a human is involved, and then AI after either an AI agent or a human agent is done with the call. We have AI processing recordings and transcripts, getting learnings from that, and then, the, you know, extreme and amazing power of all of this, it gets all fed right back in. Next call, both AI agents and human agents can be smarter, you know, more productive, more efficient. That's my a little bit longer answer maybe, but we think that world is going to be neither all AI nor all human, but a bit of both.
Where we are, we in RingCentral are just very fortunate to find ourselves, is we are one of a very small handful of providers that can actually serve both needs of the same platform. Because if you think about it, you have, you know, legacy providers, especially, you know, some of the on-prem legacy providers to this day that can bring no way, no AI, basically.
You have lots of startups, but they cannot really connect to a human. They have to, you know, integrate with third parties. RingCentral, we're able to serve both needs, okay? Single platform, single invoice, single SLA, single bill, all kinds of efficiencies and cost savings across the board. We are able to, again, field this, you know, complete, well-integrated, you know, hybrid, human agent, AI agent portfolio. That's what we're banking on.
Great answer. Thank you.
Thank you. Our next question today comes from Catharine Trebnick at Rosenblatt. Please go ahead.
Thanks for taking my question. I really appreciate it. Nice quarter. I have two questions, and I'll be brief with them. One is, it looks like you've really stabilized your revenue growth roughly 5% in the last several quarters. Full-year guide implies that the same range, you know, same band. You cited AI, ARR more than doubled year-over-year, now approaching 10% of total ARR. RingCX is gaining traction. You've got a Mitel via pipeline. Can you explain to me, you know, where you think the business gonna break decisively above 5%?
I'll take a stab. Hi, Catharine. Really good question. We, you know, numbers speak for themselves. I don't need to really cite them. We're a large company. We're still growing. We're growing steadily to, you know, restate what you all are, you know, extremely well aware of by now is, we have made a major pivot towards profitability, including GAAP profitability and free cash flow and free cash flow per share. We're very proud that, you know, all of the, you know, positive changes that we were able to effect. You know, we really are pretty close to best in class at this point on FCF basis.
As far as growth is concerned, look, we have meaningful portions of the portfolio growing in double, strong double, and in triple digits, and in certain cases, double or triple digits sequentially. Okay? I can tell you that, you know, when I was IPO in this company, you know, back in 2013, if you were to take our AI portfolio or our Customer Engagement portfolio, you know, would be, you know, independent, you know, publicly traded companies just based on that, you know, probably worth more than RingCentral was worth at the time of our IPO back then. All right? So we absolutely have these green shoots. You know, but it is a $2.6 billion business.
You know, industry is going through transformation. We are, you know, certainly seeing price rationalization, especially at the high end. As we discussed before, we're still, you know, lapping some, we still have some COVID lapping contracts even to this day. They are being repriced as they come up for renewals. Look, I think future is bright. Future is bright. We are hitting on all cylinders. Eventually, our AI-led products, and by the way, all of our products are AI-led, given their growth vectors and the given size of the market that we're seeing, you know, we are very, very confident that we have a lot of room to grow, you know. There is still obviously there is execution, you know.
you know, nobody, you know, we're not taking anything for granted here, but there is a market. We have a strong team. We're spending $250 million plus on R&D alone. We have a differentiated channel, literally tens of thousands of feet on the street between our direct sales force and partners and global service providers. That's unique in the industry. We're in a good position. I think we're in a good position to continue delivering shareholder value, which is, you know, going in our book is a combination of growth and shareholder, returning value to shareholders in other ways as well.
All right. Thank you, Vlad. Appreciate it.
Thank you.
Our next question today comes from Siti Panigrahi with Mizuho. Please go ahead.
Hi, this is Samir calling in for Citi. I was just wondering, as you make investments in the AI initiatives, how do you balance growth and margin priorities and those? How does that square off against your overall 20% GAAP operating margin targets? If you can share like a glide path or kind of like your view into how are you going to achieve those targets, that'll be great. Thank you.
Yeah. Thank you, Samir, for the question. Look, from an operating margin standpoint, we are very pleased with, you know, the trajectory that we've been on for the last 3 to 4 years. We've doubled our operating margins from, call it, 12.5% to almost 23%, 24% now. Q1 was another proof point of that. I mean, we ended the quarter with record operating margin. We are raising our guide for the full year, further expanding margins now by 100 basis points. We are doing this while we are investing in innovation.
Let's call it the power of and, which is we are growing, investing in innovation, and expanding margins and free cash flows at the same time. The margin expansion is structural. You know, we have. Vlad talked about a large recurring base. We have a $2.5 billion recurring revenue model. ARPU are strong, net retention rate is strong, gross margins are high. That gives us leverage. There is embedded operating leverage in the model wherein our revenue growth continues to outpace expense growth. It's also driven by disciplined cost management.
You know, we are disciplined in terms of hiring and offshoring, vendor consolidation, increasingly using AI within the company. The margin drivers are structural. We are also looking at operating margins in the context of reducing SBC, GAAP profitability and free cash flow and free cash flow per share. As you saw, we further reduced SBC this quarter. Our trajectory for this year is gonna take down SBC by 200 basis points, and we have outlined a long-term outlook, sorry, a medium-term outlook of 3%-4%. We are well on our way to doing that.
As a result, GAAP operating margins are growing faster. In Q1, we are expanding GAAP operating margins by almost 600 basis points. We ended the quarter at nearly 8%, and this year we'll be close to 9.5%, doubling year-over-year. That puts us on a trajectory to get to our GAAP operating margin target of 20% as well. The structural improvements, reduction in SBC is also converting into free cash flow and eventually free cash flow per share, which we guided to close to $7.
Again, as Vlad noted, it's the best in our peer group. Overall, we feel good about how we've guided. We have structured drivers in terms of our recurring revenue model. We have a large base that is very sticky. We have a diversified customer base and an improving GAAP and non-GAAP operating margin profile. Overall, we feel good about where we are.
I just want to add. That, that's all right. Thank you, Vaibhav. I just want to add, this is a very high level. I think maybe question behind the question is, "Hey, isn't AI, you know, good for growth but eating margins?" We don't think that that's the case necessarily. Customers are willing to pay for AI if it's good AI. Again, we have this natural, very deep moat with our ability to deliver both AI and human to human at scale globally. Okay? There are lots and lots of really smart engineers, and one of their tasks is to optimize AI. In human speak, use the right model for the right job. You know, it's all just a tool set.
With what we're seeing out there, you know, in the foundational AI community or ecosystem, and just how fast, you know, what used to be, state-of-the-art, you know, is no longer, you know, the very state of the art, but it's still very, very good. You know, very soon, matter of months, it becomes open source anyway. There is just a lot happening. You know, we don't think that AI is going to, you know, commoditize or become, you know, free or virtually free.
For now, we've been able to keep approximately same gross margins, even for our RCAI products. You know, we're hoping and also working hard that that's going to continue. Everything else that Vaibhav said, you know, we are confident that we will be able to continue growth, continue more AI, which means more stickiness, you know, better ARPUs as well. Importantly, you know, continuing our margin expansion and cash flow generation. Fingers crossed.
Great. Thank you very much. Very helpful. Thanks.
Thank you. Our next question today comes from Brian Peterson at Raymond James. Please go ahead.
Hi, thanks for taking the question. This is John on for Brian. I wanted to ask on the free cash flow. Really strong quarter of free cash flow raised the outlook here. I think if we look at the trajectory and the potential run rate, it suggests you guys are on path to generate cumulatively like multiple billion dollars of free cash flow over the next several years. First, am I thinking about the trajectory of free cash flow right as we move forward? Maybe talk about how you're prioritizing the deployment of capital. I have a quick follow-up. Thank you.
Yeah. Thank you, John, for the question. Look, again, we are very pleased with the trajectory we have been on. We now have a consistent track record of expanding free cash flows over the years. You know, 3 to 4 years back, we were a sub-$100 million free cash flow generating company. We've guided to $600 million, that's a 6x improvement. Q1 was another proof point. Strong free cash flow, free cash flow per share, raising the guide for the full year, all while again investing in innovation. Again, the free cash flow that we are driving is because of the structural drivers that I outlined in the previous question.
The other important point to note is that the quality of free cash flows is also improving for us. It's our operating margins are converting very closely into free cash flow out due to working capital efficiency. While we are not providing targets beyond 2026, the $600 million of free cash flow gives us a lot of optionality in terms of capital allocation. I've outlined a disciplined approach there, which is investing in or reinvesting dollars back into the business to fuel innovation. Vlad talked about the traction that we are seeing with our AI products.
We are balancing, you know, e-expansion, free cash flow expansion with investing in growth. We've outlined a target of reaching $1 billion of gross debt by the end of 2026, so that's the second use of cash wherein we are continuing to delever the balance sheet, and we are on our path to doing that. At these valuation levels, you know, buybacks remains an attractive opportunity, and we are returning cash in the form of buybacks, which we executed in Q1.
We have another approximately $400 million outstanding in terms of our authorization, and we paid our inaugural dividend this quarter, which we expect to continue to do. Overall, I think takeaway is multiple structural drivers, again, to drive free cash flow, both because of the operating leverage and the discipline that we have in terms of costs. Look, we are becoming a compounding free cash flow story that's built on a very durable operating foundation because of the large base that we have built, our recurring customer base and our growing portfolio of AI products.
Okay, thanks. That was really good color there. Then on GSPs, I did wanna ask, it's been a really good growth sector for you guys. I think it's been growing above the sort of the company average there. You guys have been expanding the product set. Can you maybe talk about the early receptivity you're seeing from GSPs around your newer solutions? Maybe what's contemplated in the guidance from GSPs, and maybe talk about like medium-term targets of where that can go to with the new solutions. Thank you so much.
We see good receptivity. I think we even mentioned some of this in the prepared remarks. We're seeing multiple GSPs lining up and now expanding their footprint with us by reselling some or all of our RCAI products. Directionally, we're very, very pleased. It is, of course, very, very early. We are not in a position to change the guide at this point. I would say that they're performing, it's early. They're performing as expected at this point. Look, our history with GSPs is that they're a wonderful amplifier, but, and we're the starter engine.
We still have to get it working right and, you know, tuned just right with our direct customers. Fortunately, we have lots of them as well. Then we take this playbook to the GSPs. Of course, they have their massive brands and, you know, massive networks that, you know, that they can use to amplify. I would think that overall, GSP or RCAI in GSP story is probably not so much for this year, but 2027, 2028 and that, if you would ask me.
Okay, perfect. Thank you so much.
Thank you. Our next question today comes from Michael Funk at Bank of America. Please go ahead.
Thank you for taking the questions. 2 for you, Vlad. You know, first, wondering how you see the pricing model changing over time with AI. Also AI related, just wondering if you could talk a little bit about, you know, the barriers to competition AI. What's gonna prevent other AI solutions from decoupling your own AI and becoming a competitive threat, whether integration or capability?
Well, again, taking the second question first is nothing prevents them except that they don't have, you know, this global network that's processing, you know, lots of tens of billions of minutes per year and billions of calls and billions of, you know, SMS texts, and we continue our leadership, you know, in the U.K. space, and we are making major inroads in the CCaaS space now, both amplified with AI. This is what, you know, gives us a, you know, pretty strong footing, I think, you know, competitively.
Again, what, you know, my answer to the very first question on this call, was that, you know, in the world of hybrid, it's very hard to see any startup be able to replicate what we have, when the job is to get AI agents and human agents, on the same platform without getting third parties involved. That's a huge competitive advantage we feel that we can come in, with a turnkey, you know, Swiss Army knife solution and say, tell customer, "Look, right tool for the right job, and you only get to deal with us." If nothing else, it gives us, you know, pricing power, and flexibility, you know. Because we also don't have any third parties to pay to.
By the way, I do wanna double-click. When we talk about RCAI, this is our native AI. Okay? So we're not paying, we're consuming tokens, of course, and we're paying foundational LLMs, but When we talk about this, these are not products, third-party products that we resell. Okay? That's the second part of the question. Sorry, repeat the first one, please.
Pricing model.
Pricing model. Look, people talk about this a lot. I can tell you what we're seeing. We're seeing, again, more of a hybrid combination model. I think, you know, people initially got all excited about, well, it's all going to be outcomes based. I'm not really personally aware of too many people who are actually truly pricing outcomes. If anything, people are pricing usage. But I tell you more and more what's coming into, you know, focus into vogue, are these hybrid approaches to where there is some minimal commitment a company makes, whether it be seed-based or, you know, some other measure, whatever.
In our case, you know, maybe minutes consumed or questions answered or something like that. But you know, people need some predictability on both sides of the equation. Customers need some predictability, frankly, providers do as well. This is what we started out with. When you look at our, for example, AIR portfolio, its pricing is very simple. You get, it's still a monthly subscription plan. You get certain allocation of minutes. You know, unit of measurement is minutes here. If you're over that allocation, you know, you upgrade into the next tier or you buy another basket of minutes.
What we find with our customers is that's a business model that resonates, is good for smaller customers because, you know, it gives them predictability. It also works for larger customers because they really have enough analytics to know exactly what they're using. Frankly, for them, it doesn't matter. You can price per seat, per minute, per enterprise. Like, everybody knows what they're consuming. We know our costs. They understand their spend. It's all open book anyway. Again, short answer, still hybrid and, right tool for the job.
That was very helpful, Vlad. Thank you for that.
Thank you.
Thank you. Our final question today comes from Elizabeth Porter at Morgan Stanley. Please go ahead.
This is [Jamie] on for Elizabeth. Appreciate you taking the question. You know, great to see the continued momentum that you're seeing with the AIR solution and realizing that it's still super early days for the AIR Pro variant. Just curious how you view the opportunity to maybe upsell some of those existing customers to the, you know, the AIR Pro tier?
Yeah. Hi, Jamie. It's existing customers of both AIR and those without AIR are both opportunities to upsell AIR Pro. AIR fundamentally is a pre-configured, fit-to-purpose agent, very easy to deploy. A receptionist can deploy it. Meant to do very simple tasks, answer questions, route calls, book appointments. AIR Pro comes with AIR Pro Studio and has ability to do much more complex workflows, complex tasks.
They complement each other. We're right now in the process with AIR Pro being early access program, open to select customers. Seeing those customers actually with AIR also buy into AIR Pro for different use cases, work in tandem, work together. Generally, the two products will be sold in parallel out there, and one can talk to another as well.
Thank you. That does conclude today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.