Ringcentral Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

Key Takeaways

  • RingCentral delivered a Q3 beat with $583 M subscription revenue (+10% yoy), achieved GAAP operating profitability, and drove a 56% yoy increase in free cash flow per share.
  • AI is now embedded across the platform with the RingCentral AI Assistant bundled for all RCC customers and the native AI-powered CCaaS solution RingCX exceeding 500 customers and a 50% attach rate on its AI Quality Management add-on.
  • RingCX saw strong commercial traction, securing multiple $1 M+ TCV deals, growing its customer base by 45% sequentially, and migrating 1,000+ internal support agents in a cost-efficient few weeks.
  • The partner ecosystem grew faster than the core business through deepened ties with AT&T and new agreements with Optus, Vodafone, BT, and TELUS, while winning a PAN India license to expand UCaaS/CCaaS coverage.
  • On the financial front, non-GAAP operating margin expanded to 21%, free cash flow margin reached 17.3%, stock-based compensation fell to 14% of revenue, and 7.5 M shares were repurchased YTD, with full-year subscription revenue now guided to +9% growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Ringcentral Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Hello, and welcome to the RingCentral Third Quarter 20 24 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. As a reminder, this conference is being recorded. I would now like to hand the call to Will Wong, Vice President of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to RingCentral's Q3 2024 earnings conference call. Joining me today are Vlad Schmunis, Founder, Chairman and CEO and Vebas Agarwal, Senior Vice President of FP and A and Chief Accounting Officer. Our format today will include prepared remarks by Vlad and Vebas, followed by Q and A. We 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.

Speaker 1

Ringcentral.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. 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 and Exchange Commission as well as today's earnings release.

Speaker 1

Unless otherwise indicated, all measures that follow are non GAAP with year over year comparisons. A reconciliation of our GAAP to non GAAP results is provided with our earnings release and in the slide deck. For certain forward looking guidance, a reconciliation of the non GAAP financial 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 2

Good afternoon, and welcome to our Q3 earnings conference call. Before I discuss our results and highlights from the quarter, I'd like to provide a management update. I want to extend a warm welcome to Abhay Lamba, who we announced today as our new Chief Financial Officer. Building from his start as a software engineer at Bentley Systems, Abay is a seasoned finance and technology leader with over 30 years of experience. Abay joins us from Amazon Web Services, where he is Vice President of Finance for Global Infrastructure, including Gem AI Investments.

Speaker 2

Prior to Amazon, he held finance leadership roles at Cisco Systems and Autodesk. In his various roles, he has driven growth and profitability for multibillion dollar businesses. Previously, he served as a sell side analyst on Wall Street for over 15 years, where he covered enterprise technology, hardware and SaaS companies at UBS, ISI Group and Mizuho Securities. Abay will join in his new role in the coming weeks. I would also like to sincerely thank Vaibhav Agarwal, our SVP of FP and A and Chief Accounting Officer, for his valuable contributions to our company during this transition.

Speaker 2

His selfless dedication and outstanding leadership ensured that we did not miss a beat during the transition period. Begov will partner with Abhay and myself as we scale the company in the next stage of growth. Now moving to results. We had a solid Q3. Revenue was above our guidance range.

Speaker 2

Our outperformance was driven by continued strength in our core U. K. S. Market combined with strong traction from our new products, in particular, ring CX. We also delivered on our profitability goals, including achieving GAAP operating profitability in the quarter.

Speaker 2

The combination of strong growth and operating margin expansion, a material reduction in SBC and the return of capital via buybacks has driven a 56% year over year increase in free cash flow per share this quarter. Our results demonstrate we are executing against our strategic priorities. They are 1, solidifying our UCaaS leadership by infusing AI across our entire portfolio amongst other initiatives 2, expanding time through new AI powered products. This include RingCX, our native AI powered CCaaS solution RingSense, our conversation intelligence offering and RingCentral Events, our virtual and hybrid events platform. And third, broadening our reach by nurturing and growing our large and diverse partner network and expanding into new geographies.

Speaker 2

We believe these priorities will drive long term profitable growth through increased wallet share, improved retention and more efficient new logo acquisition. Now let me share more about each priority and how we performed against it during the quarter. 1st, solidifying our UCaaS leadership. We have built a leading business communications platform grounded in TIP, which stands for trust, innovation and partnerships. On trust, we've been delivering 5 9 or better reliability for over 6 years.

Speaker 2

Customers of all sizes, including some of the world's best known brands, choose us because of our robust feature set, ease of deployment and use and carrier grade reliability, all built on our secure, standards compliant and highly scalable global platform. This continues to be a key differentiator and a competitive advantage for us, which is why we have been named by KARTRNAR for the 10th consecutive year as a leader in the 2024 Magic Quadrant for UCaaS report. Core to this recognition is our leadership in voice. Voice continues to be mission critical. We see this in our user base, where voice maintenance per user remains consistent with historical trends.

Speaker 2

This is supported by a recent IDC survey, which concluded that 78% of organizations agree that voice calling will remain a priority mode of communication in their employee and customer interactions. Given our leadership in voice, enterprises are choosing RingCentral's business phone platform to complement their use of Microsoft Teams messaging and video. Teams customers turn to RingCentral for advanced phone capabilities that are not available with Teams. These include, but are not limited to SMS, fax, call monitoring, call queue management, IVR, rich communications APIs, broader global reach, native integrations with major CRMs and robust analytics and reporting. Based on these advantages and our deep integration with Teams, this quarter we booked a $1,000,000 plus TCV win with a large European health care provider, who is also a Teams customer.

Speaker 2

This customer will deploy us in their 35 plus offices across Europe. Voice is a primary mode of business communication, and AI is a tailwind for voice. Businesses can now unlock the power of their voice conversations as a resource of data that enables more insights and smarter decisions. This is why we recently announced RingCentral AI Assistant, which is now included at no additional cost for all Ring ES customers. RingCentral AI Assistant automatically generates detailed real time notes for voice calls, helps write and translate texts and summarizes meetings to create action items, reducing time spent on mundane tasks and freeing up employees' time for more critical work.

Speaker 2

Am Dia Research recently cited the transcriptions by RingCentral AI Assistant as amazingly accurate. A long time RingCentral customer, the Detroit Pistons, is already implementing AI powered note taking for the IT meetings and strategy sessions. Paul Reppier, their VP of IT, said that, it has been a game changer for the business operations. Previously, we worried about missing crucial details, especially during fast paced pregame preparations. It has significantly enhanced our ability to stay organized and aligned.

Speaker 2

This technology isn't just improving our administrative efficiency. It's giving us a competitive edge by ensuring no valuable insight or strategy falls through the cracks. To further our competitive moat, we recently achieved a significant milestone by receiving a PAN India license from the Indian Department of Telecommunications. This authorization allows us to operate across all 22 telecommunications circles in India, making us the 1st cloud provider to deliver fully compliant UCaaS and CCaaS solutions throughout the country. Multinational organizations can now seamlessly connect their global offices with Indian branches, facilitating efficient communication and collaboration.

Speaker 2

Now let's move on to the new products. 1st, our new native C CAS product, Ring CX. IDC recently highlighted that over 80% of organizations believe it is important that their UCaaS solution includes CCaaS capabilities. Benefits of a joint UCaaS and CCaaS solution include improved collaboration between call center agents and the rest of the organization, resulting in overall improved customer experience, integrated conversation intelligence, unified usage analytics, a better overall user and administrative experience and uniform SLAs for all internal and external communications. RingCX is a modern AI powered omnichannel CKS platform, offering native conversation intelligence and quality management in over 20 digital channels in addition to voice and SMS.

Speaker 2

It is seamlessly integrated with our industry leading RingX platform and further differentiates on combining ease of deployment and use with depth of functionality, reliability and security. Based on these strengths, this quarter we booked a $1,000,000 plus TCV deal with one of North America's largest manufacturers of automotive replacement tires that will be deploying RingX, RingX and RingSense across their entire international footprint. As an additional proof point of RingCS' ability to scale, including more advanced use cases, we have also recently moved the entire RingCentral customer service team of over 1,000 support agents to RingCS. This was done cost efficiently in a few short weeks and without disruption. We now have over 500 customers on the platform, up over 45% sequentially.

Speaker 2

In addition to strong customer growth, we are also seeing strong ARPU expansion, which was up sequentially. The RingCX AI Quality Management add on has been a key driver of this ARPU expansion with a nearly 50% attach rate to new bookings in the quarter. AutoPay, an auto loan specialist said, Since we migrated to RingCX, we estimate a 20% time savings for customer success reps due to sophisticated AI based technology that RingCX delivers. To further enhance the value proposition of RingCX in the mid market and enterprise segments, today we've announced a strategic partnership with Verint. Through this partnership, Ring CX customers will be able to leverage Verint's leading WEM and CX automation solutions, which complement RingCentral's native AI capabilities.

Speaker 2

This is to enhance employee productivity and improve customer experiences, ultimately driving competitive advantage and operational efficiency to our customers. With the ability to address a full range of use cases, we will be prioritizing our native CCaaS platform, RigCX. The strong traction we are seeing with RigCX has validated its value proposition in the market. As RingCS grows its base, it has the potential to capture a meaningful share of the multibillion dollar Sika stamp with owner economics for RingCentral. 2nd, RingSense, our conversation intelligence platform that was formerly called RingSense for sales, now has over 1200 customers, up over 45% sequentially.

Speaker 2

The RingCentral's customer base and use cases are diverse. For example, legal firms are using it to simplify case management and health care organizations such as REE Medical are using it to automatically review approximately 75,000 calls a month for specific keywords versus previously only being able to manually review a few 100 calls per month. And 3rd, our virtual and hybrid event solution, RingCentral Events, added over 100 new customers during the quarter. These included Trimble, a Fortune 500 technology company. Trimble picked RingCentral Events for its ability to easily create high production quality branded events.

Speaker 2

We also renewed relationships with key RingCentral Events customers such as Block, DHL, eBay, NYU, Rutgers and TELUS amongst others. In February of this year, we set a target of achieving at least $100,000,000 of exit ARR from our new products by end of 2025. We are encouraged by our results so far and believe we are well on our way to achieving this target. Now on to partnerships. Our differentiated go to market includes a large direct sales force, top global service providers or GSPs and the large partner and reseller network.

Speaker 2

This allows us to have access to multiple customer groups, geographies and verticals. It is an important part of our competitive mode that allows us to successfully scale our multiproduct business. Let me give you some highlights from the quarter. First, GSPs. Our GSP business again grew faster than our overall business.

Speaker 2

This network of GSP partners and the deep engagement that we have built with them on both product and go to market are unmatched by our UC and CC peers. A great example of this deep engagement is our 10 year plus partnership with AT and T, the nation's premier fiber fixed wireless and wireless provider, which we recently renewed. We are also leveraging our large DSP network to grow internationally. We recently added Optus, a leading service provider in Australia, and are now seeing early traction together. We also continue to see success with Vodafone as well as British Telecom and TELUS internationally.

Speaker 2

Leveraging our unique GSP network is also a key opportunity and differentiator for Rig CX growth. Vodafone, Cox and Zayo have already chosen Rig CX as a CCaaS solution to bring to their diverse customer bases, and we're optimistic of further progress with these and other key partners on this front. In summary, we had a strong quarter in delivering against our strategic priorities. RingCentral is a proven leader in UCaaS where the opportunity remains large. And our new CCaaS AI and Events products are showing good early traction.

Speaker 2

We are also executing on our efficiency initiatives, which is resulting in expanded profitability and free cash flow as well as reducing SBC. We are on an exciting path and I am confident that we can continue to execute in the quarters and years ahead. With that, I would like to again thank Vavaf for his outstanding contributions and will now turn the call over to him to discuss our financial results in more detail.

Speaker 3

Thanks, Vlad. Now I'll provide highlights from the Q3 and then discuss our business outlook for the Q4 and full year. In 3Q, we executed well across all our key financial metrics: revenue growth, operating profit, SBC and share count reduction and are raising our full year revenue and free cash flow guide. In Q3, subscription revenue of $583,000,000 was up 10% year over year, solidly above the high end of our guidance range. ARR of $2,480,000,000 was up 9% year over year on a reported and a constant currency basis.

Speaker 3

On a sequential basis, currency was a moderate tailwind. By customer group, enterprise ARR rose 11% with both mid market and small business up 8% versus last year. As Vlad noted, new products, in particular, Ring CX continue to perform well with sequential ARR growth in 3Q consistent with 2Q. Moving to profitability. I will be referring to non GAAP results unless otherwise noted.

Speaker 3

Subscription gross margin was 81%, down slightly sequentially as we invest in infrastructure to support the strong growth of our new products as they scale. Overall ARPU remained over $30 with new product ARPU meaningfully higher than overall ARPUs. Over time, as the contribution from new product grows and its penetration within our large base increases, we expect new products to be accretive to overall ARPU. Operating margin rose approximately 2 points year over year to 21%. The year over year increase is driven by continued spending discipline and focus on operating efficiency.

Speaker 3

Sales and marketing expense as a percent of total revenue declined 220 basis points to 39%, as we continue to drive down costs in the sales and marketing organization and optimize for higher margin routes to market. Overall, we view operating margin expansion in conjunction with reducing stock based compensation as both ultimately drive higher free cash flow and free cash flow per share. During the Q3, we generated free cash flow of $105,000,000 up 51% versus last year. Free cash flow margin was 17.3%, up 480 basis points year over year. In addition to continued operating leverage and disciplined spending, free cash flow has also benefited from working capital efficiencies.

Speaker 3

Moving to stock based compensation. Stock based compensation was $85,000,000 or 14% of total revenue, down 6 30 basis points versus last year. Through the 1st 3 quarters of 2024, net new share grants are down more than 60% versus last year and we are on track to exceed our goal to reduce share grants by 50% of 2023 levels. The reduction in grants is important as the lower number of shares granted and lower grant values will result in continued improvement in SBC going forward. Importantly, free cash flow again exceeded SBC and is a reflection of our discipline and meaningfully reducing stock based compensation, while significantly growing free cash flow.

Speaker 3

Moving on to our balance sheet and capital allocation. We will continue to employ a balanced and disciplined approach to returning cash to shareholders through both debt repayment and share repurchase. Net debt to adjusted EBITDA improved to 2.3x, down from 3x last year as we meaningfully increased our profitability. Consistent with what we shared last quarter, we plan to address our $161,000,000 of 2025 convertible notes with available cash and cash flow. In Q3, we secured an additional $275,000,000 delayed draw commitment to our TRUM loan A, bringing total commitments to 350,000,000 dollars We have until May 2025 to draw down on this commitment.

Speaker 3

We plan to address our convertible notes coming due in March 2026 with this commitment, plus the free cash flow we expect to generate between now and March 20 26. As part of deploying a dynamic capital allocation approach, we continue to target reducing our gross debt from $1,500,000,000 today to no more than $1,000,000,000 before the end of 2026. Note, our liquidity as of Q3 stands at $788,000,000 which is comprised of cash on hand, plus the undrawn commitments on our Term Loan A and revolver. We believe that share repurchase continues to provide an attractive relative return. In Q3, we repurchased 2,600,000 shares for $83,000,000 So far in 2024, we have repurchased 7,500,000 shares for $245,000,000 and have approximately $243,000,000 remaining on our authorization at September 30, 2024.

Speaker 3

Our recent share buybacks combined with continued discipline on stock based compensation will result in our fully diluted share count continuing to decline further. We are making good progress with fully diluted share count declining by 1% sequentially and 3% versus last year. Going forward, we plan to continue to at least fully offset dilution from SBC via buybacks, all while preserving financial flexibility with respect to excess cash. Overall, our results this quarter demonstrate our ability to execute on our plan to deliver growth from our core and new products, expand margins through continued spend efficiencies, reduce stock based compensation and deploy a balanced capital allocation approach that includes share repurchase and debt pay down. With this strategy, we believe we can continue to strengthen our financial profile and believe we are well positioned for the future.

Speaker 3

Now let me turn to guidance. Embedded in our guidance is the expectation that the macro environment and the current business trends remain relatively stable with no further material improvement or deterioration in conditions. With that backdrop, for the Q4 of 2024, we expect subscription revenue growth of 7% to 8%, total revenue growth of 7%, non GAAP operating margin of approximately 21% and non GAAP EPS of $0.96 to $0.97 based on a fully diluted share count of 92,500,000 to 93,000,000 shares. For the full year, we are raising our revenue outlook. We now expect subscription revenue of $2,295,000,000 to $2,297,000,000 representing growth of 9% and total revenue of $2,397,000,000 to $2,399,000,000 representing annual growth of 9%.

Speaker 3

We continue to expect a non GAAP operating margin of 21% as we balance profitability with reinvesting back into the business. Importantly, we now expect stock based compensation of $350,000,000 to $355,000,000 down from $370,000,000 to $380,000,000 previously. We also expect non GAAP EPS of $3.69 up from $3.62 to $3.67 driven in part by our lower share count outlook as we now expect 94,500,000 fully diluted shares outstanding in 2024, down from 95,000,000 to 96,000,000 shares previously. Regarding free cash flow, we now expect free cash flow of $400,000,000 to $405,000,000 up from $395,000,000 to 400,000,000 dollars Our outlook includes capitalized expenditures of $85,000,000 cash paid for interest of $60,000,000 restructuring and other payments of $27,000,000 dollars as well as $25,000,000 of cash received from certain strategic partners. As Vlad noted, prioritizing RingCX will be a key long term growth driver with a significantly better margin profile given its owner economics.

Speaker 3

We are excited about the opportunity to meet the emerging customer demand for our fully scaled native UC plus CC solution. RingCX is our own proprietary technology that will allow us to innovate faster and better serve our customer needs. While it's still early for RingCX, we believe that over time its bookings will eventually meet or exceed those of RingCentral Contact Center bookings at its peak levels. In summary, we had a good quarter. We are executing against our strategy of delivering growth from our core, expanding our addressable markets through our new products and driving a strong financial profile while reducing our reliance on third parties for core competencies that will result in continued free cash flow generation while materially lowering our share count.

Speaker 3

We believe this strategy will maximize returns for all the shareholders. With that, let's open up the call for questions.

Operator

We will now begin the question and answer session. Session. Today's first question comes from Kash Rangan with Goldman Sachs. Please go ahead.

Speaker 4

Hi, thank you very much. Vlad, great hire with Abe, great guy, known him for a long time. It looks like you have a penchant for hiring former sell side people starting in Mitesh. So great job. On the business itself, I wanted to just get a better understanding as to how you would evaluate your own AI strategy.

Speaker 4

So we have a bunch of hypotheses we develop and we develop these products, we test it out in the market. What are the things that you have learned from the introduction of your AI products into the marketplace? And what is your best prediction as to when we hit an inflection point where the good is good enough that is AI and growing parts of the portfolio including RingCX etcetera that you could get a reacceleration in top line growth rate, which is something I know that is very near and dear to you and you've sort of intimated that that's your plan ultimately, but how is it all playing out near term with respect to AI and how that could be a positive for your business? Thank you so much.

Speaker 2

Yes. Hi, Kash. No, thank you, thank you, Nabai. And yes, hopefully, it will be a very good run with him as well. So look to your question, so the engineering means that good is never good enough, but probably that's not what you want to hear.

Speaker 2

Look, AI is real, it's transformative. It is indeed the mother of all megatrends, if you heard me say that. We are now seeing firsthand that there is a real demand, real traction, real usage. It's early, so we're not ready to share numbers yet. But everything is growing, not just quarter over quarter, but literally day over day.

Speaker 2

This is new technology that's going to affect many people, probably most, if not all people, and certainly vast majority of our customers. We are now at a stage to where we're not just experimenting with AI, but we've started monetizing. I think that if you look at our corporate deck that's available online, you will see that we are specifically calling out a number of AI first or even AI specific products that are already being monetized. RingCentral is one of them, but there are some newer entrants. For example, RingCentral Agent Assist for RingCF comes to mind and some other related technologies.

Speaker 2

I think we already said that it's pulling up ARPU, and it's also a very high attach rate, okay? So all of those are extremely positive signs. And it's very, very early, but we expect that over time, AI will be a major boom, a major growth driver and ARPU solidifier, maybe even ARPU driver for RingX because with AI, it does not replace person to person communications. It only augments and enhances it. And in the contact center space, while it will likely have an effect on the number of agent seats, but in our case, we are the trapdoor because we have some agent seats, but certainly, we can bring in a lot more value and a lot more revenue by automating and deflecting calls.

Speaker 2

And this is where our AI agents will come into play. Some we will develop ourselves. I'm sure you noticed we've announced a new strategic relationship with Verint. That is very serious about it. I believe so are they.

Speaker 2

Between RingCX and Verint, we are now well on our way of offering a very wide based contact spanning from very small accounts to some of the largest accounts because world class enterprise grade workforce management and automation. Only a few companies on the globe have it, and Verint is actually in the lead. So look, qualitatively, it is very, very positive and promising and up and to the right. Quantitatively, we have a what's our run rate, dollars 2,500,000,000 almost. So we have this business, which is very, very sizable.

Speaker 2

It's 100% recurring revenues. And to really move the needle on an entity of this size, it simply takes time. So it will absolutely be contributing. I think you will see first AI's contributions to ARPU. And then over time, they will translate into ARPA and then overall growth, but not quite ready to guide at this point as it is still very, very early in the cycle.

Speaker 4

Thank you so much, Vlad.

Operator

The next question comes from Citi Panigrahi with Mizuho. Please go ahead.

Speaker 4

Thank you. Great to see Avaya joining as new CFO. Now Vlad, looks like a lot of emphasis on CCaaS and you talked about RingCS, CX and this partnership with Verint. Few questions. What kind of trends are you seeing on the CCaaS, S and D versus enterprise?

Speaker 4

And now that you have RingCS with Verint partnership, how are you going to position the solution against versus NICE? How are you going to position in the market?

Speaker 2

Sure. Great question. And again, thank you on Abhay. Look, we've conceived RingCX initially as an SMB product. It is indeed doing very well in SMB, and it is showing very strong growth quarter over quarter.

Speaker 2

But what we're realizing now is that it is a much wider solution than just for smaller businesses. We are indeed getting accounts with 100 and 1000 of seats. And as a great proof point, we are now becoming our own customer. And we have migrated well over half, actually closer to 3 quarters of our internal contact center to Ring CX. And this was a direct migration from RingCC, which is, as we all know, nice and contact base.

Speaker 2

So this transition took a few weeks and went seamlessly and without loss in productivity. So we now know firsthand that RingCX can handle cases use cases not only for smaller and simpler businesses, but also for larger enterprises. And our use case is actually internally, it's not that simple. We have hundreds upon hundreds of queues that we're managing to optimize. We are running a very sizable call center and are processing lots and lots of traffic.

Speaker 2

And with the agent count well over 1,000, okay? And we now have well over 1,000 agents on Ring CX as well. So to answer the second part of your question, look,

Speaker 3

and

Speaker 2

I think I said that in my prepared remarks as well, Ring CX is our future. RingCentral is uniquely positioned and has unique experience, worldwide unique in combining top level UC with top level UCaaS with top level CC or CCaaS, okay? Over years, we've been combining our Cloud PBX product, which is a pure play leader in this market with InContact Cloud Contact Center, which is, I have to say, a very good product. But now with Ring CX in the freight, we believe that we can get all or maybe at this point, almost all, but eventually all of the benefits of a high end UCaaS, high end CCaaS together. Only this time around, it will be with owner economics, basically entire user experience being under our control.

Speaker 2

And of course, pricing and packaging will be such that we expect to be winning our fair share, maybe a little bit more in the overall CCaaS space. So we're very optimistic. RingCX is our go forward solution. RingCentral contact center, RingCC is still out there. We still have time left on the in contact relationship.

Speaker 2

Perhaps it may even be extended, who knows, never say never. I'm not saying it will or it will not, just to be clear, because look, it's a very good product and they've been added for a while. And I'm sure that there are customers who will want that particular feature set, which we are not trying to replicate. But what we are trying to do is not trying, what we are doing is we're disrupting the entire CCaaS space with our new AI driven and AI first RingCS product. And just to finish my very long sentence here, with Verint as our new strategic partner, we really do believe that we can address entire stack of use cases from very small to very, very large.

Speaker 4

Glad, thanks for that color. And a quick follow-up, Bhavav. We see gross margin down ticking last 2 quarters. I'm wondering how should we think about that going forward? What's driving that?

Speaker 3

Yes. Thanks, Sidi for the question. So look, overall gross margin is still very strong at about 81%. Our ARPUs continue to be stable and we are seeing scale benefits from our cost base. So things like transport costs and our fixed costs are spreading over a bigger base.

Speaker 3

There is a slight sequential headwind as we are ramping up our new products, particularly Ring CX. So we are investing in the infrastructure and that is expected to rationalize as some of these products ramp.

Operator

The next question comes from Ryan McWilliams with Barclays. Please go ahead.

Speaker 5

Hey guys, this is Damon Coggan on for Ryan McWilliams. Thanks for taking my question. Great to hear that you guys remain on track to hit the $100,000,000 from new products by the end of next year. As we begin to think about total revenue for 2020 5, I was just curious if the 4Q growth rate would be a good starting

Speaker 2

point.

Speaker 5

Any other puts and takes that we should keep in mind?

Speaker 2

Yes. Let me take maybe first part of that question, maybe a little bit more qualitative at this point, and Weisz will provide more color. Look, number 1, we are not yet ready to guide for 2025. To be honest, we are laser focused on having a good Q4 here. And of course, we are in the planning stages, but it's relatively early.

Speaker 2

So we're not ready to guide. And on top of this, as you all know, we have just announced a new CFO. He is not in the building yet. So certainly, we would like him to have his stake and have his hand in the process. Now having said all of this, look, we see very many positives happening out there.

Speaker 2

Again, some of what I'm about to cite here is in our earnings is in our prepared remarks. Some of it, I would refer you to our investor deck, which has been updated lately. But fundamentally, what we see is a continual strong use of voice. We see 3rd party proof points from the analyst community, but we also see it in our own user base to where voice minutes per user are steady and are at least keeping pace with our overall growth of the company. This is a very positive sign for us.

Speaker 2

We know that there is still huge greenfield left in the UC space, and we are adding lots of new logos to shows us, okay, to leverage this opportunity. In the contact center space, it is also good news with Ring CX doing well, and I would say, maybe a bit better than expected. But there is also the reality that for a number of years, we've been selling a combined UCaaS, CCaaS product with NICE Incontact based on NICE Incontact technology. We have a sales force and our channel outside channel is well trained in selling Zanske combined solution. Moving forward, as I just indicated, we will be leading with RingCX and RingCentral Contact Center, the OEM solution.

Speaker 2

We'll still be part of the portfolio, but that will not be our foot forward. This may create maybe is the operative word, but it may create a bit of friction, and it could potentially result in a bit of a headwind in the near term. It is hard to quantify. What we know for sure, however, is that we are well on our way of having Ring CX bookings be on their way, but not quite there to address or to get to the level where RingCC was at its peak. And some of this is net new because it is a wider product.

Speaker 2

It's addressing needs of smaller businesses as well as larger enterprises. But some of it is in fair industry placement. So what I would urge you to do is give us a little bit of time. We will be, of course, providing full outlook for 2025 at our next earnings call, and we should have substantially more information at that time.

Speaker 5

Thanks, Vlad. And if I could just one more. How did the Microsoft Teams opportunities perform in 3Q compared to 2Q? And is this helping you land with larger customers? Also, is it helping pull through more contact center deals with RingCX?

Speaker 2

Good questions. Look, so Teams itself is generally for larger customers. Most of our larger customers are Teams players. You are seeing that our enterprise growth is still ahead of our company growth and is still in double digits. From my limited understanding, this is actually maybe unique in the industry at this point to be growing anything at this level in double digits.

Speaker 2

So we feel super good about that. So with that in mind, yes, many of our enterprise customers are Teams customers and they're still choosing RingCentral, RingX in particular as an add on to Teams. Again, I will refer you to our investor deck, where we actually have added some very specific information on exactly why people are choosing to use RingX on top of Teams. And again, I just really want to reiterate, especially if we have some newer people on this call, that Teams is not a competitor to us. It is a potential channel, and it's an ecosystem like an operating system that we simply need to be part of, okay?

Speaker 2

And as far as Ring CX, historically, and with some notable examples to the contrary, RingCentral itself included, but historically, it's been more slated for smaller businesses, which is where there is not so much Teams. So what I would say is that at this point, RingCX and Teams integration, it's not a needle mover. We expect it to become that over time. And I can tell you that just like we have Ring EX for Teams, we expect to have Ring CX for teams in the foreseeable future to add that to the portfolio.

Operator

The next question comes from Michael Turrin with Wells Fargo. Please go ahead.

Speaker 4

Hey, great. Thanks very much. I appreciate all the color thus far. Vlad, you had a comment on ARPU expansion that I wanted to spend some time on. Can you just speak to the drivers of that?

Speaker 4

How much of that is cross sell from some of the newer products you're focusing in on? Or are you seeing base price improvements as well? And as you continue to focus in on selling the newer products, can you continue to also drive leverage on the sales and marketing line? Thank you.

Speaker 2

Definitely. Look, okay. So it comes in several guises. You use the word cross sell. So how I would look at cross sell is selling new products into the base.

Speaker 2

RingCX is one such new product. RingCX is absolutely driving up overall ARPU for the entire base. And I look, I don't have the exact numbers in front of me, but I believe it's registering already for overall ARPU. We will keep me honest on that. Okay.

Speaker 2

Now then I guess you can also call it cross sell. I look at it more than upsell maybe. But we have our newer products, in particular AI based products, that are also beginning to move the needle. So we have RingSense. We used to call it RingSense for sales.

Speaker 2

Why we renamed it or shortened the name to RingSense is that the use cases we're seeing are much above just for sales. It is general quality management for contact centers of all denominations, not necessarily sales right. We have AI assistance that we have out there. Some are our own, some are through OEM relationships. To be clear, over time, we would be looking to replace as much as we can from the OEM ecosystem with our native technology.

Speaker 2

This is as far as our core competencies are concerned. So these things are all accretive to ARPU. What I can say, again, I'll just refer you to the deck is, look, we've been holding our ARPUs at above $30 for quite some time now, okay? And many times, I we hear not many times, sometimes we hear, well, how can that be? Because if you go and look at competitive pricing, just go search the web and this person is below you and that person is below you and surely you must crash.

Speaker 2

And the fallacy in that argument is

Speaker 4

that

Speaker 2

we actually deliver more bang for the buck than probably anyone out there that you can think point out to. So what gets lost in this translation is that for our $30 we are delivering full up high end PBX that in many cases in its own right outside of Ring CF is already used as a small to even midsized contact center. This is driving price up, ARPU up and delivering good value, okay? We are offering analytics. We are offering reporting.

Speaker 2

Many people don't have it, period, or charge extra for it. We bundle it all in. Now with AI, it completely opens up new possibilities for us because we know that while some AI is now table stakes, so we have our AI assistant for EX, which we offer at no charge. But building on that are various forms

Speaker 3

of bots,

Speaker 2

which are think of it as things that AI can do before the call, things that AI can do during the call, so agent assist and post call, call it quality management. All of these are revenue opportunities for us, revenue generating opportunities. And again, I'm not going to guide. Not even going to guide with respect to ARPU. But what I will say is that the value that a company gets, a user gets from RingCentral at $30 is very, very hard to match from anyone in the industry.

Speaker 2

And some of the interesting examples out there is, for example, Microsoft scope pilot standalone is $30 okay? And we're incorporating parts of that into our stack. So again, we deliver value for the money and intend to do so moving forward.

Speaker 3

Yes. And then on the sales and marketing side, Michael, as a percentage of total revenue, it has declined by about 200 basis points in the quarter. So it's now below 40 percent, used to be in the 45% back in 2022. So it continues to be an area of focus for us and we are continuously lowering our CAC, which has significantly improved over the past 2 years. And we are doing this in a we are doing that by a couple of different ways.

Speaker 3

It's driving higher sales productivity, remaining disciplined on costs, and we are very mindful of the business that we are taking by shifting to routes to market that have a favorable unit economics.

Operator

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

Speaker 6

Hey, guys. This is Billy Fitzsimmons on for Samad. Maybe if I could double click on some of the macro and go to market dynamics. If I go back to the 2nd quarter print, the strengths were cited as large deals and upsells at the high end with maybe some relative softness in SMB. How did those dynamics progress in the Q3?

Speaker 6

And what's kind of implied in the Q4 guide? Any material changes positive or negative in terms of enterprise versus SMB demand? And then any material changes quarter over quarter in terms of customer vertical demand?

Speaker 3

Hey, Samad. Thanks for the question. So look, in Q3, we are quite pleased with the results that we delivered. What we saw in Q3 was enterprise ARR growing in double digits. We continue to add larger customers and we provided a couple of examples of customers buying multiple products and for longer duration contracts.

Speaker 3

So that continues to be a positive trend for us. Having said that though, enterprise continues to be more back end loaded and there is some variability in the timing of the deals. SMB is showing some early signs of stabilization in terms of the macro, but we are still kind of seeing macro headwinds. And we expect that as conditions improve and the macro subsides, this could be a higher growth segment for us. In terms of our new products, Vlad provided commentary in terms of the strong early traction that we are seeing.

Speaker 3

And we are very encouraged there in terms of some of the early momentum, especially considering the potential for improved margins from the owner economics. NRR continues to be above 99%. We see churn and down sell to be stable, but new seats up sells continues to be an opportunity as companies are rationalizing headcount growth. So that will be an area of opportunity for us. And other revenue continues to be impacted with cloud phone adoption and we are making some investments to enable our customers, particularly as they are buying new products to onboard seamlessly.

Speaker 3

So I think when we put all of those things together, that's what's incorporated in the guidance and in terms of the trends that we are seeing today.

Operator

Today's last question comes from Ali Ohaba with Rosenblatt Securities. Please go ahead.

Speaker 2

Thank you so much.

Speaker 5

Could you please provide some insight on how the relationship with AWS is progressing? And are you guys observing additional revenue from this partnership? Thank you.

Speaker 2

Yes. Relationship is live and healthy. And certainly, we are a big customer of theirs. But in addition to that, we are seeing some deal flow from them because in the end, our technology is complementary to theirs. We are not able to break out these numbers on this call.

Speaker 2

And by the way, part of the reason is that in many cases, we have multiple sources of referral, if you will. And they're all working together, but it's certainly helpful to have someone like AWS on your side as they are on our side. So we're happy with the relationship. Hopefully, there as well. And we do believe that there is more to do there.

Speaker 2

And I can tell you that we have teams actually working on making our solutions more yet more appealing to AWS' very, very large customer base.

Powered by Quartr