Everybody. Sorry, just getting my ducks a little bit in a row here. Thank you all for joining us. with me up on stage, we have Sonalee Parekh, the CFO of RingCentral. Sonali, first, thank you for joining us. We hope you're enjoying Newport Beach so far.
I definitely am, you can sign me up for this conference next year. It's a beautiful setting.
I love to hear that. I will give you five dollar later for the pitch. Look, Sonali, the first time we met in person actually was this conference a year ago, I thought maybe we'd open up with, the company's undergone a lot of changes. You've been there for a little bit over a year. Maybe it'd be helpful just from a high level, what's changed from the company's perspective? Maybe some of the key steps that you've taken over the time that you've been here as a CFO, and maybe what you're thinking about, where the company is today versus a year ago.
Yeah. Firstly, thank you so much for hosting me. It is a wonderful conference, and we're really happy to be here. You're right. I've just come up to my one-year anniversary with RingCentral, and, you know, what has changed and what has stayed the same? I think, you know, when I first came on as the CFO a year ago, I said that my top priority was to drive efficient growth, and I feel like that is exactly what we are doing today. You know, a lot of companies talk about sustainable, profitable growth, durable growth. We actually are executing on it. You know, we are still growing at a very healthy clip, despite being a $2.2 billion ARR company. We are significantly more profitable today than we were a year ago.
When I joined the company, we had operating margins of about 10%. By the way, I'm not taking full credit for this; it's the entire team. You know, today, we are guiding to operating margins for fiscal year 23 of at least 18.5% and exiting Q4 of this year at at least 20%. That's significant margin improvement. You know, how did we do that? How are we driving more efficient growth? You know, we had a very hard look at our cost base and how we were driving our growth, and we found, you know, a lot of opportunity in sales and marketing. And you can see that from our last earnings, you saw about a 400 basis point improvement in sales and marketing cost alone.
You know, what we find is we're actually spending less in marketing and getting higher quality, and better leads. Leads are actually up year-over-year, despite spending significantly less. I think, you know, we are on a very, very good path to continue driving durable growth. The other thing I will point out is, you know, I am a big believer in free cash flow and free cash flow per share growth. I pray at that altar. I think we have done a really good job of converting that operating margin to free cash flow. You saw it in Q1. There's more goodness to come there. You know, last quarter, at our last earnings, I guided to, you know, bringing forward, our previous guidance on free cash flow of at least doubling by 2024.
I said that we would now achieve that much earlier. We are also very, very focused on cash flow. The other, you know, big milestone I wanna talk to is our convertible debt. We in Q4, just after Q4, actually, we announced a $400 million term loan, a credit facility, as well as a $200 million revolver. We drew down on that credit facility and retired a significant portion of our 2025 converts. You know, the remaining balance is very, very manageable. If you think about the financial profile that we are driving today versus a year ago, you know, the complexion of the company has changed significantly and dramatically.
You know, when I think about that financial profile, I have a lot of confidence and conviction in terms of optionality around how we address the remaining balances of our convert, if you think about the deleveraging profile that we will drive. How's that?
Oh, I think that's great. You hit on a lot of the things that investors bring up with us. I think it shows the steps towards value creation that the company has taken on its own over the last year plus and has been working towards for some time. Maybe let's shift a little bit to more near term. You mentioned recent earnings. We're some time away from that. Everybody's focused on the demand environment. Maybe can you help us understand what you're hearing from customers as we think about the different pockets of the economy? Some signal that there's still strength, some areas are showing some slowdown. What are you hearing from RingCentral customers, and how does demand look?
Sure. Yes, we are operating in a you know challenging macro environment, and this is something that we've called out in the last several quarters. Actually, I think the macro literally did start to weaken a year ago, exactly as I was joining RingCentral. We have called out certain trends that we've seen, particularly on the enterprise side. It's the elongated sales cycles, the lower initial deployments or smaller initial deployments. Where we've seen, you know, some weakness is around upsell and downsell. Churn has remained very constant and stable. It's something we manage very carefully, and logo churn is very stable. It's on the upsell and downsell, and that is. You know, we're seeing a meaningful difference in terms of enterprise versus SMB.
SMB, I describe in many ways as our Swiss watch. You know, SMB is actually showing a lot of resilience in the current climate. In terms of what we're seeing today relative to, you know, our earnings, we called out a stabilization in the macro environment at our earnings, and that is still very much what we're seeing. I think on the enterprise side, you know, what we continue to see is sort of the additional layers of approval. What I would say is that, you know, moving your communications, from PBX to the cloud is an ROI-positive move. Actually, I'm getting called into some of the sales calls now, and Aziz, our Head of Procurement, is as well.
People from my finance team are getting pulled into sales conversations because customers really care about how to save money, you know, just like I'm getting called into conversations with some of our suppliers. I think what makes me feel really good is the product that we offer and the differentiation that we offer actually helps our customers do their jobs more efficiently and better. There is still very, very strong end user demand. You know, I said earlier, leads are up year-over-year. That is still the case. We feel really good in terms of, you know, when this macro subsides, that we will see this, you know, continued strong demand for our product. You know, the other thing I would say is we continue to innovate during this period.
you know, when you asked earlier about, you know, what's changed, what hasn't changed is our commitment to innovation, to making really cool products that our customers love. Again, when we come out of this macro, I feel like that will really help on the upsell side. Just in Q1, we announced four new product intros, one of which was RingSense, and I don't know if you're gonna have a question on AI. It seems to be the soup du jour, but, you know, we have our own proprietary AI solution that we, you know, believe will be, you know, monetizable and even standalone. you know, we continue to invest and, you know, delight our customers.
I'm legally required to ask an AI question to every company, or else I can't be a sell-side analyst, but since you touched on it, I'll just, I'll skip right over it. Maybe just a follow-up. You talked about the demand side, but as you think about competition in that context, are you seeing any changes in the competitive environment and maybe specifically on pricing as well, as you think about what the competition is doing?
Sure. On the competitive side, I would say, you know, enterprise-wide, on the, on the enterprise side, we do see Microsoft and Teams. What I would say there is we feel like we have a very differentiated solution, and we came out with our Microsoft for Teams, RingCentral for Teams 2.0. That is a super impressive and interesting product because it allows you to have the RingCentral phone on a single pane of glass embedded in your Microsoft Teams environment. One of the large deals that we won in Q1 was a 5,000 UC and 5,000 CC deal, in a Microsoft Teams environment of a Fortune 500 company. It was a healthcare company. We can't name them.
That just shows you that there are plenty of customers that are operating in Teams environment, where if phone and reaching their customers is mission critical to what they do, they want to use RingCentral. Yes, we are, you know, we see the competitors in terms of RFPs, but our win rates are strong and stable. The other thing I would say is on the pricing side, you know, we are seeing a bit more discipline across the board. It's hard to call that a trend because that can, you know, that can change quarter to quarter. You know, you've seen and read some of our peers, and even outside of UCaaS, are amending and changing their relationship with the channel. I think that is good overall for the industry.
You know, we talked a bit about our IGNITE! program at our earnings, but again, if you think about where the next leg of efficiency is gonna come from on the sales and marketing side, you know, we see a lot of opportunity to optimize there. We're really focused on customer acquisition cost, and, you know, that IGNITE! program plays very much into that. You know, bringing down the cost of customer acquisition is inherent in terms of, you know, seeing the operating leverage come through in the model that we're building.
That's helpful. You mentioned Microsoft Teams, I wanna maybe pull on that string a little bit. You've given some data points recently, both on the product innovation side, on the deal side. Are you seeing that business accelerate? Maybe just help us understand how you're going to market in capturing the customers that wanna work with RingCentral, with Teams.
We talked about 100% growth in the Teams practice, and that's been pretty consistent for the last several quarters. It is a high-growth engine within our overall business. It's still small, like, you know, relative to our $2.2 billion of ARR, it's a very fast and high-growing part of the business, and we believe the RingCentral for Teams 2.0 will be an accelerant. You know, in terms of where we see this business going, we don't specifically guide by go-to-market channel. What I would say is that, you know, we don't see any signs of it slowing down, and we are clearly investing in that part of the business.
There are very compelling reasons for our customers to want to adopt RingCentral in a Teams environment, and that is where they need, you know, the 99.999% reliability. Like, what does that really mean? It means in a year, you have less than five minutes of downtime. The other thing is customers are willing to pay for and highly value our integrations. We have over 10,000 integrations. If you wanna integrate with Salesforce.com, RingCentral can do it. HubSpot, Zendesk, you name it, there's likely to be an integration. Again, customers that really need those integrations, and, you know, it's part of their daily workflows, they will absolutely adopt an a RingCentral in a Teams environment. What's so special about RingCentral for Teams 2.0 is, it's single pane of glass.
You don't have to open another app. You don't have to toggle. It is so straightforward and easy. We see that as a, you know, an exciting, you know, growth vector.
That's great. I think there's a lot of investor confusion around maybe how the economics work for a company and just maybe how the structure works when there's direct routing going on. Can you just maybe broadly help us understand if somebody using Microsoft Teams and RingCentral, do the unit economics change, or how should we think about that?
Like Microsoft Teams has E1, E3, and E5 licenses. If you look at sort of a Microsoft Teams customer and what they'd be paying if they have the equivalent of MVP for RingCentral, which is message, video, phone. If you compare those two, you actually are pretty kind of net neutral in terms of the extra amount that a Teams customer would have to pay for an E5 license, which is about eight dollar, and then they'd have to pay extra for our calling plan. If you take E1, E3, plus those additional charges, and then compare that to what you would get from RingCentral MVP, you're about the same price point. With MVP, you get all this additional features and functionality, and geographic reach, and reliability and security.
You know, we also offer on top of that, data and analytics. When you talk about AI, I mean, we've actually been investing in AI for a couple of years. We have already, you know, we have AI embedded in certain of our products, meeting summaries, you know, RingSense, we were just talking about, was one of the announcements we made in Q1. You know, RingSense is very much something that, you know, our customers, we believe, will, you know, potentially pay extra for, and it just adds more functionality and helps with, you know, the overall ARPU that we charge those customers. Now, what I would say is that where we compete with Teams, it does tend to be enterprise customers, ARPUs on those customers are lower than for SMB.
if you look at Teams versus RingCentral for the same feature or actually, our features and functionality is richer, it's you're about net the same.
Understood. Maybe let's switch gears. Partners have been a really important part of the RingCentral story. You mentioned technology integrations, but maybe let's talk more on the distribution side. You know, the company recently refreshed its partnership with Avaya. You know, can you help us understand maybe what changes were made and where there's still optimism around that partnership?
Yeah. As most people in the room here know, Avaya went through a fairly long and drawn-out bankruptcy process and have recently reemerged. That's just 2 weeks ago that they actually emerged from bankruptcy, although the bankruptcy, you know, you've been reading about it for a long time, they literally have just emerged, so it's early days. What I would say is that we are very excited about the amended partnership agreement or updated agreement. I can't go into all the details of it because obviously it's commercially sensitive, and we have other partnerships. You know, we felt like we had some really big wins relative to our former partnership, one of which is minimum commits that we have on a quarterly basis from Avaya.
Secondly, we continue to be their exclusive provider of UCaaS. We are the natural home for, you know, the on-prem base of Avaya, which, you know, depending on who you ask, it's anywhere between, you know, 100 million-ish seats. Those seats will ultimately move to the cloud. It's not a question of if, it's a question of when. We are the natural home, and we continue to be exclusive with Avaya. We feel like those are two very, very big wins. The other thing is, you know, the economics today are much more aligned. Avaya makes money when they transfer a seat over to RingCentral, and RingCentral makes money, so everybody wins.
I think, you know, in any kind of, partnership, you want it to be win-win, and that is what we have today. You know, in terms of what we've seen so far, it is early days. We expect that partnership and seats from that partnership to ramp in the second half, much more Q3, Q4. You know, as I said, we have minimum commits in any case, so we feel very strong, or we feel like we're in a very strong position. Yeah, we still are really upbeat about what can come from that partnership, and it will be an important driver as we continue to grow.
Great. Maybe just sticking on the, on the partner side. There are a number of other, important partners that you've announced with over the years, and I think those relationships have evolved in more recent quarters as well. I'm just curious, as you're thinking about the overall distribution that partners are providing, is it more favorably structured, and is it kind of producing at the level as you guys would have thought? Just maybe help us understand how, like, an Atos or an Alcatel is also doing.
Overall partnerships, like, of course, we always want more from our partners, and I hope they're listening. We want more. Specific to Atos and Alcatel, we did renegotiate those partnerships. That was one of the things that when Mo, our CEO, President and COO, and I joined, you know, one of the first things we did was take a hard look at all of our partnerships. Again, we want to optimize them. As you think about driving profitable growth, that does sometimes require some renegotiation, and, you know, things do change. On Atos and ALE, they continue to be partners, but they are no longer on an exclusive basis.
You know, one of the things that became clear to us on those partnerships, and those are much smaller on a relative basis to, say, an Avaya or Mitel in terms of their contribution to us. You know, they tend to be very Europe-focused, and the way they sell in Europe tends to be much more wholesale-based. There were some changes that, you know, we came to realize, having, you know, been in the partnership for some time, that we realized would improve the overall outcomes and again, optimize it for both parties. We did decide to change the nature of those partnerships. I can't really go into a lot more detail because, again, you know, they're partnerships, so there's some commercial sensitivity, but they continue to be partners today.
You know, one of them was responsible for bringing in one of our, you know, really big. It was a French sports retailer, but, you know, a massive deal that we signed that we're really excited about. Still generating lots of good things.
Great. One of the real bright spots for the company has been the contact center business. It's gotten to a pretty big scale. I think $300 million is the last data point the company gave. It's been growing pretty rapidly. What's driving the success there, given how crowded the overall contact center market is?
Yeah. That's a great question, and it has been, you know, a really, really bright point. You're right. A quarter ago, what we said is we're gonna update the market every other quarter on our contact center business. A quarter ago, we said that it was about $300 million. Today it's $300 million-plus ARR. A big proportion of our overall ARR and also, you know, growing well above overall contact center market. We are taking share. Why is that?
You know, from where we sit, we believe, and what our customers tell us, is they want to buy UC and CC from the same vendor, and we are the only communications platform that is, you know, Gartner Magic Quadrant, top right, in both UC and CC. Of course, our partnership is with NICE inContact. It's a very good partnership. You know, I think we work really well together because in many ways, we target slightly different parts of the market. You know, we go to market together very strongly. You know, there was a survey that was done where, you know, it was a third-party survey, but 60% of respondents said that they want to buy UC and CC from the same vendor.
You know, obviously, that plays very much to our strengths. You know, we're seeing that. We're seeing 60% plus adoption rate in our business or, you know, bundled rate in our business. It's very much in keeping with what we saw from that third-party survey. You know, we. I don't think anyone else comes close. There are a few pretenders out there, but no one's doing it. The other thing I would say is, we have had that partnership for a really long time, and don't underestimate that. I think when I got to RingCentral, I underestimated that. I thought, "Well, couldn't someone else just replicate it?" No.
There's a lot of behind-the-scene integration that happens and R&D dollars that went into that, it's a very hard thing to replicate at that scale as well.
NICE is here as well, so for those of you that would like to meet with them, that's also an opportunity to learn more. Maybe just in the interest of time, Sonali, I'll jump ahead. Just thinking, you know, you mentioned the, what the company's done to take costs out, to drive leverage. You know, as you think about both from a headcount perspective and maybe overall cost measures, where are we at on that journey, and how should we think about maybe, the, the margin side of it going forward?
Yeah. You know, I started off by saying we've gone from 10% to exiting Q4 at 20%. Don't expect that, you know, quantum a year from now. I would say we're not done. You know, clearly, sales and marketing is an area that we're still focused on, you know, through all the comments I made around IGNITE! I think that there's a lot more we can do there. There's also the beauty of, you know, the operating leverage in the business. We continue to grow, you know, at a healthy rate.
You know, we expect to be able to drive that leverage, you know, and have more of that revenue go straight to the bottom line and not just bottom line, but free cash flow and generating and driving free cash flow. You know, we have incremental levers that we can pull and that we are pulling. They're much more around, you know, efficiency in terms of customer acquisition, LTV to CAC, driving big procurement programs. You know, you mentioned headcount. That is something, an action we took Q4 last year. You know, we see a lot of opportunity actually to just benefit from the inherent leverage in the model and continue to drive durable, profitable growth.
Awesome. Well, we'll leave it there. Sonali, thank you so much for joining us. Great to hear from RingCentral. There's a lot going on, and we appreciate you joining us. Thank you, everybody.
Thank you.