RingCentral Inc (RNG) 2015 Q4 法說會逐字稿

Greetings and welcome to the RingCentral fourth-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Darren Yip, Director of Investor Relations for RingCentral. Thank you, Mr. Yip, you may begin.

Thank you. Good afternoon and welcome to RingCentral's fourth-quarter 2015 earnings conference call. I am Darren Yip, RingCentral's Director of Investor Relations. Joining me today are Vlad Shmunis, Founder, Chairman and CEO; and Clyde Hosein, Chief Financial Officer.

Our format today will include prepared remarks by Vlad and Clyde, followed by Q&A. The primary purpose of today's call is to provide you with information regarding our performance for the fourth quarter 2015, along with our financial outlook for our first quarter and full year 2016.

Some of our discussions and responses to your questions may contain forward-looking statements, including statements regarding our expected financial results for the first quarter and full year 2016; our future plans, prospects and opportunities; trends in the business communications market; our expectations regarding our expectations internationally and up market; our service provider and other reseller relationships; our integrated partnerships; open platform; Glip and contact center products and our Global Office solution; our new phone distribution model; our plans to enhance our platform, further our enterprise capabilities and expand our international reach; and our growth strategies, current and future market position, and expected growth. These statements are subject to risks and uncertainties.

Actual results may differ materially from our forward-looking statements and projections for a variety of reasons including, but not limited to, general economic and market conditions, the effects of competition and technological change, the success of upmarketing, sales and retention efforts, and customer demand for, acceptance of, our products and services. A discussion of the risks and uncertainties related to our business is contained in our filings with the Securities and Exchange Commission and is incorporated by reference into today's discussion. We disclaim any obligation to update information contained in our forward-looking statements whether as a result of new information, future events or otherwise.

I encourage you to visit our investor relations website at IR.RingCentral.com to access our third-quarter 2015 earnings press release and slide presentations, our non-GAAP to GAAP reconciliations, our periodic SEC reports, a webcast replay of today's call and to learn more about RingCentral. With that, let me turn the call over to Vlad.

Thank you, Darren. Welcome to everyone joining us today for our fourth-quarter and full-year 2015 earnings call. We had a strong fourth quarter, which capped a great 2015 for RingCentral. 2015 was a solid year, exhibiting a combination of consistent top-line growth on a larger revenue base, consistent execution across all our major initiatives, combined with meaningful margin expansion, culminating in the Company reaching profitability on a non-GAAP basis one quarter ahead of guidance.

2015 has been a watershed year for us on multiple fronts, including beating and raising projections every quarter, successfully launching two new major carriers, successfully completing our first acquisition as a public company and being selected by Gartner as the UCaaS Magic Quadrant leader. We have also grown the team substantially, moved our headquarters into a new campus and established a new East Coast location in Charlotte, North Carolina. I want to thank all of our employees, customers and partners for making it this an outstanding year for RingCentral.

In 2015, we continued our disruption of the legacy on-premise system provider in the still largely underpenetrated $50 billion global market. We extended our market leadership by organically growing at a clip of 35% year over year to nearly $300 million. Very importantly, we grew across all our market segments and product lines. With our office products, a $0.25 billion recurrent revenue business in its own right, leading the charge with over 45% year-over-year growth.

Our leading market position and growth is first and foremost rooted in our strong commitment to innovation. We extended the RingCentral platform by adding a number of core enterprise capabilities which now puts us on par with best-in-class legacy vendors from a functionality perspective while offering unsurpassed flexibility, ease of use, mobility and total cost of ownership savings. We partnered leading SaaS cloud contact center provider inContact and brought to market the extremely well-received RingCentral contact center product. We introduced an industry-first business integrated communications and team messaging and collaboration by successfully integrating Glip, a company that we acquired earlier in the year.

In 2015, we also unveiled the RingCentral connect platform, a set of tools and services to build, deploy and manage customer integrations using RingCentral open APIs. We further leveraged it by integrating with a number of leading SaaS providers including Microsoft Office 365 and Google for Work. This makes our customers' employees more productive and creates more stickiness for our product.

2015 was a breakout year for us and our expansion of market, exemplified by enterprise wins at Columbia University, Medallia and Techta, amongst others. Nearly 30% of the RingCentral Office new bookings came from upmarket customers with at least 50 users and meaningful uptick from about 20% in the year-ago period. We now have solid proof points that our product is ready for enterprise customers and we expect continued out performance in this segment in 2016 and beyond.

We also saw very strong growth in our indirect channels. We now have over 2,500 [vital industry] sellers, up from about 1,000 two years ago, while also growing our carrier partnerships to three with the addition of BT and TELUS, adding further international reach in the process.

Last but not least, we reached our first non-GAAP operating profit a quarter earlier than anticipated. We did this without dampening our industry-leading growth rate or rate of innovation.

Q4 was a strong finish to the year. Our software subscription revenue grew 36% year over year. These results were driven by the strength of our RingCentral Office business which grew 45% year over year and represents over 90% of our net new bookings.

In Q4, as for the whole year, we saw broad-based strengths in all segments. SMB continues to be a strong growth factor for us, growing up 35% year-over-year. We continue viewing this as a largely untapped opportunity with compelling economics.

On the upmarket side, i.e., customers with 50 users or more, Q4 was a record booking quarter with our exit growth over 100% year over year yet again. Strong performance with customers of all sizes is what enabled us to deliver our industry-leading growth.

Last quarter, I discussed four key drivers that we're focusing on to position us for strong growth in the future. These include technology leadership, expansion of market, international reach and strong execution with our service provider and general partners. In the fourth quarter, we continued to see good progress in all these areas.

Starting with technology leadership, RingCentral strives to leverage innovation to differentiate itself from the competition. In Q4, we delivered integrated Glip team messaging and collaboration as part of RingCentral Office. With this integration, we have made our key product more attractive to a larger enterprise customers and prospects.

We have seen the usage of Glip nearly double since its acquisition in June. This place of innovation is extremely difficult if not impossible for the legacy on-premise providers to deliver and it further enhances our capability to disrupt their business.

Just like Glip helps with Columbia University in Q3, we added some additional key deals in Q4 where Glip messaging played a critical role in the customer decision-making. These include an oil and gas engineering management company with 900 users and an online media and client services company with 600 users.

We also extended our open platform to further enable integrations with leading SaaS applications and custom business workflows. We have signed up more than 1,500 developers across the US, Canada and the UK and enabled over 120 software integrations. Third-party API calls to our platform grew over 50% quarter over quarter in Q4.

We now have integrations with products across various verticals including medical, finance, recruiting, retail and construction. For instance, in the fourth quarter, we won Amalgamated Bank is a customer, initially deploying over 400 users in its New York headquarters. Our plan is to expand our footprint to the remaining 500 users in all of its 17 branches across the US.

The key to winning this deal was the power of our platform and the open APIs we provide. The key use case for our API is to embed RingCentral's call recording capabilities within the bank's custom workflows.

We continue to improve our integration partnerships in the fourth quarter and the announced the integration of Zoho CRM, an advanced customer relationship management platform, with RingCentral. This solution addresses better customer engagement and automation.

We were also chosen as a top partner and trusted communication solution in the new recommended-for-Google Apps for Work program. Being recommended by Google as a trusted business communication solution is a strong testament to our shared goal to improve the way businesses get work done through the cloud. To date, we have seen over 1,000 businesses already adopt this integration. Google Apps for Work has millions of customers worldwide, which opens up a tremendous opportunity for us to introduce a RingCentral solution to more workplace.

Contact Center was another new technology that was an important contributor, in the quarter helping us win several larger deals and in some cases providing incremental revenue wins. For example, we won (inaudible) placements for 700 office users at Aptos, a spin off from Epicor software, a market leader in retail point-of-sale solutions. That subsequently was followed up with a second deal to add an additional 100 Contact Center seats providing a single cloud solution for all their communication needs.

Aptos also standardized all its messaging calibration of Glip after (inaudible) other (inaudible) team messaging players. This place of integrated delivery with new capabilities is very difficult if not impossible for legacy vendors to match. As you can see, this is the power of our end-to-end solution, integrating business communications with team messaging and collaboration and an enterprise grade SaaS contact center.

Second, we continued to see progress with our efforts to expand upmarket. Fourth-quarter ARR for customers with at least 50 users grew by over 100% year over year for the seventh consecutive quarter on a larger base. In terms of bookings mix, pipeline and deal velocity, Q4 was the best upmarket quarter we have seen driven by the combination of our product enhancements, sales execution, as well as some Q4 seasonal effects which are especially pronounced as we sell to larger customers.

We recently announced land-and-expand successes with multiple customers including Budget Blinds (inaudible) with over 1,200 locations as well as the planned 1,000-plus user expansion at Cresa, a commercial real estate services company with over 60 offices across the world where we are working to replace it for legacy phone systems and modernize their workforce. RingCentral's ability to leverage initial entry wins and grow deployments across multi-thousand employee customers is a great testament to our ability to execute on the land-and-expand strategy that has been key to success for many leading SaaS providers.

Third, explaining our international reach is increasingly important as we expand our market to each global enterprises. I am very excited with our introduction earlier this week of RingCentral Global Office, a single global solution designed for multinational enterprises. Connecting work forces across multiple countries, RingCentral Global Office reduces complexity and high cost of maintaining multiple legacy on-premise VBX systems with a single cloud solution. A recent success with Global Office was in win at Del Monte Foods which can to us to solve its global communications needs.

As part of our international affairs, we have also announced a partnership with WestconGroup, a value-added technology distributor of category-leading solutions in security collaboration networking and data centers. With a physical presence in 60 countries and the ability to deploy products globally and in over 170 countries, the Westcon gives RingCentral the additional global reach it needs to meet the demands of global enterprise customers.

The fourth key growth driver I referenced last quarter was our unmatched relationships with service providers. With AT&T, BT and TELUS, we remain the only pure play SaaS business communications company with major carriers reselling our solution.

In the fourth quarter, we continued to see solid results from our carrier partners. In 2015, AT&T increased its share of our total revenue to over 12% even while RingCentral as a whole grew at 35% year over year.

Internationally, our carrier partners investments BT and TELUS are beginning to pay off. While it is still early, we are already seeing great customer wins from these partnerships. Our BT product grew sequentially by over 50% in Q4. With TELUS, we won a deal with H&R Block Canada for 400-plus user deals distributed across 40 locations. Overall, we ended 2015 with tremendous momentum carrying out into 2016.

Let me highlight some of the plans for the upcoming year. First, we will continue expanding our enterprise capabilities to fuel further expansion of market. Second, we will continue integration and expansion of Glip capabilities into RingCentral office. This will offer our enterprise customers an industry-first fully integrated business communications and team collaboration solutions with unified mobile-first experience.

Third, we will ramp up on our platform efforts in our quest towards developing a vibrant ecosystem to get further embedded in customer business workflow. Fourth, we will continue growing our industry-leading global office footprint throughout 2016 and beyond to fuller address the needs of multinational enterprises. Fifth, last but not least, we will continue improving profitability while maintaining our focus on growth and innovation.

With all these developments, 2016 is shaping up to be an exciting year and I'm confident that we will continue to execute and remain at the forefront of the powerful and continuing shift in how businesses communicate worldwide. The penetration of cloud business communication solutions like RingCentral is under 5% globally with little competition that offers all our capabilities in a unified scaled global mobile storage solution. We're the leading, and the fastest-growing, pure play SaaS player in the large underpenetrated $50 billion global market that is ripe for further disruption. We feel confident in our ability to continue leading the inevitable shift of global business communications to the cloud.

Before I turn it over to cut Clyde, I would like to reiterate that we would not be in this leadership position without a great, deep team. As we're setting our sights on continual strong growth off a larger revenue base across a number of vectors, we have recently consolidated all of our go-to-market teams under David Sipes in the newly created position of Chief Revenue Officer. David is a seven-year RingCentral senior executive (inaudible) who has an exceptional record of contributions across a wide range of areas including sales, marketing support and corporate development.

In his most recent position as EDP of Corporate Development, Dave opened our UK office, led our partnership with BT, championed the acquisition of Glip and expanded our product line with the RingCentral Contact Center, to name a few. Dave will continue reporting to me directly and will be responsible for worldwide sales, marketing, customer care and business and corporate development. Please join me in congratulating David in his new key role.

With that, I'll now turn the call over to Clyde for a review of our financials and guidance.

Thank you, Vlad, and good afternoon, everyone. Before I begin, want to ask that you refer to the slide deck on our investor relations website, which will help summarize the key points in our call today as well as provide some supplemental information for you.

2015 was a tremendous year for RingCentral, highlighted by 36% software subscription revenue growth and meaningful expansion upmarket all while achieving profitability for the second half. We also had a great Q4 to finish off the strong year, with our second consecutive quarter of non-GAAP profitability, accelerated revenue growth, well ahead of guidance and record bookings in upmarket. We are seeing strong growth across both SMB and upmarket segments as the market moves along the adoption curve and embraces the cloud for its business communications.

As a testament to our business model, we continued to see attractive unit economics with each dollar invested in sales and marketing contributing $8 of revenue and $5 of contribution margin over the projected life of an office customer. As Vlad discussed, we have meaningfully expand upmarket, the effects of which we experienced in Q4. In that quarter, we added over $6 million to our software subscription revenue, which is the most we have ever added in a single quarter.

This expanded our software subscription revenue to $77 million, representing an organic growth rate of 36% year over year and up 9% sequentially from Q3. Total revenue for the fourth quarter was $83 million, up 35% year over year and 9% sequentially. This was above our guidance of $80 million to $81 million. Product revenue grew to $7 million and contributed 8% of revenue in the quarter.

As a reminder, we do not develop, manufacture or otherwise touch the delivery of physical phones but provide these as a courtesy to our customers. I am happy to announce that we will now be largely exiting the direct sale of phones altogether with no change to customer experience and with positive impacts to our overall gross margin and profitability. I will discuss more about this later.

Total annualized exit monthly recurrence subscriptions, or ARR, grew to approximately $317 million, up 34% year over year and 7% sequentially. The ARR for RingCentral Office grew to approximately $247 million, up 45% year over year and 9% sequentially. Customer satisfaction continued to be strong in Q4, with overall net monthly subscription dollar retention over 99%. Office net monthly subscription dollar retention was once again over 100% as it has is common for customers to adopt RingCentral Office in part of their organization and expand at the time.

Before I move further down the income statement, I want to remind you that my commentary will be focused on non-GAAP results. A reconciliation of all non-GAAP to GAAP results is provided with our earnings press release issued earlier today.

Software subscription gross margins once again demonstrated leverage from our multi-tenant SaaS model, improving to a record 78.7% in the quarter. You should note that this included about 0.5 point of one-time benefit with our supplies in Q4 that we would not expect on an ongoing basis. Nonetheless, this marks an improvement of 220 basis points from the third quarter and 440 basis points year over year.

At our IP a couple years ago, we published a model with a target subscription margin range of 75% to 80%, on par with those of other leading SaaS companies. Since then, we have improved our gross margin for 11 straight quarters and expanded it 10 points in just the past 2 years.

In Q4, we were able to deliver gross margins at the upper end of our target range. This is truly a testament to the inherit leverage and profitability in our business model and to the RingCentral team execution. Additionally, RingCentral's expansion to mid-market and enterprise customers, who to tend to buy higher-priced editions, resulted in higher average revenue per user as well.

Product gross margin was 13% in the quarter, a 370 basis point decrease over Q4 of last year. Total gross margin, which includes software subscriptions and product, was 73.3%, up from 68.3% in Q4 of last year and 71.6% in the previous quarter.

Sales and marketing expenses were $36.4 million for the quarter, or 44% of revenues. This was up modestly from 43% last quarter and the fourth quarter year ago as we continue to invest in growth, given our model's attractive unit economics. R&D expenses were $13.3 million in the fourth quarter, or 16% of revenues, up about 1 point from last quarter, an improvement from 18% of revenues in Q4 2014.

G&A expenses were $10.6 million in Q4, or 13% of revenues, improving from15% of revenues in Q4 of 2014 and flat from last quarter. We had an operating profit of about $1 million to an operated margin of 1%, which is at the high end of our guidance range. This is an improvement of over nine points from Q4 of last year and 30 basis points from last quarter.

Non-GAAP net income improved to $0.5 million, compared to a net loss of $5.6 million in Q4 of last year and breakeven last quarter. Non-GAAP net income per share was $0.01, at the high end of our Q4 guidance range of breakeven plus or minus plus $0.01 per share. Share count 75 million fully diluted shares.

On a GAAP basis, our Q4 net loss was $6.9 million, or a loss of $0.10 per share. The difference between our GAAP and non-GAAP results includes $6.3 million, or $0.08 per share in stock-based compensation and about $0.02 from the amortization of intangibles and other items related to the Glip acquisition and currency re-measurement of our balance sheet, both of which we excluded from our non-GAAP results. We ended Q4 with cash and short-term investments of $138 million, compared to $132 million at the end of Q3.

Deferred revenue was $37 million as of December 31, an increase of 7% sequentially and 43% year over year. Deferred revenue grew faster than revenues year over year, due primarily to the fact of larger customers who are more receptive to annual invoicing. For the quarter, cash flow from operations was positive $2.9 million, compared to negative $4.3 million for Q4 of last year and positive $1.8 million for Q3 of this year.

Moving on to the full year 2015, our software subscription revenue grew 36% year over year to $271 million, driven by RingCentral Office. Total revenue grew 35% year over year to $296 million. Our indirect channel partners grew with us and accounted for over 20% of our ARR in 2015.

AT&T remains our largest partner, represented over 12% of our revenue, up from 11% in 2014. Software subscription gross margin was 76.3%, up 5 points from last year. Total gross margin was 71.2% up [150] basis points from last year. We substantially improved non-GAAP operating margin over 11 points from negative 13.5% in 2014 to negative 2.[3]% for the full year of 2015.

We also made significant improvements in cash flow operations as we moved from negative $11.4 million in 2014 to positive $5.1 million in 2015. Capital expenditures in 2015 was $17 million, or roughly 6% of revenue.

Before turning to 2016, I wanted to update you on some data points I provided last year that help illustrate the traction we are experiencing with our business model today. First, we are doing more longer-term contracts, with greater than two-thirds of new Office bookings in 2015 opting for annual multi-year agreements, up from about half in 2014. We also continue to see an increased portion of our contracts with upfront payments, resulting in higher deferred revenue.

Second, annual gross dollar churn rate for Office was about 11% in 2015 versus over 14% in 2014, a 20% improvement year over year. As a reminder, this follows a 20% churn improvement in 2014, so overall a great retention story over the past two years as we provide more value to our customers and expanded our offerings to larger enterprises. In addition, for Office customers 50 users and above, the gross churn continued to be less than half the overall Office rate.

Third, in spite of some of the concerns we hear on price compression, our direct ARPU actually went up a few percent. This was driven by two factors. One, more customers opting for premium-plus editions that have more capabilities for web and video maintenance, integrations with other key cloud application and enhance enterprise features and two, our expansion upmarket. Upmarket customers tend to gravitate toward the premium-plus editions.

Turning to 2016, we have entered into an agreement with Westcon group, a global distributor of category-leading unified communications, to distribute phones to RingCentral customers. RingCentral's core strength is cloud-based communications software.

This agreement allows both companies to focus on what they do best. It leverages Westcon capabilities to configure, sell, deliver and support physical phone devices to customer. RingCentral will exit direct phone sales. For our customers would like to by physical phones, RingCentral will act as an agent on behalf of Westcon, referring physical phones (inaudible) to Westcon.

Responsibility for inventory fulfillment, accounts receivable, and warrantee service will be with Westcon, with no change to our customer experience. Once implemented, most of the sales of physical phones will be with Westcon and will no longer be in our revenue line. We will receive a commission from Westcon as an agent.

This will result in slightly smaller total revenue but will be accretive to overall gross margins as there is essentially no additional cost associated with this model. This will also result in no change to operating profit. The agreement is effective immediately and is expected to be implemented over the next few months.

From a revenue recognition point of view, as we phase this in, investors will see less product revenue on our P&L, as this is transferred to Westcon. We will replace the product revenue line on our P&L with a line called of other revenue, which will mainly include revenue as an agent of Westcon, professional implementation services and a small amount of product revenues coming from subsidized phones that we occasionally may offer. In addition, in the first half of the year, as we move to this new model, there will be some residual product revenue during the intermediary period while phasing in Westcon.

Altogether, on an ongoing basis, we expect the revenues in our other revenue line to only total 3% to 5% of our total revenues. The vast majority of our revenue, over 95%, will be software subscription revenues. Investors should note that this change will not have any negative impact on operating or net dollar profit and is actually accreted to gross and operated margins. With this model, our P&L will align with other leading cloud software companies across revenue and gross margin.

Moving to our outlook for the first quarter and full year 2016, we have historically provided guidance to total revenue but given the change to the new model, we will be providing more line-item level guidance. The summary deck on our IR website will help investors compare side by side what our guidance would have looked like under the old model.

Under our new model, for the first quarter, we expect software subscription revenues of $77.5 million to $78.5 million, or growth of about 29% to 31%, year over year. We expect total revenue of $79.5 million to $82.5 million. We expect software subscription gross margin to be 76.5% to 77.5%, this is about a 1.5 point from last quarter. Half of this decline is due to the benefits I described earlier that we would not expect in an ongoing basis and the other half is due to normal seasonal effects such as employee taxes and paid time off.

We expect total gross margins of 74% to 75%. We expect non-GAAP operating margins of breakeven to 0.5%. This should lead to non-GAAP earnings per share of zero, plus or minus $0.01, based on 76 million weighted average, fully diluted shares.

For the full year 2016, we expect software subscription revenue of $337 million to $345 million, or growth of about 24% to 27% year over year. We expect total revenue of $247 million to $357 million. We expect software subscription gross margins of 77% to 78% and total gross margins of 75% to 76%.

We expect non-GAAP operating margin of 1% to 1.5%. This should lead to non-GAAP Earnings per share of $0.01 to $0.05 based on 78 million weighted average, fully diluted shares.

In summary, we had a great 2015 and are positioning the Company for another strong year in 2016. We are still in the early innings as we penetrate a very large market and we are excited about the opportunity ahead.

With that, I'll turn the call over to the operator for Q&A.

(Operator Instructions)

Mike Latimore, Northland Capital.

Great quarter there. Just a clarification. Did you say the small business segment, did you say the small business segment revenue grew 35%?

Correct, Mike.

Okay. And then in terms of the Telco channel, as you look throughout this year, how are you thinking about the Telco channel in terms of overall potential growth rates?

You're talking about our carrier partners, right, Mike?

Correct.

Yes, we don't break that out separately. Obviously, you saw the results last year and keep in mind a couple things. One is AT&T as a percent of revenue increased by about a point even as the company grew revenues 35%. So you can do that math. We just started ramping up TELUS and BT, so without giving away stuff that we're restricted by the confidentiality, you could assume that this should continue to grow.

Got it. Did the contact center business you saw, did that grow sequentially?

Yes. Very healthy. I think the combination national contact center and of PBX, our sales team is very excited by that and we are getting very good traction.

Last quick question on the Global Office. I know you guys have had a number of deployments where there is a global reach to the deployment. Can you just clarify what is different about the Global Office versus your prayer global deployment?

It's really the next step forward. With this type of global footprint, we had customers in a large number of countries, but what Global Office does is very important. It's really an important step forward for the industry. We now enable full local presence for those countries that are included in our current Global Office footprint.

So what this means is that if you are a customer in one of those countries, say Germany, then your phone experience is the same as if you were to use a local phone service. So your caller ID is a local caller ID. People call you on a local number. You are perceived as if you're using a fully local phone while you are in that geography.

We really feel that we are pushing the envelope with this. We expect good reception by multinational enterprises.

Great, thanks. Nice job getting that phone deal done.

Thanks, Mike.

Thank you.

(Operator Instructions)

Terry Tillman, Raymond James.

Good afternoon. With that in mind, I will limit myself to just a few questions, but I have a ton of questions. The first question relates, Vlad, philosophically or strategically, as you all add value, and obviously with Glip that ads that important component around key messaging, where are you now on the potential monetization around products like that as well as, what about embedded communications?

We're hearing a lot about these apps like Salesforce introduce a click-to-call type dynamic. Is that relevant? It's kind of a two-part question.

Yes, hi, Terry. As far as monetization of Glip is concerned, we are monetizing Glip. We are monetizing at both directly and indirectly but the best way to look at it is we have major customer wins. For example, last quarter we've announced Columbia University, which has chosen to go with RingCentral because of the team collaboration and messaging capabilities that Glip brings to the table.

Now, clearly they also want a full-out business communication system but Glip was a big differentiator. So we see a number of companies and especially as you're going further upmarket, more into the enterprise arena now, where people are interested in communicating within the company and also with their customers outside of PureVoice, and that's what Glip has to add.

Another recent example, for example, we just talked about now is Aptos, which is another sizable company also interested in this. We expect for more of this to come. Okay. Sorry, what was the second part?

The second part, Vlad, was the idea of this platform that you have and as we hear more and more in trend around embedded communication, we're hearing a lot of companies, particularly in areas like sales, [fill] ops and marketing introduce capabilities where as part of the workflow, there is the communication dynamic. Think of it as click to call.

What are you doing in terms of your APIs and platform to try to leverage opportunities like that? Or is that might big opportunity for you all in terms of embedded communications?

As we've been talking about I think for some time now, we consider our platform and our open APIs to be an absolute differentiator and an extremely important part of our overall strategy, and frankly, as we look at of other cloud communications providers, we just don't see any kind of motion in that direction. So, just like when we talked about Glip, it's a great enabler and a great differentiator.

We have a number of companies and wins that specifically chose RingCentral with the idea in mind to integrate whatever data and communications capabilities that we have in the system, or have stored in the system to integrate those into their custom workflows. That's, like I say, easy way for us to secure and maintain larger accounts.

Again, one recent example is Amalgamated Bank, which is a sizable institution that specifically wants to integrate call data into their custom workflows. So again, expect more of this to come. Again, very similar to how Salesforce did things for a long time, right, enabling their customers with data that's residing within the sales cloud.

Bhavan Suri, William Blair.

Can you hear me okay?

Yes, we can.

Great. Just first turning to -- looking overall on the deferred revenue line. That's been growing really nicely and actually faster than revenue growth year over year. How should we think about the deferred revenue growth into 2016 and then beyond?

Then a quick follow-up on that, which is you have been providing the 50-plus seat customer count for a metric now and considering it's growing nicely, about 100%, can you just provide some context at how big that plus number is getting? Sort of the average number of seats within this customer base? I think that would be really helpful.

On deferred revenue, we showed very good growth, above overall average. That as a result of us moving up to larger customers, which is essentially the second part of your question, because what we find is larger customers tend to sign more long-term contracts.

I think about two-thirds of them sign contracts and more of them, as you would expect from other -- as what you see with other providers like us, are prepaying. Trend wise, our intention is to continue that trend. As you saw, growing over 100% 50-plus, that's the kind of customers that we do.

In terms of size, the size is increasing. We don't have a metric to provide for you on it, but if you look at the three market segments, we have always done really, really well and continue to do really well on the SMB space. That's still a young market that has a lot of penetration and our product has always been great there.

The mid-market inflection point, I think Vlad described, a quarter or two ago has happened and you can see from the few examples we gave that there are more and more companies with hundreds of customers -- companies with hundreds of customers adopting that and I think that's going to continue to do very well. I think the adoption rate is becoming very prevalent for that group.

The enterprise, which we define as 1000-plus, early stages. We've had a fair amount of success. We announced a few on the call today and you see, around the industry, that happening. That's probably the next area of inflection point that will happen in the future, although you will see, from time to time, a fair amount of deals.

Don't have a metric to provide for you, but overall as you can see, whether it's from the 50-plus revenues, which now represents about 30% of our overall bookings, up from 20% a year ago, whether it's overall bookings, whether it's deferred revenue, all of those metrics are pointed in the direction of a larger customer size.

Thanks, that's helpful. Congrats, guys. Thanks again.

Nikolay Beliov, Bank of America.

Thanks for taking my questions and congrats on good performance. I wanted to dig a little bit deeper into Global Office. By first question around Global Office was, is there technological reason or other reasons to maintain two different brands, Office and Global Office?

Secondly, just wanted to -- can you walk us through the pricing? Looking at your website, the pricing looks about the same as Office, but then you have per country pricing that is significantly less than the $25 to $45 for the core modules.

Vlad here. Taking the questions in reverse order. The way that we came up with the pricing model, firstly the overriding criteria was simplicity and really avoiding any type of surprises with these customers as they take on our service. When you look at our international pricing, this is in addition to the standard of per-seat pricing that they are getting. Those are additive.

Basically, what we're saying is if you are in one of those regions, then you will have to pay this much extra for a -- say, $15 extra for most countries for a RingCentral seat and based on our competitive analysis, we believe that this pricing will actually be disruptive in the industry. So, that's one.

As far as maintaining two brands, look, honestly there's only one brand and that's RingCentral. We just feel that it's important for multinational organizations to understand that with RingCentral, we can solve their needs globally, and that's the Global Office name, but really what our sales force is trained to sell and our marketing materials are all about is about is really about the RingCentral.

Got it, thank you. My last question is around Skype for Business. Are you seeing any impact from Microsoft making a bigger push in this space in the marketplace?

Well, we care about it, but they don't seem to have a product ready for market at this point. People talk about it, but nothing to buy from Microsoft yet. As you know, Gartner seems to think that there is a two- to three-year gap and we tend to agree. So no, we're certainly continuing our growth unabated as you can tell by the results.

Got it, thank you.

John DiFucci, Jefferies.

This is Julian Serafini in for John DiFucci. I want to follow up on the question on Global Office specifically. What I'm trying to understand is, does Global Office impact your ability to maintain your run-rate profitability? What I'm getting at is, is there additional spending for this offering? Do you need local sales and support for geographies? I'd be interested in hearing your thoughts on that.

Thank you, Julian. For the near term, no. Most of the customers that you'll see, US customers that wanted to deploy this in different countries, so that's a positive for us. We have been clear as we invest to fill out the footprint, we'll have to invest in some CapEx in other geographies to fill out the serviceability of it, but net is -- our margins, our operating margins should show some moderate improvement next year, as we guided to.

Okay, thank you.

Heather Bellini, Goldman Sachs.

This is Nicole Hayashi in for Heather. My first question is for Clyde. You were just talking about Global Office and your continued expansion internationally. Can you just talk about the top countries you hope to expand to in 2016?

Well, let's explain a couple things. We have a ready footprint in the US, Canada, UK. That will continue. What Global Office allows us to do is to serve customers who have offices in -- and if you go on the website, Nicole, you'll see it includes many, many countries of service. It's hard to predict where those countries will come up, but what it does is gives us the capability to serve customers globally in their branch offices.

Okay, got you. I guess in terms of total CapEx, do you think that will increase, then, in calendar 2016?

No, think we have encouraged people over time to dial in 5% to 8%-ish of revenues in CapEx. I think that's probably a fair, reasonable rate.

Okay, great. And for Vlad, Cisco also talked about their cloud PBX inter-quarter. Could you compare Ring's offering to theirs as well? Thanks.

Yes. It's a little bit hard. We don't see Cisco cloud in the field all that much. We don't believe that they have a product or are frankly even trying to sell into our segments, which, we span everything from very small businesses all the way into multiple thousands of seats. Cisco actually seems to be positioning itself above even that.

Again, we don't see them in our space and we just frankly unaware of them having anything that can realistically be used by a business with less than, say, 5,000 employees, and this has to do with the packaging, price, ease of administration, ease deployment, channels that they are using, all kinds of things. Our mobile-first approach really plays well for us. So no, we don't see them as a competitive threat or as a presence at this point.

Brian Schwartz, Oppenheimer.

Thanks for taking my questions this afternoon and congrats on a real solid quarter there in 4Q. Vlad, I wanted to ask you two questions on the upmarket, on the operations and what you're seeing out there. The first question really is on the sales cycle trend. Are you seeing any compassionate on the upmarket sales cycle as you are gaining more upmarket reference ability as well as industry analyst recognition?

Well, we're certainly seeing improvement in market acceptance upmarket, and you can see this in our numbers and triple-digit growth for seventh quarter in a row, kind of speaks for itself as well. Those are very positive signs.

As far as cycle compression is concerned, that's a harder one. First of all, we are growing the sales team quite a bit. So we are dealing with maybe better market acceptance, but also there is a dynamic that the team is fairly new, the upmarket team as we grow this. But frankly, the larger the company, the more likely they are to go through more of a process and with a RFP maybe issued, so they tend to take their time.

Again, what's really gives us solace is the fact that we are clearly being accepted. We don't need to explain to people why the cloud is the way to go like we used to. We think there is more of this to come. Needless to say, it's really helped a lot that Gardner recognized our progress, named us the leader in the UCaaS quadrant, the one most innovative, as well as most likely to execute, so that all plays very nicely with our upmarket pitches.

The follow-up question I have, maybe it's for Clyde here, just wanted to tap into see how you guys are feeling about your implementations capacity, because you've had a lot of strong momentum here, gosh, over many quarters now in terms of larger deals that you are signing up, and just wondering at all if you may need to step up your implementation capacity next year.

I'm making this assumption that given this trend that there is probably more and more larger deal opportunities that are filling up in your pipeline, and just wondering if that's included in the guidance and how you guys are feeling about your implementation capacity for these larger deals.

Brian, I think you are talking about professional services. The short answer is yes, we'll see more for all the reasons you described, which is larger customers tend to want them. Fundamentally, RingCentral could work without it, but as we transition from some of the on-premise PBX and the like, they want a turnkey solution, so we see more and more of that and next year we'd expect to see more. The team is building a reasonable basis. Our guidance does contemplate some increase in this, but yes, we are ramping up that team.

James Faucette, Morgan Stanley.

Most of my questions have been answered but two quick ones to wrap. First, you mentioned on the sales cycle on upmarket, can you talk about if there has been any change in sales in your historical markets and in that process? Just wondering if you are seeing better close rates, or any changes in close rates, first thing?

Secondly, when you talk about the land-and-expand opportunities, specifically looking at expand, is that expansion typically coming from increased seats or upsell of existing seats and how does that process change over time?

Vlad here. Again, taking in reverse order, land and expand, I would say has more to do with additional seats. We tend to come in either in a trial situation and then once the customer gets comfortable, expense through the organization, or not uncommon for us to come into a situation where we would get a region, or a maybe number of locations and expand across the footprint. So that's continuing.

As far as our, what you said, traditional business, I think said maybe core business, every business we're are in is core in that certainly includes the upmarket. But if we're talking about smaller customers, you are seeing improved profitability across the board and some of it is margin related and some of it is not.

We are being as or more efficient with our marketing dollars, or I should say sales and marketing dollars, as we have ever been. Our ratios that we keep quoting of $8 of revenue and $5 of profit, that continues to hold. So we're certainly not seeing any degradation there. I would say that we are generally improving our execution as a Company across the board, which again, includes the go to market.

That concludes our Q&A session for today. I would like to hand the call back over to Management for closing comments.

Thank you very much for joining us today. We appreciate the interest that you have expressed in RingCentral. We will be seeing you at several conferences in the next couple of months. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.