Good morning. I'm Ryan Koontz. I cover the cloud communications and broadband sectors here at Needham. I'm joined today by RingCentral. RingCentral simplifies business communication to help 5 million people connect worldwide. I'm joined today by CFO Sonalee Parekh. Welcome.
Thank you. It's great to be here.
Nice to have you here in New York. Let's start with the first quarter results. you know, excellent print, and stock had a nice pop. Most impressively, the OP margin gains you guys have put together in the just of late have just been pretty eye-popping.
Mm.
Can you expand on the quarter and how management felt about the quarter overall?
Sure, yeah. you know, it was a really good quarter. We beat on top line, operating margin, and bottom line. We also felt really good about the underlying free cash flow number we delivered. We delivered 700 basis points of year-over-year improvement in operating margin, and it was a record operating margin at 17.2%.
Yeah.
It was also a record quarter for cash flow. We delivered $61 million of free cash flow. We did have a one-off charge related to restructuring. The headline number was $54 million, but on an underlying basis, that's $61 million. I think as a team, we were really proud of that number. In terms of the operating margin improvement, I mean, you've heard us talk about this, well, actually, since I've joined Ring, which is...
Yeah.
By the way, my one-year anniversary.
Congratulations.
Which I'm celebrating here. you know, a lot of work went into that and, you know, you asked about what we were proud of. I think what for me as a CFO that I'm most proud of is some of the efficiency actions that we took last year, where we actually took costs out, have allowed us to become more agile and actually delivered better outcomes and better results. One example of that-
Mm-hmm.
-is on Demand gen. We took, you know, a significant amount of brand spend, out year-over-year, but also, on pure Demand gen spend. We've become much more targeted.
Mm-hmm.
in how we're spending those dollars as opposed to, you know, Jackson Pollock style, throwing it everywhere.
Sure.
We're now being super targeted in our, in our verticals that we've, you know, that we're focused on.
Yeah.
One example is healthcare, but what that's done is it's created a much more focused pipeline for our salespeople to go out and convert.
Yeah.
I think that's the best of all, where you're actually able to be more efficient, and it allows your people to do their jobs better. I think that's where we as a team felt really, really good.
Yeah.
Overall, as you say, you know, the quarter, we saw some stabilization in some of the macro trends that we called out.
Oh, yeah.
Macro.
Yeah.
I won't front run that answer. You know, I think overall we do feel really proud about what we delivered and-
Yeah.
you know, we see more goodness to come.
Very surgical, I would say.
Yes.
Right?
Exactly.
I mean, just adapting to the reality in real time. Congratulations on that.
Absolutely right. Thank you.
That's great. Let's talk about, you know, some of the headwinds on the top line. We've seen slow, obviously macro impacts. Kinda walk us through how that's impacting RingCentral and how you're adapting to some of these headwinds on the, on the revenue side.
Sure. You're absolutely right. There have been, some, you know, certainly we believe macro headwinds impacting the business, particularly on the enterprise side. What we're seeing is more resilience in our SMB business.
Mm-hmm.
On the enterprise side, what we have called out and again, we're seeing a stabilization of these trends, but they are persisting. It's the longer sales cycles, reverting back to pre-pandemic levels. You know, more levels of approval and-
Sure.
you know, we're now seeing CFOs in some of the conversations.
Yeah.
its interesting because I'm, often, when a CFO gets pulled in, I get pulled in as well, and I'm doing more sales calls now, which I love. It's actually really fun to be in front of your customers. You know, I also really understand what that CFO is going through because, you know, when you asked about some of the efficiency measures we took, you know, we as a company at RingCentral are going through every line item.
Yeah.
You know, I have a head of procurement who literally is going through every contract and, you know, I'm disappointed if he's not able to negotiate at least, you know, more for less or, you know, some kind of concession from the other side. You know, we're seeing it ourselves and living it.
Yeah.
Our customers are still, those extra layer of approvals do cause, you know, there's.
Sure.
It takes longer to close something.
Yeah.
The other thing is those, smaller deal sizes, the smaller initial deployments, and again, that's more on the enterprise side. The other thing I would call out is.
It's more challenging to upsell some of those.
I was just about to say that. It's. Our churn has remained stable.
Yeah.
Very proud of that, particularly in the current environment, and we are very focused on maintaining our logos.
Mm-hmm.
Actually, adding logos has been very strong too. Where we're seeing more impact and where we have seen over the last several quarters is on the upsell, which is more challenging, particularly enterprise, and then the downsell. That's more, customers who are managing to, you know, slightly different workforces and.
Sure.
You know, they've been rationalizing their workforces. We are fortunate in that, you know, we don't have too much exposure to tech vertical. We're much more exposed to healthcare, and retail, financial services.
Yeah.
You know, we are still seeing the impact on the, on that downsell.
Yeah. Those are pretty resilient sectors, though, right?
Yes, they are. Exactly.
Wind around too hard, at least.
Yes.
Your win rates in general, you've commented are?
Win rates are stable and, you know, looking good. The other thing is, you know, when you think about end user demand for our product, leads also, you know, strong and up year-over-year.
Mm.
It's just taking longer to convert those leads. You know, that's a great for us, you know, when I'm in my seat, when I look at leads, that's a great indicator of what's to come.
Mm-hmm. The big picture really sounds like a TAM issue rather than a share loss challenge here. You're really just, the macros kinda you saw a lot of pull forward probably during the pandemic and some recoil.
Yeah. I think so I don't think it's TAM necessarily because the opportunity is still out there.
Mm-hmm.
I mean, those on-prem seats are eventually-
They're there.
They're there. You know, it's not a question of when. It's not a question of if, it's when. Like, those seats are eventually moving to the cloud. I think it's slower decision-making. You know, I still am excited about the TAM and ultimate opportunity. It's really just a question of getting through the current macro and challenging environment.
Got it. You said, enterprise challenged elongating sales cycles, SMB relatively robust.
Robust and resilient.
The mid-market, how is that? Just kind of fits in the middle there more?
I would say mid-market is more along the SMB side.
Okay.
On the resilience.
Great
...on the enterprise side where we're seeing, you know, those headwinds.
Yeah.
Not worsening. Very much stable on what we saw in Q4. The only other thing I called it out on our earnings call, and I think it is worth mentioning, is there is more back-end loading in the quarter.
Mm-hmm.
You know, when you're in a business like ours, you know the linearity and typical linearity.
Yeah.
You know, people ask me, what surprised you in the last quarter? The linearity was more exaggerated in terms of being back-end loaded.
Mm.
I strongly believe that's a feature of the macro because we at RingCentral are also doing that, you know.
Sure.
I think customers often feel like the longer we wait, the better deal we're gonna get.
Yeah.
Um-
You need to make sure the cash flow is there to support it.
Exactly
at the end of the quarter.
That's right. Absolutely.
Yeah. You talked about some big efficiency gains in sales and marketing and really your go-to-market, I think at RingCentral has been historically for a decade plus, a huge differentiator.
Yes.
Talk about some of the retooling you're doing there, to gain some of these efficiencies and the internal changes made around the sales and marketing.
Yeah. you're right. I think our go-to-market has been a great source of differentiation. you know, we have several unique go-to-market motions.
Mm-hmm.
You know, channel and our partners are very, very important to us and a significant part of our business. We also have our GSPs or global service providers, which, you know, we have some legacy relationships that are, you know, contributing a significant amount today. Then we add or layer new relationships on. An example of that is Charter, which we've recently added.
All right.
Charter has been going very, very well, you know, exceeding expectations. We continue to expect to, you know, the GSPs or service providers or telcos, as some people know them, as, you know, are sitting on millions and millions of seats. Again, those are.
Legacy, old BroadSoft technology.
Exactly
that are still running on, and they'd like to.
Still running on. Many are being decommissioned. So we feel very upbeat about the opportunity there. In terms of the retooling, one thing I would definitely call out is that when we did take efficiency measures, mostly in Q4.
Mm-hmm
a little bit in Q1 this year around go-to-market.
Mm-hmm
...we were very careful, and you used the word surgical, about not impacting our frontline sellers.
Yeah.
What we've done is try to be a lot more clever around, customer acquisition cost. We've tried to be a lot more clever around, again, where we spend our marketing dollars and our program dollars. That is where we're actually seeing a lot of the efficiency go through. Again, it was 420 basis points year-over-year.
Yeah
that we managed to do in sales and marketing-
Yeah
...which we're proud of. You know, we think that there's even more that we can do there. You know, when I first arrived and I looked at our overall cost base, sales and marketing was an area that I knew I was gonna want to,
Yep
...at least, spend more time on. Within that, I would also say, you know, we were talking about churn and stable churn. Customer success is an area that w,e're investing in.
Mm-hmm.
When you think about retooling and when you think about a SaaS company of our scale, you know, we're $2.2 billion of ARR now. Managing churn and downsell is really important. We decided at the end of last year, when we took some of these efficiency measures, you know, not all of them go straight to the bottom line. Some you're reinvesting.
Mm-hmm.
You're reinvesting for, growth, and you're reinvesting for higher ROI opportunities, but also reinvesting in areas that perhaps we hadn't invested in enough historically, and customer success is one of those areas.
Great. On the channel side, do you still have some direct motion as well?
We do indeed.
Is it still-
Yes
...core to what you're doing or not?
Absolutely.
I do hear a trend toward more channel and trying to.
we called that out.
...get more channel.
Absolutely.
How do you balance that out between-
Yeah
...your own direct motion.
Yeah
The Fortune 500 maybe?
Exactly. That's right. We called it out on the conference call, and we are looking at some retool or adapting the relationship.
Mm-hmm
Between ourselves and channel partners, where the channel partner will take on even more of the selling motion.
Right
...including aftercare. The reason that's a positive for us is, you know, again, it's accretive to our CAC, our cost of acquisition.
Yeah
...and accretive to our LTV to CAC. That's something that's currently ongoing. We're in the early stages of that. As a you know, go forward, we will still very much have a direct motion, a channel and VAR motion, as well as the GSPs.
Yeah, the GSPs, I mean, that's been a hallmark, I think, of the company for many years, and you continue to grow. The, the Charter addition, I was particularly impressed by it 'cause they... Charter has their own strategic initiative to kind of bring up the balance on business services...
Yes.
within their own.
Exactly. Yeah. No.
That's a really good-.
We see a lot of potential there and, you know, cable operators in general.
Mm-hmm.
You know, we've also recently announced a partnership with Vodafone, which we'll start to ramp this year.
Yeah.
Which we're excited about. You know, they're one of the largest, telecom companies globally.
Yeah.
You know, super, upbeat about what's to come there.
Great. How about on the R&D front? Seems like you've mostly been able to protect your R&D investments...
Yeah.
not looking to cut too much there.
Yes. Innovation is the lifeblood of this company.
Sure.
I think I said that in my press release quote. I also, you know, tell people it's one of the main reasons I joined RingCentral, is because innovation is at the heart of what we do. This is a product-led company. You know, at the end of last year, as a management team, when we were looking at the areas where we saw the, you know, opportunities for efficiencies, we were very careful. Vlad, our founder in particular, was very careful about protecting R&D, and I think that's absolutely essential, one, to ensure that we maintain our product leadership and differentiation, and, you know, our industry-leading ARPUs. Also, you know, we feel very important that we need to continue to innovate.
Mm-hmm.
You know, we started off as a disruptor, and we want to maintain our disruptor position. You've seen in Q1, we actually made quite a few product announcements.
Yeah.
One of which is RingSense, which is our AI platform
Right.
Which is pretty cool. Currently in beta with our sales force, but it's so far we've had incredibly strong feedback. In fact, our sales force is using another product right now, a third party product.
Right.
That we're, you know, none of them wanna use it anymore. They say RingSense is so much better. We also have been innovating on our team's practice.
Saw that.
We launched.
I saw those at Enterprise Connect.
Oh, you... Okay.
It looked really good.
Oh, yeah. Actually, I think, Will, my head of IR, mentioned that you saw it. Yeah. Teams 2.0, you know, really great because, basically we now have Teams on a single pane of glass.
Right.
What that means is if you are a customer, you don't need to toggle between Teams and RingCentral.
Yeah.
We think that could be pretty game- changing, and, you know, feel very excited. Then, you know, we also announced our RingCentral for frontline workers.
Push-to-Talk.
A Push-to-Talk technology, which,
Like the Nextels.
I remember Nextel well.
Yeah.
That's the first thing I said, by the way, when somebody mentioned it. You know, there are 2.7 billion frontline workers out there.
Right.
We've deployed it with, you know, a couple of major customers and one in particular that I'm thinking of. They apparently love it and are already asking for more.
Great. Excellent.
It's been a great quarter for innovation, and you're right, like, we're gonna continue spending there.
Yeah.
I'm gonna go back to the point about when you, when you take costs out, you know, it's the luxury of that is that you can decide where to redeploy those dollars. Of course, we want lots of it to go to the bottom line and to free cash flow, but we also wanna be investing in areas-
Mm-hmm.
-that we feel, can drive future growth and future upsell opportunities.
Yeah.
That's where we see, you know, things like RingSense really making a difference.
Yeah.
-to our sellers.
Outstanding. On the updated guide, 10%-11% subscription growth on the year. I think that's pretty healthy. You guys feel like that you've reached a sustainable level here?
Yeah. you know, I guided a week ago.
Yeah.
No real change to make there, Ryan.
Sure.
Yeah, we feel comfortable with.
Good to hear it, you know, reiterated, though.
No change in the last week. Yeah, we feel comfortable with where we've guided and I think, you know, also the at least 18.5%.
Yeah.
OP margin guide, you know, that was a raise again. you know, it's several quarters where we've raised the outlook and, you know, feel confident about exiting, 2023 at OP margins above 20%.
Is that mostly coming from further sales and marketing efficiencies?
It's broad-based.
Where's?
Yeah.
Where's it coming from?
Yeah. It's broad-based. I mean, some of it is the operating leverage that is inherent in, you know, as we grow and, you know, you mentioned.
Revenue.
Subscription revenue growth of 10%-11%.
Yeah.
You know, that is accretive, and there are many costs that we don't need to incur, over and over, as we continue to grow. You know, we are always looking for new areas. We're being super disciplined right now. I can give you an example, in terms of, you know, some of the savings we're actually seeing in finance. Like I'm using my own department here.
Sure.
You know, a lot of our processes from procurement to payment were actually highly manual.
Wow.
Yes, because we grew so quickly, right? Sometimes the processes don't keep up. Now here's this opportunity to look at everything, and we're bringing in a third-party software.
Mm-hmm.
on procurement.
Mm-hmm.
That alone is going to generate high, high single digit savings.
Really?
Like, those are savings that will continue into perpetuity.
Wow.
That's just in my own department. You know, where are we doing more on the procurement side, I expect to see, you know, significant increases in terms of savings. Then, you know, lowering the customer acquisition costs, what you talked about on what we're doing with the channel.
Mm-hmm.
That should also deliver, you know, pretty significant savings.
Your IGNITE program, I believe that was called?
Exactly. Finally, just managing the workforce. You know, in terms of where people are located. You know, incremental hires we're doing in hubs like Dallas and Charlotte.
Yeah.
which, you know, are great places to live and work, and, we actually find talent really wanna come and work at RingCentral in those markets.
Yeah.
You know, we get the savings, but equally a really great talent pool.
Great.
I think all of that combined helps to give us confidence on the OP margin continuing the upward trend.
Are there some long-term opportunities you're deferring on the, on the go-to-market side, like some international expansion areas you probably have had to cull back a little on?
Yeah. Look, international has been somewhat impacted by, FX.
Mm-hmm.
You know, ex-FX, our international business is, you know, operating to plan. In terms of scaling back, where we really push hard on international or where we feel we're differentiated is through our GSPs.
Mm-hmm.
You know, I mentioned Vodafone.
Vodafone, yeah.
We also have a relationship with Deutsche Telekom. There are others in the pipeline which I can't call out. I wouldn't say we're really scaling back, but what I would say is that I think we feel that there are lots of opportunities in our current kind of You know, 90% of our business is U.S. and Canada. We feel very good about the opportunity there, and international will remain a long-term opportunity for us. Whether it's going to get a lot of incremental investment this year, you know, apart from the GSPs-
Yeah.
They... That-
You get an amplifier effect from the GSP relationships.
Correct. Correct.
You have to invest to get these markets launching.
Yeah. We think that that is a great way to also, you know, test out some of these markets where we don't have a lot of boots on the ground.
Right. Right.
That we'll continue doing that.
How about on the gross margin front? We've seen that stabilize here in the upper 70s. What are some of the puts and takes on margins we should think about going forward here?
Yeah. gross margin, I always think about it as subscription gross margin.
Right.
you know, healthily above-
Yeah.
Well above 80. Feel good about being able to maintain that.
Mm-hmm.
In terms of puts and takes, you know, great, scale helps, right? In terms of telco costs and, you know, I, again, I think we do have industry-leading gross margins, and the team there does an amazing job, although I want them to push even harder, of course. As we get bigger, it's easier to negotiate. In terms of the revenue mix.
Mm-hmm.
CCaaS is growing.
Right.
Growing higher than our overall aggregate go-growth.
Yeah.
That is a inherent natural headwind to gross margin.
Right. Yeah.
which you've seen in the, in, you know, coming through the base. That being said, you know, again, feel very good about maintaining it above 80.
Telecom costs and things like that.
Yes. Exactly.
I've heard a lot of shopping going on, like, "Hey, we can get better deals.
Exactly right. We have.
That's great. Maybe shifting over to product and talking about some of your differentiators there, in the, in the overall competitive landscape, like, you know, with RingCentral, with your, you know, workflow integrations, APIs, these sort of things have always been a hallmark of RingCentral.
Yes.
Do you feel like you're still continue to invest there and you've got a nice leg up on your competitors?
We absolutely are, you know, I'll go back to our founder. I mean, he is so focused on product and technology, which I love. You know, why do people trust RingCentral with their businesses, and especially, you know, things that are so mission- critical.
Yeah.
in terms of reaching their customers? I mean, it's our reliability. 99.999, right? Five- nines reliability. I think we're in our 19th quarter.
Yeah.
Of Five- nines reliability. No one else can touch us on that.
Yep.
You know, what does 99.999% reliability mean? It's about five minutes of downtime per year.
Right.
like, RingCentral is there for you. Our integrations, I mean, we have thousands and thousands-
Yeah.
of integrations, and, we have best-in-class integrations with the likes of Salesforce, you know, ServiceNow.
Right.
HubSpot, you name it. If you name it, we've probably integrated with it.
Yeah.
Again, they're best in class. Geographic reach, again, like none of the peers come close. 145 countries, that's really important, particularly as we deal with more and more enterprise customers. They expect that and want that from us. Then there's our new products that we're adding in terms of RingSense, the AI analytics and data, and, you know, we have billions and billions of conversations, minutes of conversations.
Sure.
That customers can use to provide insights and learn more about their customers and their customers' behavior. You know, we think that there's going to be a treasure trove in terms of being able to, provide value and insights to our customers and improve decision.
I imagine that will really apply on the contact center side. We can unpack that a little bit and your strategy there. You've had a long-standing relationship with NICE inContact.
We have.
For big enterprise, and you've got your own homegrown.
Yes.
low end. Can you kind of walk us through, the CCaaS strategy?
Sure. Sure.
in general and
Absolutely.
How do you see it unfolding as we go forward?
Yeah. We have a great relationship with NICE inContact. It's going on, I think seven or eight years now. I think, again, some of our peers have relationships with someone on the contact center side, but it's fairly new.
Yeah.
Don't underestimate how important that kind of, six to seven- year, lead we have is.
Sure.
because it means the integrations are incredibly strong. We're also the only leader on both UCaaS and CCaaS in the Gartner Magic Quadrant.
Yeah.
If you're an IT buyer and you know you wanna, you want the best, you're gonna go for the combination of Ring and NICE because they're both that.
I've been to their conference. They value RingCentral's relationship a lot.
Okay. Oh, great. I've never been to their conference, but I certainly know all the management over there. Yeah, it's a great relationship. Last quarter, we talked about our CCaaS business being $300 million of ARR. Just our CCaaS business
Yeah
... you know, as big as many large software companies. Growing, I said earlier, growing above, our aggregate growth and growing above, the CCaaS market growth.
Mm-hmm.
Yes, we are taking share there. Again, I think it's just that, the quality of that, you know, joint go-to-market. We recently, actually, you know, won a very large Fortune 500 UCCC deal.
Great
... together with NICE inContact, and that was 5,000 UCC seats, 5,000 CCs, seats.
Wow.
It was a healthcare provider. You know, again, I think it was that differentiation, the fact that we were able to go to market together. The customer is on our paper.
Mm-hmm.
I think it's just the combined, you know, leading products. We continue to invest there, as you say, in our own products as well, which is called Engage Omni. Engage Omni goes out to a different segment of the market.
Mm-hmm.
It's, don't wanna call it lower end, but, you know, somewhat downmarket.
Yeah
... less feature rich.
Less feature rich, yeah.
Smaller number of seats in terms of deployment. You know, that business is a business that we're investing in as well. We think, you know, on a combined basis, we're really excited about, you know, the offering we have, and we're very, very relevant to our customers.
Yeah.
As you say, that's another area where we think, you know, at one point our, you know, RingSense platform can, you know, layer on and provide those analytics.
Yeah
... additional data. You know, I think there are almost no limits in terms of where we can go, in terms of, you know, adding or layering on interesting products that we can sell to our very large install base there.
Sure. Yeah, the strategy seems very well thought out. You've got, you know, a leader, right, at the high end, and you've got your own homegrown product at the mid and low end.
Exactly.
A lot of your peers have similar just tried to do an organic strategy, which, you know, gets you started there, but it doesn't let you go after the big-
Exactly
... big deals.
Yeah, yeah. Like I said, that really large one that we won very close to the end of the quarter.
Great.
I think it's because of that, you know, the strength of the partnership.
Great. You talked to us about the contact center and how some of the AI capabilities that you have of spanning both UC, and CC and access to those transcripts and making that part of the learning model can become.
Absolutely
... added feature.
There's on the contact center side, but even on the UC side, I mean, you know, this RingSense for Sales that we're using now, right now it's our sales force using it, but when customers use it, they can actually integrate the insights into their own sales suite. Say they're using CRM, it's fully integrated. Again, our sellers are saying it's helping them know which customers to follow up with, how quickly to follow up. You know, it's using keywords. It's using even emotional intelligence.
Great
... I think it's going to be, you know, we feel very excited about the opportunity that it lends on the UC side. You know, we do see AI and we have lots of conversations with Vlad, our founder. He is a visionary and, you know, we see it as very much as, you know, augmenting our business and being an incremental TAM for us to go after.
Yeah. Hopefully something to monetize as well. I think RingSense is.
We're gonna-
...your first...
Yeah. We're gonna bundle RingSense and also you're gonna be able to, you know, again, it's early, but we see it as a standalone product too, very much. Yeah.
In terms of some of the other products, I know you talked about overlay a little bit as well.
Yes, exactly.
that's kind of a. Is that like an entry strategy for a legacy-?
It's for the legacy.
On-prem?
It's for the legacy on-prem. It's in partnership with Vodafone.
Yeah.
Again, if you think about, you know, the potential customers that we can reach with it, but it's for those that are continuing to be on the legacy system but want a cloud-based telephony overlay.
Mm-hmm
... and want messaging and phone. Messaging, video and phone. It's adding something incremental to them. Again, it's starting with Vodafone, but I think there are, you know, there's lots more that we can do with it. Four really big product announcements this quarter.
Yeah. Outstanding. Another partner that came up recently is AWS as well.
Yes.
Can you talk about that in terms of your relationship with them on the public cloud side and part of their marketplace, maybe?
Yeah. We are expecting to be on their marketplace, certainly second half of this year.
Mm-hmm.
Just there is some, you know, work you need to do on the front end to make that happen. We're already starting to see some really interesting leads.
Mm-hmm
From that relationship. We haven't embedded any of it into our guidance for now because it is very early days.
Sure.
We'll be watching that one closely and updating you as things move along.
Is there any change in the hosting strategy you have to implement for them there?
No.
No.
No. They were already a partner of ours.
Got it.
... a supplier.
Yes.
There's no meaningful change in terms of how we work with them. No.
Got it.
They will continue to be, you know, a supplier to us. We also have private cloud as well, within our overall infrastructure.
Got it. In terms of the management team, since you've been on board, we've had some nice stability there.
Yes
... and the team's coming together. Can you talk a little bit about how the team is working together?
Yeah, absolutely. You're right. I'm celebrating my one-year anniversary now and very happy and, you know, it's been an interesting year in markets in general, but, you know, feel really proud of what we've accomplished as a team at RingCentral, you know. Driving operating margins up 700 basis points in a year is
Yeah.
I think pretty impressive. Also, you know, free cash flow, record free cash flow this past quarter. In terms of the overall team, you know, Vlad is very much our visionary leader, our tribal leader, and, you know, he's wonderful to work with. Mo, who joined us from AT&T, I think he's been at Ring now for about a year and a half.
Mm-hmm.
John Marlow, who some of you may or may not know, but he's been at Ring for the past, I think 15 years. We're coming up to our 10-year anniversary of our IPO, but he actually even predates the IPO.
Wow.
We're all a very close-knit team and, you know, I think we're working really well together. Some of those leaders have brought in and I've brought in some of my own best talent from, you know, organizations I've worked in in the past. I always think that's a sign when you bring, you know, your best people from where you worked in the past to come work with you, it's a sign that you're excited about the opportunity ahead.
That's great. How about shifting gears into the partner ecosystem a little more, in terms of how those are developing. I know you've had some changes with the Avaya relationship.
Yeah.
They're coming out of Chapter 11. Can you maybe talk through some of those relationships?
Sure.
kind of state where they are today and how you expect them to evolve?
Yeah. On Avaya specifically, you're right. They actually just emerged from bankruptcy, I think, in the last week or two.
Two weeks, yeah.
Yeah. Although it was a slow burn. In terms of the relationship going forward, I'm optimistic, particularly because, in this new arrangement, Avaya 2.0, we have actually, negotiated minimum commitments.
Mm-hmm.
Which I think is really important. You know, I think it was a big win for us. We also, they have the ability to sell wholesale, which I think could open up a much larger group of enterprise customers.
Yeah.
Really excited about that. That being said, you know, they've just emerged, so, I'm expecting the impact from Avaya to be more back half- loaded, second half- loaded.
Yeah.
You know, they still remain, and are the largest holder of on-prem seats today.
Yeah.
We are exclusive with them.
Right.
So, um-
As far as ACO is live.
Absolutely right. you know, that exclusivity, again, you know, hard-fought and, I think a really big win for RingCentral.
Mm-hmm. How about some of the other partners, that you've historically had there, in that space?
Yeah. Mitel is another partnership, that we have that's going well.
Mm-hmm.
Certainly, you know, I mean, we don't talk about partner seats on a quarterly basis, but what I can say is.
Mm-hmm.
you know, Mitel exceeded expectations last quarter.
Nice.
You know, that's a newer partnership, you know, going well. We have partnerships with Atos and ALE.
Yeah.
There was some change to those partnerships, some renegotiation, at the end of last year and early this year, where they are no longer on an exclusive basis.
Mm-hmm.
However, they still are good partners and actually one of the very large deals that we won with a French sporting goods company came from one of those partners.
Great.
Still working together very well.
Yeah.
There was just, you know, a slight change in or modification in the actual agreement.
Understood. How about going forward in terms of, you know, what's your perspective on M&A? Is that something you're contemplating at all? Obviously, you've got the pressure from the debt, so your, you know, kind of currency maybe isn't where you'd like it to be to be active there. Mostly focused organically.
Yeah. I'm not feeling pressure from the debt. Yes, M&A is, you know, one potential use of cash, within our dynamic capital allocation policy. You know, you never rule it out completely.
Yeah.
I will be, and we as a team will be very disciplined in terms of, you know, any form of dilution.
Yeah.
Should it ever arise. You know, I view capital allocation holistically. You know, it can take the form of organic investment. You were talking about, we just spent the last couple of minutes talking about product. You know, organic investments are really important.
Yeah.
We wanna keep innovating. There's potential inorganic. There's share buybacks. You know, we bought back $75 million of stock in Q1. We happen to feel that our shares are really good value here. You know, that was a high we believe would be a high ROI decision today. We will also use part of our cash to retire our debt, as you say.
Yeah. Yeah.
In terms of, you know, seeing as you brought up the debt.
Yeah.
What I would say is, you know, when you look at the operating margin profile we are driving and what we've delivered.
Yeah.
Not just driving but delivered, you see the free cash flow profile, you know, especially when you think about what we delivered in Q1, and you know sort of there's always this five to six point delta between our OP margin and free cash flow, where we're going, we expect free cash to be strong over the next couple of years.
Yeah.
Growing. Within that, you know, that will give us a lot of optionality in terms of how we address our convert. It won't be, you know, through dilutive, you know, means. We will have conventional debt markets that will be available to us. You know, we did announce a term loan A facility, I guess it was at the end of last year. That's a $400 million facility and a $200 million revolver.
Mm-hmm.
You know, that is available to us as well. The Term Loan A is available to us until mid-November of this year, should we choose to, you know, draw down.
It's a great tool to have in your back.
It's a great tool to have in our back pocket. I think, you know, what I would urge investors to think about is, you know, if you look at the strengthening financial profile of this company.
Mm-hmm
... you know, that profile will be able to service, you know, our current convert debt. You know, again, if you think about the profile even more than that, again, I don't feel particular pressure. It is a priority, make no mistake, for the entire management team, to me personally.
Yep.
It's not one that I feel, you know, I feel very confident and have high conviction about our ability to address it.
Well said.
Thank you.
Thinking about the year ahead, what has you most excited about the rest of this year in terms of execution, where you're at, what?
Yeah. What am I most excited about? Look, driving free cash flow because, you know, we're at a level and stage of scale where you'll really start to see that coming through, and I think that's exciting. You know, what am I most excited about in terms of overall RingCentral? I'm most excited about AI and what that brings. You know, my kids finally think my job is cool. They don't think I'm cool. They think my job is cool. You know, I wanna see what that brings. You know, I love that we're investing there and we have the capacity to invest there.
Yeah. That's excellent, Sonalee .
Yeah.
Thanks so much for joining.
Thank you, Ryan.
Appreciate it. Thanks.
Yeah, thanks. Take care.