Hi. Thanks everyone for joining us. My name's Sterling Auty. I'm a software analyst here at SVB MoffettNathanson. Very happy to have with us Sonalee Parekh, who is the CFO of RingCentral, for our next session. Sonalee, thank you for joining us. We appreciate it.
Thanks, Sterling. I'm delighted to be here in New York.
Maybe for a couple people that might be, you know, newer to the story, let's do two things. Let's, one, just give the one-minute elevator in terms of who's RingCentral and what makes you special.
Sure. Firstly, thank you for having me at the MoffettNathanson SVB conference. Really happy to be here. Who are we, RingCentral? We are the leading cloud communications provider. We sell a product called MVP, Message Video Phone, which is really a set of collaboration tools. We are coming up to our 10-year anniversary of being a public company. We have revenues of around $2.2 billion, or ARR of $2.2 billion. Our founder is still our CEO, and we are very much a product-driven and product-led company. We very much lead with phone as our main modality. Anyone who's used our product, I think would agree with me saying that we truly are differentiated and best in class in that modality.
We have a very sticky customer base, we're currently. What makes us special, I mean, I think it's just how cutting edge our product is, the reliability. Five nines reliability. For those of you who don't know us, that's 99.999% reliability. What does that mean in the real world? It means that your downtime on an annual basis is only five minutes a year. That's what makes us truly special. You can rely on us.
We will always be there. You won't click on the link and not get through where you need to go. Click on the dial. It will get you through. We also have an amazing go-to-market. Our Founder, Vlad Shmunis, talks about trust, innovation, partnerships. Partnerships are very much a part of who we are and how we grew and scaled so quickly.
Makes perfect sense. Before we actually proceed, anyone that wants to submit a question, there's actually a QR code that's up here on the screen. Go ahead and click that and enter your question. It'll come up to me on the iPad up here. In the grand scheme of things, you're relatively new to the position. Maybe kinda go through for those who... You know, what's your background, and what was it that attracted you to, you know, the seat at RingCentral?
Yeah, that's a great question. I actually just answered it in the hallway 'cause I ran into an old friend, investor. I've been in the role for this is pretty much my one-year anniversary that we're celebrating here in New York. You know, what attracted me to RingCentral? I think there were a couple of key things. One is I was very attracted by the opportunity to work with a visionary leader and a founder, CEO, chairman and I found that in Vlad. We got to know each other over several months. He always says we dated. We did.
You know, I got to know him, and it was a time, I can tell you, and I wish my old boss was listening right now, but, you know, there was a lot of demand for CFOs or people with experience. I was a divisional CFO at Hewlett Packard Enterprise, but I also had a Wall Street background and knew the investor relations. I have my head of IR sitting right here, but I had done that role for a long time as well. There was a lot of demand for people who could bring both the operational side of things and then the Wall Street knowledge, and I had a lot of opportunities.
What I will say is that I, you know, I turned down nearly all of them, even the original conversations, because I loved my job at HP, but Vlad was special, and RingCentral was special. It's because, you know, he is such a visionary. He lives, breathes, lives and dies by the product, which I love.
Yeah.
I think it's why our product is what it is, you know. Innovation is just so core to what we do, and it's exciting, and it's infectious. He's infectious. When you're around him, you get excited. You know, he gets up to the whiteboard and starts, you know.
Brainstorming.
coming up with great ideas and brainstorming. Exactly. That was one element. Then, you know, two other things. Scale mattered a lot to me. I think it's 'cause I was once an analyst and, you know, you look at companies, and you wanna make sure, okay, does this company have staying power? Also can it be profitable? Is it gonna be a long, hard slog? Because some of the other opportunities that were coming my way were subscale. Actually, in hindsight, I'm really glad I didn't go after those opportunities. You know, we were a $2 billion or very close to $2 billion ARR business. There are not that many software companies out there, that operate at that level of scale, and profitable.
You'll probably ask me about earnings, but, you know, when I joined, I think, RingCentral was at about a 10% operating margin. We're now at 17.2%, but it was important to me that there was a path to being profitable. Then, you know, the rest of the team as well. I think, you know, it's always about the people that you work with and, you know, the colleagues. Mo isn't here today, but our COO is someone who, you know, we see the world very similarly. Also our Chief Administrative Officer, John Marlow, who's been part of the company for 13 years. You know, I love that team, and I like the small team.
where you can make decisions quickly. We do. You know, we have a small group of people who, you know, can get things done very quickly and, you know, not to criticize where I was before. That's not how it worked. Where I was before, it was quite bureaucratic and institutionalized. I think it was all of those things in combination, and I saw a huge opportunity to create value.
No, it makes a lot of sense. you know, over the last couple of years, COVID and pandemic has reshaped the way that we all work permanently, and in terms of how we interact with one another, et cetera. How would you say that that timeframe and, you know, through to today has kinda shaped or impacted RingCentral?
Yeah. I mean, you know, we often hear, "Oh, were you a COVID beneficiary?" Things like that.
Right.
I think, you know, certainly that there was some pull forward as a result of COVID, naturally, and I think not just us, but the sector as a whole, and even more broadly beyond UCaaS and CCaaS. I think, you know, at RingCentral, we absolutely are central to what our customers do. Even or notwithstanding a bit of COVID pull forward, there's this huge TAM out there of legacy, you know, PBX seats out there. Those seats ultimately, you know, pandemic or no pandemic. Actually, somebody just told me that apparently we're gonna have another pandemic in a year or two's time. Like, with or without pandemics, you know, those seats are ultimately gonna move. It's not a question of if, it's a question of when.
We still, or I still believe that there's, you know, a huge opportunity out there in front of us. The bottom line is the bottom line. We save people money. Like, I actually enjoy going to pitch to customers because often you leave the meeting and they're smiling 'cause you're telling them, "Oh, you're gonna save, you know, your payback period is nine months if you switch to UCaaS, and you're gonna have an ROI of, you know, above 100%." That's, especially to a CFO, that is a fairly straightforward sell.
Even if there is in the current macro, you know, we've talked about certain trends that we've seen, again, we're not alone, but these longer sales cycles and more levels of approvals, I'm starting to get pulled in more on calls because the CFO is actually on the call, and I think, you know, certainly during the pandemic, that wouldn't have been the case because people were just rushing purchase decisions. I think, you know, at the end of the day, it still makes sense to move your PBX or legacy telecom product to UCaaS, to the cloud, and we do that. With UC and CC, so unified communications and contact center, it's even more pronounced in terms of the savings. It's greater than 200% ROI, and the payback period is even shorter. It's about six months.
You know, we called out in our earnings call, one of the big wins we had this quarter was a 5,000-seat UCaaS and 5,000-seat CCaaS deal of a Fortune 500 healthcare company. You know, one of the big features was that we were going to save them money. Again, pandemic, no pandemic, everybody wants to be more efficient. You know, we see a huge opportunity. The other thing I'll just say is you know, I know we are truly differentiated. For businesses where reaching their customers, which tend to be consumers, is business-critical, mission critical, RingCentral is a natural choice, partly because of that uptime, partly because of that reliability.
Yeah.
The security, all of those things. There are certain verticals that we are, you know, we feel like we have a right to win in, healthcare being one of them, retail another, financial services another. We're seeing real traction there. Again, I think, you know, as we move out of this macro, we're ensuring that we're investing in those verticals so that when, you know, the world emerges from the current macro, that we'll see a nice upswing there.
When you talk about, you know, hey, you've got these PBXs that just have to, to move, one of the questions that I get from investors is, geez, you know, I can't remember the last time I did a call. I've been on a video conference call for, you know, an abundance of my interactions. Why do they have to switch? Or is there a sense of, hey, there's 345 million business telephony users, but what portion of them will end up continuing as a telephony, you know, user?
Yeah. that's interesting that you say that's the perception because, you know, I think that's anecdotal. You know, we look at a lot of surveys, obviously, and market research and, you know, most. This is, like, third-party data, not a survey that we paid for. This was one that was done by Salesforce.
Yeah.
You know, 60% of respondents said that they prefer phone as the leading modality. You know, we believe phone is very much here to stay, and I think all of us in this room, and you and we are used to, you know, we're knowledge workers. We work behind a desk. I think if you spoke to somebody who was an insurance broker or, you know, somebody who worked in retail, they wouldn't say that they're doing a lot of video calls. I think there's a huge segment and a huge TAM out there, which is exactly the customers that we're going after, and they're probably not. Not to say we wouldn't love your business. We'd love all your business, but they're probably not people like you and I.
Right.
You know, again, that was third-party data that I'm quoting. Actually, in terms of phone engagement, that stat, it went up year-over-year. It's, you know, customers are preferring it more and more. Sorry, companies are preferring it more and more as a means to engage with their customers. That's phone.
We do have video, too. Actually, we have a great video product, which I use. Like, there's competition out there. Of course, there is. When you asked who are we and what makes us special, it is our phone that makes us special. Our video is very good. You know, there's this company called Zoom you may have heard of. I don't know much about it, but you know, they lead with video. There's this other company called Microsoft you may have heard of, and they lead with messaging. We all have our strengths, but I think we also are targeting quite different segments of the market. You know, where we are targeting in those verticals in particular that I called out, you know, they want to use phone to reach their customers.
They get the video as well and messaging.
That makes sense. You and I talked about after the quarter, I think you've seen it in your own data, right? In other words, I would expect that if that was really the case, that a huge portion of these were no longer gonna be telephony users, you would start to see falloffs in call volumes.
No, and we're seeing the opposite. We're seeing higher levels of engagement in minutes.
That, to me, is the, you know, beyond the anecdotal evidence surface.
Exactly. I mean, we monitor that very closely for that very reason, you know? Like, because it's a leading indicator as well. We, as, particularly as a CFO, you're thinking about, okay, where do we wanna deploy the next $1 in terms of investment, including R&D? You know, if I suddenly saw phone falling, like it would. We'd be making very different decisions.
Right
around where to make incremental investments, ultimately where to incrementally do M&A, where we incrementally hire talent, all of that. We monitor it very closely, and phone engagement is up. Again, this survey came from Salesforce.com. I'm sure, my head of IR would be happy to share it. It's a public survey. You know, we were delighted to see the results, but not surprised.
No, that's great. in terms of one of the questions that actually came in is just helping understand then within the macro environment that we're in, phone is a per employee, per user in situation-.
Yes
O r pricing structure, et cetera.
Of course.
As we're seeing layoffs grow, how is that impacting the installed base as well as the new customer?
Yeah, good question. Again, like something that we are very, very focused on. You know, in the current environment, something like churn is an area that we invest in heavily. Or when I say invest in churn, it's customer success. You know, we are lapping three years from the pandemic. So we have a pretty decent renewals year this year. It's not, it's not massively bigger than last year, slightly bigger. Again, when I was doing the, you know, annual operating plan and planning, I specifically said I want to invest more in customer success because we want to be very...
We wanna be on the front foot in terms of customers renewing and maintaining our customers because we were starting to see, you know, some macro trends that were certainly leading indicators to what we're now all seeing or all facing. I think, you know, when I think about macro and when I think about kind of where we're investing and how we're running the business, maintaining logos is really important to us. Yes, in the quarter, and I think you heard us call this out on the conference call, upsell was quite challenged compared to, you know, a year ago, say.
Downsell also, we saw some pressure. Downsell, I think is exactly what you're talking about. The notion of, you know, workforce management and people cutting the size of their workforce. Luckily for us, we have fairly low exposure to the technology sector. I know tech has been where a lot of the job cuts, particularly, you know, where we are in Silicon Valley. We have more exposure to things like healthcare, retail, which have been less impacted, but still impacted.
Yeah.
Everyone gets impacted by a recession or maybe it's not a recession, but a slowing macro. You know, we, as I said, we make investments and then, like, stable churn is something that we're proud of. Now it's stable churn on a larger base. You know, we're now at $2.2 billion ARR base. What that means is acquisition and upsell is an even higher bogey because if your churn is stable on a larger base, you're needing to offset that. That's, you know, one of the things that we're currently navigating. You know, I always tell my teams and our sales force that, you know, it is much more profitable to keep an existing customer than to go out and acquire a new one.
Yeah.
That's not always well understood by salespeople on the ground. They love the, you know, the chase and the like, "Oh, wow, a new logo." You know, I cheer for customers that renew much more because, you know, it's, it's accretive to us. Profitability, you'll probably ask me a bit about that, or I hope you do.
I will.
That's very important in the current macro. What I would say is, yeah, we saw some weakness in upsell, and down-sell, but with down-sell, you know, we believe it's strongly macro. On upsell, what I would say is, you know, this was a very good quarter in terms of new products and innovation. I think you asked Vlad about it when we had our one-on-one call. You know, we introduced four new products this quarter.
you know, it shows you we continue to invest through the cycle and, you know, we continue to be a company that innovates, and we'll have even more cool things to sell into our $2.2 billion, you know, sticky customer base.
You talk about the importance of logo churn. What does logo churn look like?
Yeah. We don't specifically call out logo churn, but what I can tell you is overall churn is stable.
At what level? 'Cause the stickiness, one of the things that's always stood out to me as a vendor, you know, you're in a very rare group of companies in terms of what your renewal rates look like.
I, you know, I can talk to net retention, which we said was above 100%, that's another metric that I'm firmly focused on as the CFO. You know, I do describe our customer base as a sticky customer base. You know, I'm pleased that net retention is above 100 and, you know, that's very important for us to stay the course there.
Another question that came in is just help investors understand where you are now in terms of the split of the go-to-market. How much is coming through partners? How much is coming through...
Yeah.
resellers? How much is coming through direct?
Sure. We give, some disclosure on that. What I can tell you is, we have several go-to-markets, as you say. It is one of our reasons that we were able to grow and scale as quickly as we did. I do think it's a huge source of differentiation.
Yeah.
And allows us also to, you know, get into new, newer markets more quickly. We have our direct sales force. We have channel partners and VARs. We also have global service providers. Those are some people might know them as like, you know, the telco carriers.
BT, Vodafone, AT&T, Charter. Actually, Charter's one that we recently added that's been very, very successful. In terms of breaking that down, about 40% of our sales are through channel and VAR today. Within that, I don't think we've specifically said how much is GSP, but, you know, it's a significantly smaller portion than the channel. The rest is partners, i.e., the larger partners, the Avayas and Mitel, and direct.
When you look at the global service providers.
Yeah.
The AT&Ts, the BTs, et cetera, how do they balance going to market with your solution versus trying to perhaps retain a legacy connection, which, you know, I would think economically would benefit them to do if they could?
Yeah. We're never specific on exactly what the relationship is with the carrier, but, like, make no mistake, they make money off of it too.
Yeah.
You know, I run the business very much on, like, a minimum contribution margin. That's how I think about the world and my team thinks about the world. You know, when you go to market with a GSP, often it will be the customer themselves who say, 'We're gonna do this anyway.' Like, 'Our asset is fully depreciated.'
We need to be on the cloud for a variety of reasons. We want the, you know, resilience and reliability and cost savings. Mostly cost savings. It's mostly customer pushing carrier rather than the carrier going out and saying, "Oh, you know, you should get off these POTS lines and come and adopt." That's the way the motion works. You know, there are millions and millions of seats sitting with those GSPs, and, you know, we recently signed Vodafone, and that's one that we feel is, you know, I'm very optimistic about, and that's one of the largest telcos in the world, right?
Charter's going really well, and, you know, there are more that we're working on, and it's really a layering strategy. You have the legacy relationships that are still doing very well and providing stable growth. You have these new ones that layer on top. you know, we feel really happy with the strategy there. The other thing I would say is it's Those GSPs have allowed us to move into European markets, certain European markets, way more quickly than if we had to stand up our own motion, you know, boots on the ground, country leader, all of those things.
Right.
Like, it allows us to just go in very, very quickly.
I think for anyone that's newer to the story, they may hear that and go, "Geez, you know, if it's inevitable that all these lines are gonna move over, why aren't they creating their own solution, you know, to go to market?" You know, RingCentral's had a history, you know, of some of those attempts. You know, can you maybe highlight for investors why that hasn't worked?
You mean our partners just doing it themselves?
Yeah, the AT&Ts-
Yeah.
The Vodafones.
You know, I spent a first part of my career analyzing those stocks. I don't think that they are great in terms of innovating. Like, you know, the plain old telephony, the old telcos. You know, they didn't come up with any. You know, they don't have big software-
Yeah. It's about-
They don't have software DNA. You know, we're cloud native, right? Look, you don't have to be born in the cloud to be good at the cloud. I think there are others that are shifting their business models. The telcos are not, or the GSPs are not where I see a lot of great innovation. I remember a couple of them did some M&A over the years that, you know, kind of never really amounted to much.
It ends up being kind of a rounding error for them because the rest of their businesses are very large and, you know, cashflow bases that they need to protect. The other thing I would say is it's not that easy to do.
Yeah.
You know? Just ask some of those competitors that I just mentioned. They haven't been able to do it on phone. Like, our phone is significantly, unequivocally, in terms of features, integrations, reliability, security, like no one else is close. It's, it's not that easy. You know, we've got a 20-year head start. We've been public for 10, but the company's kind of been around for 20. I'm actually. That's one thing I'm not worried about, is that they're suddenly gonna come up with their own offering.
Before you touch upon profitability, before we dive into that, I wanna go back to innovation but at RingCentral. You talked about the four new products, you know, that have come out. What has you excited about some of? New offerings, what could it do to the, you know, to the top line and the market opportunity?
Yeah. I think the one that I'm most excited about is RingSense AI. I was just saying in another meeting that my kids finally think I have a cool job because I'm, you know, working, doing a bit in AI. I think if you consider what UCaaS really is, at the end of the day it's, you know, we're facilitating. We have this MVP product, but we have all this data in terms of call logs, call volumes, words. All this unstructured data that, you know, we. It's proprietary to us and our customers that we can derive insights for our customers that they can then use to, you know, help them sell better, help them, you know, make better decisions, all of those things. We haven't even scratched the surface in terms of what we can do.
This is billions and billions of minutes of calls. We haven't yet disclosed how we're gonna price RingSense, which is our proprietary AI platform. What I do believe is we can bundle it with MVP, but we will also be able to sell it standalone, and that will definitely be, you know, an incremental revenue stream, like selling it standalone. The other thing is, you know, we talked earlier about upsell. I mean, I'm excited to have more things to sell into our customers. We have this amazing go-to-market that we've built. We have, you know, again, channel, VAR, direct GSPs. It's all there. To just, you know, take new products and add them to our stable, I think it could have. You know, we haven't given any revenue forecasts or targets.
It's certainly not embedded in our guidance. You know, I, I do get excited by that. The other thing I would say is Microsoft Teams 2.0, or RingCentral for Microsoft Teams 2.0, we now have the embedded dialer on one single pane of glass. You're on your Microsoft Teams... Say for example, you know, where I used to work, we happened to use Microsoft Teams, but we didn't use Microsoft Teams for phone. Now you don't need to toggle between RingCentral and Microsoft Teams. It's all on one screen. It's just so easy. You know, don't underestimate the number of Microsoft Teams users that actually go external for their UCaaS. It's about 47% that use an external UCaaS provider, including RingCentral. That...
No one else, again, you know, when you talk about competition, no one else has that embedded dialer on a single pane of glass. I think, you know, I think adoption will be high on that product.
Why do you think such a high percentage goes outside for a UCaaS provider?
You know what, again, don't wanna be, don't wanna criticize competition. I was describing in an earlier meeting. Where I used to work, we use Teams, and I used to sometimes have palpitations when I knew I had a board call because I was so scared it wasn't gonna work. Like, maybe they fixed it, and hopefully they have, but.
Oh, see. Yeah, exactly.
You know, I used to have my assistant, like, dial in just in case.
Yeah.
because, you know. I think that's why. People just want the reliability. Microsoft themselves, I believe they recognize that because they make it easy for us to integrate into them. I think, you know. It's not just us. There are others that integrate into Microsoft. Ours happens to be the best integration. We also have the best integration, you know, when you talk about differentiation, the best integration with a lot of, you know, like, Salesforce.com, ServiceNow, HubSpot. You know, we have over 10,000 integrations, which again, is like why people use us. You'd struggle to find something where we don't have an integration.
You talked about that you haven't disclosed how you're gonna price or monetize.
Yeah.
For RingSense, is there a sense of timing and what RingSense will look like as a product? In other words, does it have a front end? Is it really something that's under the covers? What?
Yeah. You can go on our website right now and actually have a little look around. In terms of pricing, I would say it's even internally, it's somewhat early days.
Yeah.
It's still being discussed. I think in general, you know, we tend to at least price about in line with where others are. If you look at, you know, some of our other offerings. For newer products, it's possible that, you know, at the beginning, we do it as a, you know, a slightly discounted price just to drive adoption.
Yeah.
Then I talked earlier about bundling it. I think with certain customers, there may be some considerations around bundling. What I know is that our sales force is currently using RingSense for Sales, and we previously used a third party, who I won't mention. Our sellers, we haven't forced them to use RingSense. We're like, "Just buy." It's been, you know. There has been huge adoption of RingSense for Sales internally, and they love it. I think that's a great endorsement.
That's one of the reasons that I'm so excited about RingSense.
It'd be very difficult if it was the other way. How could you go?
Yes.
Sell it if you're on sale?
Exactly, exactly. You know what? You'd be surprised. They're good at complaining too.
Well, you're getting real-time feedback.
Yeah, exactly.
You talked about how, you know, EBIT margins are now over 17%. They were sub, you know, 10% when you joined. What's the big difference? How were you able to drive-?
Yeah.
That's a lot of operating leverage in a short period of time.
It is. I mean, you know, you asked me, why did you join Ring? I said, I wanted to join a SaaS company at scale, with a visionary founder. I will say, when I first arrived at Ring, one of the things that surprised me was that the margins weren't higher. It did.
Yeah.
It was one of the natural places. Like, this is even before the macro was super clear that, you know, 'Cause I joined in June, or I think I announced May the ninth. Like June, the world was still like, "Oh, is there, something happening macro-wise?" I felt, and I think this is not just RingCentral, this is, you know, many SaaS companies in the valley. You know, when interest rates were zero, money was free. There was this growth at all cost mentality.
We were guilty of it. You know, I always felt like for a company running at $2 billion plus of ARR, there has to be more leverage in the model. What we found was that, you know, there were certain areas and where we've seen the most significant savings is in sales and marketing. What I'm gonna tell you there is that we actually have managed to take 400 basis points. Out of the 700 year-over-year improvement, 420 basis points came from sales and marketing. We did not touch any frontline sellers. A lot of it was marketing. Some of it was brand spend, but a lot of it was demand gen. What we found is we were kind of. I said earlier, it was like the Jackson Pollock.
We were just.
Yeah.
Money was free. We were, you know, we were ending up with pipe that wasn't very focused.
Now we're generating pipe based on customer persona, and I think the verticalization strategy has helped there a lot as well. What we're finding now is we're getting for significantly less money, I mean, you see it through the P&L, way higher quality pipeline for our sales team to go out and mine and convert. The other thing, you know, that jumped out at me was procurement was not nearly as sophisticated as it should have been for a company of our size. I mean, again, $2 billion, right? Not a small company. The thing is it grew so quickly. Some of the processes perhaps didn't grow as quickly as the top line. There was a lack of automation in finance. I can tell you alone, from procurement to payment, so many of the processes were manual.
We've brought in a third-party software vendor on procurement that we're implementing now. That alone is driving $9 million of permanent savings. That's just in finance, you know. You know, we're going through every single vendor relationship. You know, the guy who's running the project for me, you know, I always say to him, like, "Don't come, don't come and update me unless you've made a saving or like completely cut the need for the cost." He's good. Like, he's delivering. A big number is gonna come from that. Look, we took the really difficult decision to let some of our workforce go last year. That was super hard and painful, and we did everything we could in terms of cutting discretionary spend before we did that.
That is very much our mantra. It was necessary because, you know, we were planning based on a certain macro and a certain, you know r ight growth profile, ultimately we had overhired. Even today, you know, we're managing our workforce such that we are hiring in lower cost locations like Dallas and Charlotte, where people are super excited to work for a software company. We actually find we're finding great talent, and it's more efficient. They're willing to work for less money. It's a lower cost of living there. All of those things combined. Then there's the beauty of, you know, the actual operating leverage, you know, 'cause we're growing revenues. Last quarter, we grew subscription revenue about 16%. Yeah, you know, you get the incremental bookings and revenue, but it doesn't come at high a cost. It's just the natural evolution of the operating model working.
How have you gone through those changes without negatively impacting employee morale?
Yeah.
How clear was it that you're like, 'You know what? We can see to here we're cutting fat, from here we're cutting muscle, from there we'll be cutting bone'?
Yeah, yeah. It's a great question, and one that we discussed a lot as a management team. I mean, a lot of the cuts were program.
Not people. On the people side, we were surgical in terms of, you know, no one who had a frontline selling job was touched. There were some frontline sellers that were not meeting their quotas.
Right
Were underperformers, you know, bottom, whatever it was, couple of percent. They may have gone. Then we backfilled them. It was really areas where we found there was overlap. There was... You know, again, you ask what, you know, when I first arrived, like, there was a quite a bit of duplication. A lot of the same people touching 1 sale.
You know, my colleague Mo, who's our COO, would call it overlay, but it was, you know, duplication. You know, on the marketing side, again, a lot of it was program dollars. Where it was people, it was areas where, you know, there were, there were kind of shadow organizations where there was a lot of duplication, whereas now we do it more center of excellence. You know, the way we were organized in marketing didn't make a lot of sense. We did use a strategy consultancy to help us with some of the, you know, org structure and org design, 'cause we wanted best practice and best in class. That was, that was really how we did it or thought about it.
That makes sense. Another question came in was going back to your comment on AI and the billions of minutes. Are your contracts structured such that it allows you, like, anonymous use or how?
We wouldn't be able to use it without the customer. What we believe is that customers, and certainly we wouldn't be using customers' data without their permission.
Right.
We believe customers would want to use their data in that way.
You bring the AI, they bring the data.
Exactly.
You get together, and really you're helping on a case by case basis.
Helping them to. Exactly. For, you know, greater insights with that data and, you know, better decision-making and analytics and, you know, we've seen. There are actually some analytics products that we're already selling to our customers using AI. You know, AI or LLM, it's sort of new in terms of the, you know, lots of people are talking about it today, but it's something that we. Like, we made an acquisition in 2020 with a company called DeepAffects, and they were and are an AI company. RingSense is kind of built on that. We've taken our engineering and product teams and built on that. It's something that we had already been doing with and for our customers. Just RingSense is taking it to another level.
Gotcha. Gotcha. We talked about the global service providers, but I wanna dive into some of the partnerships, the Mitel, the Avaya, et cetera. You've signed a number of notable. When we look at the install base of legacy phone lines, you've got a massive coverage in terms of your partnership exposure. Where are you kind of in the, in the evolution and ramping of those partnerships? Are they all fully productive or is there still milestones that you're looking for?
We'll leave DSP to the side because some of those are ramping.
Yeah.
I won't go through every one. On the Avaya side, let's start with Avaya, 'cause it's the largest.
Yeah.
Avaya is, and remains today, the largest holder owner of on-prem legacy seats in the market. We have an exclusive partnership with them. It's exclusive on UCaaS. We recently renegotiated that partnership as a result of their unfortunate bankruptcy, which they literally just emerged from, like, a week ago. It was a slow burn. It was a long time, but it was about a week ago that they finally reemerged as a private company. Still, you know, very much, now very much a going concern. One of the things that we did when we renegotiated that partnership was include minimum commitments in the contract, which, you know, we felt was a big win. You know, obviously we're... it's early days.
The partnership is re-ramping, and we expect to see the fruits from that much more so in the second half of this year than we did, for example, in Q1, naturally, because they were going through, they were very heavily going through the bankruptcy then. You know, we are the natural destination for those seats. You know, we have all the integrations. You know, we absolutely expect to continue being a good partner to Avaya, and, you know, we'll hopefully have good news to share with you as we, you know, progress through the year. Mitel is the other one you referred to. Mitel, the partnership's going very well. It's a really good partnership and, you know, we don't disclose seats by partner, but Q1 was a very good quarter for Mitel, I can say.
You know, where we exceeded our expectations. I'm not gonna give you the number of seats, but it was above plan. As you know, we beat our revenues. We beat our revenues, our OP and our bottom line in Q1. You know, Mitel was a contributor to that beat, good things there. You know, we have other partnerships with Atos and ALE. Those are much smaller, and those are non-exclusive. I think, you know, in terms of order of impact, you know, Avaya at the top, we're, you know, we're really pleased with what we've renegotiated there. We think it was a good outcome and no more prepaid.
You know, we pay as they deliver seats, which is a better model as far as I'm concerned, and it's accretive to us.
It's a healthy match, I think.
It's a healthy match. It's how it should be.
Yep.
Yeah.
If we bring a lot of this back together, you had some pull forward because of COVID, but it wasn't a massive benefactor. You still have this huge install base of on-premise PBX systems that have yet to migrate. You've got the elongated sales cycles because of macro. How should investors just think about, you know. I think about the one slide in your earnings presentation was, hey, it's about innovation, it's about reasonable growth, and it's about improving profitability. How should investors think about that reasonable growth profile going forward?
Yeah, I think that's a good way of framing it, actually. Durable profitable growth or, you know, resilient profitable growth. What I think and, you know, again, a tenet of RingCentral is we continue to invest in innovation and we continue to invest in product, and our UCaaS product is the best. We have announced four new products. Actually, we didn't talk about two others. One is Push to Talk for frontline workers, and the other one is Webinar. You know, we have a lot of new products coming out all the time that we absolutely intend to leverage and upsell into our base. We're excited about the opportunity ahead. That being said, you know, we are not gonna buy growth. Profitability is very important.
I said earlier, you know, we manage or I manage the business very much on a contribution margin basis.
Right.
You know, that does require a degree of discipline, so we are disciplined about our growth. You know, what I think is important is in times like this when the macro is creating challenges, ensuring that we free up capacity and investment dollars to invest in the highest ROI opportunities is exactly what we should be doing, and that's where we're focused. We're focused on, you know, durable growth, becoming even more profitable. As you know, we guided to at least 18.5% operating margins this year. We're gonna exit the year at above 20% OP margins. You know, when you think about that versus a year ago, that's a 1,000 basis point improvement. And cash flow, you know, was a record quarter this quarter as well. You know, keep watching that.
I think overall, I'm really excited about the financial profile we're driving and the strength of that financial profile. You didn't ask about our converts, but, you know, the strength of that financial profile is also really important in terms of thinking about how we address the converts. You know, I have very high conviction about having a lot of optionality around that as I sit here today, so.
That was gonna be the next part 'cause you touched upon free cash flow. How do you see that free cash flow expansion? You know, obviously you don't wanna pin yourself down to exactly what you're gonna do, but, you know, any high-level thoughts around what's some of the optionality and what's some of the timing, you know, around when you would have to do something?
Sure. On cash flow, you're right, we don't specifically guide on free cash flow, and I have my head of IR here who's definitely gonna say, "Don't guide." What I did say on the call. Well, in Q4 we gave some color around cash flow, and we said we expect cash flow to double 2022 to 2024, so it was implying about $180 million of free cash. Sorry, $280 million of free cash. What I said on the last call was, we expect for that to happen much earlier. Without being specific on when, I think you understand the how 'cause we went through some of the levers.
If you think about the margin profile that we're driving, and if you think about the delta that we have, because we're a SaaS business and, you know, you invest upfront in customer acquisition, there's always about a five or six point delta between operating margin and free cash flow. If you think about the operating margin profile that I described and, you know, exiting the year at 20% plus, you can see using similar delta where the cash flow is going. We will be generating significant cash flow over the next 3 years. Q1 was a record quarter. It was $61 million of free cash flow.
If you think about the levers that we have or the optionality we have around addressing the converts. The first maturity is not till March 2025, second maturity, March 2026. I've said we won't allow them to go current. If you think about our financial profile and that margin profile and that cash flow profile, we will be able to use free cash flow that we generate. We will be able to use the term loan, a delayed draw facility that we announced at Q4 of last year. That's a $400 million facility and a $200 million revolver. We will also be able to access conventional debt markets if you think about the financial profile we're driving.
You know, we really do see a lot of optionality around addressing the converts, and the profile we're driving allows us to really be in a position to see how the market is responding because of course, it's always market dependent. What I said on the call and what I'll reiterate today is, you know, we feel confident about addressing the converts, and we will not allow them to go current and feel like the profile we're driving will be more than satisfactory to do that.
I love it. Sonali, thank you for joining us. We really appreciate it.
Thank you. Surely.