RingCentral Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 7, 2023

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to RingCentral's 2nd Quarter 2023 Earnings Conference Call. Joining me today are Vlad Schmunis, Founder, Chairman and CEO Tarek Robiadi, Incoming CEO and Simele Perek, CFO. Our format today will include prepared remarks by Vlad, Tarek and Simele followed by Q and A. We also have a slide presentation available on our Investor Relations website that will coincide with today's call, which you can find under the Financial Results section at ir.ring central.com. Some of our discussion and responses to your questions will contain forward looking statements regarding the company's business operations, financial performance and outlook.

Operator

These statements are subject to risks and uncertainties, some of which are beyond our control and are not guarantees of future performance. Actual results may differ materially from our forward looking statements, we undertake no obligation to update these statements after this call. For a complete discussion of the risks and uncertainties related to our business, please refer to the information contained in our filings with the Securities the Securities and Exchange Commission as well as today's earnings release. Unless otherwise indicated, all measures that follow are non GAAP with year over year comparisons. A reconciliation of all GAAP to non GAAP results is provided with our earnings release and in the slide deck.

Operator

For certain forward looking guidance, a reconciliation of the non GAAP Guidance to the corresponding GAAP measure is not available as discussed in detail in the slide deck posted on our Investor Relations website. With that, I'll turn the call over to Vlad.

Speaker 1

Good afternoon and thank you for joining our Q2 earnings conference call. This has been a busy quarter for RingCentral. I know you've likely seen the exciting news that Tarek Robiatti has been appointed as RingCentral's next CEO, effective August 28. I will be transitioning to Executive Chairman on that date. I'd like to extend a warm welcome to Tarek, and we'll talk more about this later on in this call.

Speaker 1

I also want to take a moment to say a few words about Mau Katibert, who will be leaving the company in the coming weeks to pursue other opportunities. Moe has played a pivotal role building out our team, evolving our product roadmap, expanding our partner ecosystem, shaping our winning culture and driving meaningful efficiencies in the business. On behalf of myself, the Board and the entire team, will wish Mao all the best in his future endeavors. On the corporate development side, Last week, we announced the acquisition of the Events and Session product lines from Kopin, a leading provider of Online Audience Engagement Technology. Hoping events allows users to easily set up complex of Virtual and Hybrid Events and fits well with our video strategy of delivering more personalized and engaging video meetings and event experiences for customers, all at a competitive price point.

Speaker 1

The technology from Hopin provides us with the complete DDA portfolio that now includes meetings, webinars, rooms and virtual and hybrid events. I would like to welcome Hopin Events and Hopin Session's talented teams to the RingCentral family. Now let's turn to the quarter. This is my 40th earnings call as the CEO of RingCentral. On our first earnings call nearly 10 years ago, we reported $161,000,000 in ARR.

Speaker 1

Today, this number stands at over $2,200,000,000 10 years is a long time, and I am proud to say we have not ever missed our financial guidance during this period and today is no exception. Q2 was another solid quarter as we continue to execute against our plan of delivering sustainable profitable growth and continued innovation. For the Q2, total revenue grew 11%, above the high end of our guidance range, and ARR grew 12%. Operating profit margins increased 8 percentage points versus Vlad's share to 19.4%, another quarterly record and well above our outlook. These improvements demonstrate the leverage in our model and our disciplined approach to spending.

Speaker 1

The profit improvement also translated to another quarter of record free cash flows. We're delivering this increased profitability, while also continuing to invest in innovation, which is the lifeblood of our company. RingCentral was founded and grew on the complementary megatrends of connectivity, mobility and cloud computing. RingCentral has been an early pioneer leveraging and contributing to all these important innovations. But now there is a new megatrend emerging that may prove to be the most impactful of all and that is of Conversation Intelligence.

Speaker 1

RingCentral again expects to be the beneficiary of and a contributor to this major innovation. Conversation Intelligence is highly relevant for business communications as it has the potential of enhancing employee productivity, improving customer service and positively impacting business outcomes. We saw the potential of conversation intelligence several years ago. In December 2020, we acquired Deep FX, a conversation intelligence company, which is now the foundation of our RingSense AI platform. In March of this year, we announced our 3rd commercial product, RingCentral For Sales.

Speaker 1

Since March, We have introduced significant new updates to RingCentral sales. And earlier today, we announced 2 new products, RingCentral Phone and RingCX, our new native intelligent omnichannel contact center. A few words about these products. 1st, RingCentral sales. We've been innovating at a fast pace.

Speaker 1

We have added many features to address customer feedback and improve our competitive positioning. Some of these enhancements include: 10 integrations with leading third party applications such as Salesforce, HubSpot, Microsoft Dynamics, Outlook Calendar and Gmail Calendar. Deal scoring, which makes it easier for leaders to track pipeline health and see whether deals are progressing or are at risk AI Coaching, which helps sales agents improve interactions based on AI analyzed customer sentiment and effectiveness of their pitch and AI Driven Win Loss Analysis, which provides effective selling insights from Conversations to improve winloss rates. 2nd, RingSense for Phone. Leveraging conversation intelligence, RingCentral Phone enables organizations to apply AI to their voice conversations and leverage deep insights to boost productivity and collaborate more efficiently.

Speaker 1

A few key highlights include of live transcription and closed captioning and post call summaries, insights and sentiment analysis. RingCentral is hosting billions of minutes of voice traffic for many millions of users. RingCentral for phone will allow them to be more effective on live calls as well as gain important insights via post call analysis. Together, we believe it will lead to more efficient and productive conversations so as to drive improved business outcomes. Last but not least, Ring CX.

Speaker 1

We have seen great success selling RingCentral MVP with RingCentral Contact Center that is powered by NICE inContact. With our HECAS business that is now well in excess of $300,000,000 of ARR, we have conclusively proven the case for UCaaS and CCaaS integration. Our joint solution with NICE inContact is well differentiated as it integrates our respective Magic Quadrant leading products into a unified offering from a single provider. We continue to invest in this partnership and see significant continued potential. However, in listening to our customers, we've recognized an additional need for a native intelligent contact center solution that would also be better suited to simpler use cases.

Speaker 1

That is why we are now introducing RingCX. RingCX is a powerful product that offers a native integrated 20 plus omni channel experience for agents and administrators. It also includes AI powered transcripts, summaries and conversational insights as well as workforce engagement management via and OEM Partner Integration. We believe RingCS will also be well received because of its ease of use, ability to be quickly deployed and its disruptive pricing. RingCentral sales, RingCentral phone and RingCS are all currently in controlled availability with expected general availability by the end of this year.

Speaker 1

It is early, but we're getting good initial feedback. In summary, it was another solid quarter highlighted by our strong innovation and operational execution. Now back to the CEO succession. When I founded the Twin Central over 2 decades ago, we were a tiny unfunded startup with an ambitious mission to improve how businesses around the world communicate internally and with their customers. From those humble beginnings, we have become a recognized leader in our space and one of the largest pure play SaaS companies in the world.

Speaker 1

September 2023 marked the 10th anniversary of our IPO. Given the strong position we're in today, Operationally and financially, I believe this is the right time for a CEO succession and Tarek is the right person for the job. Tarek is a highly accomplished senior business leader. He has been a key member of our Board since January, which has given him an opportunity to get to know our business, our team and our culture. I believe Tarek is in a unique position to hit the ground running on day 1.

Speaker 1

As for myself, my plan is to stay actively engaged in the business, focusing on what I love most, strategy, innovation and product development. I'm incredibly proud of what we have accomplished together and I'm energized about the future. With this, I will now turn the call over to Tariq for some additional remarks.

Speaker 2

Thank you, Vlad. I consider it a distinct privilege to be RingCentral's 2nd ever CEO. And on behalf of the Board, let me express our immense gratitude for all you have built. You took this company from an idea to a multibillion dollar global enterprise serving approximately 6,000,000 paying end users and bringing together an expansive 15,000 partner ecosystem. I believe our potential is vast and we have an enduring foundation on which to build our future.

Speaker 2

Vlad and I are aligned on RingCentral's core principles, people and customers first, ever present drive for innovation and a commitment to delivering results for all our stakeholders. These will continue to be cornerstones of our operations as we drive greater performance and profitability through the focused execution of our strategic initiatives. And importantly, on behalf of the Board and from me personally, I would like to thank Moe for the contributions that he has made during his tenure and wish him the best of luck. Now let me turn the call over to Sona Lee to go over the quarter in more detail.

Speaker 3

Thank you, Vlad. I'm very much looking forward to continuing our partnership in your new role. Tara, and equally excited to be working with you again. I'd also like to thank Moe for his valued contributions and partnership and wish him the best of luck going forward. I'll now provide highlights from the Q2 and then discuss our business outlook for the Q3 and full year.

Speaker 3

Subscriptions revenue of $514,000,000 was up 11% year over year and above our guidance range. ARR was 12% versus last of the company's business to $2,220,000,000 Growth was driven by strength within key industry verticals where our products are mission critical, such as Professional and Financial Services, Healthcare, Retail and Public Sector. Additionally, contact center ARR was roughly $330,000,000 up from roughly $300,000,000 at the end of 2022. The strong traction we are seeing in contact center is driven by continued demand from customers for a leading integrated UCaaS plus CCaaS solution. An example of the power of our platform is our recent competitive win with Republic Airways, one of the largest regional airlines in the U.

Speaker 3

S. The company's legacy tools required frequent maintenance. Their on prem phone system also did not integrate well into their contact center, which Republic Airways relies on to quickly reach its pilots and flight attendants to provide them with any urgent scheduling changes. RingCentral's industry leading Five9's reliability for the past 20 quarters advanced call routing and Integrated Cloud Contact Center will help Republic Airways solve these challenges, all while saving them money. Importantly, Republic Airways plans to utilize our new RingCentral for Teams 2.0 Embedded App, which continues to see great traction in the marketplace.

Speaker 3

Moving to profitability. I'll be referring to non GAAP results unless otherwise noted. Our subscription gross margin was 82%, consistent with last quarter. Overall ARPU was again above $30 as customers continue to value our differentiated of Sabrina. Our solid ARPU supports our strong gross margin.

Speaker 3

Operating margin rose 800 basis points versus last year to 19.4%, another quarterly record. The increase was driven by operating leverage and efficiencies generated across the business, most notably in sales and marketing, which was down 4.90 basis points versus last year. Sales and marketing expense improved due to the efficacy of our marketing spend as well as the headcount actions we took last November. As a reminder, Those actions did not impact customer facing salespeople. Our increasing profitability translated into record quarterly free cash flow of $81,000,000 on an adjusted unlevered basis.

Speaker 3

The improvements to our free cash flow continue to be driven by operating leverage, efficiency throughout the business and improving our free cash flow conversion. Our robust free cash flow generation allows us to employ a dynamic capital allocation strategy that includes evaluating organic and inorganic investments, repurchasing shares and addressing our convertible debt maturity. This quarter, we were able to execute against all three of these vectors. 1st, during the Q2, we paid $427,000,000 to repurchase $461,000,000 in aggregate principal amount of our 2025 convertible notes. The repurchase was funded with cash on hand and $400,000,000 from our term loan A.

Speaker 3

We also entered into a swap agreement that fixed the floating interest rate on our term loan A. The fixed interest on our term loan A is approximately 6.6% and can step down modestly as we further deleverage. This results in a weighted cost of debt of approximately 1.6% following the repurchase. Based on our Q2 results, our trailing 12 month net leverage ratio is 3.3 times. And based on our 2023 outlook, we continue to expect our net leverage to be less than 3 times as we exit the year.

Speaker 3

Second, in the quarter, we repurchased approximately $100,000,000 of shares at an average price of approximately $30 Additionally, during the Q2, our Board approved a new of the company's share repurchase authorization for $125,000,000 effective through December 31, 2023. Lastly, as Vlad mentioned, last week, we acquired assets from Hopin to augment our video offering. While we are excited about the addition, we expect the acquisition to have an immaterial impact on our revenue and expenses in 2023. Before I provide our Q3 and full year guidance, I'd like to provide you with additional details on the macro trends we are seeing in the market today. Macro trends are largely consistent with last quarter.

Speaker 3

Sales cycles remain elevated versus last year and customer buying decisions continue to go through additional layers of approval. We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee count. Importantly, marketing driven lead flow remains consistently strong, demonstrating continued demand for on prem to cloud conversion. Now turning to guidance. For the Q3 of 2023, we expect subscriptions revenue growth of 9% to 10% total revenue growth of 8% to 9% non GAAP operating margin of 18 to 18.5 percent and non GAAP EPS of $0.75 to 0 point 78 dollars of note that we are reinvesting a portion of the operating profit outperformance we delivered in the Q2 into innovation and go to market of our business activities in the Q3.

Speaker 3

Specifically, there are areas of strength in select verticals where investments, including in AI, are expected to drive greater product differentiation and incremental demand. Now moving to the full year 2023. We continue to expect subscriptions revenue growth of 11% and total revenue growth of 10% to 11%. And we now expect non GAAP operating margin of 18.5% to 19%. At the midpoint, this is up more than 600 basis points versus last year and 25 basis points above our prior outlook and non GAAP EPS of $3.11 to 3.25 Note that this outlook is inclusive of interest expense from our Term Loan A, which our prior outlook of $3.19 to $3.25 did not include.

Speaker 3

Additionally, Last quarter, we noted that we would be able to achieve $280,000,000 in free cash flow much earlier than our original target of 2024. I'm pleased to share that we now expect to achieve adjusted unlevered free cash flow of 270 to $290,000,000 in 2023, roughly a full year earlier than we had originally expected. We are well on our way as we have already generated $142,000,000 in the 1st 6 months of 2023. Our updated target demonstrates the power of the operating leverage inherent in our business. It also speaks to the progress we are making on our efficiency initiatives, all while continuing to invest in innovation and targeted go to market activity.

Speaker 3

In summary, Q2 again demonstrated our ability to execute against our strategy of driving profitable healthy growth with robust free cash flow generation. We believe our leading differentiated product offering and focus on innovation, coupled with our scale and attractive business model, positions us well for continued success. With that, let's open the call for questions.

Speaker 4

We will now begin the question and answer session. Our first question is from Meta Marshall with Morgan Stanley. Please go ahead.

Speaker 5

Great. Thanks. Vlad, sorry to see you stepping aside after so long. Look forward I really enjoyed working with you. I guess just in terms of Tarek obviously has been on the Board, but just why you felt like He was the right choice.

Speaker 5

What your kind of ongoing engagement with the company will be and and maybe deciding to go with somebody kind of outside of traditional software realms. Thanks.

Speaker 1

Right. Hi, Amitav. Okay. Firstly, I'm not quite stepping aside. I'm transitioning to an executive chair role.

Speaker 1

I intend to stay actively involved, less so on the governance side. Obviously, Tarek will be You know a real CEO, no questions asked, but I'll be around and working on innovation, product introductions, long term vision and strategy, etcetera. I and by the way, for disclosure, Tarek is here in the room with us, so he can also answer some of the questions directly. But we both I believe it speaks to for both of us. We see it as a partnership moving forward.

Speaker 1

We specifically discussed that quite at great lengths. And I also want to remind you and the rest of the folks, Tarek has been on the Board since of last year. He's been an active Board member, both member of our audit committee and comp committees. And he knows the company very, very well. It was very important for me and the Board to have a seamless transition, to have someone who understands the business, understand the landscape, very importantly, shares our values, shares our strategy, that being profitable growth.

Speaker 1

So, both words are being very important, profitable and growth. And Tarek He is a well known heavy hitter in both of those on both of those dimensions. Look, to your question, why not someone from the software industry? Tarek is from the software industry, and he's had of a number of major accomplishments, specifically both at HPA and prior. And I tell you what, Sonali, our CFO, She's been working with Tarek and for Tarek for a number of years.

Speaker 1

Maybe you can shed some light.

Speaker 3

Yes, absolutely. Hi, Meta. So yes, I've known Tarek for over 25 years and did have the pleasure of working and reporting directly into him when we were at HPE, where he did a spectacular job of really shifting the HPE portfolio to much higher growth areas, such as Aruba and he was a huge proponent of investing at the edge, which is where we saw a massive amount of growth. Obviously, HPE is a much larger revenue base. So sometimes you don't see it in the aggregate amount, But the Aruba business was a significant grower and then he was also very central to the GreenLake and as a service pivot.

Speaker 3

And then finally, the high performance computing and AI divisions, which all grew well above the overall portfolio. And Tarek has vast experience as both and a very strong track record as both a CEO and CFO And has successfully scaled businesses whilst also driving growth and importantly profitability and cash flow. So we think he's just very, very well rounded.

Speaker 4

The next question is from Terry Tillman with Truist Securities. Please go ahead.

Speaker 6

Yes. I mean, I have a question, but I do want to ask an extra and I think I should be able to. Vlad, are you still going to be on these calls answering our Provocative questions and then I will ask my question.

Speaker 1

Look, I want to reiterate, Tarek is going to be the CEO. But I would say is as appropriate, Tarek wants me to Participate maybe on a case by case basis. Look, I'm around. I'm not sailing into the sunset. I still have immense interest, not just financial, but also financial in this company's success.

Speaker 1

And as you know, I tend to speak my mind for better or worse. So I don't think that that's going to stop anytime soon either.

Speaker 6

Congrats to you both. My question for the call is actually, certainly, I think in the past you've talked about ARR bookings, how that would trend ahead of top line growth. We only have 2 quarters left and I don't know what kind of visibility you have in the second half, Could you give us an update on how you're thinking about ARR bookings for the year and the growth rate there? Thank you.

Speaker 3

Yes. Sure, Teri. As you know, we don't typically guide on ARR. And we do have good visibility on the second half, and that's We guided and reiterated very much our full year guide today and raised our guidance on operating margin, as well as provided more color around free cash flow. But when you think about ARR, In terms of providing you color, we did about $60,000,000 of bookings in the quarter.

Speaker 3

So that means we've generated about of net new ARR bookings in the first half of twenty twenty three. And if you think about how our business has historically been slightly more second half weighted. Whilst not guiding specifically, we think if Typical seasonality holds. It's absolutely something that we should be able to achieve. And just if you do, you didn't ask specifically around the guidance, but we are reiterating the full year on both revenue and subscription revenue.

Speaker 3

And on margins, we strongly exceeded of the 2Q outlook by about 200 basis points, which is up 800 basis points year over year versus of Q2 of a year ago. So because of that, we raised the midpoint of the margin guidance by 25 basis points. So for the full year, we're now looking for 18.5% to 19% margins. And we We continue to expect to exit the year at least 20%. And, you know, we will always strive to do more.

Speaker 4

The next question is from Samad Samana with Jefferies. Please go ahead.

Speaker 7

Great. Good evening. Thanks for taking my questions. I'll echo Vlad. It's been great working with you and look forward to still talking to you every now and then.

Speaker 7

So Maybe just a question on the C Gas side of the business. I know you mentioned where the new product fits into the world, but I guess if you can you double click on that, Maybe who do you see is that more of a greenfield opportunity? Are you targeting replacements? If so, who would that be that you're going after with that product? And then I actually have and CCaaS ARR follow-up as well.

Speaker 1

Sure. Okay. Well, thank you, Samad. Okay. So, as far as RingCX is I think what you're asking about in that announcement.

Speaker 1

And look, So, what do we have that's unique? We have a of CCaaS business as part of our portfolio that's well over $300,000,000 in ARR. It actually makes us one of the largest of CCaaS Providers in the world. But there is a twist here, and the twist is that We are playing and playing extremely well in the unified UCaaS, CCaaS communications market, Okay. This is where people will have this integration.

Speaker 1

It's unique to this day between us and inContact and NICE inContact and obviously has been playing extremely well, okay? Now, where does the so what's the new opportunity? So firstly, we are frankly up until now, not as we were locked out, but we don't really Tend to see pure play requests, line of business requests. If somebody needs a just a contact center, You know, they would likely not even involve us in an RFP. So, with RingX RingCX, We expect to be getting those opportunities and participating directly.

Speaker 1

So that's number 1 to remember. Secondly, NICE inContact is a fantastic product. Gartner has it right. They are up into the right and one of the 2 core leaders without any questions. But it's also an enterprise grade product.

Speaker 1

It's a high end product. And unfortunately, that means complexity And that means fairly healthy pricing. We see an opportunity. This is where the greenfield comes in to come in, not just necessarily into smaller businesses, but into businesses with simpler with simpler requirements, okay? And they can be small or they can be very large.

Speaker 1

It depends on how they've organized their contact center. We believe that RingCS will be a viable player. It will compete well based on features, based on the fact that it is AI first, it is a next generation product built on next generation pure cloud architecture. Pricing will be competitive, if not disruptive. And look, I tell you people, you, certainly not The list of them have been asking, okay, well, where is your own contact center?

Speaker 1

Here is the answer. Here it is. So we're in beta now. Early results are promising or better. Feedback has been great.

Speaker 1

We're obviously learning on that feedback and incorporating and expect more to come. And to tell you, with me now having more time to concentrate on little housekeeping items like getting products out, expects it will be a strong player in that area.

Speaker 3

And if I could just add something there. You can just imagine that with proprietary economics, The contribution margin on RingX will be RingX will be much higher than what we drive today on RCCC.

Speaker 7

Understood. And maybe just a quick question on the CCaaS, on the ARR disclosure that $300,000,000 plus or the data that you gave. It implies really robust growth, right? So it's like north of 30%. One, I want to see if that math is right.

Speaker 7

And then on for UCaaS, I would make it kind of more like high single digit. Is that the right way to think about those two growth rates for the go forward future?

Speaker 3

Yes. So, I think a couple of points I'd make. So yes, we are very pleased with how the CCaaS business is growing. And the last time we updated you, we said that we'd update you every quarter on where we are. So this quarter, I'm proud to say we're now at $330,000,000 of ARR.

Speaker 3

And what I would say there is that we've seen great success obviously in selling RingCentral MVP with RingCentral Contact Center. And over 60% of our large 1,000,000 plus TCV deals include both UCaaS and CCaaS. And what I would say there is we really are uniquely positioned relative to all of our competitors to offer of both UCaaS and CCaaS from 1 single vendor, which is what we truly believe particularly enterprise customers are looking In terms of what we're seeing on the UCaaS business, we still are growing well above the market in terms of revenue market share, And if you look at any of the 3rd party data, Synergy, Gartner, etcetera, We are continuing to take revenue share there. So I would say CCaaS growing well above the market and UCaaS still continuing to take revenue share relative to the overall market.

Speaker 4

The next question is from Brian Peterson with Raymond James. Please go ahead.

Speaker 6

Hi, thanks for taking the question and congrats to Vlad and But certainly, I wanted to follow-up with you. You mentioned that on some of the efficiencies that you've recognized, you're going to be reinvesting in the Q3. I'd love to understand How much of that is more product oriented versus go to market oriented? And how should we be thinking about potential efficiencies going forward? Should those be reinvested as well?

Speaker 6

Thank you.

Speaker 3

Yes. So great question. And as I said earlier, we strongly exceeded our Q2 profit margin outlook. It was at a 200 basis point beat. So we were at 19.4%.

Speaker 3

But we still need to invest in the business. And there are areas of strength that we are seeing in select verticals where investments, including in AI, and Vlad has said he's going to spend more time there, are expected to drive greater product differentiation and incremental demand. So in Q3, we will be investing of the company's business. And part of that will include investing in some of the higher performing marketing channels that we believe will drive more sales. That being said, if you look at the overall full year margin outlook, that is very much Still increasing, but we do want to balance both investment for growth and profitability.

Speaker 3

And you've heard us call this out in prior calls, but upsell has been an area of the business that has where we've seen some of the challenges. And we do feel that the new products being introduced will deserve investment and also will drive that up of the call that we expect to see as the macro recovers.

Speaker 4

The next question is from Kash Rangan with Goldman Sachs. Please go ahead.

Speaker 8

First of all, Vlad, I've got to say congratulations on a 10 year stint as public company CEO and bigger congratulations on hiring a former equity analyst from Lehman Brothers as your CEO, the future of our industry. My industry is really, really bright, it looks like. Having said that, I actually want to ask Tarek a question, if that's okay. First of all, very impressive that you speak 6 languages, maybe over a beer one day, you'll tell me how you managed to do that. That's very impressive.

Speaker 8

But I'm curious, Tarek, to get your take on what is it that you've learned about the company that you can share with us being on the Board that gives you the conviction to step into the hot seat and take questions from people like us. I look forward to working with you. And what about you've got tremendous background and we've been an equity analyst many years back and you've been in the tech industry for a long time. What do you see as RingCentral's of the company has challenges. So what do you think is RingCentral's primary challenge going forward?

Speaker 8

And what is going to be the secret sauce that you bring with your pivoting towards that new segment of the market or these acquisitions. I want to just be cognizant that there are challenges and how do you envision overcoming them in your future. Thank you so much and congrats.

Speaker 2

Well, thank you very much for the intro. You made me feel a bit younger because when I was an equity analyst, it was 25 years ago and we were with the same team with Sonali. So thanks for reminding me of this. Let me answer first by saying, I see a tremendous opportunity at RingCentral and the vast potential. The opportunity that exists in UCaaS and CCaaS combined that Vlad has mentioned is quite formidable and it's something that I'm very keen on capitalizing on for the future and realizing that full potential.

Speaker 2

Those use cases that you've heard about from Frontier Airlines are very telling. These are use cases where communications become More pervasive all the way from inside the office with a contact center all the way on to field workforces or sales forces anyway you want to look at them. These are unique use cases that RingCentral can pursue and I'm very keen on making sure that we continue at RingCentral to innovate to grow because the practical reality is that in this industry the very first lever for value creation is growth and we intend to continue to dial up the growth here for all our stakeholders and obviously our shareholders. What stands in the way, to be honest, it's a bit early for me to say what stands in the way. It's true that I have the vantage point of having Spent 9 months on the Board of Ring and think I know it somewhat, but I have to spend more time under the hood so to speak really in the operations of the business to figure out what stands in the way.

Speaker 2

And I will start doing so immediately upon my first full time day on the 28th August. But between now and then, we're not I'm going to be spending some time with the management team, making sure I understand where they're coming from so that we can have a real solid operation moving forward.

Speaker 4

The next question is from George Sutton with Craig Hallum. Please go ahead.

Speaker 6

Thank you. My congrats to Vlad and welcome to Tarek. I am curious, Lee, you had mentioned that marketing driven lead flow had been really the strength in this quarter. I was just as interested that there was no mention of the large partnerships, the Avaya's and Mitel's, of the frontiers and AT and Ts of the world. Can you just give us an update on the partnership side of the business?

Speaker 3

Yes, absolutely, with pleasure. So you called out Avaya, Mitel, specifically we also have AWS and I'll talk to the GSPs, global service providers as well. So Avaya, as you know, has recently come out of emerged from bankruptcy. They continue on their new go to market motions that were enabled as part of our updated contract with them. And we've seen slightly better traction and execution from Avaya this quarter.

Speaker 3

And as I said earlier, we do of more of a back end loaded impacts from Avaya and I we continue to expect that. Mitel also continues to contribute seats at a healthy of CLIP. On AWS, well, it's still early. We have started to see some really good traction in the pipeline there and we're starting to see the first deals beginning to close. So we're on track to be live on the AWS marketplace later this year.

Speaker 3

In terms of the GSPs you talked to, one of the ones that I would specifically call out is Charter, where we're continuing to see extremely strong execution there. And as you know, There are a couple of other GSPs that have recently come online, particularly in Europe. And we're seeing more and more traction with Vodafone as well. So we have the legacy partners that are fully ramped and continue to contribute. But then importantly, we have these new ones that we're beginning to see very solid impact from.

Speaker 3

So That's the story for partnerships. And as you know, they remain a very, very important part of our overall go to market. And we see a lot of scope for all of those partners to continue contributing for the rest of this year and beyond to our overall growth.

Speaker 4

The next question is from Matt Stottler with William Blair. Please go ahead.

Speaker 6

Thank you for taking the questions. Vlad, sorry to see you go, but obviously you'll still be engaged. So look forward to chatting Congrats on the position. Maybe just one question on geographic specific question. There were a number of press releases over the course of the quarter, specific to India with regulatory compliance, office openings, plan hires, etcetera.

Speaker 6

I would love to just double click on the opportunity you see in that geography, how that might layer into of the business over time and then how you think about the competitive landscape there relative to what you see elsewhere around the globe?

Speaker 1

Right. Well, thank you, firstly. Look, as far as India is concerned, so firstly, it's great that we're We think we're actually literally the 1st foreign service provider to be allowed to offer this kind of services in the area. So, it's a huge accomplishment. Look, our primary or 1st foot forward, let's say, would be to extend India into our global office of Technology.

Speaker 1

So, what that means, if you have a U. S. Or some other international based business with offices in India, then we would be able to deliver local dial tone in a legal manner. So that's really where we're seeing most of the demand at this point. Secondly, as you all know, We have a strong and growing GSP practice.

Speaker 1

And with this announcement, and more importantly with this capability, we are now much more likely to be able to partner with local service providers in powering up their B2B offerings in the area. And lastly is an opportunity to engage directly. Again, that's a little bit farther down the list for us. We first need to do the first two, but certainly an opportunity. And needless to say, India is 2nd largest country in the world population wise, by far the largest where we can legally do business given otherwise restrictions in China.

Speaker 1

So, definitely an area of growth for us as we look forward.

Speaker 4

The next question is from Jim Fish with Piper Sandler. Please go ahead.

Speaker 6

Hey, this is Quintin on for Jim. Vlad, we wanted to echo the congratulations and well wishes for the new role and look forward to working with you, Derek. On the Microsoft Teams 2 of the 2.0 opportunity. We continue to hear strong results from this product across your channel partners. When Microsoft talks about their past 17,000,000 PSTN users on the platform, Do you think all 17 of those 17,000,000 of those players make sense as the addressable market for the 2.0 of Tuniti or are you more focused on the G2K players?

Speaker 6

And then maybe just on the penetration side, how do you see that penetration of

Speaker 1

the opportunity today? Thank you. Yes. Well, look, it's super hard to talk about all when you're talking about large numbers. But Again, as we look at the landscape, Microsoft is packaged into E1, E3 and E5 tiers.

Speaker 1

E1 and E3 have no business telephony included, can be upsold, but not included. And E5 does have it, but it's still positioned behind us features wise and global reach wise. So look, it's been our major introduction last quarter, this past quarter. It continues to do well. We I think on earnings in prepared remarks, we talked about of Republic Airways.

Speaker 1

Importantly, they're a Teams customer and the plan is for them to be using our embedded dialer as part of the technology suite that they're standardizing on. We continue and you've heard me say this before. Teams has been and we believe for the foreseeable future will continue to be a growth driver of Porus. We were, I would say, at parity up until Q1 or late Q1. I don't think we're at priority anymore.

Speaker 1

I think we're leading now as far as quality and user experience that our of integration has to offer. So, it is basically the best integration that we know of in the marketplace. Very importantly, you saw some of these other announcements from us and in particular, RingSense for phone. And I just want to stress that, that will also be available in the Microsoft version of our packaging. And by the way, as a side It will also be made available to all of our 15,000 partners, including GSPs and strategics.

Speaker 1

Okay. So, it will all play in together, will make us stronger, You know, rest is GTM and getting to at bat. And actually with Tarek's joining and his absolute focus on operational excellence and efficiencies. We're having pretty high hopes here We will be getting more at best in all segments, not so least being enterprise.

Speaker 4

The next question is from Citi Panagrahi with Mizuho Securities. Please go ahead.

Speaker 9

Thanks for taking my question. I also extend my best wishes to Vlad and Tarek. Craig, looking forward to working with you. And I want to ask about your growth at this point. I understand you talked about various of Factor influencing growth.

Speaker 9

But now that, let's say, Avaya coming reemerging out of bankruptcy And there are partnerships that's coming back. When do you think that growth will trough? And when should we think and what are the drivers you think all this product you talk about when do you think we'll start seeing growth to reaccelerate again?

Speaker 1

Yes. Well, look, Obviously, we've guided how we've guided, and this is probably not the best time to make forward looking remarks. So, you'll just have to wait until our guide after this present quarter and how we next year and beyond. But directionally, For the first time in a fairly long time, RingCentral now has is a true multi of product company, and we have a full quiver of product offerings addressing needs of both employees, so EX, as well as contact center of Centers and Customers, so CX. So, if you look at just the announcements this past quarter, We've augmented and completed our Vidya portfolio with Klapin's assets.

Speaker 1

And for those of you who are new to this story, Hopin has been a unicorn, really high flying. They've pioneered the virtual and some hybrid events markets. They have a number of you know who is who names amongst their customers and an extremely well received product. And we were just very fortunate to be able to acquire this asset from Koppen. So now we have video meetings, of Rooms, webinars and now events and not just virtual events and obviously With COVID being no more, purely virtual events are less interesting still interesting.

Speaker 1

Airfare is still But hybrid events, which is where has been making investments prior to us getting involved, and we continue to double down on those. Can tell you that. So, this really does complete our portfolio there. In particular, Microsoft doesn't seem to have an Events product. So, this would be one good area to differentiate.

Speaker 1

And look, in general, what we find is if we are in an account and the customer gets exposed to Ring. Those customers tend to stay with us. So, we view all of these are as Springboards to get into accounts and then lend an expense from there. So that's just on the VDSI. Then we have RingCX and I already addressed that, where now we have our own native standalone as well as integrated of contact center products that we think will be disruptive on features, on positioning, on pricing And not just the value that it generates, okay?

Speaker 1

So, that's 2. Then there is this whole AI opportunity. And look, it's interesting. News late breaking news here is that Zoom, I guess, changed their terms of service. And he's now announcing that they'll be training on their customers' data.

Speaker 1

Well, we don't do that. We have other means of training the system. Training that we are doing and intend to be doing will be on customers' own data to enhance results with that particular Not intermixing. So, we think that with that and the fact that we are moving billions upon billions of minutes, We're serving millions of direct customers. But if you think about it, it's tens or hundreds of millions of callers who get to experience RingCentral.

Speaker 1

So, the fact that we given the scale, breadth and depth of our network and partnerships that we are now able to interweave intelligence into all of those conversations. That's a big step. So look, again, without changing the guide, we think we're well positioned. We think the product He's well differentiated more so than in any time in the last few years, and the team is energized. You know, Mohawk has done an outstanding job in keeping the ship steady last few years or last 18 months, But now we have new blood coming in with Tarek, and I'm sure he'll be bringing in his own ideas and his own playbook that we think will further enhance.

Speaker 1

So again, upward and onward, and Hopefully, we won't let anyone down.

Speaker 4

The next question is from Ryan Koonce with Needham. Please go ahead.

Speaker 1

Thanks for the question.

Speaker 10

I want to follow-up on the AI capabilities. It sounds like you've got a great team there from deep FX. How do you think about the infrastructure requirements for that in house versus building your own versus public cloud partners? Can you talk a little bit about that and How that can affect the model going forward on cash flow, etcetera. Thank you.

Speaker 1

100% public cloud, no infrastructure.

Speaker 4

This concludes our question of the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.

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Key Takeaways

  • Leadership change: Tarek Robiatti named next CEO effective August 28, with founder Vlad Schmunis transitioning to Executive Chairman and VP Mau Katibert departing.
  • Strong Q2 results: total revenue up 11% YoY, ARR up 12%, non-GAAP operating margin reached a record 19.4% (up 8 pp), and free cash flow set a new quarterly high of $81 million.
  • Acquisition completes video suite: RingCentral acquired Hopin’s Events & Session products to round out its portfolio of meetings, webinars, rooms, and hybrid/virtual events.
  • AI-driven product launches: built on its RingSense platform, RingCentral rolled out RingCentral for Sales, RingCentral Phone, and the upcoming native omnichannel contact center RingCX in controlled availability.
  • Guidance & outlook: Q3 subscriptions revenue expected to grow 9–10% with 18–18.5% operating margin, while full-year revenue is projected up ~11% and adjusted free cash flow forecast at $270–290 million.
AI Generated. May Contain Errors.
Earnings Conference Call
RingCentral Q2 2023
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